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The withholding data is the real deal. It continues to show the US economy growing rapidly. Inflation will continue to run very hot, and the Fed will remain under pressure to reduce QE. That showed up this week in Powell’s statement that the Fed will stop saying the bad word, “transitory” because people misunderstand what the Fed means by it.
Of course the real reason is that the Fed has been horribly, disastrously wrong, yet again. Just another in a series of compounding policy errors that work like compound interest over long periods of time. After a while, suddenly you’re talking about real money, and unimaginably big problems. So the Fed has a big problem now of its own making. There’s really no way out of this that doesn’t result in a mess.
The other change out of the Fed this week is that Fedheads are now talking about doubling the rate of cuts in QE. That would bring QE to zero by March instead of June.
Mark my words. That’s not going to happen. The markets will crash before that, and the Fed will reverse course, and restart QE, yet again. But how much damage will have been done already, and will the market still have the ability to get up off the mat again and punch the lights out on the upside?
My outlook now has more of a hard edge than it had a month ago. The Fed has demonstrated its cluelessness yet again. Therefore, I think that it is much more likely to be too late in response to the approaching “unexpected” crash that “no one could have predicted.”
Now, as they embark on another insane response to their previous insane policies, they face the massive compounding of the fragility they have caused in the financial system. The Treasury market simply won’t be able to maintain current prices and yields when the debt ceiling is finally lifted. The Fed will be sharply cutting its purchases or indirect funding of Treasury issuance just when massive new Treasury supply will flood the market. It will be ugly.
So the rally in Treasuries has once again presented us with a gift horse. If I were trading Treasuries, I sure would not xxxx xxxx xxxx (subscriber version only).
Here are the data, charts, and analysis that tell you why you would want to protect yourself, and even profit from what’s coming at you very soon. It also analyzes the likely timing. Be ready.
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