Hey There Income Hunters,
When the captain of the ship says he is taking on water … it’s time to jump onto a new boat.
Well, cap’n J-Pow aboard the USS Fed admitted this week that “it’s time to retire the word transitory” to describe inflation.
And, the solution, in his view, is to consider wrapping up the taper of asset purchases, perhaps a few months sooner.
You don’t say?
Talk about being late to the party.
Power Income readers know it was completely obvious to me J-Pow and co. were making up the whole “transitory” message.
Now they will remove the stimulus, crush the stock market, then ultimately reverse course and start printing money once again.
Today, I’ll give you the trade that can capitalize on shifting policies between central banks that will crush it in Q1 2022.
The Great Divergence
This shift in FFEd policy comes on the heels of a shift in China to more stimulus over the next few months.
So, we have the two largest economies in the world heading in different directions.
This offers you a fantastic opportunity to get out ahead of what will be significant flows away from the US and into China.
It is not often you get such a divergence among developed nations:
Rate Hikes Priced Into the Market for 2022
Since Powell’s speech, the market increased the odds of two rate hikes in 2022.
Right now the probabilities of one rate hike is 98%, for two it is 85% and for three it is 55%.
I can see two rate hikes for the year.
But there can only be one out of two possible outcomes.
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Powell tapers and raises rates, which will crush stocks. Yes, that will slow down inflation, but not enough to remove the cost burden to consumers.
The consumer will be forced to stop spending, and stocks will get crushed as the economy goes into recession.
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The tapering causes credit stress and corporate bonds and stocks collapse.
The Fed would have to resume QE in full force and inflation would move to Stage 3 (Stagflation) as commodities soar and investors move into real assets and foreign stocks (i.e. China).
Evaluating Long China/Short US Tech
I trade the KraneShares China Internet ETF (Ticker: KWEB). It is a very liquid ETF and holds shares in a diversified group of solid internet companies.
Check out the ratio of KWEB to the Invesco QQQ Trust ETF (Ticker: QQQ):
When the trend is down, KWEB is getting cheaper versus QQQ. When it’s up, KWEB is getting more expensive.
We are confirming a positive price/RSI divergence above.
The divergence is positive for the ratio, meaning that KWEB will begin outperforming QQQ in the weeks ahead.
Bring It Home
This time of year presents many opportunities. Bad positions are taken off for a loss, accentuating the risk and cheap relative valuations.
Now is the time to set up trades into the end of Q1 2022. Money flows to start the year will reestablish themselves in the trades that will capitalize sectors.
I would include a US/China shift and also funds flowing into cannabis, beaten down commodities and precious metals.
I will continue to focus on these areas and share the macro drivers that are impacting them.
Have an awesome Friday and as always …
Live and Trade With Passion My Friends,
Griff