Investors flock to inflation hedges … the “day of reckoning” is here … a market strategy that hedges your portfolio while putting cash in your pocket
The 10-year Treasury yield popped higher this morning, notching a multi-year high of 2.39%.
The surge came in the wake of Federal Reserve Chair Jay Powell’s hawkish comments that are being interpreted as “we’re serious about curbing inflation. Get ready for rates to climb quickly.”
From Powell:
If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.
For more on Treasury yields, the potential for a yield-curve inversion, and inflation, let’s jump to legendary investor, Louis Navellier, and his Platinum Growth Club Flash Alert podcast from yesterday:
The 2-year, 5-year, 10-year, and 30-year Treasury yields are all above 2%. And the yield curve is very flat.
Our Federal Reserve does not want to invert that curve. It destroys bank profits…
Market forces are shoving Treasury yields higher and the Fed has to respond. And there’s all this in-fighting now in the Fed.
St. Louis Fed President James Bullard is demanding we do 12 rate increases this year. And get the federal funds rate to 3%. The irony is, we’d still be below inflation…
Meanwhile, this Modern Monetary Theory, this unlimited money printing – we’ve been doing this unlimited money printing (here in the U.S.). And there’s a day of reckoning. And apparently, we’re there.
Because Modern Monetary Theory was too good to be true, until it spun out of control. Which is where we are now.
So, there is a panic out there to load up on any inflation hedge you can find. Energy stocks, fertilizer stocks, steel stocks, any company that can raise prices.
I want you to brace yourself.
***Let’s backfill some of the details within Louis’ comments to make sure we’re all on the same page
Louis begins by discussing the yield curve.
A yield curve is a graphical representation of the yields of all currently available bonds – from short-term to long-term.
In normal times, the longer you tie up your money in a bond, the higher the yield you would demand for it. So, you’d expect less yield from a two-year bond and more yield from a 10-year bond.
Given this, in healthy market conditions, we usually see a “lower-left” to “upper-right” yield curve.
But when economic conditions become murky and investors are nervous about the future, this can change. Specifically, uncertain economic times tend to flatten the yield curve.
The problem is: An inverted yield curve has preceded every economic recession since 1980.
As I write, we’re growing close to an inverted yield curve. We measure this by something called the “10-2 spread.” It evaluates the difference, or spread, between the yields on the 10-year and two-year Treasuries.
A negative reading implies an inversion.
Last year, the 10-2 spread was as high as 1.6. Today, it’s fallen to just 0.19.
Powell doesn’t want to jack up short-term interest rates too much, too fast, which would continue flattening the yield curve, increasing the odds of an inversion.
But if he doesn’t do this, our current runaway inflation continues to burn through the economy, which is what Fed President James Bullard wants to stop through his proposed 12 quarter-point rate hikes.
It’s an awful, rock-and-a-hard-place position. But Powell’s latest comments suggest he’s going to err on the side of combatting inflation, even though that might mean pushing rates up faster than the markets may be ready for.
***As to Modern Monetary Theory…
This is an economic theory largely championed by former President of the European Central Bank, Mario Draghi.
It’s complex. But at the highest level, the theory suggests that a central bank can print all the money it wants without fear of a ballooning national debt or runaway inflation, as long as the country’s productive capacity is commensurate with the amount of new currency.
Our government has cannonballed into this idea in the last two years (though it’s been gradually embracing it for longer).
Below you can see what happened to the M2 Money Supply (basically, all the dollars in circulation) since the 1960s.
Notice the near-vertical climb beginning in 2020.
You’re seeing the M2 Money supply explode 27% in 2020-2021 – and it’s still climbing.
Even if Modern Monetary Theory holds up, it’s obvious that domestic productive capacity has not soared 27% alongside new currency/federal spending.
This leads us to Louis’ takeaway of the “day of reckoning” that’s now here. And that points us toward inflation hedges.
With this in mind, let’s pivot to our technical experts, John Jagerson and Wade Hansen of Strategic Trader. In yesterday’s Strategic Trader Alert, they recommended a new trade on gold which is a fantastic way to play inflation, while putting a few bucks in your pocket.
***How to get paid to own the inflation hedge of gold
Gold has finally awoken.
Two weeks ago, it surged above $2,040, a hair below its all-time settlement high of $2,069.40.
Since then, the precious metal has pulled back to $1,915 as I write. But if thousands of years of history are any guide, owning at least some gold during a highly-inflationary environment is wise.
Well, how would you like to have this inflation hedge and get paid for having it?
This is the idea behind a market strategy that John and Wade use involving a “put option.”
We’re going to approach this concept from a high level today. Please don’t put on any specific trade in your own account unless you’re confident in your understanding of put options and how to use them appropriately.
The best way to explain using a put option with gold is by walking through a hypothetical.
As I write, you could buy the gold ETF, GLD, as an inflation hedge for about $178 per share.
But with a put option, you have another choice – you can get paid to buy GLD shares if they fall to a specific, lower price that you set ahead of time.
Here’s how it works…
Let’s say “Jen” is an investor who owns GLD shares.
Jen thinks that gold’s price has gotten ahead of itself. She wants some protection if GLD pulls back for any reason.
This “protection” she wants takes the form of her buying a put option.
When Jen buys a put on GLD, it enables her to “put” her shares onto someone else under specific circumstances – namely, if GLD shares falls to a predetermined price, within a predetermined amount of time.
Arbitrarily, let’s say those conditions are, “if GLD falls 5% within the next 45 days.”
In exchange for this put option, Jen has to pay the investor on the other end of the deal a chunk of cash up-front.
If you take this side of the trade and sell Jen the put option, then you’re this “other investor” who gets paid cash. And you can do it right in a brokerage account, with a “sell to open” trade order.
***So, how might this situation play out?
Option 1 – GLD doesn’t fall to the pre-determined price within the pre-determined time-frame.
In that case, you don’t get to buy Jen’s GLD shares at the discounted price, so you won’t own GLD. But you will keep the cash she paid you up front.
Option 2 – GLD does fall to the pre-determined price.
Here, you will buy GLD shares at the price you and Jen agreed upon. However, you’ll still get to keep the chunk of cash she paid you ahead of time.
In other words, you just got paid to buy GLD at a discount to its earlier market price.
“So, what’s the catch, Jeff?”
The only catch is that if GLD falls even lower, you’re still on the hook to buy it at the agreed-upon price.
For instance, if you and Jen agreed you’d buy it at $170 per share, but it’s now at $165, you still have to buy at $170.
But keep in mind, a moment ago, we were discussing the possibility of simply buying GLD outright as an inflation hedge at its market price of $178.
If you were happy to buy at that price, how much happier are you to have bought at $170 – and gotten paid to do so?
Inflation protection and cash in your pocket. Not a bad deal.
It turns out, John and Wade just recommended this type of put trade on GLD in Strategic Trader.
If you’re interested in learning more about using options, as well as the strategy we discussed today, John and Wade have a fantastic introduction course. Click here to learn more.
Bottom line, inflation is here and it’s putting your wealth at risk. Make sure you’re prepared for it.
Have a good evening,
Jeff Remsburg
