The Emperor Has No Clothes

The truth will always set you free.

And on Wednesday, J-Pow finally told the truth.

Well, like a young kid he had to be told to tell the truth.

I pronounced on Day 1 of Janet Yellen’s appointment as Mother Mary of the Treasury that she would be concerned with a single goal — full employment — and she would do anything to get there.

And Janet finally told J-Pow to tell the truth.

I just want to thank every participant in this week’s press conference for repeatedly asking J-Pow what he meant by “substantial further progress.”

Now we know.

J-Pow spelled it out clearly … he said that “substantial” refers to strong job numbers and progress toward maximum employment.

Not even a mention about inflation.

The real J-Pow finally stood up.

There were a few other surprises in the speech and Q&A.

Fed Changes Based on the FOMC Statement

1.    The Fed will consider tapering when substantial further progress is made

        • I take this to mean, the Fed will announce tapering to begin in January of 2022.
        • The announcement will most likely come in the 4th quarter.

2.    The Fed is officially launching a Repo program for its primary dealers

        • Cash will be available to the primary dealers against Treasury securities.
        • This facility is counter to the Reverse Repo Program, where they borrow funds against their Treasury securities.
        • The rate the Fed borrows is .05% and they will lend at .25% (the top range of their Fed funds target range).
        • There is a limit per approved primary dealer of $500 billion.

3.    The previous interest on excess reserves or (IOER) is now replaced with Interest on reserve balances (IORB)

        • I see these changes as the Fed taking another step towards providing all banking operations directly to the public.

Back to Inflation

The Fed continues to create a monetary illusion of lower inflation. And the primary driving force of higher inflation going forward will be shelter …

The chart below illustrates the gap between the CPI’s current level used and the real price of owner equivalent rent …

Closing this gap will provide a significant boost to CPI and it will not be transitory. These increases usually stick.

What’s Next?

      • We will soon see a 5% handle on core CPI and the market will not take kindly to that. The bond vigilantes will rise from the dead and push long-term interest higher. This will be negative for tech and favor value.
      • This will push the Fed to consider capping interest rates as low as 2% and we should see that level tested.
      • Assuming Congress passes both spending bills, we could see all asset prices rise with talk of S&P 5,000 entering the consensus narrative …
      • The dollar is toast and should break the lows of the range within the next couple of months. The US trade deficit, as of March, is at an all-time high of $74-plus billion and will most likely continue to grow the rest of the year. Dollars will have to be converted into other currencies.
      • The commodities, metals and miners’ markets will make new all-time highs and most of all the Fed’s truth should free up gold to make a run at $2,000 by the end of the year — that would only be a 24% rally from the low of the entire correction.

Bring It Home

No doubt the Fed will have to walk this back a bit in the days ahead, but I don’t see it doing a famous flip-flop until the fall.

It will be interesting to see how China responds to this. The global monetary system must be coordinated through the BIS, so it is the one area where the US and China must work together.

The digital currency arms race will heat up big time and it will be an interesting battle …

Stay tuned, and as always …

Live and Trade With Passion My Friends,

Griff

 

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