01Aug3:08 pmEST

The Fed is Trapped; Long Live The Fed

It may take a little while longer yet for equities to fully grasp the picture. But what else is new? 

The first asset classes to usually catch on are fixed income and, at times, gold. 

So what is it, exactly, that these markets need to "catch on" to regarding The Fed?

How about this: The Fed is officially trapped and now they know it. Any semblance of a tightening cycle, or the ability to restart one, is a joke at this point.

And the biggest macro risk we face is not any type of trade war, nor any type of slowing economic data, more slowing earnings, nor an exogenous event. 

Not even close. 

The biggest risk we face is that the bond market vigilantes finally wake up from a long slumber in Chicago--Hungover from years of biding their time versus Bernanke and Yellen in deep dish pizza, a Cubs' World Series, German beer, awful winters, corrupt local politicians and heinous murder rates.

Now, the Chicago vigilantes wake up and pounce on The Fed's obvious weakness to cause serious dislocations in the bond market over the next six-to-eighteen months, via selling bond aggressively and trying to force The Fed's hand. 

Should that happen, there will of course eventually be Hell to pay around the world, including or even especially with equities getting whacked. Gold and her miners should be a stalwart this cycle, especially if the yellow metal is currently in the first two innings of sniffing out the scenario I laid out above, where the bond market rebels against The Fed doing an about-face and decides to "raise" rates the old-fashioned market way, via TLT selling off aggressively. 

Fed Chair Powell, one senses, initially wanted to avoid going down this road. But sooner or later most Fed Chairs acquiesce. While Paul Volcker gets plenty of credit in the early-1980s for raising rates aggressively and for being a tough Fed Chair, note that he inherited a Fed where inflation was already obvious and in everyone's face--Thus making raising rates somewhat easier (though he still caught plenty of flack at the time). 

In order for Powell or anyone else to eventually raise rates again it may take a good deal of time and inflation--Not that he needs to raise rates right away. 

But the main point here is that gold and her miners may be in the early innings of sniffing this whole scenario out. And if TLT is in the process of head-faking a breakout higher only to sharply reverse lower, it will add credence to this thesis. 

I recognize that may seem like a bunch of macro mumbo-jumbo, which has me returning to the QQQ undergoing obvious distribution (heavy selling by institutions) the last two sessions, meaning we should likely be treading very carefully as August begins with a harsh reminder of how volatility it can seasonally be. 

Kirkland is Not Just Costco'... Enjoy the Journey

 
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