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Thursday, July 25, 2024

Free Money Friday – Draghi and the PBOC add Fuel to the Fire


Europe is up 2% with no signs of slowing at lunch as Mario Draghi kicks it up a notch, saying the ECB is ready to "step up the pressure" and expand its asset-purchase programs if inflation fails to show signs of quickly returning to the ECB’s target.  BAM!!!

“We will continue to meet our responsibility—we will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us.  If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialize, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases,” 

That was enough to send the Euro plunging 1% ($1.24) as the Dollar jumped over the 88 line for the first time since 2010, when the Global Economy was collapsing and we looked like the only game in town.  Well, China wasn't going to take that lying down so, of course, the PBOC, in the middle of the night on Friday in China, suddenly decided to cut their own rates by 0.4 to 5.6% and they lowered their deposit rate by 0.25, to 2.75% effective tomorrow.  

“All the targeted easing measures or the mini stimulus measures to cut the cost of financing are in fact ineffective,” said Chang Jian, chief China economist at Barclays Plc in Hong Kong, who correctly forecast one interest rate cut in the fourth quarter of this year. “So the only way to really reduce the cost of financing is through cutting the benchmark rate.”

Today’s move suggests a shift toward pro-growth policies that may fuel even more debt. An unprecedented lending spree from 2009 to 2013 led to a surge in debt on a scale that’s triggered banking crises in other economies, according to the International Monetary Fund.  China’s total debt reached 251 percent of gross domestic product as of June, up from 234 percent in 2013 and 160 percent in 2008, according to Standard Chartered Plc estimates.

“Certainly, the divergence between the major economies is going to a major feature of the next few months,” said Mark Williams, Capital Economics’s chief Asia economist in London. “It’s relatively, and historically, unusual for the major central banks moving in different directions like this.”

Our Futures are reacting well to the news and that's good news for those of you who took our advice yesterday (delivered to subscribers pre-market in our morning post!) and went long on the Futures at Dow 17,600 (/YM), S&P 2,040 (/ES), Nasdaq 4,200 (/NQ) and Russell 1,155 as we're now pegging 17,800 on the Dow (up $1,000 per contract), 2.066 on the S&P (up $800 per contract), 4,275 on the Nasdaq (up $1,500 per contract) and 1,185 on the Russell (up $3,000 per contract).  

Why would we flip short in the face of such massive stimulus?  Because, when you are in a hospital and you see a team of doctors rushing into a room with a dozen nurses and all sorts of machines being wheeled in – do you bet on the patient being fine?  WTF is wrong with the Global Economy that these sort of measures are so urgently required?  

There is something catastrophically wrong with the Global Economy, folks.  If there wasn't, China wouldn't need to go 20% of their GDP in debt each year to get 7% growth and the ECB wouldn't need to spend $2Tn in an $18Tn economy to get 0.1% growth (narrowly keeping them out of recession).  The US seems to be growing, but we've already had a $7Tn boost to our own $17Tn economy (41%) NOT counting the Fed's additional $3.5Tn (20% more) for an average of 12% of our economy each year thrown on the fire.  And it's STILL TOO HEAVY.  

We're in a deep and dark Global Recession folks, and we're masking it with constant stimulus from pretty much every country on Earth as we slide deeper and deeper into debt, which is now over $100,000,000,000,000.00 on a $60Tn Global Economy with $40Tn (75% of global GDP) added in the last 5 years for a Global Average Annual Stimulus of 15%.  All that has bought us is an average of 2.5% growth over the same period of time.  How long can we really sustain this?  

As you can see from the chart above, Japan is as bad a China (not pictured) and Greece is "only" 152% of their GDP in debt, yet their S&P rating is CC (junk) vs Japan's AA- rating or the US's AA+.  All it would really take to topple this apple-cart is for the ratings agencies to do a realistic assessment of Global Debt ratings but don't worry – they are in on the scam too.

So we will continue to party like it's 1999, or the spring of 2008 or whatever metaphor you want to use for "before the music stops" and everyone has to find a chair – then things are going to get ugly fast.

Meanwhile, our Long-Term Portfolio just crossed the +25% line for the first time this year and that's where we put the bulk of our money as we don't fight the Fed, though we are losing faith and we cashed our our other large portfolio (Income Portfolio) to leave us more nimble into the very uncertain holiday season.  I'm sorely tempted to take 25% off the table and RUN in the LTP as well, as this is a ridiculous amount of money to make in a single year but our Short-Term Portfolio is up an even more ridiculous 67.5% and that one is protecting (over-protecting) our LTP gains with a heavy dose of shorts.  

As you can see, our LTP has more cash than value at the moment but we still have plenty of active positions, it's just that we are practicing our "BE THE HOUSE – Not the Gambler" strategy by selling premium, leaving us with tons of cash on hands to ride out a shallow market correction (as we just did in October).  We made several very bullish adjustments last week in our Live Member Chat and this week we added a couple of new bullish plays as well.  As I've been saying all week, these are the kinds of things you can do when you have CASH!!!

Like last Thursday, at 3:27 in our Live Member Chat Room, we added a bullish play on TNA that should be doing very well this morning.  It was:

A fun bullish play (if you don't want to get whipsawed again) would be the 10 TNA Dec $77/83 bull call spread at $2.15 ($2,150), selling 6 Nov $77 calls for $1.70 ($1,020) for net $1,130 ($1.13) on the spread.  If the short calls expire worthless, you have a very cheap cover into Dec.  If the short calls go in the money, the short Dec $83s are $1.25 so probably an even roll and you can always DD on the Dec $77s if you get worried it will get away from you but, like the short $80s we discussed this morning, you have 1,200 acting as a pretty hard stop for the Russell overhead.  

Those Nov $77 calls will expire this afternoon and TNA is up to about $78.50 at the moment and that should give us a great pop in the spread as we give back $1.50 of the $1.70 we sold the calls for.  Also, less than a month ago, on 10/29 in the morning post, we gave you the TNA Nov $75/80 bull call spread at $1.20 as a nice bullish play for the month (it was also sent out as a Top Trade Alert the previous day).  At $78.50, those calls will be $3.50+ this morning for a $2.30 gain (+191%) in 3 weeks.  Happy Thanksgiving on that one!  

Again, we have no reason to fear cash.  If we cashed out a $100,000 portfolio on 10/29 and risked just $2,400 (2.4%) on the TNA trade – to make sure we "didn't miss anything" – we'd be cashing it in for over $7,000 today for a gain of $4,600 or 4.6% OF THE ENTIRE PORTFOLIO in just 3 weeks, without risking the other $97,600 at all.  

THAT is how you enjoy your holidays – let the Fed and the other Central Banksters throw money at us, we know how to benefit from their largess WITHOUT taking all the risks.  



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