Not Enough to hold interest rates down

Hey There Income Hunters,

Have you ever watched a movie where the bad guy takes a punch and just keeps coming?

We’ve got the financial equivalent happening right now …

And there’s a market that not even a bullish relative strength index (RSI)/price divergence can save.

Not cool, man, that’s one of my favorite analysis tools!

Divergences are usually awesome technical indicators that help me measure the bullish/bearish direction and momentum of an asset … and it can also help predict highs, lows and trend reversals.

A divergence occurs when there’s a disagreement between price and RSI. In an uptrend, the price will make higher highs but RSI will not.

That’s not happening in the market I’m talking about.

Can you guess which one it is?

Longtime #IncomeHunters will know …

Because Power Income’s the No. 1 principle is to Trade the Fed by riding the most powerful money flow in the world.

And right now our central banking system is committed to printing money into oblivion to inflate the U.S. debt away … while the response from leaders is that we don’t have to worry about inflation.

Well, Americans certainly are worried.

Why shouldn’t we be?

We see prices, including gasoline and food, rising every month.

And the bond market certainly knows better … as an overwhelming supply/demand imbalance may just power through a solid bullish RSI/price divergence that formed this month.

Take a look at this chart to see what I mean …              

There are more telling signs why bonds will continue going down unless the Fed flips the supply/demand imbalance.

And there’s a way for you to take advantage!

It’s a Trap!

On the other side of the coin, there’s a Fed secret that the media, the administration and the Fed itself doesn’t want to talk about:

For every dollar the Fed prints, a dollar of Treasury bonds must be issued to pay for it.

You see, when a country’s debt issuance grows above 80% to gross domestic product (GDP), it reaches the point of diminishing returns.

Translation: every dollar of debt outweighs and produces much less than a dollar of growth.

This bleak scenario is known as “negative productivity trap.” It began here in 2016 and has now reached 129%, so the hole continues to deepen

However, we #IncomeHunters can use the Fed for prey.

If they are so hell bent on devaluing the dollar and Treasury bonds, then we may as well get out ahead of them and *Jim Cramer voice*, “Sell, sell, sell!”

How High and Low Can They Go?

So, how high can 10-year rates go and how low can iShares 20 Plus Year Treasury Bond ETF (Ticker: TLT) prices go before the Fed steps in?

Fed intervention, by the way, would come in the form of

  • Yield curve control via more quantitative easing (QE), with spending on longer-term securities (such as government bonds) to increase money supply and economic activity.

  • Yield curve twist via selling into the market short maturity bonds to buy long maturity bonds. The goal being to force long-term interest rates lower to build more affordability into the housing market.

In a recent JP Morgan poll, asset managers were asked what levels it would take for the Fed to come in and stop interest rates from rising. The overwhelming response was 2%. So far the 10-year has risen to 1.75% and TLT bottomed out at 133.19.

I do not agree with the notion of 2%. Heck we are only 29 basis points (.29%) away!

Knowing what Fed Chairman Jerome “J-Pow” Powell is trying to accomplish, I think he will let rates rise to 2.25%-2.5% so he can unload a cash bazooka on the market.

He needs enough of an excuse to buy $250 billion in bonds a month … because the banks are not happy campers and they could make his life miserable.

The chart below shows that the Fed’s primary dealers are unable to hold as many Treasury bonds on their balance sheet. Due to supplementary leverage ratio requirements they must shrink their assets to meet the requirements …

Bring It Home

I want to keep driving these points home because of how powerful these debt forces and capital flows will be …

It’s very important to play the market from both sides. Right now, you should try and short about half the capital you are long. In a couple of months, that may switch to only being long half of what you are short.

In the meantime, bonds are the No. 1 short, followed by mega-cap tech and consumer staples…

As we witnessed yesterday, with Archegos  there is a minefield of bankruptcies just waiting to happen. That is the consequence of so much debt.

Keep your thoughts and comments coming, and as always …

Live and Trade With Passion My Friends,

Griff

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