Hey There Income Hunter,

 

On Friday, Jerome Powell delivered his best Hawkman since this tightening began seven months ago.

 

The speech was not a surprise to me – and Power Income readers – because as I have been saying since the beginning the Fed will never stop inflation with their policy but they will try with their narrative.

 

After a massive relief rally, Powell needed to put a wet blanket on the markets, and once again tighten financial conditions with his words. 

 

The truth behind the words was much more closely related to this narrative …

 

Essentially, Powell said …

 

The Fed has an obligation to stabilize prices while maintaining full employment … 

 

However, today with $70 trillion in global GDP outside the US and $30 trillion of debt inside the US, in order to get inflation back to 2%, we (the Fed)would be forced to blow up the global economy …

 

So, our words are our only real tool – and because of the damage we are causing around the world, we will be forced to pull back the tightening in the next couple of months.

 

That is the truth. Today, I’ll share the factual data that will force the Fed to pull back in spite of what Powell said on Friday.

 

Powell Can Not Be Paul Volker

 

Last week I wrote a newsletter on how Friday’s speech would be Powell’s best Volker impression .

 

Powell needed to make this connection with Volker to strengthen his case to be able to get inflation down to 2%. The Fed has been using the media and the banks to get this narrative flowing through the markets, as well.

 

I can tell you with certainty Powell knows this narrative is unachievable with policy, so has had to jawbone tightening in hopes of slowing it down.

 

The actual tightening is currently hurting countries around the world much more than it’s hurting the US.

 

The Fed: Central Bank of the Planet

 

The US portion of the global economy has shrunk over the years from above 50% to below 30%, which means Fed policy impacts nations outside the US more than it impacts the US itself. 

 

Let’s look at 2 specific examples …

 

Chile and Columbia’s economies have gotten crushed over the past year because they issue debt in dollars to buy their energy. This has serious consequences from two angles ….

 

One, a stronger dollar forces their citizens to pay higher energy prices, while their income is earned in the local currency.

 

Two, the country’s debt grows since they borrow in dollars. So, if they owe $1 billion and the dollar exchange rate increases 30%, they now owe $1.3 billion dollars. 

 

Notice the massive spike in the US dollar to both countries’ exchange rates …

 

 

So, Powell is getting bombarded with calls from central banks around the world pleading with them to pull back tightening and provide relief from the stronger dollar … 

 

Because the stronger dollar is a wrecking ball for poorer countries that issue debt in dollars but whose GDP is in local currency. 

 

On the US side the FASTEST rate hikes in history are now beginning to hit the US economy … 

 

And as soon as inflation expectations decrease while unemployment increases the Fed will celebrate like it’s the Fourth of July and hit the pause button. 

 

The pullback may even start next week as stocks trend lower and Fed speakers start to soften Powell’s tone.

 

The Data That Matters

 

Here is the most critical information to absorb  …

 

• $30 trillion in wealth destruction has already been wiped out from the recent drawdown in stocks and bonds. 
• We’re at the end of 0% interest rates and the beginning of elevated inflation and low growth – indefinitely.
• $57 trillion is still held by baby boomers via passive investment into stocks and bonds. This provides a massive headwind above the market.

 

Now, in the past couple of decades, tech and growth grew to become 40% of the S&P while materials and metals shrunk to only 6% (down from 20% in 1980). 

 

This trend has begun to reverse and will begin to accelerate in the weeks and months ahead.

 

This is necessary as countries around the world focus on building new infrastructure needed to expand energy capacity and gain independence in a new every-man-for-himself world …

 

Bring It Home

 

I have set up my Power Income program for the resumption of the bear market trade. 

 

I am long puts on the SPDR Select Financial Sector ETF (XLF) and long bearish option vertical spreads in the iShares High Yield Corporate Bond ETF (HYG)  …

 

The key in the week ahead will be the SPX 4000 strike, which is the largest put open interest strike

 

 It provides good support and I will consider closing the XLF puts against the 4000 level and look to reset shorts on a bounce. 

 

Stay tuned for opportunities to sell rips in the indexes and buy materials, metals and industrials on dips.

 

Live and Trade With Passion My Friend, 

Griff