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Hey There Income Hunter,
The Fed and Biden administration prepared the world for a high CPI number and that’s exactly what we got yesterday.
Once again it was a number that came in at “the highest level in 40-years.”
I am still calling for CPI to roll over in the months ahead because we will see the worst economic and inflation base effects in Q2 22.
Inflation this high is a demand destroyer because people will not spend with so much geopolitical and economic risk ahead.
Here’s what to do right now.
Time to Get Real
Inflation is the killer of wealth because the headline inflation rate must be subtracted from your investment returns and your wages.
So, notice in the chart below that when you look at the “real” average hourly they are a negative 2.6%. That means your earnings are not keeping up with inflation, so households are getting squeezed each month.
This tells the real story about inflation being a demand destroyer. If it stays up at these levels, we will begin to see consumption fall even lower.
This is also why it is insane for the Fed to tighten when inflation itself is already tightening its grip on consumers.
Financial Conditions Tightening Significantly
By far the worst thing that can happen in any market is when financial conditions tighten. This is similar to throwing sand into the gears of a machine that slows it down to a grind.
Financial conditions tighten when funds for lending dry up. When cash is pulled from funding markets people get nervous … and it can have a domino effect of counterparties pulling out of the market.
Once that happens investors have no choice but to sell assets they own to use the proceeds to settle other transactions.
This is when you get a crash in the market, as many people are trying to get through the door at the same time.
Time to Buy Bond ETFs
Consider buying the iShares 20+ year maturity TReasury Bond ETF.
TLT is probably the No. 1 bond ETF in America and it is currently at an attractive level to buy.
We know bonds are highly correlated to inflation and they are also tied to growth. In the weeks ahead I believe we will see lower growth numbers and lower CPI as well.
Once those numbers come through we will see money flowing back into bonds and could see a nice rally develop.
I love the charting pattern here as today’s lower low in price was met with a higher low in RSI.
Known as a RSI reversal pattern, this setup increases your probabilities of success.
Bring It Home
I executed 4 $TLT MAR18 135/136 call spreads at $.35.
I think bonds are back to pricing in many more rate hikes than the Fed will deliver …. Therefore if Powell softens his hawkish tone at all next week we could see a nice snap back in TLT.
I also see a chance that option expiry next week could cause a bit of a squeeze higher as dealers have to square off positions and the sell-off.
After next week volatility should pull back a bit and I expect another probe lower, which could set up a good location to buy/add to the TLT trade.
Enjoy the weekend and as always …
Live and Trade with passion My Friend,
Griff
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