The Fed is Tightening into a Recession

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 significantlyand 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,


Griff

Powell’s Only Answer: PAIN!

Hey There Income Hunter,

 

Jerome Powell really took the market on a wild ride on Wednesday.

 

I was loving the higher open and I had high hopes for the beginning of a nice correction up.

 

Unfortunately, J-Pow had other plans and he took us for the third straight rollercoaster ride of the week. 

 

 

This type of volatility is what long-term tops are made of and I don’t really have a problem with that.

 

What I do have a problem with is why the most important man in global financial markets is unwilling to give investors the straight scoop on what the Feds plans are. 

 

I mean, come on – it is spelled out so clearly what the Fed’s role is on their website …

 

Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.

 

I think we would agree they have actually failed to maintain stability and yesterday was a perfect example. 

 

Today, I’ll break down the bullets that give us a clue as to what the Fed will do and the trades that make sense into the March meeting

 

My Take on Powell’s Speech:

 

J-Pow went on and on about how strong the economy is and how high inflation is, but never said what the plan was to do anything about it. 

 

The Fed really has two issues that are making its job harder. You see, the central bank is only responsible for its dual mandate, which is to reach full employment and maintain stable inflation. 

 

Well …

 

      • We may have low unemployment but it mostly comes from a low participation rate. Plus people may be working but inflation is killing their budgets.
      • Now the Fed is cutting off all liquidity in the system to fight inflation but it is causing stress in the financial markets.

 

Check out the speed at which the Nasdaq reached almost 1,400 new lows.

 

 

Keep an eye on the iShares high yield ETF (HYG) and iShares LQD credit ETFs (LQD)

 

 

5-year Bonds at Critical Resistance

 

 

The 1.7% level in the 5-year bond is at critical resistance. Treasury bonds usually provide a safe haven for investors in times of trouble.

 

Their lack of support speaks to a loss of confidence in the Fed and the possibility that investors may continue selling US assets to move into real assets, which looks to be the longest lasting trend of the decade.

 

Year-to-Date Performance

 

Finally, the chart below is the Fed’s worst fear. Higher oil prices will really make inflation stick – and possibly reach double digit rates down the road. 

 

 

Bring It Home

 

Inflation plus the US nearing the end of it’s long-term cycle of debt is a lethal combination.

 

A strategy that makes a lot of sense in a bear market is to dollar cost average into precious metal miners. 

 

This strategy turns a bear market into a massive opportunity.

 

You can accumulate low-priced quality miners that will be attractive takeover targets as the commodity bull market builds steam in the months ahead. 

 

Here is the updated portfolio, and I”ll have new picks soon. 

 

 

Have a great day and as always …

 

Live and Trade With Passion My Friend,

Griff

Is the Fed About to Spark A Rally?

Hey There Income Hunter,

 

It’s already been a dramatic week of trading and we haven’t even gotten to the main event yet.

 

Here is the stat of 2022 so far … 

 

The VIX is up 70%  YTD and nearly hit 40 on Monday. This is the highest reading to start the year since … you guessed it, the 2008-2009 Lehman period. 

 

Monday was also critical in the sense that Nasdaq internals showed a capitulation trade and more than 1,000 new lows were recorded. That is pretty incredible considering the broad index did not hit a bear market. 

 

Over the past week I have closed my broad index and sector put spreads and sold my long bond call spread. 

 

I think it is time to get long for a substantial relief rally based on even a hint of dovishness from Jerome Powell later today …

 

Now, believe me, I am not comfortable relying on the Fed, but the probabilities of a rally from here are high enough to make a play.

 

Today, I’ll share additional supporting data on why I think the Fed will ignite a short-term reflation trade into the end of Q1.

 

Check that out inside

 

But first …

 

You don’t want to miss today’s Power Income live presentation because I will give you 2 great names that are no-brainers to rally 10-20% in jus the next couple of weeks.

 

Register for the event here.

 

Fed QE Taper Policy

 

We have to remember the Fed continues to inject money into the banking system until March.

 

The Fed initiated the $120 billion a month in purchases in mid-2020, so in 18 months they added $2.16 trillion into the market, which mostly went into stocks and bonds. 

 

However, they reduced that number by $15 billion a month in November and December, and will further pull back by an additional $15 billion (for a total of $30 billion) in January, February and March.

 

 

March 16 is the next FOMC meeting, so after today the market will trade on technicals until we hear what the Fed will do beginning in March.

 

I believe Powell will give the Fed a bit of wiggle room to maneuver beyond a March +.25 rate hike. 

 

Here Is What Is Currently Priced In

 

Below is a table of FOMC meetings and the percentages for each target range that Fed funds futures are currently pricing in. 

 

The cells highlighted in yellow are the meetings that Fed funds futures sare pricing at least a 50% chance of a .25% rate hike. (Well, the fourth hike is 49%, but I included that for now.)

 

 

The market has been discussing four rate hikes since November. I do not think the Fed will get there.

 

A Likely Scenario Heading into Today’s FOMC:

 

      • Powell will tweak his message and maybe point to Omicron, geopolitical risks and recent slower growth reports.
      • The stock market will get a nice bounce from now until early March. The rally will be led by the beaten down info tech, healthcare and consumer discretionary names. Quality companies down 50%+. 
      • From now to March I will be out of the stocks because from then on liquidity is drained from the system and I am not sure if the market can handle that.

 

Here is a stock I will be long into the meeting.

 

Teladoc Health Inc. (Ticker: TDOC)

 

TDOC recently put in a 52-week low and is down 78% from the high. 

 

Now, this is a company that is considered the pioneer in the virtual medicine space. 

 

They are well positioned in a global telehealth market that was recently predicted to grow to $636 billion by 2028. That is a rate of 32% annually. 

 

It’s incredible to see that TDOC was trading at $308 in early 2021. Plus they ranked No. 1 in consumer satisfaction by the J.D. Power Telehealth Satisfaction Study in two out of the last three years. 

 

In Q3, TDOC reported revenue growth of 81% with $2 billion projected for all of 2021. Analysts forecast growth of 181% from 2021, which would take revenues to $3.62 billion with an EPS of $2.57. 

 

That is enough for me. Let’s take a look at their chart pattern.

 

Notice in the chart below how large the volume was from the low on Monday: 

 

 

The volume for the 30-minute bar at the low on Monday was 4x the average 30-minute volume and highest since a similar-high volume move from the $95 level in mid December. 

 

Bring It Home

 

These are trades you must make, and you can only know about them if you understand the Fed and how the central bank works. 

 

We can find periods of massive flows that are driven by shifts in investor psychology triggered by the Fed.

 

Once they are triggered your window of opportunity lasts until the next time Powell pivots.

 

Make sure you sign up for my Power Income event at 3 p.m. today. I will be revealing two more tickers – along with the optimal trades to crush it in the weeks ahead.

 

Until then …

 

Live and Trade With Passion My Friend,

 

Griff

How to Hedge Your Stock Portfolio With Bond ETFs

Hey There Income Hunters,


I’m sure there were more than a few of you taking a breath at the close today.


The NASDAQ-100 Index (Ticker: NDX) hit 13,725 at lunchtime, which put it more than 18% off the day’s high. 


That’s a whisker from official bear market territory.


But everyone stayed calm and by the close it bounced to 14,517 – a stunning, nearly 800-point recovery in the afternoon.


I hope you read my Monday morning newsletter, where I wrote that I thought the chances were 50/50 Powell would walk back the extreme tightening that is priced into the market.


Because with the NDX down over 11% in five trading days, any walk back will trigger a short squeeze higher. That will at least offer investors a second chance to hedge their portfolio. 


>> We’ll break that down when I go LIVE on Wednesday following the FOMC meeting starting at 3 p.m. Don’t miss this key moment. <<


To prepare you, I will share a couple of excellent ways to protect your portfolio by using Bond ETFs.


Know When to Fold’em and When to Hold’em


Regular readers of my Power Income newsletter understand how powerful Fed-generated flows are and how different 2021 was to what I am calling for 2022.


Notice the chart below, and the accelerating growth and Inflation trend from the second half of 2020 and most of 2021. 



Yep, the most powerful bull run in history.


Why?


One simple reason … The Fed printed money and most of it went into the market. Plus, the US government spent money and the Fed printed that, too, and much of that made its way into the market.


That is what we call a State 2 market. It’s defined by a stimulative Fed and government with growth and inflation accelerating. 


Not a hard environment to make money in, especially when you are given stimmy checks credited by the Fed, which is also injecting trillions into the market to help you out. 


There is now $18 trillion invested in NDX stocks, much of which is held by foreigners.


Take a look at that last chart again and the projected 2022 decelerating trends for both. The Fed is now threatening to withdraw funds from the markets and raise interest rates the entire year.


That is what I call Stage 4 market, defined as deflation. Stage 4 is the most stock market bearish while Stage 2 is the most stock market bullish.


Pretty wild to go from one to the other …


And that can only happen because the Fed controls the financial markets. 


Bear Markets Offer Tremendous Opportunity 


First, you need to understand what sectors of the stock market you should be long in Stage 4. 


Stage 4 stocks to own are utilities (XLU), consumer staples (XLP), real estate (XLRE) and healthcare (XLV) and of course optimal single stocks in each.


It is critical to find value and income stocks in bear markets. If you do and hedge it properly, you can build generational wealth. 


Now, the Russell 2000 index reached bear market territory today and rejected it big time. It went from down nearly 22% to down only 17.5% at the close. 


However, there was enough damage done that unless the Fed reverses the tightening policy and goes back to printing money – and lots more of it – the highs are in for a decade or more.


How to Hedge Your Stock Portfolio


Historically bond yields or interest rates move in tandem with stock prices. That is why you should hedge your stock portfolio with bonds.


Plus during a Stage 4 bear market, bonds are a most highly rated long outright.


So, holding stocks and bonds are valuable for a couple of reasons including:


  1. If you are holding the stocks I suggested earlier, then you are most likely collecting some nice dividend distributions. Plus their capital appreciation over the long-term.

  2. Bond ETFs also distribute dividends, so one compliments the other as an income generator.

  3. You can also complement the dividend income with premium income generated by selling calls against your stock and bond holdings, which can really boost your income generation.


iShares 4-7yr Bond ETF (Ticker: IEI)


IEI holds actual Treasury bonds maturing in the middle or belly of the US Treasury note market, holding mostly notes maturing between 3 to 7 years from now. 


These bonds are not as risky as longer maturities and are more influenced by the Fed’s policy, which is what you want. 


Here are the specs for IEI:



IEI is a deeply liquid, low-cost ETF. You trade IEI like you trade any stock ETF and it has liquid options as well. 


Currently IEI is yielding 1.14%, plus you earn any capital appreciation and call premium you sell. 

Diagonal option spreads are a great strategy for playing a longer term strategy with IEI. It involves buying a long expiry call at one one strike and selling a shorter expiry and lower strike on a separate call.


The idea is to keep reselling calls without losing the position and keep accumulating the shorter call premium as additional income in your portfolio. 


This is a very good time to begin a strategy because as I said earlier, the Fed WILL have to eventually go back to stimulating the markets by buying US Treasury bonds (QE).


The trigger will be lower broad equity index prices. When they do, you will see a very sharp rise in IEI.


So, if you are long the defensive stocks mentioned earlier plus bonds, you can crush it in a bear market. 


Bring It Home


I left out the other awesome stock you want to be long in a Stage 4 bear market … That of course is SPDR Gold Shares (Ticker: GLD).


How about yesterday’s action in GLD? The dollar was higher and GLD was in the green all day. 


We need to see a breakout above $1,880 and we will see some big money flow buying it. When the Fed does capitulate and go back to printing, GLD will soar.

 

I have many more great trade ideas to share, plus access to a system that will help you stay ahead of the Fed and consistently profit from the most powerful money flow in the world …

 

And you can access it when you register for my Power Income Trader live presentation this Wednesday. It begins at 3 p.m. immediately following the Fed’s FOMC meeting. 

 

I’ll see you on Wednesday.

 

Until then …

 

Live and Trade With Passion My Friends,

 

Griff

 

This ARK Is Taking on Water

Hey There Income Hunter,

 

The first bubble has burst …

 

And it's Cathy Wood’s ARK Innovation ETF (ARKK).

 

Check out the chart below showing the 1998-2003 (dot-com bubble period), when the Nasdaq-100 (NDX) price trended lower for two years. The chart includes the ARKK price trend which is down more than 50% from its high and down almost 20% YTD …

 

Chart, line chart Description automatically generated

 

Notice how tight ARKK has traded to the price trend of NDX during the dot-com meltdown.

 

There is plenty of downside left, but we may get a nice correction this week if Jerome Powell throws the market a bone.

 

>> We’ll break that down when I go LIVE on Wednesday following the FOMC meeting starting at 3 p.m. Don’t miss this key moment. <<

 

Today, we’ll take a look at the market indicators and economic data that suggests Powell should walk back the hawkishness a bit.

 

Let’s get ready for a big week.

 

Big Inflation, Big Problem

 

High inflation works against the ARKK ETF because higher inflation attracts higher interest rates, which are kryptonite to the mega-cap, high-growth names.

 

Large-cap growth stocks suffer when interest rates rise because a major variable affecting their valuation is the level of interest rates.

 

Cathie Wood has been bold with her predictions, which haven’t panned out so far.

 

Many of her holdings are still trading at rich valuations and other than a short-term bounce it doesn’t seem likely that things will turn around.

 

ARKK Needs a Break From the Fed This Week

 

I do think there is a 50/50 chance Powell lets the dove out of the cage on Wednesday …

 

He has to be watching the December economic numbers and thinking back to 2018 when he last made the mistake of tightening into a slowing economy.

 

Check out a few critical numbers that are indicative of an economy that is rolling over:

 

      • Institute for Supply Management (ISM): Manufacturing 58.7 vs 60.0 expected       (manufacturing slowdown)
      • ISM Services: 62.0 vs 67.0 expected (service sector slowdown)
      • Jobs Report: 199k vs 450k expected (lower job growth)
      • Retail Sales: -1.9% vs -0.1% MoM expected (big drop in retail sales)
      • Industrial Production: -0.1% vs +0.2% MoM (production slowdown)
      • Consumer Sentiment: 68.8 vs 70.0 expected (consumer confidence trending lower)

 

SPX Front Running the Fed

 

With the net Fed balance sheet – which includes gross balance sheet minus the Treasury account – you can see the overall balance sheet has already turned down.

 

When you combine the shrinking BS with the aggressive Fed tightening forecast, the correction last week makes sense. 

 

However, my 4400 target on the S&P 500 was reached on Friday and I am now flat equities and looking to get long going into the Fed meeting on Wednesday.

 

Chart, line chart Description automatically generated

 

Bring It Home

 

I think the markets have corrected enough based on the initial hawkishness of the Fed. We may see follow through selling on Monday based on the volume and volatility we saw on Friday, but I think that presents an opportunity to buy.

 

We are at a critical point in the broad indexes and plenty of quality stocks are on sale at discounted prices.

 

The Fed is once again offside and these are times that present tremendous low risk/high reward opportunities.

 

I have many great trade ideas to share, plus access to a system that will help you stay ahead of the Fed and consistently profit from the most powerful money flow in the world …

 

And you can access it when you register for my Power Income Trader live presentation this Wednesday. It begins at 3 p.m. immediately following the Fed’s FOMC meeting. 

 

I will go into details on any tweaks Powell makes to current policy and positions I am putting to catch the next wave of money flows.

 

As always …

 

Live and Trade With Passion My Friend,

 

Griff

The Fed Meeting Next Week Will Be Fun (Profitable)


Hey There Income Hunter,


Market action this week was Jerome Powell’s worst nightmare.


The graph below illustrates that the only sector up on the week was oil, and higher energy prices are the last thing J-Pow wants right now.



Well, I guess there is another sector that has been haunting him, too – precious metals.


Silver was up 6% and gold was up 1.5%, while the S&P 500 was down 3.78%.


This week’s action was indicative of higher inflation and slowing growth, which is a disaster in the making for the Fed.


Think about this …


The Q4 2021 GDP estimate is 7%. The forecast for GDP in Q1 2022 is 2%.


Can you imagine the backlash if the Fed tightens into an economy that is tanking?

Today, I’ll show you what matters for next week on the charts as or next week as J-Pow preps for a crunch Q&A following next week’s meeting.


Walking A Tightrope


Powell will have no choice but to walk back the four  hikes that are on the table for 2020.


The economic data, plus the tightening that inflation is inflicting on the economy, simply do not support them


Even President Biden is starting to walk it back. He was talking this week about how difficult it is to generate economic growth because of COVID.


The chatter now is he may be prodding the Fed to help the economy. 


So, I guess the President has had a change of heart after pounding the table that the administration needs to find a way to reduce inflation. Wait until he sees what removing the tightening does to inflation. Wow, this is really turning into a mess.


The NASDAQ index is now down almost 14% from the all-time high, and without any dovish talk out of Powell it may drop a lot further. 


Notice in the chart below that NDX is oversold. so any hint of less than four tightenings or adjustments due to data could trigger a nice short covering rally. 



Charting S&P 500


The chart below illustrates the SPX rallies that have occurred every time the differential between implied volatility and actual vol reaches the 8-10% range – which was hit at the market close on Friday.


In the past the Fed would time their tweaks in policy for when the market was out of balance, meaning it was  oversold like it is now to get maximum benefit.


This would be one of those times.


Powell owes the administration one for the reappointment so the probability does favor a slightly dovish response. 


Lastly, I think bond ETF option vertical spreads or outright calls are the best play heading into next week.


Here is why …


If he triples down (since he doubled down at the last meeting), then stocks continue to meltdown and bonds will rally as they anticipate worse economic data.. 


iShares 7-10year Treasury Bond ETF (Ticker: IEF)


IEF is a deeply liquid bond ETF that is down 10% from the all-time high it hit when COVID began.


I like IEF in this spot because, if Powell does hint at being flexible if data comes in soft, then this ETF could scream higher.



I put the Power Income Trader members into this trade last week …


So far, it is up 28% as bonds started to recover this week and investors began to anticipate the economic slowdown and a rise in bond prices. 


It has been a nice couple of weeks as two other trades I gave out at the last Power Income Trader live event were closed for 30% and 44% gains. 


There will be many more great trades to come as market volatility remains high with so much uncertainty around the Fed. 


>> I’ll share some exclusively when I go live at 3 p.m. on Jan. 26 following the FOMC meeting. << 


This is when Power Income Trader shines because I called the Feds bluff when it was pounding the table on “transitory” inflation and went on tear with long energy and miners.


Now, I am calling their bluff on all this tightening and and have done well so far in 2022.


And the best is yet to come.


Have a great week and as always ….


Live and Trade With Passion My Friend,


Griff

Gold is Golden in Stage 4

Hey There Income Hunter,


What a whipsaw trade yesterday.


For me, it’s further proof that we’re in a bear market.


This will go down as the week that investors began the massive shift from financial assets to hard assets.


Look, you can’t wait until the Fed tells you they won’t hike as much as expected (which they eventually will) … because they are always way behind the market.


We were getting incredibly bad internals a month ago.


Clues including internal signals showing that ex-FAANGMT stocks were falling below the 200-day moving average and heading for bear markets one by one. 


Now the mentality has to switch somewhat to when the Fed change its tune on hikes.


Either way the place you should consider allocating to is GOLD.


Today, I’ll share supporting data so you can be prepared for the massive move coming in the precious metal. 


Let’s mine this information for profits.


Survey Says


First, let me show you the new survey on what the most crowded trades are.


This will give you an idea on how long the move from growth to value can last.


It is hard to believe the needle hasn’t budged much on the long US tech stock trade …



I look at that chart and I immediately want to buy healthcare and sell tech, but it’s not because I am a contrarian …


It’s because Stage 4 tells you to sell tech and buy healthcare and bonds.


What’s Stage 4?


As a reminder, my Power Income Trader system breaks Fed and US Government policy, growth, and inflation into 4 stages:


  1. Balance – growth is accelerating, and inflation is decelerating

  2. Explosive – both growth and inflation are accelerating

  3. Stagflation – growth is decelerating, and Inflation is accelerating 

  4. Deflation – both growth and inflation are decelerating


Based on a custom array of input, these are the sectors I have targeted to be long and short in Stage 4:


Table Description automatically generated 


That is why I say if you get the Fed policy right, you get the market trends right.


In this case it’s a bonus that the right trades to do now are ones that investors are still on the wrong side of.


So, here is the way I see it. …


  • If the Fed doesn’t say anything and goes ahead and hikes rates, money will move out of tech and into silver and gold miners. 


  • If the Fed does say something and walks back the tightening stocks will recover, but gold miners will soar on that news. 


Look at the move gold has made against SPX in the past couple of days …



The chart above shows a pretty big breakdown in the SPX/Gold ratio. When it gets going it’s hard to stop. 


Here is another very good indicator of a U-turn uptrend in the metals. 



Silver has had a couple of great days and is now breaking the recent uptrend in the gold/silver ratio. This signals a period of silver outperformance.


The gold / silver ratio has been a solid leading indicator. Once silver starts to outperform gold, it is a great signal of a major uptrend for the entire precious metals sector.


Bring It Home


The markets are aligned, as the sectors that should do well in Stage 4 acting as they should – and the ones that should perform badly are acting according to type, as well.


I am sure the White House is as confused as the Fed is. So, the critical timing is when the Fed starts its walk back. 


The Nasdaq-100 is down almost 12% and the survey I mentioned earlier was unchanged as to what the most crowded trade is. 


So, let’s see what Jerome Powell says next Wednesday. If this continues I expect him to turn more dovish.


The sector I want to be long for that possibility is Bonds. TLT, ZROZ and IEF are my choices. Maybe LQD also.


I’ll firm that up early next week. Until then …


Live and Trade With Passion My Friend,

Griff

Tech and Bonds Sharing the Pain

The 60/40 portfolio strategy (that’s 60% stocks, 40% bonds) is getting crushed.

 

Onlookers are watching the iShares 25+ Treasury Bond ETF (Ticker: TLT) and SPDR Select Sector Technology Fund (Ticker: XLK) go down together.

 

This shift in trading is important to recognize because tech and bonds have not moved in the same direction since the 2008 financial crisis.

 

My thesis all along has been that financial (or paper) assets such as stocks and bonds will be heavily sold as the Fed is forced to keep printing money.

 

Yes, keep printing money.

 

Because the central bank’s attempt to stop inflation by raising rates and draining dollars from the economy will fail. That’s a fact and the reason is simple …

 

The Fed can’t accumulate debt to the tune of 1.3 times its income and think it can raise rates high enough to slow down wage, price and monetary inflation.

 

Today, I’ll share more details so you can be flexible and open to the major changes that are coming.

 

The Fed’s Nightmare

 

The government has politicised inflation so they can blame their own ineptitude on something other than stupidity.

 

Now the Fed has no choice but to drain liquidity from the markets AND raise borrow rates on consumers in hopes of slowing down inflation.

 

Well, the 1,000-pound gorilla is laughing at them.

 

Why?

 

Because the Fed is so late to the game that it will now be tightening into an already slowing economy … 

 

Look at these recent economic numbers …

 

      • Institute for Supply Management: (ISM) Manufacturing 58.7 vs 60.0 expected (manufacturing slowdown)
      • ISM Services: 62.0 vs 67.0 expected (service sector slowdown)
      • Jobs Report:  199k vs 450k expected (lower job growth)
      • Retail Sales: -1.9% vs -0.1% MoM expected (big drop in retail sales)
      • Industrial Production: -0.1% vs +0.2% MoM (production slowdown)
      • Consumer Sentiment: 68.8 vs 70.0 expected (consumer not doing well)

 

In December, the rate of inflation also slowed and will come down further in the months ahead. 

 

The Market Is Already Tightening for the Fed

 

It’s important to understand that the market is already tightening.

 

The Fed purely reacts to the markets and they are always very late to do that.

 

Honestly, the time to tighten was Q2 2021, when both inflation and growth were accelerating.

 

But no. All J-Pow wanted to talk about was transitory inflation and how the Fed could be patient. 

 

Now the Fed is probably NOT going to be able to raise as many times as the market has priced. And if they do? They will surely push the economy into recession.

 

Heck, they made the same mistake in 2018, which ended in a 20% drop in the S&P. 

 

That will take SPDR S&P 500 ETF (Ticker: SPY) down to $384 and that will only be the first leg down. 

 

The Fed will then print many trillions more of dollars and the market will have one more sugar rush rally before plummeting again.

 

That’s why I don’t want you to miss out on what will be an incredible year this will be to make money trading.

 

If you can understand the way the Fed works, you can make an absolute killing this year.

 

But make no mistake about this … 2022 is about the Fed coming to the end of their long-term debt cycle.

 

The jig is up and there will not be another boom/bust cycle after this one breaks for a very long time. 

 

Bring It Home

 

Next week’s Fed FOMC meeting is HUGE.

 

Look for details on a live session I’ll be hosting on the afternoon of the 26th following the meeting.

 

I’ll break down the Fed’s message and any changes since December.

 

Plus I’ll share my favorite ideas for 2022 and trades to put on now.

I look forward to cleaning up on profits while the Fed and US government try to clean up their mess.

 

Until then …

 

Live and Trade With Passion My Friend,

 

Griff

Signals That Trigger Meltdown

Hey There Income Hunter,

 

Flexibility is extremely important in trading.

 

News moves fast and trends reverse for seemingly no reason at all.

 

So you need to be able to shift strategies to go with the flow.

 

This is especially true in 2022, as the Fed tightens into a slowing growth and inflation environment. 

 

Here is an example from 2018 on how fast the Fed’s policy can shift. Speaking after the Fed had tightened aggressively for months already, Jerome Powell said this:

 

The really extremely accommodative low-interest rates that we needed when the economy was quite weak, we don’t need those anymore. We are gradually moving to a place where interest rates will be neutral. We may go past neutral, but we’re a long way from neutral at this point, probably.

 

Powell made this statement after eight .25% rate hikes, and he was signalling potentially would have to go higher.

 

Guess what?

 

That day was the peak in stocks and after that they dropped 20% in less than three months. 

 

Today, we will look at the signposts that will warn you of an imminent collapse and what the Fed may do to keep the financial system intact.

 

Click here to protect your wealth.

 

Signposts of a Bear Market

 

Interest Rates: A reversal of the 40-year downtrend in interest rates would trigger a meltdown in stocks. This is because the public and private sector are loaded with debt and higher rates would cause a debt crisis. 

 

However, the Fed could cap interest rates at levels that would allow companies and households to maintain their debt load. This is a simple task using QE to buy bonds from banks. 

 

Corporate Tax Hikes: Corporate tax rates have been in a downtrend similar to interest rates, which has also contributed to higher stock prices. However, political and public sentiment have shifted and higher tax rates would also put a lot of pressure on stock prices. 

 

Antitrust Regulations: Mega-cap stocks have led the way throughout the current bull market. However, the tide is shifting as bipartisan support to take antitrust measures against tech companies is increasing. Keep an eye on news – and Frank Gregory – in this area.

 

Commodity Supply/Demand Imbalance: If the supply/demand balance continues in the direction of overwhelming demand for commodities, this could squeeze corporate margins and their equity valuations. 

 

Bear Markets Present New Opportunities

 

Bear markets can really spook investors but in reality they also present excellent opportunities . 

 

Reallocating to sectors that will outperform is an early step you can take to reduce your draw downs as the broad large cap indices correct. 

 

Think high dividend names using covered call strategies that will defend your position on the down side while you collect dividend distributions. You also want to apply a dollar cost average strategy so if your stock does go down your cost basis is improving along the way. 

 

Low-beta, meaning stocks that lag the performance of the benchmark index, and low-volatility stocks will outperform in bear markets. 

 

Sectors to buy on dips include:

 

      • Consumer staples (XLP)
      • Real Estate Investment Trusts (XLRE)
      • Healthcare (XLV) and 
      • Utilities (XLU)

 

Bear Market Plays

 

As I mentioned above, you want to be long the lowest volatility, lowest beta names that offer the best risk/reward.

 

Below is a graph that plots the risk/reward ratio (X axis) against the expected returns (Y axis). In a bear market, you want to be long stocks in the high and left quadrant of the graph. This is back tested research from 42 Macro LLC. sourced from Bloomberg data.  

 

These are mostly the bond ETFs and commodities that historically have done well in environments when both growth and inflation are decelerating. 

 

Bring It Home

 

You can always be in control of your trading – and emotions – if you are consistently ahead of the markets. 

 

Understanding Fed policy and how to get out ahead of the Fed is critical to make money in all trading environments. 

 

Investors are just starting to make the switch into the direction of selling rips as opposed to buying dips. 

 

Meanwhile, I have been talking about this for months …

 

Sell the rips cover on dips

 

Rinse and repeat, and as always …

 

Live and Trade With Passion My Friend

 

Griff

Foreign Flows Into US Set to Shift

Hey There Income Hunter,

 

The greatest advancement in the 100-year cycle of the Federal Reserve has been the development of the financial markets.

 

That development and ensuing accessibility to foreign capital, along with Fed and US government policies, have successfully pulled trillions of foreign capital into the US stock and bond markets.

 

Of course, that capital from abroad is now contributing to the massive financial market bubble the Fed is trying to protect today.

 

Think about this stat …

 

US stock market capitalization represents 61% of global stock market cap … However, the US accounts for only 23% of global GDP.

 

This means the US is more reliant on consumer spending and external financing than most developed countries.

 

Today, I want to show why this is so important to understand and the ultimate ramifications of this trend on your wealth.

 

Extreme Valuation Thanks to Foreign Buying

 

The chart below shows the Wilshire 5000 (the benchmark market cap index) to GDP ratio. Notice how far above the dot-com bubble era we are today …

 

 

This is an all-time high … and if the stock market drops by 25% that means the gross domestic product would fall by 50%!

 

Most investors don’t realize the fragility of a market that is stretched as what we have on our hands today.… And don’t think this has to do with US companies selling more products abroad, because that is not the case. 

 

The extreme valuation is mostly due to higher valuations of corporate earnings or the price-to-earnings ratio (PE). 

 

Massive Equities Overvaluation Drivers

 

      • Interest Rates: As you can see from the chart below, Treasury yields (Red) are tightly and inversely correlated to the cyclically adjusted P/E ratio.

 

Lower interest rates allow equity valuations to go higher, and the situation also creates incentive for investors to own excessive stock exposure.

 

This is because low interest rates make it easier for stock returns to beat the safer investment into Treasury bonds. 

 

So, as we are beginning to see higher interest rates have a negative impact on equity prices, especially large cap growth stocks that rely on low interest rates to fuel their growth.  

 

      • Trade Deficits: This is a really important variable to understand because it is a trigger that will drive mass selling of financial assets in the US as rates rise.

 

Trade deficits always grow for countries that manage the global reserve currency  … 

 

This is because of the deal the US struck with Saudi Arabia in the 1970s, when they committed to protecting OPEC nations militarily in return for their promise to exclusively use dollars in exchange for oil.

 

Five decades later the cumulative US trade deficit has hit $14 trillion dollars!

 

Our deficits are surplus dollars for nations including Japan, Germany, Switzerland, Taiwan and China, among others. Those countries take their excess dollars and invest in US assets like corporate bonds, stocks and real estate.

 

 

Non-US holdings prior to the “PetroDollar” deal with Saudi Arabia stood at 4.3% … Then from the 70s to 2021 the level rose to 25%.

 

The shift in non-US investment into the US has taken the US from the world's largest creditor nation to the world’s largest debtor nation. 

 

 

To be clear about what the chart above represents:

 

The US owns $34 trillion in total foreign assets, while foreigners own $50 trillion in total US assets. 

 

The foreigners pick and choose the best assets to buy and in return the US buys depreciating consumer products from our trading partners so they have more dollars to use in exchange for oil.

 

      • Passive Investing: Fund flows into passive index investments are now greater than flows into active products.

 

Most retirement plans just pour money each and every week into the S&P 500 and other benchmark indexes that are traded closely to the S&P 500.

 

Since most passive indexes are weighted by market capitalization, it means that more and more capital flows into the largest and most expensive companies.

 

The chart below shows how extreme this shift to passive funds has changed the makeup of household portfolios …

 

 

Capital has been flowing into the US at a high rate as massive dollars have been printed and found their way into US financial markets. 

 

The point here is, now that the Fed and US government are being forced to shut off the printing press, where will the buyers come from to hold valuations at such extremes?

 

Bring It Home

 

Later in the week I will lay out possible drivers of the reversal in equity prices.

 

For now the dollar is the critical signpost for when we can expect a serious downturn.

 

I foresee a bounce in the dollar, which may be a great selling opportunity. The dollar itself will be the clue that foreigners are liquidating dollars as they shift to the alternative currencies of non-US trading partners.

 

The winds of change are beginning to blow and once they start to howl we need to be ready to get ahead of the market because the fire sale of assets can spread quickly.

 

Until then …

 

Live and Trade With Passion My Friend,

Griff