The FED is Beginning to
Hint Tightening is Working
I spent five hours this week, listening to Jerome Powell getting grilled by politicians from both sides of the isle regarding the economy and what the FED is doing about inflation.
Powell couldn’t be more diplomatic or restrained; I actually respect his ability to stay humble and patient, even as politicians ask him the same questions for hours on end, from slightly different angles.
He is a class act, when it comes to taking the time to really drive home his points and the one that’s really the centerpiece of his testimony is that raising interest rates is the Federal Reserve’s main tool, but that this alone won’t solve the nation’s challenges.
Nobody’s perfect and he has an impossible job description, but I believe that he did one thing right this week; he made it so clear to Congress that hiking interest rates is now starting to abuse the economy, not to contribute to it.
- The stock market has endured the worst H1 of any year since 1932!
- The Treasury bond market has suffered the worst H1 of any year since 1788!!
- Monthly mortgage payments are up 40% in six months!
- Venture capitalism is slowing dramatically.
As you can see, this week’s testimony has convinced the market that the FED isn’t stupid; it is explaining that what Paul Volcker did was an emergency and a policy we really don’t need to resort to, if Congress and if Washington do their part as well.
The SQQQ ETF, which is the triple-short of the NASDAQ has seen an all-time high inflow of funds just now, while the TQQQ ETF, which offers a 3X-LONG on the NASDAQ, has seen a 1-year low in assets under management.
The bearishness is historical, but the Federal Reserve is clearly stating that, for what it is able to do, interest rate hikes and balance sheet reductions, it believes that the market’s forward-looking pricing mechanisms have done their part.
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Powell told Congress that his actions will not lower oil prices, will not lower food prices, will not help with supply chains and will not help to build new homes faster.
The FED influences demand and attempts to lower it, but the supply-side is the government’s purview and it was obvious that politicians got his subtle reasoning.
Powell has signaled to the markets that once the FED raises rates by 0.75% in late July, which will take the Fed Funds Rate over neutral to 2.25%, defined as “somewhat restrictive,” the FED will lower the increases to 0.50% in September and begin to mark the end of tightening, right around the time the Mid-Term elections roll around.
All of this is setting up a major RISK-ON rally, especially as we do see inflationary expectations coming down.
Courtesy: Zerohedge.com, Bloomberg
If the FED is pre-announcing the end of tightening and with cash levels the highest they’ve been in 20 years and with the dollar so strong, the U-turn ahead could easily send silver to $30/ounce.
It’s difficult to understand just how much selling has happened and how much cash is parked in dollars, but we’ll soon realize just how much, as a tiny fraction of it returns to commodities and sends silver up.
In our mind, the road to $30/ounce has already been paved and now it’s time for it to hit the tarmac.
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