Today’s trade was similar to yesterday from an option flow perspective … Market opened down on terrible news out of Germany showing still very high inflation.
Interest rates spiked much higher on the news and that spilled over into the US as the US 10-year spiked above the June high.
Bonds are signaling load and clear that inflation investors believe inflation is here to stay …
This is not good news for the Fed because they are running out of time in their attempt to reduce inflation …
This will all come to a boiling point soon and when it does the Fed will do what they always do … Go back to printing money …
They admitted as much and you can read all about it here Fed Admits it’s High Inflation or Depression …
Today we will look at where the money will flow once the Fed pulls back, which I think is weeks away …
I do not think the Fed will actually admit they can’t get inflation down … I think they will tighten .75% tomorrow and continue to talk tough …
However, I do not think the economy can handle much more of this … Remember the consumer is 60%+ responsible for fueling economic growth through spending …
So, let’s take a look at how the consumer is doing during the Fed tightening …
I mean we are talking about $6 trillion of Fed and government stimulus just 2-years ago all coming to a complete halt and consumers needing to put $160bn on their credit cards …
Plus, tap into their personal savings that took their savings rate from 34% at the peak to under 5%!
The consumer is literally tapped out … The Fed knows this but they chose to go too far on the tightening and break something so they can avoid admitting they were wrong.
It will most likely be the bond market that crushes corporate borrowers or causes an emerging market crisis …
Then the Fed will come riding in on their white horse and claim they rescued the economy.
Watch the Credit Spread for signs of a breakdown.
The surest sign to know a crisis is imminent is when corporate bond prices go down and Treasury bond prices go up.
That is a sign of investors rushing to safety because corporate borrowers are becoming insolvent.
There are two deeply liquid ETFs that represent each sector. The iShares 7-10yr maturity Treasury Bond ETF (IEF) and the iShares investment grade corporate bond ETF (LQD)
Notice below how a ratio of these two ETFs can show how drastically they can split apart during an economic crisis …
Bring It Home
I believe we will see a breakdown before the end of the year and it will force the Fed to at first pause the tightening and inevitably move to a full-on QE in the first half of 2023.
As always bond ETFs will reveal the truth as to the smart money internal flows to the markets.
I still do not rule out Powell softening a touch as he watches what is happening to Europe and Japan …
So, buckle your seat belts, we may take off on a wild ride around 2:45 p.m. tomorrow…
I will be there to report on all the details and what they mean for the markets at 3:00 pm tomorrow …
I will be coming to you live with the insight you need to jump on new trends and that will last for a while. See you then and in the meantime …
Live and Trade With Passion My Friends,
Griff