The Volatility Crush Is Back!

Hey There Income Hunters,

The Jerome Powell flip-flop did it again.

The dovish/hawkish flip-flop two-step Powell has been dancing to has now run its course.

Get ready for all-time new highs.

As I’ve said all along, no one can turn inflation on and off at will.

And Powell knows that

In late 2018 when asked if the Fed was finished normalizing interest rates higher after three rate hikes Powell confidently said, and I am paraphrasing, we are not even close to normalising rates.

Just a few weeks later after their 4th rate hike and a 20% drop in the stock market Powell  promised to not raise rates again. 

I hope it is clear that Powell played politics last week to get his job back. Now he needs the stock market to go down to bail him out from being forced to raise interest rates. 

Today, I’ll show why that will not happen and instead we may see new highs before year’s end. 

It’s All About the Yield Curve 

The shape of the yield curve is telegraphing the loss of confidence in the Fed. It’s actually proof that smart money never believed Powell’s tough talk to begin with. 

Notice the 5-year/30-year yield curve spread chart going back to the financial crisis … 

The spread widened 100 basis points after Covid hit in 2020 because the Fed printed money and issued more long-term debt.

This was classic free money, the kind that drives short-rates to zero, while the Treasury must issue $1 of longer-term bonds for every dollar they print. 

So, Covid was a game changer that forced the curve steeper. However, once investors realized any hike in rates would trigger a debt crisis — something I have been saying from the beginning — smart money sold its short-term bonds and bought long-term bonds.

This trade is usually done at the end of a rate hiking cycle, but the market is so sensitive to rate hikes, it is happening before they even start.

Yes, I think the knee-jerk reaction is overdone and we should see a snapback in the stock market and a short-term resteepening of the curve. 

The critical point here, though, is that the curve is signalling some real problems in the financial system. 

Backwardation of Rates Signal Trouble Ahead

One of the most important signals for the economy is when the yield curve goes into backwardation, which means long rates go lower than short rates. 

That signal is a warning sign for economic recession — and guess what? The eurodollar curve, a global US yield curve that is the barometer for foreign debt issued in dollars, inverted recently.  

There is a good chance the economy goes into recession next year. 

The yield curve flattening is the warning and the Fed pushing themselves into a corner on the aggressive tapering will all but guarantee it happens. 

Bring It Home

Power Income Trader will keep you in tune to the policy changes we can expect from the Fed before they happen.

On Friday, I said the bonds should go down this week because Powell’s speech got every bond bear to cover short bond positions based on Powell’s tough talk. 

This week, investors will have to absorb $58 trillion 3-year notes, $36 billion 10-year notes and $22 billion 30-year bonds. Oh and then get a 7% CPI report on Friday.

I have bear strategies set up in bonds.

Bring it on, and as always …

Live and Trade With Passion My Friends,


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