Hey There Income Hunter,

FOMO (that’s the fear of missing out) is back.

Bear market rallies always lure the bulls back in, but it’s purely a numbers game – and a consumer price index (CPI) print today above 7% will bring back a dose of reality.

All you have to do is take a good look at what is happening in Europe to realize the Western world is in a heap of trouble. 

As you can see in the chart below, European high yield spreads have broken out. It’s a much more dangerous scenario in Europe than the US because corporate bond debt on the continent is 130% above GDP. 

That is a level that creates diminishing returns. For example, borrowing another dollar by issuing more debt will only net $.50 of production because the cost of servicing the debt is rising. 

Today, we’ll take a look at the Fed’s plan to attack it debt problem and what the likely outcome is … 

Now, I mentioned bull markets up to, and here’s something interesting about them …

There will always be a bull market somewhere.

Tonight starting at 8 p.m. ET,  Andrew Giovinazzi and I will reveal three of them that will lead the pack in 2022. (Plus EXCLUSIVE trades for attendees.)

>> Click here to join us. << 

Debt + Inflation = Recession

I was always a numbers guy. That is probably why I always love trading the markets.

And I especially love the macro flows. Because you can always find a trade that makes sense when looking at the big picture.

Let’s take a look at the US fiscal spending situation ..

The US spends 20-25% of GDP per year (outside of war and the occasional crisis).

Now, the US has spent much more annually than it takes in ever since Nixon defaulted from his promise to exchange dollars for gold in 1971. (The Fed simply printed billions more dollars than the Treasury had gold to back it.)

The government’s solution was its petrodollar deal with OPEC nations to provide US military protection for a promise to only accept US dollars in exchange for oil. 

But forced the US to become a debtor nation, which means we were printing money to export dollars in exchange for goods with our foreign trading partners.

Everyone needed dollars due to the petrodollar deal and we were happy to print money and outsource our real economy. 

However!

That can only last as long as our government can stay solvent – but the numbers today show that if the US was a company, it would be rated below junk bond status. 

And now the Fed is being forced to raise rates to fight inflation, which will crush our fragile economy – that transformed into a financial market economy due to the petrodollar deal. 

How High Can Rates Go?

With $30 trillion in debt and $23 trillion in income (GDP), every 1% of average interest rates on the debt, across weighted average maturities, equals $325 billion per year in interest expense. 

So, if interest rates on government bonds average 3%, then they would be paying $1 trillion a year.

This is so important to understand because it proves that the Fed cannot raise interest rates high enough to stop inflation without igniting a fiscal spiral.

A fiscal spiral would force the government to issue debt JUST to cover the interest on the $30 trillion they already owe.

Today’s debt level is 7.6x greater than average annual tax revenue … So, think about a company with a 7.6x debt-to-sales ratio, with negative income, where expenses are a quarter of revenue and rising.

That would be the US government in a higher rate scenario. 

What’s Next?

The Fed has no choice but to raise rates 2-3 times and move forward on quantitative tightening. This may be enough to crash the stock market. If it isn’t, they will keep tightening until they do.

Here is why …

When government debt as a percentage of GDP gets very high but is denominated in its own currency, their only choice is to default with high inflation while holding interest rates down. 

So, prepare for recession, low interest rates and high inflation.

This is what worked in the 1940s into the 1950s in dozens of developed countries and debt levels are now in a similar position. 

2022 will be the year of recession or very low growth (1-2%) if the reopening trade is robust. 

Fed’s Plan

The government will have the Fed hold interest rates low if they rise much above 2% on the US 10-year. 

They will support the Fed in creating new money to buy the bonds, and let inflation run high. Bondholders will get paid back, but in much weaker dollars. As a result, bondholders’ real wealth will be reduced dramatically. 

It’s the same plan as the 1940s, except when it is all over we still won’t have much of an economy. 

Here is what the plan looks like:

By holding interest rates down and keeping inflation high, the Fed can inflate the debt away and sacrifice the dollar, which is at the end of its sole dominance as the world reserve currency anyway.

Sure, it’s a plan, but with a little responsibility beforehand it could have all been avoided.

Bring It Home

The Fed’s plan will sacrifice the stock market. And eventually the bond market, as well. 

That is why it is so essential to follow the global macro flows. There are always great opportunities to trade markets outside the US and that has never been more important than now. 

Capital will move away from dollars when the market liquidity dries up …

Join our live event tonight at 8 p.m. to get ready to prosper in the new reality of 2022 and beyond.

Plus I’ll give you a few low risk/ high reward trades to capitalize on the Feds plan that will be announced on May-16 at the next FOMC meeting. See you there!

Live and Trade With passion My Friend,

Griff