Hey There Income Hunters,
Thursday was another day of up then down for stocks.
And the Russell 2000 (RUT) is now down in crash territory after making a new low (-22%).
Nasdaq will be next then the S&P 500. And when the SPX gets there, Powell might wake up and smell the coffee.
Richard Fisher, one of very few past Fed presidents I respect, was on CNBC this morning and Joe Kernan implied the Fed had no resolve to stand behind its prescribed policy course when markets react.
Fisher had a great reply …
“The market has been wearing beer goggles for the longest possible time … and they just assume the Fed’s going to bail them out.
I think the strike price on the Fed put has moved significantly … and unless we have a dramatic turn in the markets that indicates it can infect the real economy, I don’t believe that they will be weak in following through on what they pronounced."
Richard was never shy about what was on his mind.
If he is right, then the line in the sand for Powell is probably not until the S&P gets into bear market territory.
Today, I’ll share the spreads that indicate we are headed for recession this year.
The Vol of Vol
The VVIX, which represents the volatility of the VIX, is confirming the trend to higher SPX volatility.
That would be music to Jay Powell’s ears. Here’s why…
First, Powell is not a dummy. He worked in the credit markets prior to his role at the Fed, so he understands that if he tightens into a weakening economy all Americans would be hurt.
However, by staying firm on an aggressive easing cycle and having past presidents confirm that the Fed put is gone, he can engineer a market crash, where the pain would be more concentrated on Wall Street.
Now where could that idea have come from?
None other than Janet Yellen, who wants to play Robinhood in order to narrow the wealth gap.
Now, you have to believe they must be working on a rescue bill for after the fact that can be injected directly into the economy.
Bingo wealth gap narrowed.
It’s genius – I am glad I thought of it! (Kidding.)
Here is the vol of vol chart setting a series of lower highs and lower lows. While it could head down for a time, I don’t think it will come close to the levels of March 2020 – but it could get down to the levels hit in June ‘2020, which would get the VIX to hit a new high.
Yield Curve Flattening May Forecast a Recession
The slope of the Treasury Security yield curve is such a great signpost for many things but the most crucial is when the 2-year/10-year spread inverts.
As you can see in the chart below, the spread inverted less than a year before the economy headed into recession.
This is another reason why Powell may be engineering a market collapse before he gets very far into a tightening cycle.
Bring It Home
I hope you guys are having fun.
As I started piecing the possibilities together, I went and bought SPY put spreads against my long positions from yesterday.
You have to avoid the temptation to get too long in a bear market because even oversold conditions don’t matter when real money needs liquidity.
With the Fed put all but gone, liquidity could dry up quickly. The other thing is being long quality stocks that are already down 50+% against a short in SPY could also work well.
Should be a fun day today to close out the week.
Live and Trade With Passion My Friends,