Hey There Income Hunter,

J-Pow spoke at the National Association for Business Economics (NABE) today and was back at it with his talk-tough-and-hope performance. 

He had a couple of classic lines like this one:

“We will take the necessary steps to ensure a return to price stability. In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,”

Now if that were really true, then why didn’t they raise .50% last week? 

He could have gotten away with a .50% hike last week prior to the really weak economic numbers that I expect us to start getting next month. 

What is worse is how he is taking the stance that the economy is strong enough to avoid recession …

The reality is, we may already be there.

Consumer’s Do Not Agree With Powell

Inflation is killing the consumer, which represents 70% of the economy. Now Powell is going to say that the Fed can hike rates because the economy can withstand it?

This is worse than his transitory nonsense.

Wages, after adjusting the inflation that he readily admits is so high, do not even cover the average consumer’s costs …

 

Here are the latest consumer sentiment readings of current and expected spending conditions: 

These numbers are barely above the levels that triggered recessions in the past. The expectations number is very worrisome, especially with inflation rates expected to rise further.

Yield Curve Warning

The US 2-year/10-year yield spread is a most reliable indicator of economic conditions.

Every time the US has gone into recession the yield on the 2-year note has risen above the yield on the 10-year note.

The reason the inversion of the curve is an important indicator is because banks can’t make enough spread on the borrow-and-lend programs. 

You see, the differential in short rates to long rates measure the profit margins of loans for banks. They borrow at short rates and lend at long rates, so if they borrow at 2.10% and lend at 2.10% there is no money in the transaction.

Notice in the chart below how little is left in the spread. It closed today at .18% which is a major  signal that growth is slowing already. 

 

Bring It Home

Powell is aware of all this but the Fed zero choice now.

Politically, the Fed must fight inflation, knowing that it will crush the markets and the economy.

The incredible part of this equation for traders is that you can make money on the way down and then make even more on the way back up …

Now, after last week’s purely short covering rally, is the time to set up the bearish trades in the broad indexes to catch the melt-down …

Because the Fed has zero tools to fight inflation and it actually needs inflation to reduce its $30 trillion debt. 

So, Powell’s goal is to crush the market and then fire up the printing press and make it like he saved the day.

Live and Trade With Passion My Friend,

Griff