Hey There Income Hunter,
The most incredible statement Jerome Powell made last week was that financial conditions have been tightening quite a bit.
Right after Powell’s comments on Wednesday, economist Mohamed El-Arian tweeted this …
Now, Powell is no dummy. He has to know that financial conditions have factually been loosening dramatically …
Heck, financial conditions are as loose as they were – ready for this – when he began tightening!
Today, we will look at why Powell intentionally lied to the American public at such a critical time in the Fed’s tightening cycle.
The Truth Must Be Told
I closely monitor the Bloomberg U.S. Financial Conditions Index …
The factors behind the index include key ratios measuring risk-free assets vs risk assets, along with volatility and equity prices.
The higher the value, the easier financial conditions are.
Three Possible Reasons Why Powell Misinformed Americans
- He is biding time to try to get more data while continuing to seem confident in Fed policy.
- He may be realizing that fighting inflation is no longer the main priority in Washington, so he is making one last push in an attempt to show the Fed has done everything it could to fight inflation.
- Powell may be facing the fact that he cannot be a Paul Volcker-like inflation buster and, similar to No. 2, he used this “white lie” to convince himself that he could still be Volcker.
The bottom line is this … Powell is cornered.
Treasury Secretary Yellen’s job is to ensure the bond market remains liquid.
Yellen is ensuring a weakening US dollar, which began in October will continue to weaken.
Yellen is acting on behalf of an administration that is no longer willing to fight the inflation fight
What’s the Trade?
First of all, the single macro force driving the markets is illustrated in the chart below, which shows the interest expense on Treasury debt and entitlements as a % of tax receipts.
The economy will certainly not grow enough to cover 120% of interest expense over tax receipts.
Ultimately this means Yellen will continue to engineer:
- A weaker dollar over time
- Lower interest rates
- QE as needed to monetize debt
- Yield curve control to hold interest rates down and “inflate” the debt away
Use the current correction in the dollar higher (possibly as high as 106) and energy, commodities and precious metals lower as an opportunity to increase all three holdings.
I am buying natural gas via the Natural Gas Fund (Ticker: UNG) and silver via the iShares Trust (Ticker: SLV).
In the next couple of weeks I will be adding oil via the US Oil Fund (Ticker: USO) and silver miners via the ETFMG silver miners ETF (Ticker: SILJ) …
I am selling credit spreads in some high-flying stocks to fund the positions …
Live and Trade With Passion My Friend,
Griff