The Fed is Successfully Engineering Deflation

Hey There Income Hunters,

The Fed’s ongoing lack of transparency is making it nearly impossible to trade …

At this point, our central bank is just toying with investors.

Since the Covid lockdowns, the Fed has reassured the markets that stimulus would be there when needed — meaning traders should buy dips.

However, as the economy and inflation have heated up, the Fed has been playing games with headlines instead of being honest …

The reason I have focused on playing for longer-term inflation is because I knew the Fed was committed to its inflationary mission, but also knew they would deceive investors along the way.

You see, Fed officials know if they raise rates that would trigger a debt crisis and collapse in the markets …

So, they are talking tough to trigger a stock market correction, which may reduce inflation without the need to raise rates.

I shared my thoughts on a Fed-engineered correction weeks ago. 

Today, I’ll show you the real money flows that could cause further downside and the trade I put on just yesterday to hedge the Power Income Portfolio.

The US Dollar Is the #1 Signpost for Short-Term Deflation

The dollar is on the verge of breaking out of its trading range. If confirmed, it would signal  increased deflation fears.

Notice the weekly chart below of the Dollar Currency Index (Ticker: DXY)

This is the first time since September 2020 that the dollar has been above 93.47. A higher dollar is deflationary because it allows consumers to pay less for goods and services we import from countries with currencies that are cheaper relative to the dollar.

In the long term, I still expect the dollar to cheapen and inflation to stay elevated … This week there were meaningful signs of cash allocations away from dollars to alternative investments, and the Afghan disaster will also have longer-term ramifications for the dollar.

Real Money Allocations Away From the US

      • BlackRock calls for Investors to lift allocations to China’s Markets

This week, BlackRock’s research unit recommended investors boost their exposure to China by as much as 3X. That’s a 300% increase and, based on valuation between the two countries, a large chunk would have to move out of the US to China.

Wei Li, chief investment strategist at the BlackRock Investment Institute, said in an interview, “China is under-represented in global investors’ portfolios but also, in our view, in global benchmarks.”

      • Palantir bought $50 million in gold bars in August as the cash pile grew.

Palantir COO Shyam Sankar said, “You have to be prepared for a future with more black swan events, which mean unforeseen external shocks that impact markets.”

After the week we’ve had globally, I agree.

The Afghan Withdrawal Consequences

We are obviously not hearing about it much in the press, but China’s Foreign Minister Wang Yi welcomed the Taliban delegation to China just a couple of weeks ago …

China shares a 47-mile border with Afghanistan (which is just wonderful), so you can bet the Chinese will be looking to secure a deal with the Taliban for the many natural resource assets in the region.

This is a bigger issue than you will hear from the media. With this access, China has now taken a leap forward in global importance as a trading partner, which means more foreign investment will flow into China over the US …

As I say often, China follows a disciplined strategy with long-term goals and as BlackRock said, their time may have come to directly compete with — and eclipse — other developed nations.

Bring It Home

With today’s close above 93.47 we may have a deflationary narrative hanging over the market in the short term.

Stay focused, however, on the fact that the Fed and US government must keep flooding the market with liquidity so they can compete with China for the long term.

As for me, I added to my KranseShares China Internet ETF (Ticker: KWEB) bullish position by purchasing a 45/50 call spread for $1.80 to Nov. 19 expiry.

Good Luck on Option expiration day and as always …

Live and Trade With Passion My Friends,

 Griff 

 

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