Hey There Income Hunter,

Repeatable profits and consistently winning trades ARE possible today.

But only if you understand the bond markets’ role in fiscal and monetary policy and its impact on the economy and capital markets.

This fact may be understood much better by Vladimir Putin than the Western media and even our own policymakers.

That’s judging from a speech he made last week, anyway. Here’s an excerpt:

“… you can’t feed anyone with paper – you need food; and you can’t heat anyone’s home with these inflated capitalizations – you need energy.”

What Putin understands better than most is that an energy spike sends all energy importing nations into a serious payments deficit, meaning they will be forced to sell the $7.5 trillion in US Treasury bonds they own to finance their energy purchases. 

This is the part of the financial system that is breaking.

The US is attempting to raise rates to drive the dollar higher to attract money into bonds for safety … instead money is flowing into energy at the expense of US bond prices.

Today, we’ll take a look at the importance for the Fed to resolve this soon by renewing quantitative easing and what the ramifications are if they don’t.

Bloomberg: World Currency Reserves Shrink by $1 Trillion in Record Drawdown

Foreign currency reserves have declined by about $1 trillion so far this year to $12 trillion … This the biggest drop since Bloomberg started to compile the data in 2003.

These US dollar reserves are critical for countries that must use them to finance their energy needs. When reserves dwindle, countries must sell their US bond holdings to fill any deficit in their energy demands.

Notice in the chart below of foreign central bank US Treasury holdings that $40 billion were sold into the market in just 1-week …

Now, as long as energy prices stay elevated, foreign central banks will likely continue to sell US Treasury bonds to buy energy and defend their currencies. 

Unless the US government can get oil prices down significantly, US Treasury bonds will continue to be sold into a highly volatile and illiquid bond market …  

This will continue until either the financial system collapses under the burden of high interest rates, or the Fed resumes QE to address the US Treasury market illiquidity, despite still-elevated inflation. 

Too Much Debt and No Longer Enough Buyers 

The truth is always in the bond market.

Rising interest rates despite falling inflation expectations is the signpost that is saying the Fed is going to have to resume QE in one way or another – and soon.

If it doesn’t …  the release valve for an implied US Treasury “credit risk,” meaning a loss of confidence in the Fed,will be the value of the US dollar … However, until then, as rates and the USD rise due to the supply/demand imbalance in bonds, stocks will sell-off.

Bond Volatility (MOVE Index) Says Fed has Lost Control of Bonds

Historically a MOVE near 150 (currently 148) signals the Fed has lost control of the bond market. 

The Fed appears to still be “hopeful” it will not have to do what is ultimately inevitable … You can hear the concern in recent headlines.

Like this from Richmond Fed president Tom Barkin …

“Treasury bonds are not the most liquid they have been, but those markets still appear to be operating fine …”

US 10-year Interest Rates

Keep an eye on the US 10-year (US10Y). We should see a new high above 4% in the days and weeks ahead. 

This week will reveal real insight into the supply/demand imbalance with almost $100 billion in new bond supply issued on Tuesday, Wednesday and Thursday.

On Thursday we will also get the Consumer Price Index (CPI), which I believe will remain elevated so should continue to see pressure on stocks and  non-government bond ETFs as well. 

Bring It Home

The Power Income Trader portfolio is in very good shape right now …

I have been extremely bullish on precious metals and closed three nice wins early last week. One was nearly 80% and two others returned 45% … 

I am now neutral precious metals, looking for an opportunity to reset my core long positions this week. 

After closing the precious metal longs, I entered a long US dollar/ short UK position (FBE), a short iShares high yield ETF (HYG) and short iShares Russell 2000 ETF (IWM) bearish option positions. 

Each is pretty nicely in the money and I look to close them this week as I re-enter the precious metals bull positions. 

Stay tuned for more, good luck this week and as always … 

Live and Trade With Passion My Friend,

Griff