The Fed’s Political Hail Mary

I hope Jerome Powell is ready for his most important performance to date.

If he blows it, fear and uncertainty will return and stocks will resume their sharp fall.

So, you know, no pressure, J-Pow.

It’s time to play politics and here is what he faces in Washington …

On one hand, he’s being screamed at by Sen. Joe Manchin (D-WV) and co. for the Fed’s out-of-control spending igniting inflation concerns …

On the other, he has President Biden, who desperately needs to pass a trillions in new spending.

The President needs Powell to talk tough — which would put the pressure on Congress to pass the mega spending bill — so he can build momentum into the 2022 midterms …

This is all theater but if J-Pow plays ball, he’ll be reappointed as Fed chairman, Congress will fall into place, the debt ceiling will be raised and the spending bills will be passed.

No matter what he says, I am confident in my plan, and I’ll lay it out for you with a trade that I see shaping up to be a homerun.

You see, I’m very confident that no matter what happens today we are heading to higher asset prices. Here’s why …

Bet on No Fed Rate Hikes Until 2023

Notice that the betting odds favor no rate hikes until December 2022 the earliest, and its 50-50 at best for that:

6% CPI Is Coming 

A jump in rent prices could bring a 6% CPI in the months ahead …  

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As I have written about previously, Owner Equivalent Rent carries a lot of weight in the CPI and it is on the rise.

An even higher CPI in the months ahead, coupled with a global reopening that is picking up speed,will give a massive boost to real GDP in Q4.

Get Ready for Wage Inflation

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Decades of lower wages contributing to transitory inflation are history.

Amazon (Ticker: (AMZN) is leading a charge to higher wages. First, they were criticized for $13/hour pay and now they are up to a high of $19/hour.

On top of that, job openings are 50% greater than in 2019, meaning the power is shifting to labor …

Today, American  workers have a greater influence on wages than they have had in the past 20 years.

We are finally going to see a beautiful reopening and it will be even stronger in Europe, which leads me to my first trade …

iShares German Index Fund ETF (Ticker: EWG)

The German equity market is very well positioned to make a new move higher in the weeks ahead … 

Covid infections are decreasing rapidly outside the US, with cases dropping anywhere from 18% to 46% across Europe and in Japan, as well.

Germany is also crushing it in electric vehicle sales, with 41% of the market share, and they are offering significant incentives to buyers, which will spike sales even higher.

There is also a key indicator in the options market that forecasts an imminent move higher. Check it out in the chart below …

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The recent correction has been led by buying of puts in the options market, which has caused implied volatility to rise. However, the volatility was not matched in the real historic vol. 

Notice the red circle in the chart above revealing a similar situation in March 2021. The vol spike was resolved as the put buyers had to sell because there was no real followthrough selling and the market roared back.

I already purchased a 33/34 call spread to Oct. 15 for $.53 and it closed at $.60 on Tuesday. I will add on Wednesday by buying 34-strike calls post-Fed FOMC announcement, looking for $.50 – $55 to Nov. 19.

I think we could see a new high before expiration.

I also see another trade with homerun potential …

Sell The iShares 20+ Maturity Treasury Bond ETF (Ticker: TLT) 

The Fed will most likely mention tapering at today’s meeting, but I don’t think they will officially announce anything until the Nov. 10 meeting.

That gives the market plenty of time to absorb higher inflation numbers and more Treasury supply. So, yesterday I put on my first position to set up for a trend lower in TLT into November … 

I purchased a 145/143 put spread to 11/19 for $.41, which is a great low risk/high reward play. I locked in a 4/1 reward-to-risk ratio and once the debt ceiling issue is behind us, TLT will get there fast.

As you can see on the weekly chart, the rally is running out of steam and, following the muted run up after US stocks tanked Monday, it was clear to me TLT doesn’t have investor support at these levels …

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Bring It Home

Trading US Treasury bonds via TLT can reward you with consistent profits. I have made money trading bonds for 30 years by understanding Fed policy and the power of its impact on the markets.

We are entering an incredible period of transition back to global growth and inflation in Q4

You have to get out in front of the market, and now is the time to set up while the masses are hanging onto a China situation that may be a problem in 2022, but it is not now.

We’ll talk about the Fed’s comments next time. Until then …

Live and Trade With Passion my Friends,


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