By Andy Krieger, Editor, Money Trends In case there were any doubts, there are no longer any hawks on the Federal Open Market Committee (FOMC). Instead, every member of this very important committee – which makes key decisions about interest rates and the U.S. money supply – has been drinking the same Kool-Aid. They seem hell-bent on driving the Federal Reserve ever further towards subsidizing the greatest asset bubble in history. In fact, Fed chief Jerome Powell no longer even pretends to be focused on the Fed’s mandate of ensuring long-term price stability. A hawkish Fed would already be pushing up interest rates. A modestly hawkish Fed might maintain the status quo… But it would absolutely set a timetable for tightening monetary policy, most likely based on reaching an inflation level of 2%. What we have now is an entirely different sort of Fed, and it spells trouble for the stock markets. Let me explain… Bizarre Double-Speak Powell not only doesn’t want to set timetables… He doesn’t even want to entertain a discussion under which the FOMC would begin to raise rates or reduce its bond buying. During a press conference last week, Powell noted that we should stop talking about the Fed slowly reducing its vast monetary stimulation. Why? Because “the markets are listening.” Powell knows the market bubble will start to deflate once investors realize the Fed’s massive monthly intervention will slow, and eventually stop. Much of Powell’s investments are in exchange-traded funds (ETFs). He also has over $16 million invested in Goldman Sachs products. And he has just shy of $12 million invested in products from BlackRock, the world’s largest asset manager. Clearly, a surging stock market is very beneficial to him, making him more market dependent than data dependent. I wish someone had asked Powell, during last week’s conference, how much he has personally benefited from the stock market rallies since the low point in March of 2020. Of course, that person would have been banned from future Fed forums, as it would have upset the carefully crafted tone of benign pleasantries which Powell naturally prefers. Perhaps the reporters were thrown off by Powell’s talk, which was filled with bizarre double-speak. The Fed chairman said things like, “U.S. debt is not on a sustainable path, but the debt is totally sustainable.” Huh? How could dozens of seasoned economic reporters not attack that? I felt like I was watching a movie scene from some dystopian 1984-like future society. But Powell’s remarks are not the only sign of trouble… | Recommended Link | “Sorry, U.S. taxpayer” Those are the exact words of the former U.S. government official at the epicenter of a terrible mistake. This mistake is already destroying the lives of millions. Wealthy elites – including former President Trump himself… Barack Obama… Bill Gates – all look to be moving into position to avoid the fallout. |
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Signs of Market Instability Does it make sense that, with over 20 million people still receiving some form of unemployment insurance, our stock markets should be rising parabolically and moving farther away from long-term averages than ever before? This is not the sign of a healthy market. It is unsustainable, and it is dangerous. If the crash down was a sign of market instability, the explosion upwards is as well. Central banks are continuing to overdo it, and the result is still more financial instability. In a way, central bankers have good reason to be concerned. They’ve created a bubble of historic proportions. In fact, as I’ve shown you before, we’ve never had equity markets so overbought – not even during the 2000 dot-com bubble. When the bubble deflates, it will unleash an awful wave of bankruptcies – both personal and corporate – that will wreak havoc on our economy. Therefore, the central bankers will try to somehow keep the bubble inflated while praying that inflation doesn’t rear its ugly head before their term is up. I’m sure they would love to just kick the can down the road and leave the problem for the next group of governors to handle. All the Fed governors would get cushy jobs and big speaking fees as thanks for their wonderful service to the investment community. But sooner or later, the Fed’s “cure” will prove to be far worse than the economic illness Covid-19 created. So where does this leave us? A Hedge Against the Mother of All Sell-Offs If the cycle work of my consultants is correct – and frankly, I hope it is wrong – we need to brace ourselves for the mother of all stock market sell-offs. The market is nervous about a possible tapering off of the Fed’s monetary intervention while 10-year yields are only 1.095%. How will the market like 1.5% yields, or perhaps 2.5% yields, without gigantic increases in income to offset the sharply higher yields? Even with yields at current levels, the stock market needs at least a 50% increase in earnings across the board to come close to justifying today’s valuations. If we run into any sort of snag in D.C. with the passing of widely anticipated spending programs, while yields keep rising due to budding inflationary pressures, we should gird ourselves for a market sell-off that could match or exceed the sell-off after the dot-com bubble burst. In fact, one analyst I respect is afraid that the cyclical downturn in the stock market and the economy will be so severe, that Biden’s administration will face a worse sell-off than we had in the 1930s. If stocks were to sell off dramatically, the currency markets would go into hyper-volatility mode. I’d expect the yen – which is traditionally a safe-haven currency – to surge on the crosses. (The crosses are currency pairs that don’t involve the U.S. dollar.) I’d be looking to buy the yen against the Euro, Aussie, New Zealand dollar, and Swiss franc as a hedge against a possible financial crisis. The yen may even surge against the dollar as well. Buying yen against a basket of currencies may prove to be the best possible hedge against this sort of wild market activity. For more sophisticated traders who have access to the forex options market, long-dated, low-delta calls would be a higher-risk, higher-reward way to play this. It is certainly more efficient and much cheaper than using puts on equities. Regards, Andy Krieger
Editor, Money Trends
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