Hey There Income Hunter,
Powell most likely already knows what is coming. Since the last rate hike in June, the economic data has gotten progressively worse.
We will soon find out that the economy is in fact in recession, and Powell will hike rates 0.75% this week knowing that.
Now if the US government debt burden resembled the 1970s, Powell could “pull a Volker” and hike all he wants to crush inflation … but there’s no chance of that happening in the 2020s.
The 2020s will be known as the Decade of Transition from a paper currency or fiat-driven monetary system to one that is driven by energy and commodities.
The Fed is trying to apply an old monetary policy to a new world and it will only make this transition more difficult.
Today, we will look at the options on the table for Powell and his most likely path.
Powell Has Already Blown It
Powell already made his catastrophic mistake by providing much more stimulus than necessary once the Pandemic hit.
Once the government spent over $3 trillion in 2021 to send money directly to consumers the Fed should have ended QE.
There was no reason to continue flooding the market with new money each month. In the end all that did was attract most of the economic stimulus into the market as well.
Going back hundreds of years, there isn’t an economy that could handle the about-face inflicted on the US economy this year.
Check out this abrupt 180 …
Powell is smart enough to know what putting the brakes on after keeping the pedal to the metal for nearly two years would do.
He played a very big part in transitioning the American economy into what it currently is, and now he is pulling the rug out from under it.
It’s All In The Numbers
Last week we received three forward-looking economic reports that confirm not only is the U.S. already in recession but it is getting worse:
- US July Purchasing Managers Report – The services component, which is the largest component in the economy today, fell from 52.3 to 47. A number under 50 reveals economic contraction, and that is a Q3 number.
- Initial Jobless Claims – Jobless claims rose to 251k from 244k, which was 11,000 more than expected. The four-week average rose to 241k and is now at a level that signals rising unemployment is imminent.
- The Philadelphia Fed manufacturing index – fell to -12.3 from -3.3 (+.8 was expected). The six-month business outlook fell sharply to -18.6 from -6.8 … The weakest since 1979.
Can you imagine having to get in front of the camera’s after these reports to tell Americans “we have voted to raise interest rates 0.75%?”
Especially since Powell’s policy has fueled a much stronger dollar that is squeezing our foreign emerging market trading partners because they buy dollar-based commodities and have dollar-denominated debts.
What’s the Real Plan?
Objectively speaking you have to consider the possibility that the government and the Fed are purposely inflicting as much damage to our trading partners and here is why …
The new monetary system is being designed as we speak. Brazil, Russia, China and South Africa (BRICS) are working with the Bank for International Settlements (BIS) to create a neutral basket of commodity backed currencies.
They are designing a digital currency backed by BRICS and many other nations including Turkey, Argentina, Iran and Saudi Arabia. They are also launching a settlement and payments system to work around the US SWIFT system.
The US knows they could no longer be the reserve currency of the world but will do anything to maintain their dominance on the global stage.
To that end, the only weapon they have is still the Dollar and they have purposely manipulated its value to hurt the economies that are still heavily reliant on it.
Once Powell and the Treasury (Janet Yellen) break something in the financial system they will surrender the dollar and take the final steps to inflating the debt away by holding bond rates much lower than inflation.
Notice the two graphs below. The one on top shows the GDP and Public debt trajectories since the late 1800s. Only twice has public debt crossed above GDP. That was the great depression and today.
The only way out of this mess is to deploy a policy that will keep inflation above interest rates for an extended period of time. That policy will devalue the dollar and debt denominated in dollars.
Bring It Home
Powell may not flinch this week. He must keep this charade going as long as possible.
He has done all he could to ensure the Fed can keep it going, i.e. demand the banks hold excess capital buffers via stringent stress tests …
He also provided the reverse repo facility, which sends high quality liquid assets (US Treasuries) to institutional investors …
This is done to ensure they have collateral to support their trading while earning the Fed Funds rate on their deposits.
However, this house of cards that he helped create is on a very fragile foundation now and we are close to the end.
Stay tuned this week as I unfold the internal market signposts that reveal the trade strategies that will keep you ahead of the Fed.
Good luck this week and as always …
Live and Trade With Passion My Friend,
Griff