The Fed’s Vendetta Against Trump Heats Up
In the last few issues of Money & Crisis, I’ve been building a case that the Fed is actively trying to sabotage the economy and the stock market in order to hurt the Trump administration.
In particular, I’ve outlined how aggressive Fed monetary policies have been under the Trump presidency (green box in the chart below) – particularly compared to how the Fed acted during the Obama presidency (blue box in the chart below).
The evidence is clear. The Fed aggressively raised rates to stop the Trump economy from igniting and achieving its full potential.
The Fed Could Kick the Markets Off a Cliff Later This Month
The Fed will unveil its next monetary policy move on July 31, 2019.
Currently, the markets are predicting a 70% chance the Fed will cut rates by 0.25% and a 30% chance the Fed will cut rates by 0.5%.
Put another way, the markets believe the Fed will definitely cut rates in some capacity at its July meeting.
Which is why if the Fed doesn’t cut rates… or worse still, RAISES rates… we could see the stock market collapse.
Reason being, the market hates surprises. And with investors believing with 100% certainty that a rate cut is coming in some form, the Fed could do maximum damage by:
- Raising rates
- Continuing its current policy of “watch and wait” regarding the economy.
Given the animosity the Fed has towards President Trump, I think there is a very good chance this could prove to be the case.
This would trigger a sharp drop in the stock market… a drop that the chart below is already forecasting.
Right now, the S&P 500 is forming a rising bearish wedge (purple lines). These patterns almost ALWAYS lead to breakdowns.
Indeed, this was the very formation that triggered the May 2019 drop in stocks (green lines) a few months ago.
It’s still early here, but as we get closer to month end I believe we’ll see a similar breakdown as stocks realize the Fed won’t cut rates out of spite for the President.
For carefully positioned investors, this could actually be a chance to profit…
Taking Advantage of Market Weakness
A great way to profit from the coming market drop is the UltraShort S&P 500 ETF (SDS).
Why? Because the SDS is a leveraged play on the U.S. stock market collapsing.
You see, the SDS returns TWO TIMES the inverse of the S&P 500 ETF (SPY).
So if the SPY falls 5%… the SDS returns 10%.
And if the SPY falls 20%… the SDS returns 40%.
I believe we could easily see the stock market plunge 15% if not 17% when the Fed fails to cut rates at the end of July.
This is roughly where bond yields suggest stocks should be today, which is illustrated on the chart below.
Under these conditions, the SDS would return over 30% in a relatively short time period.
That said, do not rush out and make this trade just yet. The Fed meeting is too far away and the market’s momentum is up right this minute…
Instead, I’d put SDS on your watch list. We’ll revisit it later this month as we get closer to the Fed’s July meeting.