Cash Is Trashed

Hey There Income Hunters,

 

What makes team sports so interesting to me is how successful sides adjust strategy as circumstances change during the game.

 

Whether it’s the pitcher, pass rusher or power play — if players and teams don’t make adjustments, they usually get slaughtered. 

 

Well, it’s no different trading.

 

If #IncomeHunters don’t adapt as investor psychology shifts, they (you!) run the real risk of getting slaughtered.

 

And guess what …

 

It’s time to adjust.

I have good reason to believe the dollar will collapse soon.

The latest sign pointing that way is that central banks in Canada, China and the U.K. are tightening monetary policies as the Fed continues to be ultra-easy with its approach to U.S. currency.

As you can see in the graph below, China’s yuan is strengthening to the dollar — and it’s fueling a non-dollar equity rally.

Those money flows are dollar bearish since global investors will sell their dollar reserves to invest in non-dollar equities…

The graph below shows the damage on the dollar so far — and we still have a long way to go.

 

The $89.43 level was the low close in January. A close below that would trigger further selling of dollar assets, which would take the U.S. Dollar Index (Ticker: DXY) down quickly to 88.62 and ultimately 78.88.

Three Macro Forces Driving a Weaker Dollar

1)    The global reopening has a much larger impact on global growth overall than it does on the U.S. itself. Some $64 trillion in global GDP for non-U.S. countries will give a boost as economies come back, especially with Brexit out of the way and trade restrictions reduced.

2)    The central banks leading the way as inflation surges globally are the People’s Bank of China and Bank of England as they fight inflation by tapering and pulling back credit. This will strengthen their currencies at the expense of the dollar…

3)    U.S. fiscal and monetary policy continue to add pressure on the dollar internally by letting inflation run, which reduces the wealth inside the U.S.

These are all critical points because they point to a changing world order.

Developed countries outside the U.S will turn into sellers of dollars and Treasury bonds. The Fed will be happy about the extra pressure on the dollar since it fuels the inflation they want so badly.

However, the Fed will not be happy about the pressure on U.S. bonds and they WILL be forced to respond with yield curve controls (YCC), meaning to hold down the yield on bonds.

US 10-year Yield Projections from the Congressional Budget Office (CBO) 

The CBO projects that by the end of the decade, the yield on the 10-year bond will rise to 3.5%.

But the Fed will never let the rates rise that high.

In the 1940s, even with rampant inflation as high as 8%, the Fed held 10-year rates below 2.5% — and they held them there for most of the decade.

The CBO also projects that in 20-years, 30% of all fiscal revenues will be used to pay back interest on government debt, up from 8% today. This will pressure the Fed to monetize the debt with YCC to slow down the inevitable rise.

DON’T MISS IT: Holding rates down while inflation rises will fuel even higher inflation. The necessity to keep long rates low is very bullish for precious metals and bearish for the dollar.

Cashing in on “Cash Is Trash” 

      • Be short TLT, EDV, ZROZ and long ultra-short bond ETFs: The market will force the Fed to pull the trigger on yield curve control by selling bonds and pushing rates toward the 2% target, which may be the level at which they would launch YCC.

Just to give you an idea on trades being done to capitalize on the move to high rates and lower prices in bonds, here is a look at Michael Burry’s (aka big short) position’s courtesy of the Bear Traps Report (May 22). Burry must have read a couple of my Power Income letters.

 

      • Puts on the iShares 20+ Year Treasury bond ETF (Ticker: TLT), equivalent of 1.27mm shares
      • Calls on ProShares 20+ Year Treasury Ultrashort ETF (Ticker: TBT), equivalent to 2.54mm shares
      • Calls on the ProShares 20+ Year Treasury Ultrashort ETF (Ticker: TTT), equivalent to 100K shares
      • Calls on the Direxion Daily 3x leveraged 20-Year Treasury Bear ETF (TICKER: TMV), equivalent to 38,400 shares
      • Outright long in the ProShares 20-Year Treasury Ultrashort ETF (Ticker: TBT), amounting to 300,000 shares

 

Burry was in the press not long ago talking about U.S. hyperinflation similar to 1920s Weimar Germany — and YCC is an event that brings the potential for hyperinflation into the picture…

A weaker dollar means higher commodity prices

There is global demand for commodity prices and that is what makes this period of inflation so serious. A massive amount of money is flooding the economy, along with a real demand for a limited supply of raw materials.

Materials most in-demand include: Copper, palladium, platinum, nickel, coal, uranium, oil, and natural gas. Because of the ongoing dollar debasement, silver and gold will be in high demand — especially as digital currencies are launched by global central banks who will demand gold as a potential backup.

Long/Short Equity Strategies 

Value really matters in an inflationary world, especially because we never know when a sharp correction could occur. So, long undervalued stocks against short overvalued stocks is a great strategy. Also, long value versus short growth will be a preferred strategy for the next couple of years.

Bring It Home

Like all long-term trends we will see violent corrections along the way, and they’ll likely come when we’re in between stimulus events.

The market is going to constantly need stimulus to remain at elevated prices, hedging or closing some of your core positions during lulls will help to maximize returns…

We may hit a slowdown in the next couple of months as the low base inflation effects from last year runoff.

Later this morning, I’m going to highlight a great long/short trade and run through the fundamentals and technicals so please join me at 8:45 for Power Income LIVE.

Until then …

Live a Trade With Passion My Friends,

Griff

 

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