This morning, we received consumer inflation data for the month of May and the numbers were not encouraging. Energy inflation is biting hard and helping to drive up prices across the economy; the airfare component of the CPI was up a breathtaking 37.8% year-over-year!

This is all feeling very June 2008ish. For those who weren't involved in markets in June 2008 that was the month that oil accelerated above $140/barrel for the first time ever, eventually peaking at $147.27/barrel on July 11th, 2008.  Natural gas prices also went parabolic in June/July 2008, reaching an all-time high price of $13.69/MMBtu on July 2nd, 2008. The 2008 energy price surge occurred against a backdrop of a rapidly slowing economy and the Bush Administration sending out $600 stimulus checks to consumers to try to 'offset' the pain at the gas pump. 

Sound somewhat familiar?

In addition, one of the most memorable aspects of the 2008 Global Financial Crisis was the divergence between financial stocks (XLF), mega-caps (S&P 500), and crude oil; equities had begun turning lower months before oil peaked in July 2008 - the energy price inflation of summer 2008 in combination with a rapidly worsening financial crisis resulted in an unprecedented level of demand destruction between July 2008 and Q1 2009. 

WTI Crude Oil with XLF and SPX (February 2008 - October 2008)

By the time crude oil peaked in July 2008 financial stocks were already in a full blown bear market. 

Look at crude oil's performance relative to XLF and the S&P 500 today:

Equities are tumbling on this morning's CPI data and it's hard to foresee how this tide will turn in the near term. We are cruising for a demand destruction/recession scenario this summer, and nobody knows at what oil/gasoline price the consumer will say "I'm done! I'm not taking that trip and I'm cutting my spending". It feels like we're close, but definitely not quite there yet.

The Fed wants to curb demand in order to rebalance the supply/demand balance across the economy, and in turn bring down inflation. It seems to me there is not really a "soft landing" scenario in this environment - the combination of very high energy prices, rapidly tightening financial conditions, and misguided policymaking decisions in the West are a perfect recipe for a full blown recession (not to mention a war happening in Eastern Europe).

The best time to buy gold and gold miners will be when the recession is acknowledged by the Fed and the FOMC waves the white flag on tightening.

We are not there but we sure are getting closer. 

UPDATE: August gold has moved back above $1860 as equities continue to trade near session lows. The yellow metal seems to be sniffing growing stagflation across the economy. 

Gold (15-Minute)

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