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January 26, 2018

 Inflation Coming + Loan Demand going through the roof

= MUCH Higher Interest Rates and MUCH Lower Bond Prices.


The Fed is meeting again next week…With what is happening on a number of fronts, I will be absolutely dumbfounded if their language and actions regarding interest rates do not become significantly more “hawkish.”  As I have maintained for some time now, the Fed Governors (who are just guessing at the future like everybody else) having been stupefied for months by  a ROARING stock market, MUST now be thinking, “Maybe we need to move FASTER on raising rates”.  I mean, let’s face it, their baby steps towards preventing an overheating economy and/or exuberant speculation have so far had ZERO effect at any level whatsoever…and they must now be realizing that they are behind the curve as regards taking rates back to more normal levels…With this FIRM belief in mind, I believe that any given Fed meeting (like next Wednesday, Jan 31st) will be the one in which they announce an ACCELERATION of the rate raising campaign…with the result being that the Bond market, reflecting long term interest rates is NOW beginning what I think will be a rapid and outright collapse, dropping MINIMALLY, some 25-30 points from current levels…or $25,000-$30,000 per futures contract.

For one thing…I firmly believe the first thing the Fed governors are now checking every morning is the stock market…this barometer of future economic activity…and beginning to shake in their boots with the possibility that they have been FAR too timid and/or complacent in their moves toward higher interest rates.


And btw, I DON’T think stocks are stopping here…

Here are some charts that show you what is happening in the real world that also are indicative of ramped up economic conditions…AND potential inflation.

Crude is jamming it on the upside…


The Lumber market, representing construction activity is screaming higher also…


And ditto for Copper…


These 3 major industrial commodities ARE indicative of STRONG economy activity…AND, as I keep noting, THE NEWS OUT OF WASHINGTON IS ABOUT TO MAKE A BIG SHIFT TOWARDS INFRASTRUCTURE BUILDING…which represents A MASSIVE stimulus towards economic attitudes…and again…make no mistake, EVERYTHING THAT GETS BUILT WILL BE DONE WITH BORROWED MONEY AND THAT MEANS INCREASED LOAN DEMAND…

And to oversimplify, when there is a lot of borrowing going on,  BANKS DO RAISE THE PRICE OF MONEY…OR INTEREST RATES.

Rates have been moving higher (meaning Bonds and Eurodollars moving lower) since mid 2016, with Bonds having made a notable sideways consolidation for the past year…Having traded this market more than any other the past 38 years, I can tell you that this market is typically a big mover, and the fact that the Bond market has basically done nothing for a year had DRAMATICALLY increased the odds of a very big move…and I DON’T think it will be up (meaning lower rates). As noted previously, I think are going to see at least 25-30 points on the downside.

Eurodollars and Bonds generally move in tandem…

As can be seen below, Eurodollars have started the year by breaking into new 2 year lows…as short term rates are now climbing higher on almost a daily basis…And if short term rates are rising, history has shown that long term rates will do the same (in spite of all the STUPID talk out there right now about the yield curve inverting), which can also be seen on this chart (longer term) and the one following…


And here is the shorter term look...The truth is, I think Treasuries are hanging by a thread…and about to blow through the lows of this one year consolidation, and basically just go straight down about as fast as any market ever does.


If I could, I would put these on and not want to even see the markets for 3 months.


There are LOTS of ways to do this…with shorter term (cheaper) options or with June puts (more expensive)…or with 2 & 1 or 1 & 1 combinations. 

Important thing is I’d say this market is NOT going to just sit here on its one year lows…Something big is about to happen (it IS the nature of this beast) and I just cannot imagine that it will be to go higher…towards LOWER interest rates.

I think this IS a very, very big trade…Does NOT mean I’ll be right but I have been here before…

 And Still Shorting Eurodollars…

I firmly believe (because I have seen it too many times) that this steady move lower in Eurodollars WILL accelerate at some point (like now) and start moving down faster and bigger…


This IS happening…RATES ARE GOING HIGHER…and I think these are both still KILLER trades.

If you are still on the sidelines, I urge you to get back on this…

Call if you’re interested.




All option prices in this newsletter include all fees and commissions.

The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Treasury Bonds, Eurodollars.

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