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'A deep and severe recession' will come if 'aggressive' Fed keeps tightening - Ronald-Peter Stoeferle

Kitco News

A severe recession could occur if the Federal Reserve keeps tightening and the dollar becomes stronger, said Ronald-Peter Stoeferle, Managing Director at Incrementum AG.

“We’re seeing a very aggressive Federal Reserve now,” he said. “Additionally, we are seeing quantitative tightening kicking in, with $95 billion a month [of assets sold] in September. And we are seeing this enormously strong U.S. dollar… those drivers, for me, scream not a mild recession, but a deep and severe recession.”

To help bring down inflation, which hit 40-year highs this year, the Federal Reserve has hiked rates by 300 basis points over the year. Headline inflation in August was 8.3 percent. The Fed has also started to sell assets off its balance sheet.

However, Stoeferle said that continued tightening is unlikely.

“There will be a big U-turn and the Federal Reserve will end tightening,” he said. “I think over the next couple of weeks, we will see inflation rates come down dramatically. This will give central bankers some leeway.”

Stoeferle spoke with David Lin, Anchor and Producer at Kitco News.

The Strong U.S. Dollar

Fed rate hikes have benefitted the U.S. dollar, since investors view dollars as a safe haven asset.

The U.S. Dollar Index (DXY) is currently at 114, and has gone up 18.9 percent over the year. Stoeferle said that a strong U.S. dollar could act “like a wrecking ball,” especially for emerging markets with dollar-denominated debt.

“If you have a look at CDS spreads for some emerging market countries, you can see that it’s getting riskier and riskier,” he explained. “Every time the dollar goes through the roof, that causes emerging market crises.”

Sri Lanka defaulted on its dollar-denominated debt in April, and JPMorgan analysts recently recommended selling emerging market debt.

Stoeferle said that the DXY’s strength is largely due to the Euro’s weakness, as the European Union struggles through an energy and economic crisis. The DXY basket contains 57.6 percent Euros.

“It’s primarily the weakness of the Euro versus the U.S. dollar,” Stoeferle explained. “Going forward, I can clearly forecast a strong dollar versus many other G7 countries.”

The ‘Weaponization’ of Money

However, Stoeferle said that the dollar’s strength would not last long-term.

After Russia invaded Ukraine, Western nations kicked Russia out of the SWIFT international payments system and imposed other sanctions, including freezing the country’s $630 billion in central bank assets.

Stoeferle said that, long-term, this signals a politicization of payment systems that will cause the U.S. dollar to lose favor.

“China is watching, and they know what the playbook of sanctions actually is,” he said. “We are seeing so many signs that this de-dollarization is happening.”

Among the signs that Stoeferle pointed to were the Moscow Gold Standard, an alternative to the London Bullion Market Association, as well as “trade agreements between China, Russia, and Saudi Arabia.”

“Those countries have a high affinity for gold, not only as consumers, but also as producers,” he explained. “China is the [world’s] largest gold producer, Russia is the third largest producer… I think that in the Western world, especially in Europe, we have completely overestimated our position.”

To find out Stoeferle’s gold price forecast, watch the video above.

Follow David Lin on Twitter: @davidlin_TV

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