Monthly Archives: June 2021

Why the Fed’s Bluff Will Cost Investors’ Trillions, Pt. 2

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Yesterday I outlined how the Fed is extremely late to curb inflation. 

As a brief recap, it only took CPI clearing 5%, multiple signals that inflation is running hot, housing entering a bubble, stocks roaring to new all-time highs, and signs of frothiness including: someone sold a Non-Fungible Token (NFT) of a fart, crypto-currencies including ones that were designed as a joke exploding higher, etc.

Put simply, it only took an extreme level of frothiness as well as some of the worst inflation prints in decades for the Fed to decide it needed to do something. 

We’ve already assessed how the markets initially reacted to the Fed’s move. But now it’s time to digest what the Fed actually did.

Did it actually hike rates?

No. 

Did it actually taper QE?

No.

Did it do anything besides change inflation expectations?

No again.

The Fed has clearly decided it is willing to stomach higher inflation in the near-term to sustain the bubble in stocks/ recovering economy. However, with inflation expectations rising (within 10 minutes they recovered over two years’ worth of declines)…

 and Treasury yields getting dangerously close to breaking their long-term downtrend (see the chart below)…

… the Fed was forced to temper these expectations.

So, the Fed did what it does best… it made a verbal intervention.

But was the Fed really serious?

I can’t claim to be psychic in the sense that I can read Fed officials’ minds. What I can tell you is that I don’t think it’s coincidence that within 48 hours of stocks selling off:

1)    The Biden White House convened a meeting with the President’s Working Group (the so-called Plunge Protection Team).

2)    There will be SIXTEEN (16) Fed official appearances this week, the vast majority of which have been to issue dovish statements about how the market overreacted to the Fed and that the Fed is nowhere near thinking about tightening monetary policy. 

Since that time, Fed Chair Jerome Powell has appeared before Congress during which he stated:

  • Fed Will Wait for Actual Inflation as Trigger for Rate Rise
  • Fed Won’t Raise Rate Preemptively
  • 5% Inflation Is Not Acceptable (We’re old enough to recall the 2% threshold)
  • Inflation Effects from Reopening Larger Than Expected
  • High Inflation Temporary, Will Abate
  • Factors Weighing on Labor Supply Should Abate 
  • May Take Some Patience to See What Is Really Happening
  • Hard to Say When Supply Bottlenecks Will Disappear
  • Enhanced Unemployment Benefits May Be Factor
  • Expects to See Strong Job Creation in the Fall
  • ‘Very, Very Unlikely’ U.S. Will Suffer 1970s Inflation Experience

So… Powell is basically telling us the Fed is NOT going to act preemptively concerning inflation… that the Fed still believes inflation will disappear by itself… and that the Fed is in “watch and wait” mode.

Put another way, the Fed spooked bond yields into dropping, and until they start rising again, the Fed is happy to let things bubble up in the markets.

In this sense, what the Fed has done is move to curb future inflation expectations without actually doing anything. This in turn has pushed long-term bond yields back down again… which has opened the door to stocks roaring to even higher levels before crashing down in a spectacular crisis.

I’ll explain why in tomorrow’s article… until then.

In the meantime, we have published a Special Investment Report concerning FIVE secret investments you can use to make inflation pay you as it rips through the financial system in the months ahead.

The report is titled Survive the Inflationary Storm. And it explains in very simply terms how to make inflation PAY YOU.

We are making just 100 copies available to the public.

To pick up yours, swing by:

https://phoenixcapitalmarketing.com/inflationstorm.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research​

Why the Fed’s Bluff Will Cost Investors’ Trillions, Pt. 1

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So the Fed finally moved… but what precisely did it do?

After a full year of the most extreme monetary policy in history, including…

  1. Over 12 months of ZERO interest rate policy despite the economy growing.
  2. Over $3 trillion in money printing.
  3. Buying corporate bonds, muni bonds, corporate bond ETFs, Treasuries, Mortgage-Backed Securities Student Loans, Certificates of Deposit, etc.

…the Fed finally announced it is thinking about tightening monetary conditions.

It only took CPI clearing 5%, multiple signals that inflation is running hot, housing entering a bubble, stocks roaring to new all-time highs, and signs of frothiness including: someone sold a Non-Fungible Token (NFT) of a fart, crypto-currencies including ones that were designed as a joke exploding higher, etc.

Put simply, it only took an extreme level of frothiness as well as some of the worst inflation prints in decades for the Fed to decide it needed to do something. That something?

The Fed announced that intended to start tapering QE in late 2021/early 2022 while also potentially raising rates late in 2022/ early 2023.

Regardless of whether or not the Fed will actually do any of this (more on that in a moment), what matters for us today is how the market reacted to the Fed announcement.

Treasuries, particularly long-term Treasuries (20+ years) caught a major bid on the news.

The long-term Treasury ETF (TLT) jumped 4% in the span of a few days. This forced widespread liquidations at hedge funds in their short bond positions. And when hedge funds start liquidating losses, they often will liquidate winners as well to free up capital.

You can see this in the stock market when compared to TLT: they are a mirror image of one another (blue rectangle in the chart below) with stocks falling in near perfect synchronization as TLT rallied.

Chart Description automatically generated

This suggests that the sell-off in stocks was collateral damage from the move in bonds, NOT necessarily a bearish development outright for stocks.

With all of this in mind, we need to take a look at what the bond market is currently doing for signs of where things are headed. Remember, it was Treasuries, that forced the Fed to act. And it was Treasuries that forced the sell-off in stocks last week.

So, what precisely did the Fed do?

We’ll address that in tomorrow’s article.

In the meantime, we have published a Special Investment Report concerning FIVE secret investments you can use to make inflation pay you as it rips through the financial system in the months ahead.

The report is titled Survive the Inflationary Storm. And it explains in very simply terms how to make inflation PAY YOU.

We are making just 100 copies available to the public.

To pick up yours, swing by:

https://phoenixcapitalmarketing.com/inflationstorm.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research​

Warning: Both the Fed and the Treasury WANT Higher Inflation

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Over the last week, we’ve been outlining the absurdity of Treasury Secretary Janet Yellen’s belief that higher inflation and higher interest rates would for the U.S.

By quick way of review:

1)    Secretary Yellen believes that President Biden’s $4 trillion spending program would be good for the U.S. even if it contributes to higher inflation and results in higher interest rates.

2)    Inflation is already roaring in the U.S. before President Biden’s $4 trillion spending program. Higher inflation would NOT be good at this point as Americans are already experiencing rising costs living.

3)    Higher interest rates would also be extremely problematic as the U.S. now has $28 trillion in public debt. This massive debt load requires extremely low interest rates for the U.S. to avoid a debt crisis. The last time interest rates spiked higher in 2018, the corporate debt market froze, and the stock market collapsed 20% in a matter of days.

Now, Yellen is one of the two most important and powerful figures in the financial world. As such her views on this are of extreme significance for determining what policymakers will be doing going forward. As far as the Treasury is concerned, inflation will be allowed to rage.

This leaves Fed Chair Jerome Powell as the only potential voice of sanity from a senior policymaker perspective. And unfortunately for us, Powell is likely to prove just as delusional as Treasury Secretary Yellen when it comes to issues of inflation.

The first sign of this came in 2018 when Powell used his first Jackson Hole symposium to glorify former Fed Chair Alan Greenspan’s economic insights and “considerable fortitude” in not raising interest rates back in the late ‘90s.

Yes, Powell believed Greenspan was a genius for not raising rates in the late’ 90s. If you don’t remember what stocks did at that time, it looked like this:

Considering this, the below quote from Powell’s 2018 speech is quite revealing.

The FOMC thus avoided the Great-Inflation-era mistake of overemphasizing imprecise estimates of the stars. Under Chairman Greenspan’s leadership, the Committee converged on a risk-management strategy that can be distilled into a simple request: Let’s wait one more meeting; if there are clearer signs of inflation, we will commence tightening.13 Meeting after meeting, the Committee held off on rate increases while believing that signs of rising inflation would soon appear. And meeting after meeting, inflation gradually declined.

Source: the Federal Reserve records

In this context, it is not surprising to see Fed Chair Powell now arguing that inflation is “transitory” and should be ignored. This is practically the exact policy he lionized in hits 2018 speech: ignore inflation, don’t raise rates no matter how frothy the markets become, and allow a massive stock bubble to form.

From Powell’s Q&A session in early May:

“We suspect transitory factors may be at work,” Powell said, adding inflation should return to the Fed’s target over time, and then be symmetric around its objective. Powell was commenting at a news briefing, following the Fed’s two-day meeting.

“If we did see inflation running persistently below, that is something the committee would be concerned about and something we would take into account when setting policy,” he said.

Source: CNBC

So, what does this mean?

That both the Treasury Secretary AND the Fed Chair, the two most important figures in finance, believe inflation is NOT an issue or even worse, is a good thing. Neither policymaker believes that they need to tighten monetary conditions. If anything, Treasury Secretary Yellen believes the government should print and spend even MORE money! 

So inflation is going to rage and rage, until this bubble bursts wiping out trillions in investor capital.

As I keep warning, inflation is going to ANNIHILATE investor portfolios. 

However, those investors who are properly positioned for it will make literal fortunes. 

On that note, we just published a Special Investment Report concerning FIVE secret investments you can use to make inflation pay you as it rips through the financial system in the months ahead.

The report is titled Survive the Inflationary Storm. And it explains in very simply terms how to make inflation PAY YOU.

We are making just 100 copies available to the public.

To pick up yours, swing by:

https://phoenixcapitalmarketing.com/inflationstorm.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research​

Stocks Are Preparing For a Major Breakout

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Stocks continue to churn.

The S&P 500 has been in a consolidation phase since mid-April. Yes, we’ve had a few runs to new all-time highs, but as the below chart shows, most of the action has been sideways (see the blue box in the chart below).

Whenever markets enter a consolidation phase, the eventual breakout tends to be violent. And the longer the consolidation, the more violent the breakout.

Considered the last market consolation which took place from February through late March 2021. Stocks chopped back and forth in a significant box pattern before finally breaking out to the upside. They then ripped higher by 5% in the span of a little over a week.

Indeed, this has been the hallmark of this bull market since the March 2020 lows: stocks rip higher, then enter a six to eight week consolidation phase before breaking out to the upside again. I’ve identified the consolidation phases in blue boxes in the chart below. All of them resulted in breakouts to the upside.

With this in mind, I see no reason to overthink the current consolidation. Until the Fed begins to tighten monetary policy, it’s difficult to see a reason why stocks should collapse. It is clear the Fed has decided to let inflation run hot, and as I’ve outlined multiple times in the past, stocks initially LOVE inflation.

On that note, we just published a Special Investment Report concerning FIVE secret investments you can use to make inflation pay you as it rips through the financial system in the months ahead.

The report is titled Survive the Inflationary Storm. And it explains in very simply terms how to make inflation PAY YOU.

We are making just 100 copies available to the public.

To pick up yours, swing by:

https://phoenixcapitalmarketing.com/inflationstorm.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research