Hey There Income Hunter,

 

What the heck!?

 

Now the markets are pricing in a 30% chance of an emergency rate hike.

 

OK, yes, the CPI report came out and showed inflation at a 40-year high. But let me get this straight …

 

J-Pow goes from denying there is any inflation to being so worried about it he can’t even wait for an official FOMC meeting.

 

I would not rule it out. I see the logic, since March 16 seems far away right now and they need to get the process going before they completely miss the window to tighten at all.

 

The chart below shows that the Fed Funds contract that matures before March 16 traded higher in yield meaning somebody is betting they could go before the FOMC meeting. 

 

 

The Fed always feels the need to raise rates just so they can lower them during the next downturn. 

 

Unfortunately, this downturn has already started and the market has priced in six tightenings, so it’s really a moot point. 

 

Today, I’ll lay out why it doesn’t matter whether they go today or March 16.

 

Recession Is Coming in Q2

 

The Fed must be even more desperate than I thought.

 

This is what happens when you are making decisions based on old news. By tweaking policy based on the previous months’ data they are falling further and further behind the curve.

 

Let’s look at some forward looking data. Here is an updated earnings report from Bloomberg:

 

The chart above shows current results from the 2021 Q4 earnings season. Of course after $6 trillion in liquidity injections into the economy and the markets in Q1 & Q2, earnings were robust.

 

However, when they completely shut the liquidity down, the rate of change immediately decelerated.

 

That is what forward looking analysis is about.

 

It’s like the reaction to the CPI report today. You knew this number had the potential to be strong because there was still plenty of excess cash in the system from QE.

 

Let’s remember, QE is still going on. It will end this month and that tells me the Fed is only interested in:

 

• • • Pushing interest rates higher while the market expects it so they can lower them later or
    • They want to keep the pressure on the stock market and engineer a crash to gain cover to go back to QE.

 

I think it is a bit of both. 

 

The No-Brainer Trade

 

Let’s not forget the fact that the US government debt is very expensive to carry. It currently costs $400 billion to pay interest on the $30 trillion debt burden now.

 

If rates rise much further, the Fed will have to put a cap on rates like Japan announced yesterday.

 

So, what does that tell you? 

 

Well, if the market has already priced in more rate hikes then the economy can handle, then buying short-term bonds at this level has a high probability of success. 

 

Plus there’s tremendous upside under the scenario of the Fed flipping back to QE, which would send bonds soaring.

 

Bring It Home

 

I want to thank everyone for coming to the Power Income Trader event last night. If you missed out, here is the replay – join us!.

 

These markets can be difficult at times but having so many talented traders together certainly adds a ton of efficiency to the process.

 

That is really what trading is all about, leaving the emotions at home and sticking to a disciplined, systematic approach. 

 

The next few months offer tremendous opportunity and we have an awesome game plan.

 

See you soon and as always …

 

Live and Trade With Passion My Friends,

Griff