February 15, 2017
You must understand that the intent of the Fed raising rates is to either to slow an ALREADY overheated economy…which can result in excessively risky corporate and consumer behavior, as well as dangerous inflation levels…or, as is more often the case, to PREVENT an overheated environment before it happens . In either circumstance, higher rates are used as an economic brake…
With this in mind, it is important to remember that any moves by the Fed do NOT have an instantaneous effect…Simply stated, the impact of rate hikes only come far out in the future, when businesses, looking to expand in what may be a “hot” economy, find that the higher cost of money makes their potential project less viable…and thereby perhaps deters what may be overly risky corporate “behavior”…So the Fed HAS to be proactive…ahead of the curve…which, in my opinion, they have NOT been…and we therefore have now reached the point where the Fed will NOW be forced to act more aggressively…which, as I have repeatedly written here, is exactly what has been the case MANY times in the past.
The Fed’s biggest fear/enemy is INFLATION
The Fed is always fighting a battle on two fronts…One is to ensure that we have solid job growth and low unemployment…And in spite of the misguided complaints that I’ve heard for DECADES…that “they’re not the right kind of jobs” or “the unemployment rate is not what the government says it is”…the FACT is, today’s Unemployment Rate is just about as low as it ever gets…and is NOT, for even two seconds, what anyone at the Fed is currently worrying about.
But…Fed governors are essentially bankers, ultra CONSERVATIVE in other words, and one thing they DO worry about…for a multitude of reasons which I will leave for another time…is excessive inflation…with their commonly defined comfort level now being somewhere around the 2% mark…which we are already exceeding…AND…as I have noted before, we have entered 2017 with the economy in a solidly ACCELERATING expansion mode, when NONE of Trump’s fierce desires to build out the USA have even been formally ratified yet…which they WILL be…and when the are, I can only surmise that these massive stimulus packages then WILL be adding fuel to the economic fire…AND THE PROSPECTS FOR INFLATION…WHICH, AGAIN, IS ALREADY REARING ITS HEAD...and moving beyond the levels the Fed wants to see.
Take a look at the two principal gauges of inflation that were released yesterday and this morning…
And at the consumer level…
Really…Right now the whole thing IS about inflation….I keep saying it, but just walk out your door and drive through ANYWHERE, and you will witness ACTIVITY ALL OVER THE COUNTRY…in just about any industry you want to name…and I’m oversimplifying, but THIS IS NOT THE SORT OF CLIMATE THAT RESULTS IN DOWNWARD PRESSURE ON WAGES…OR PRICES…QUITE THE CONTRARY…AND I FIRMLY BELIEVE THE FED WILL HAVE NO CHOICE BUT TO STEP UP THEIR RATE INCREASES BEYOND WHAT THE MARKETS (AND ALL THE NEW YORK “EXPERTS”) ARE CURRENTLY ANTICIPATING.
The Stock Market is telling you…and these two inflation figures are doing the same…THE GREAT RECESSION IS FULLY BEHIND US. IT’S TIME TO FLY…INFLATION IS COMING…AND RATES ARE GOING UP.
If you already are on this…ADD to what you own…If you have been “waiting to see what happens”, or “what Trump does”, I urge you to get off the fence and make a move BEFORE you are “sure” of the outcome…This, I believe, is in your face. I might be dead, dead wrong, but I think this is HAPPENING….now.
Here’s the long term picture in Eurodollars…
DOES 9800 look like a stretch to you…?
After trading sideways…and making new 7 week highs (taking out stops) just 6 days ago…Eurodollars today were making NEW LOW CLOSES…
And here’s the put option I continue to recommend here…WITH OVER 8 MONTHS OF TIME….
I think this about to get serious…YOU tell me what’s going to be getting cheaper? You tell me what’s out there to slow the economy? It sure has hell isn’t going to be coming from Congress and the Prez?
The WORLD (not just the USA) is IN GEAR guys…For several years now (and more), you have heard ALL sorts of crap about China going down, Europe going down, the United States too…and here we are with Stocks still flying, the economy still growing, jobs being created, etc, etc. etc….
THE WHOLE LOW, LOW RATES THING IS OVER…DON’T JUST SIT THERE WONDERING…DO SOMETHING WITH THIS.
I still say I have never seen a trade like this…A ton of leverage and a ton of time…
Give me a call…Thanks,
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: Eurodollars