Hey There Income Hunter,
Prior to this week’s Fed meeting, I wrote that I thought the Fed pivot back to quantitative easing would come by the end of September.
Well, in the aftermath of the meeting, I think it may happen by the end of August.
Part of the reason I say this is because the most forward-looking indicators, like the Philly Fed index, continue to move further into negative territory. Other indicators, meanwhile, are giving out 2008 and 2020 vibes.
It’s clear that Powell this week opened the window for a pivot away from tightening with comments like. “we are watching for a slowdown in economic activity …”
Because the forward-looking data shows we will get even worse economic numbers in the weeks ahead, it tees up a perfect opportunity for Powell to pivot at the Jackson Hole symposium in late August.
Today, I’ll lay out why although Powell may not have pivoted this week, he very well could introduce a pause in tightening during his high profile-speech in Wyoming.
What We Know
- Global economic data is likely to get significantly worse over the next 4-6 weeks.
- Powell’s Jackson Hole speech at the end of August is an ideal setup for him to pivot based on his dovish statements at the Fed meeting press conference this week.
- Biden this week called for a fundamental change to the structure of the US dollar reserve status by calling for US industrial policy this week.
The three points above point to an early start to a renewal of the commodity bull market.
Three Critical Paths Based on the Global Energy Crisis
Two statements out of Germany and Japan this week must be considered as potentially drastic political shifts in the global structure.
Annalena Baerbock, German Foreign Minister:
“If we don’t get the gas turbine, then we won’t get any more gas, and then we won’t be able to provide any support for Ukraine at all, because then we’ll be busy with popular uprisings.”
Takeshi Hashimoto, Japan Shipping Boss
Japan has no choice but to buy Russian gas … because of soaring energy prices and limited prospects of rebooting nuclear plants.
Following the changes to the global structure will give you an edge on changes in market trends. Here are three probably paths to consider:
- Either the EU and/or Japan economically collapse for lack of sufficient energy, touching off a global economic crisis. This would cause sovereign debt to be questioned as an asset, which could trigger a debt crisis. This would be bullish for USD.
- The US Treasury is forced to move to modern monetary theory (MMT) to assist in buying EU and/or Japanese debt, which would weaken the USD (DXY) significantly.
- The EU and Japan are forced as a national security issue to buy energy from Russia in either RUB, EUR, or JPY, ending the post-war global geopolitical order as we have all known it. This would also be very bearish for the USD.
It’s All About the Dollar
By saying the Fed is forced to pivot away from tightening is saying they must surrender the dollar, and that is what will trigger a renewed uptrend in commodities, especially the precious metals.
However, paths 2 and 3 above are, in my opinion, more likely than No. 1, and they introduce other real forces at work, which could dismantle the dollar, as well.
Once the dollar uptrend is broken, the prices of precious metals, miners and industrial commodities will soar.
Finally, this essay in the WSJ on Thursday really drives the momentum of global change home …
With China rising and the U.S. ever less predictable, Japan is reassessing its security arrangements
Japanese policy makers have lost some confidence in American staying power in the region.
Bring It Home
I believe August will either confirm or deny that the Fed pivot and/or dollar downtrend will happen in 2022.
From a trading perspective this event will set the path for the way to make the most amount of money trading in the months ahead.
It is possible the high for the Invesco Dollar Index ETF (UUP) is already in … I am looking to buy puts on move back up to 28.75.
Live and Trade With Passion My Friend,
Griff