Get Ready for the Double Dip

Andy Snyder|August 8, 2022

Money is still too cheap.

That’s the mantra we repeated several times during our monthly call with VIP subscribers last week. (You can see our full list of VIP trading research services here.)

It’s not good news.

In fact, it could be quite bad.

The stock market has been on a joyous ride over the last six weeks or so. Since June’s lows, the S&P 500 is up well over 10%.

It’s no surprise. Interest rates have plunged. Real rates are back near zero.

Wall Street’s trading algorithms have picked up on this activity, and the large firms have been buying like crazy.

It’s creating a new push for speculative stocks… the exact thing Jay Powell and his troops are fighting against.

There are many factors creating this mess. Most folks have totally missed them.

First, remember how the Fed is supposed to be reducing its balance sheet? It’s supposed to be selling all the assets it used fake money to purchase over the last two years.

To be fair, it is selling… but at an incredibly slow pace.

To make any significant dent in its balance sheet, the Fed will need to start unloading much faster than it is.

Right now, it doesn’t have the guts.

But there’s another overlooked phenomenon taking place.

Remember how Joe Biden took such pride in reducing the nation’s budget deficit? It’s gone down about $360 billion over the last 12 months.

Who or what is responsible for that is a debate for another column… in another rag. (Hint: It’s not Mr. Biden.)

That $360 billion figure is important. It’s much larger than the $110 billion or so in assets the Fed has offloaded.

It tells us, adding up all the figures, that despite the Fed’s determination to push bond prices higher by offloading its debt onto the market… Washington’s significantly reduced borrowing is offsetting the Fed’s efforts by nearly 3 to 1.

That’s a bit confusing, so let me put it this way…

The Fed needs to flood the market with Treasurys. When supply outpaces demand, prices fall… and interest rates rise.

Washington, on the other hand, needs to borrow to pay its bills. But with fewer bills… comes less debt.

That means less supply, which leads to rising prices… and, therefore, falling yields.

We can see the idea in this table…

All it’s showing is the amount of debt the Treasury has issued or is planning to issue this year. We can see that offerings are falling across the spectrum.

Back in May, for example, Yellen and her crew borrowed $36 billion via 10-year notes. By October, that figure will fall to $32 billion.

All told, Treasury borrowing is dropping by more than $30 billion… greatly counteracting the Fed’s efforts to flood the market with debt.

We’re seeing this action trickle into the stock market.

The speculative fervor is returning.

Like we told our paid subscribers last week, it may be good news for the next few weeks. But it will lead to some very disappointed investors when Powell takes the stage in September and warns of stubborn inflationary pressure and an increasingly hawkish outlook.

Markets have cheered over the past month, believing a recession would cause the Fed to turn around. We led the charge.

It played out just like we said it would.

But it’s time to turn the page to the next chapter. We need to look further ahead.

The story does not go well. Money is still too cheap.

Inflation will remain stubborn. The Fed will tighten for longer than folks are currently expecting. And the markets will pay the price.

It’ll be a short-term rally with pain to follow as the market realizes its mistake.

Nimble traders will have a field day with the big swings ahead.

Note: With interest rates still near historic lows… and the Fed running out of options to pin down this wild economy… I’m more convinced than ever that a devastating event for many Americans could be right around the corner.

My research shows it will have a longer-lasting and more personal financial impact than the crisis of 2008 or even the Great Depression. You should make some key moves before September 21…

Here’s how I’m urging my readers to prepare.