Is QE the Fed's Oxycontin?

Nov 1, 2021

Is QE the Fed’s “Oxycontin”?

We promise inflation isn’t real… No seriously...

This week we explore:

• Powell’s “no win” options regarding inflation and the Fed’s “forward misguidance”

• Why today’s “Everything Bubble” really is different than past financial collapses

• An economic timeline for the next 7 days and why these events are so significant for short term investors

“I don’t suffer from insanity, I enjoy every minute of it.”

— Edgar Allen Poe

Enclosed please find this month's Full Faith and Credit Newsletter,

Party Like It’s 1928, 1969, 2000!

This month's FFC explores:

• We know we are in a bubble - but maybe this time is different?
• How an $8000 dollar investment in Shiba Inu became worth
• The unnerving similarities between today’s economy and the economies preceding the worst financial periods in our country’s history
• An analysis of the ongoing misplacing of money by central banks and how that affects investors and markets in the short and long term
• An in-depth examination of how real rates will affect future gold price in a variety of scenarios (all of which investors of any size should be monitoring closely)

And while this month’s FFC examines the long term ramifications of the Federal Reserve’s actions, short term investors must be on high alert as the rest of the week is sure to offer a lot of movement in markets.

Here are few key dates and events to keep a close eye on:

• November 2nd –- Vehicle Sales
• November 3rd – MBA mortgage applications, ADP employment report, ISM and Markit services PMI’s; factory and durable goods and capital goods orders
• November 4th – Challenger job cuts, weekly jobless claims
• November 5th – Official monthly payroll data
• November 3rd – The Federal Reserve Open Market FOMC policy decision

Main Event

All eyes around the financial world will be focused on the FOMC meeting this week. The big question is not if the Fed will taper (this is a foregone conclusion), but rather what they will signal about inflation, and what measures they plan to take to slow it down?

Forward guidance is arguably the single most powerful tool the Fed has left. At this stage, the Everything Bubble can only continue if the Fed remains loose. Tapering a $120 billion per month speeding freight train of free money down to $105 billion per month is not something anyone would consider tight. We expect ongoing forward “misguidance.”

The drama comes from signaling on the future of rate hikes. One year ago, the majority of Fed participants had the first rate hikes coming in 2024, but recent meetings have seen more participants moving their projection on rate hikes into 2023. However, this past week Goldman Sachs came out with projections that the first rate hikes would begin in mid-2022.

Should a majority of participants agree with Goldman, we could see an aggressive repricing in markets in the coming weeks.

Central banks from across the globe are taking steps to address inflation, and are actively raising interest rates. Australia, Canada, Norway, Hungary, Paraguay, Pakistan, and Brazil have all raised rates in recent weeks as they struggle to contain inflation.

But it’s not just Goldman and foreign central banks pressuring the Federal Reserve...

While most retail traders are focused on the all-time high in the stock market, the bond market is signaling an entirely different story. The spread between the yield on 5 Yr Treasuries and 30 Yr Treasuries has come down significantly in the last week, dropping from 112 basis points to 74 basis points.

But it is the speed of the flattening yield curve which is alarming. It’s a pace that has not been witnessed in decades, and indicates that the inflation the Fed has permitted to rage has already become too much to contain. A flattening yield curve often indicates that the Fed is stuck, and must raise rates into a slowing economy.

The Fed is facing a lot of pressure to tighten and admit the truth about inflation. The market wants the Fed to admit inflation is not “transitory.” Activist investor and hedge fund manager Bill Ackman this past week aggressively called out the Fed to stop QE and begin rate hikes immediately. Ackman argues that ongoing disregard of the facts around inflation diminishes their credibility.

None of this is news to our followers. In fact, the timing itself is the foundation for our long term positioning.

What will Powell do? We’ll have to wait and see. Followers who really want to know should read this month’s newsletter. Party Like It’s 1928, 1969, 2000!

But the upcoming calendar is also the support for our most aggressive trade we have ever shared with our readers. We expect the next several weeks to be volatile. They will also offer what we anticipate to be explosive short and long term opportunities. We have laid out our short term strategy in our 2/22/22 Event Trade.

2/22/22 Event Trade Followers:

The 2/22/22 Event Trade continues to evolve. For those following the trade closely, click here to track the trade’s daily performance. This interactive page is updated daily at the close of each business day. Our link allows users to scroll through each day to see the day-to-day performance.

For those who have subscribed to what we believe could be the trade of the century, we remind everyone following our positions of two very important considerations:

The first is that this trade is made up of very risky and aggressive positioning. We are using options and leveraged ETFs to maximize the potential upside of the trade. This makes the positioning very risky. Movements of 15% or more per day will not be uncommon. The entire seven figure position could be worthless in five months, or worth multiples. Anyone following along must understand these risks.

The second is that we are playing a conclusion, one which we don’t expect to fully play out until early next year. This is what makes it an event. We called it the 2/22/22 Event Trade because of this timeframe.

The aggressive nature of the positioning can be seen in the daily performance. In the first 9 days the account was up 26%. The last few days have seen those gains pared back. At Monday's close the trade event was up over 5% through the first 10 days.

Pay close attention to our upcoming updates as we monitor the response to the Fed’s policy decision this week.

Best,

Adam Baratta

Editor in Chief

Brentwood Research