In a recent interview, Mike McGlone, a Senior Commodity Strategist at Bloomberg Intelligence, provided a sobering analysis of the current economic landscape. McGlone went into the concept of a “reset of a lifetime,” discussing the global deflationary recession he sees on the horizon, the performance of key assets like Bitcoin and gold, and the broader implications for the economy and financial markets.
McGlone began the interview by revisiting his previous call that Bitcoin could lead the markets downward. He explained that Bitcoin, which was once seen as a “fastest horse in the race,” is now showing signs of weakness. He highlighted the Bitcoin-to-gold ratio, which peaked during the greatest monetary expansion in history, and is now trickling lower, signaling a potential shift in market dynamics. Despite significant inflows into spot Bitcoin ETFs, McGlone noted that the cryptocurrency is underperforming compared to gold and even some traditional equities, indicating a possible reversion of risk assets that could signal broader market declines.
McGlone emphasized gold’s outperformance relative to other commodities, noting that it has been steadily rising even as broader commodity indices have declined. He argued that gold’s trajectory is indicative of global deflationary pressures, drawing parallels to the financial crisis of 2008. With central banks, particularly in China, continuing to buy gold, McGlone sees the precious metal as a critical asset in an environment where deflationary forces are becoming more pronounced. He predicts that gold could reach $3,000 per ounce, solidifying its role as a safe haven in uncertain times.
Throughout the interview, McGlone painted a picture of a global economy teetering on the edge of a deflationary recession. He cited various indicators, such as declining demand for diesel, unleaded gasoline, and container boards, as evidence that economic activity is slowing. McGlone pointed to the sharp decline in natural gas prices, which he described as a clear sign of deflationary forces taking hold. He also discussed the implications of the Fed’s monetary policy, noting that while interest rate cuts are likely, they may come too late to prevent the deflationary spiral he anticipates.
McGlone highlighted the rising unemployment rate as a key factor that could drive the Federal Reserve to cut interest rates sooner rather than later. He mentioned that Bloomberg Economics forecasts a 5% unemployment rate by next year, up from the current 4.3%. He believes this increase, coupled with a weakening labor market, could force the Fed’s hand, leading to more aggressive monetary easing. However, McGlone warned that such cuts might not be enough to stave off a recession, especially if inflation remains sticky and the economy continues to slow.
One of the most striking points McGlone made was his assertion that we are on the brink of a “reset of a lifetime.” He explained that this reset could involve a significant reversion of risk assets, particularly equities, which he believes are currently overvalued. McGlone compared the current market environment to the late 1920s and early 1930s, suggesting that a similar reversion could lead to a prolonged period of economic hardship. He advised investors to prepare by reducing exposure to risk assets and focusing on more defensive investments like long-term U.S. Treasury bonds and gold.
McGlone also discussed the role of central banks in navigating the coming challenges. He noted that while central banks, particularly the Federal Reserve, have been focused on combating inflation, the growing risk of deflation could prompt a significant policy shift. McGlone argued that the Fed’s past mistakes, such as pumping too much liquidity into the system, could exacerbate the coming downturn. He suggested that central banks might eventually be forced to pivot from their current stance, but warned that this could happen too late to prevent significant economic damage.
In line with his deflationary outlook, McGlone expressed his bullish stance on long-term U.S. Treasury bonds. He explained that in a deflationary environment, long bonds typically outperform as investors seek safety. McGlone noted that the bond market is already signaling trouble ahead, with the yield curve flattening and bond yields in other major economies, such as China, remaining low. He believes that a further downturn in risk assets could lead to a flight to quality, driving up demand for U.S. Treasuries and pushing yields even lower.
McGlone also touched on the performance of commodities, which he sees as being caught in a deflationary cycle. He pointed out that while some commodities, like copper, experienced temporary spikes due to speculative excesses, they have since reverted to lower levels. McGlone argued that this reversion is consistent with a broader deflationary trend, as demand for industrial commodities weakens in the face of slowing global growth. He warned that this trend could accelerate if the global economy continues to deteriorate, leading to further declines in commodity prices.
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