Hey There Income Hunters,
In case you missed my Griff’s Picks show in our Volatility Edge program yesterday at 1pm … I wanted to share the details …
J-Pow has been adding 30% more reserves to the banking system, even though he has been talking about draining reserves for weeks …
Check this out … This data comes right from their reserve balances …
Now, the Fed had stated that their amount of quantitative easing (QE) would be $120 billion per month …
However, it has been much greater …
Could J-Pow be building a cushion before they do start tapering in November? Anything is possible because QE is their only monetary tool they have left. Rates are at zero, and if they sense trouble in the credit markets or the economy all they can do is increase QE.
The Powell Christmas Massacre May Be Repeated
The timeline the Fed has constructed for tapering at the end of this year is eerily similar to 2018.
Powell was also at the helm in 2016, which is when he started tightening by reversing QE, and raising interest rates. It seemed absurd at the time because gross domestic product (GDP) was barely above 2% …
The recovery from the great financial crisis was the worst in history, and he started draining liquidity … So, by October, the Fed Funds interest rates had risen by 1%, and the stock market started selling off.
J-Pow just kept raising rates anyway, and then in early December, it started melting down and by Christmas Eve the S&P 500 (Ticker: SPX) was down almost 20% for the month …
Check out this meltdown:
Powell then came back after Christmas, and said the Fed would stop raising rates, but by then the damage was already done.
The takeaway here is that until the Fed and Government can create real economic growth. They should not attempt to drain liquidity from the system.
Watch the Jobs Market
Yesterday marked the official ending of the unemployment benefit checks … Now we will see the real condition of the job market … Notice the current state of the participation rate …
15 million prime workers now have to look for jobs. The labor participation rate will rise, but will there be enough jobs to move the unemployment rate much lower?
If there isn’t, then the unemployment rate will rise. Right now, it is sitting at 5.4%, while it was 3.5% pre-COVID.
If it does rise, the Fed will have the cover to avoid tapering … The bottom line is the Fed does not have the latitude to reduce much of the liquidity they have already added …
The consumer and the economy are much more fragile now than they were in 2018. Stimmy checks are history, and the spending bills up for approval will not do anything for the consumer.
No tapering and more spending can only mean one thing …
Sell the Dollar
I think will continue to go down for two reasons:
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- One is the Fed has turned more dovish just as other central banks are turning more hawkish, like European Central Bank (ECB) and China.
- Second, and potentially a much more powerful force, is the Afghanistan disaster. It could trigger a loss of confidence in the dollar worldwide …
- We have already seen a number of countries shifting away from the dollar, and exiting Afghanistan may perpetuate similar moves.
- It did not take China long to reach out and set the tone for trade deals and support for Taliban, and they have $3 trillion in dollar reserves for sale as they set up trade deals in Yuan …
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Set up bear strategies in the US Dollar Currency Index (Ticker: UUP) …
Implied volatility (IV) is at the lows, so I like buying the Oct. 15 25-strike puts … I paid $0.31 for the puts.
You may have your own ideas on how to play it; however, from a macro and technical perspective the trade could reach the recent lows and provide 100+% returns.
If UUP closes back above $24.90 you can stop yourself, putting the risk/reward in your favor …
Bring It Home
September could be an interesting month. Can a reopening lift the economy and bring the US back to the accelerating growth and inflation economic condition of Q2?
I think it is a toss up at this point. However, if the Fed repeats the mistake of 2018, and tightens too soon … that may kill any chance for an economic recovery …
A bearish dollar strategy is a great short-term play since Powell has made his dovish pitch, and we should see weaker economic numbers in the weeks ahead.
And of course, if you find yourself wanting to play more trades based on government shenanigans, Frank and Andrew specialize in the Deep Information Washington trades that other traders don’t have the resources or intel to find.
They closed out a partial win on Kroger (Ticker: KR) yesterday for a +50% win, and you can join them until midnight right here.
Good luck, and as always …
Live and Trade With passion My Friends,
Griff