Hey There Income Hunter,

 

Well, hopefully J-Pow got a good night’s sleep last night because today he could not be facing a worse environment than he is right now …

 

It does not get any worse for an economy than negative GDP and historically high inflation …

 

>> But it’s great for members of Power Gains, where we’ve racked up 11 wins in 13 trades. Join us for our biggest Fed Trade of the year at 12:15 p.m. ET today. <<

 

I know Powell only wants to talk about getting inflation down but to do that he will break the back of the consumer …

 

Here is what the Fed is faced with today …

 

Powell will be out there walking a tightrope across the Grand Canyon – one misstep and he triggers the worst debt crisis in history. 

 

Today, we’ll take a look at what the Fed is up against and the best way to play it.

 

The Numbing Numbers

 

Here is the most recent US manufacturing numbers 

 

• ISM (headline) fell to 55.4 in APR from 57.1 in March, a 22-month low. 
• ISM Employment fell from its March peak of 56.3 to 50.9 in April below 50 would be recession territory.
• ISM Inventories were up with both new orders and backlogs slowing 

On the Inflation side we are seeing a deceleration in the rate of change

• Iron Ore prices are down 11.1% in the last month
• Aluminum is down 13.2% in the last month
• Zinc is down 9.0% in the last month

This is why the Power Income Trader (PIT) policy gauge has remained in a Stage 4 bear market.

I have said all along inflation will peak in Q2 ‘22 and decelerate throughout 2022. 

I am more confident than ever on that, so basically the market has priced in ten rate hikes of .25% plus Fed QT of $90 billion a month …

The graph below shows the Fed’s balance sheet in Red and the interest rate on high yield corporate debt in blue. 

Now, back in 2018 the Fed raised rates to 2.5% and only reduced the balance sheet 10%, which crashed the markets …

Imagine what will happen today with another $7 trillion in debt and high yield debt levels at 7% before the tightening even starts?

I am sticking to my prediction that the Fed will only be able to get 2 rate hikes of .50% done before they are forced to stop.

So, how should you be positioned? 

Going into the meeting Power Gains, a product that Andrew Giovinazzi and I manage, has a VIX put spread on …

The VIX term curve is inverted, which is a sign the market is loaded with short-puts … 

So, assuming Powell stays with the consensus forecast of .50% rate hike and QT starting with $90 billion a month we should see a sharp pullback in volatility – and maybe a 5% short covering rally in SPY.

 

That rally will present a good opportunity to reset bearish trades in the S&P Index ETF (SPY), The Invesco QQQ Trust ETF (QQQ) and especially the SPDR financial sector ETF (XLF).

 

Worst Performing Sectors During Past Bear Markets

 

The table below shows the worst performing sectors during the past four bear markets. My preference is the financials (XLF) and also regional banks (KRE) …

 

Also the Consumer Discretionary stocks or SPDR Consumer Discretionary ETF (XLY).

 

There is more room to the downside especially if Powell is serious about bringing inflation down at the expense of the economy. 

 

 

Bring It Home

 

No matter what Powell’s decision is today, one thing is for sure … We are in a global growth slowdown and bear market in financial assets

 

My premise for the past couple of years has been that the US was at the end of their 80-year run as the reserve currency of the world … The world is in transition to a new monetary system., which the US dollar will be a part of but its role will be reduced.

 

This has major implications for the markets and could last 3-5 years. 

 

Please join myself and Andrew tomorrow at 12:15 for a more detailed live event on what we expect from the Fed and specific trades to do in the days ahead. 

 

Live and Trade With Passion My Friend,

Griff