Hey There Income Hunter,
This week’s weaker economic data triggered a parade of Wall Street banks coming out with warnings on earnings declines in Q2.
As usual, the banks were way behind the curve on this since they always talk their book by forecasting high earnings and price targets on the stocks they own.
I have been saying for months earnings forecasts were way too high and that the US is already in recession.
July will be a pivotal month and I expect we will see even worse economic data and many earning misses to the downside.
Today, we’ll take a look at what a shift from inflation to recession means for the markets so you can be ready to crush it in July.
Tax Collection Is Already Falling
This is really important to understand. You see, the US fiscal position is massively important to keep an eye on when the economy is weak.
Of course the Wall Street banking casino and politicians ignore it because all they want is more currency for trading and spending on voters.
However, the US is already dangerously close to insolvency due to interest rates rising and Tax receipts falling.
The chart below shows a 16% decline in tax receipts in May, which is already signaling recessionary levels.
The decline in US tax receipts that has already begun will likely corner the Fed into making one of three choices:
- Allow interest rates to rise in a recession as the US government is forced to issue more bonds to cover the shortfall in taxes.
- The US government defaults on either entitlement spending or Treasury debt payments.
- Fed pivots back to QE and buys up the excess debt to hold rates down.
I believe the Fed will opt for No. 3 and go back to QE and print money to monetize the debt.
It will accomplish this by buying bonds from the banks, who buy them directly from the Treasury through the auction process.
In the meantime we could see significant volatility as the Fed continues its hawkish charade …
It is this balance of payments problem that is speeding up the timeline of a Fed pivot
From here, there are two most likely paths:
- The Fed is forced to pause rate hikes soon due to market dysfunction.
- The Fed keeps tightening to fight inflation, which causes a debt crisis because interest rates keep rising while the US is in a recession.
Bring It Home
As I said earlier probable outcomes favor the Fed pivoting back to QE within the next three months.
So, if you want to plan ahead for the inevitable pivot, option strategies that expire in September or October are a good choice.
When the Fed pivots you can expect the following:
- The dollar rally will reverse
- Treasury bond rates will trend lower
- Stocks will trend higher
Planning a strategy that could be executed in the next couple of weeks may be timely. Look for new lows in equities by the middle of July and pull the trigger …
Stay tuned to Option Pit and Power Income for more details in the weeks ahead and as always.
Live and Trade With Passion My Friend,
Griff