US sanctions on Russia seriously complicate the Federal Reserve’s next steps.
While the Fed’s main goal is to get inflation down, higher energy prices brought on by imposed economic penalties will only make inflation worse.
We will also likely see an 8%-plus consumer price index on Thursday – and that’s before higher oil prices begin to be factored in.
Worst of all, elevated prices reduce economic activity by forcing consumers to pay more at the pump, leaving less for bills and other expenditures
The risk of a Fed policy error was already high. Now it’s through the roof.
However!
If you understand the bigger picture, then you’ll know what ultimately must happen and can use short-term volatility to increase your profits.
(It also helped me close gains of 76%, 140%, 233% and 225% – on Monday alone – on recommendations I gave readers right here in Power Income.)
But first, today, I will reveal the most critical market macro driver, lay out what I think the Fed will do and the impact that will have on the markets.
Freezing the Flow of Money and Goods
Sanctions aggravate another pre-existing problem: supply chain disruptions and shipping delays.
Why were so many countries so quick to slap all kinds of sanctions on Russia when the world has been complaining about how damaging inflation AND slower growth have been to their economies?
Tanker lines are either raising their rates to move gas out of Russia or declining completely.
Banks, insurers and others who facilitate shipping also have to comply with sanctions and it will take time for countries to draw down reserves.
Cargo already in motion to reach their destinations will take time to arrive and plenty more shortages are inevitable.
American Businesses Getting Hurt
It will not only be international business that gets hurt, because inflation for longer means the Fed will have to raise rates even higher.
Higher rates will hurt all businesses that issue debt and debt levels are already at historic extremes.
This situation is really starting to resemble the 1970s oil embargo that created all kinds of conflicts and instability.
The 1973 oil embargo caused a stock market crash, which was a result of the inflation ignited by the high oil prices.
The US also had to deal with a collapsing monetary system that was triggered when the US defaulted on its promise to exchange gold for dollars.
Plumbing Problems
It is never a good idea to cut off a sector of the global economy.
Yes, Russia is a relatively small economy, but its role as a top energy supplier makes it a country more important than its size would imply.
Freezing Russia’s central bank reserves may cause instability that will be felt around the world.
Any single counterparty may seem to have a strong balance sheet, but if any portion of it is impacted by the sanctions it could become insolvent overnight. Once the dominos begin to fall it can escalate very quickly.
Monitoring credit spreads like Treasury bonds versus corporate bonds can reveal cracks in the system and provide a warning sign on when to liquidate financial assets and move into safe assets like gold.
China on the Prowl
The plumbing issue is the most critical, and the fact that central bank reserves are subject to freeze will give leaders a good reason to hold their reserves close to home.
China was already moving on many fronts to build an alternative to the dollar-based financial system and President Xi will certainly accelerate that process now.
Hasty decisions like sanctions, embargos and freezing assets can lead to much larger problems for the US, which is already dealing with an enormous debt burden.
I don’t see these moves as being helpful.
Bring It Home
Tuesday was a great example of the confusion our policymakers inject into the markets on an almost daily basis.
I think Biden and team went too far by freezing reserves and banning imports.
These moves will bring a sense of urgency to China and many other countries to work together to find alternatives to US dollars when trading goods and services with each other.
Now pay attention to here …
Without COVID, the US was heading for recession, and without the Russian invasion the US would still be headed for recession today. I predicted a month ago that the probabilities favored a US recession beginning in Q2 of this year
The macro economic forces and cycles that have been in place for 40 years were always about the US weakening itself by printing money and creating one boom and bust cycle after another.
As the debt accumulated the real economy shrunk until we basically produced nothing and borrowed money from everyone to finance our debt.
Now we are at the end of the game – and neither you nor your trading profits can avoid the impacts.
We’ll cover …
– How to trade globe-shaking macro events for MAX profit
– The BEST ways to win over and over in the months ahead
– How to profit — regardless of which way the market shifts
– Why a new global power structure offers ENORMOUS opportunities of 233% and more
– A exclusive “sterling” trade idea to play now
See you Thursday night!
Live and Trade With Passion My Friend,
Griff