Category: Inflation

Where the I/O Fund Holds Cash When Banks Keeps Failing

Posted on by io-fund

Amidst the growing skepticism in our banking sector, we thought it would be helpful to introduce an alternative way to both protect and diversify one’s assets. The information below discusses a method the I/O Fund uses to hold its cash, which is safer than banks, and yields 4.5% or higher.

The I/O Fund is an actively managed portfolio. We are not financial advisors, rather we discuss openly and in great detail what we are doing with our money through weekly webinars and real-time trade alerts. This has led to 174% better returns compared to Ark and results that are double the Nasdaq in the same time period.

Banks failing presents a new problem for investors, which is where to hold cash. We shared our thoughts on Treasury Direct accounts with our premium members last month, where we explained that opening a TreasuryDirect account allows anyone to directly purchase savings bonds and Treasuries (Notes, Bonds, Bills, TIPS, and FRNs) directly from the U.S. government.

This offers an option that is outside of the banking system, offers a decent yield, and is very liquid. This article is offered as a guide that will walk you through the process of opening a TreasuryDirect account and how it can potentially help secure your cash in these uncertain times.

Below is a brief video clip from our premium webinar. For more detailed information, please reference the article below.

More Concern in the Financial Sector & Why Having a Plan for Cash is Important

The current news cycle and media narrative suggests that it’s just regional banks that are facing challenges due to interest rate risk and depositors withdrawing funds to go to larger "too big to fail" banks. However, taking a closer look at the charts reveals that the situation may be more complex and not limited to just U.S. regional banks.

This is what appears to going on in Financial Sector in the US (XLF), which is comprised of the largest and most recognizable financial institutions in the US.

I/O Fund XLF chart

After breaking down from a bear pennant, we have a clean 5 wave drop from the February high. Until XLF can reclaim the $36 region, which is about 8.5% from current prices, then risk remains high.

International banks like the Royal Bank of Canada ($RY) also are exhibiting similar ugly trends. In fact, warnings are present in most major banks around the world. Here are some quick bullet points:

  • Japanese banks Mitsubishi UFJ Sumitomo and Mitsui Financial are down 15%-17% since March 9th.
  • The Commonwealth Bank of Australia is down ~12% since March 14th, and HSBC in England is down ~14% since late February.
  • Itaú Unibanco, Brazil's top bank, is down ~18% since last November.
  • Deutsche Bank is down another 21% from it January high, while the largest bank in France, BNP Paribas, is down 14% from its February high.

It appears that the risk doesn’t stop at the regional bank level but is international as well. Global banks are facing significant challenges, and it is unlikely the banking problems are over.

I/O Fund Royal Bank of Canada chart

The Royal Bank of Canada ($RY) looks a lot like some of the bigger banks in the US.

An Alternative Solution to Uncertainty: A TreasuryDirect Account for an Extra Layer of Security

To tackle potential issues in the banking sector, we are taking a proactive approach with some of our cash. We are purchasing T-Bills directly from the U.S. government through a TreasuryDirect account, eliminating counter-party risks with banks. If the banking situation deteriorates or becomes systemic, funds in these accounts remain safe and secure.

The Appeal for T-bills vs. Bonds

Investing in four-week T-bills might be the prudent choice in this situation, as they carry no default risk compared to bonds and do not tie up your cash for a long period of time. As an example of what to expect, the four-week Treasury bill rate is around 4.5%, compared to 0.15% last year. This is much higher than the long-term average of 1.22%.

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It is true that the U.S. government has never defaulted on its federal debt, which includes the umbrella of Treasury bonds, bills, and notes. However, it is also true that countries around the world default on their debt obligations, either partially or entirely, all of the time. We saw Iceland default on their external debt in 2008, and even recently Argentina defaulted on their sovereign debt in 2020 smack dab in the middle of the pandemic. In the event that the U.S. defaults on its debt, it’s speculated that T-bills are safer then bonds because of their shorter-maturity periods, lower interest rate risk, higher liquidity, and general overall market perception.

Opening a TreasuryDirect Account: A Step-by-Step Guide

Here is a link to a video that we gave to our premium subscribers, where I go throguh step-by-step on how to open a TresuryDirect Account.

TreasuryDirect Account

1. Visit the TreasuryDirect website: Navigate to the official TreasuryDirect website (www.treasurydirect.gov) and click on "Open An Account."

2. Choose account type: Select the appropriate account type (individual, entity, or minor) and fill out the online application form: this essentially like a brokerage account with the government, so you will need your Social Security Number (SSN), email address, and bank account details.

3. Create a password and security questions: Choose a strong password and security questions to ensure the security of your account… this account will hold your cash and security should be prioritized just like your bank account ect.

4. Simply review and submit: Double-check the information you filled-out and submit the account application.

5. Check your email for a confirmation message from TreasuryDirect and follow the instructions to verify your account and email address.

6. Access your account: Use your account number, password, and the one-time passcode sent to your email to log in to your TreasuryDirect account.

7. Purchase bonds and T-bills: Once logged in, navigate to the "BuyDirect" tab and select the desired security type (T-bills, notes, bonds, etc.). Follow the on-screen instructions to complete your purchase. 

Lessons from the 2008 Crisis: “History never repeats itself, but it does often rhyme.”

The 2008 financial crisis exposed the banking system's fragile backend to the public in a fast and violent sweep, catching many people unprepared. Most people had no idea what fractional banking was, nor how complex their banks had become. These banks have only grown in size and complexity since.

We rely on banks to store money, but it does come with some risks. When a bank fails, individuals can depend on government-backed insurance (FDIC) to recover their deposits and restore stability in our banking system. However, this process can be lengthy and challenging. As we saw in 2008, no one wants to wait on a Gov’t backed insurance timeline to get money back that they thought was being safely stored in a bank account.

Conclusion:

Considering the current risks within the banking sector, going through the process of opening a TreasuryDirect account offers a safe alternative for people to store their cash in. This guide was written to help you navigate the process of buying Treasury marketable securities and really to show just how simple it is to get started securing your cash with bonds and T-bills. It is important to stay informed and protect what you have worked hard for, we wanted to shine light on something we felt hasn’t gotten enough spotlight in the investment world.

What’s Next:

This Thursday at 4:30 pm Eastern, I will be holding a webinar for premium Tech Insider Network members to discuss how I plan to navigate the broad market, as well as various tech entries including Tesla. We offer trade alerts plus an automated hedging signal. In addition, we are an audited portfolio with 174% better returns than Ark and are results are double the Nasdaq in the same time period.

We identified a strong buy signal in Bitcoin in December, and we also identified Nvidia's (NVDA) bottom in October. Bitcoin is a leading asset YTD in the market, and Nvidia is the leading stock in the S&P 500. We take gains often and we discuss this in our weekly webinars and on our premium site, one of which is scheduled for next Thursday, April 27th.

Recommended Reading:

Bitcoin Vs Banks: Here's Where the Price Goes Next
Banks, Inflation, and One More Low
The Importance of Verified Returns and Risk Management for Retail Investors
Bitcoin is up 40% in 2023, Here’s Where it Goes Next

SIVB: Unintended Consequences

Posted on by io-fund

We thought it may be helpful to our readers to share our initial thoughts after the SIVB bailout. As we write this, CSFB has reported material weakness in its financial reporting so we’ll see if this will create further stress on the financial system.  

In response to the SIVB collapse, the Fed had no choice but to take decisive action to further stem deposit outflows and the potential risks to the banking system. The Fed’s response was a comprehensive pledging of cash in exchange for all Treasuries, agency debt and mortgage-backed bonds without any discount being applied to face value. Commentators have described these actions as akin to quantitative easing on demand for the financial system.

Below is a chart of the Fed Funds rate dating back to the 1950s. As recent history shows, the Fed had embarked on a policy of ultra-low interest rates – brought on by the GFC and again by the Covid pandemic – that were unprecedented in scale and duration. This created unintended consequences and fueled asset bubbles and inflationary pressures throughout the economy.

Similarly, as the Fed aggressively raised interest rates in 2022, this has also created unintended consequences. The collapse of SIVB. While SIVB’s demise seems not to pose a systemic financial risk at the moment.  Its overnight collapse is a reminder that the banking sector remains vulnerable to sharply rising funding costs after years of operating in a low rate environment.

SIVB’s demise has been well covered in the financial press, we’ll touch upon some salient details. There were red flags, a couple that were somewhat unique to SIVB.

  • Greg Becker, SIVB’S former CEO, served on the board of the Federal Reserve Bank of San Francisco until the day of the collapse. He had lobbied that that banks of SIVB’s size should not be subject to as much regulation as the mega banks
  • In 2018, a bipartisan bill was passed that exempted banks with $100 billion to $250 billion in assets – Silicon Valley's size – from requirements that included regular examinations of how they would fare in tough economic times, known as 'stress tests.'. The 2018 law also provided the Fed with more discretion in its bank oversight. The central bank subsequently voted to further reduce regulation for banks the size of Silicon Valley. In October 2019, the Fed voted to effectively reduce the capital those banks had to hold in reserve.
  • The bank had grown rapidly. Its assets quadrupled in five years to $209 billion, making it the 16th-largest bank in the country. And roughly 94 percent of its deposits were uninsured because they exceeded the Federal Deposit Insurance Corporation's $250,000 insurance cap. That percentage was the second highest among banks with more than $50 billion in assets, according to ratings agency S&P. Signature had the fourth-highest percentage of uninsured deposits – which uncoincidentally also failed. Signature had large exposure to crypto clients.  
  • According to analysis done by UBS. SIVB had 52% of its deposits from venture capital and private equity related businesses and funds.  First Republic Bank, another California-based lender that dropped more than 60% in pre-market trading on Monday, only 8% of its deposits to those types of clients.

Ultimately SIVB’s risk management, or the lack-thereof, proved it’s undoing. It’s not uncommon for banks to have unrealized losses due to their bond holdings. According to Bloomberg,  US banks had booked $620 billion in unrealized losses on their available-for-sale and held-to-maturity portfolios at the end of last year, according to filings with the FDIC. But SIVB’s investment portfolio had swelled to 57% of its total assets. No other competitor among 74 major US banks had more than 42%. It was this toxic brew of a very large unrealized losses on Treasuries and mortgage bonds combined with a concentrated depositor base that proved fatal.

This was exacerbated by SIVB’s failure to hedge the interest rate risk on these holdings and an upcoming  credit downgrade. Once it was made known to the market that SIVB may raise equity to pre-empt the downgrade, this was the catalyst for deposits to be withdrawn which worsened their credit standing. It became a self-fulling prophecy.

So as technology focused investors, how do we assess the current situation?

Let’s start with the macro. I have written extensively on concerns over the broad market from both a technical and macro perspective. The latter namely due to the Fed’s inability to combat super-core inflation and the over-leveraged consumer. I and the rest of the team have been monitoring for further signs of weakness.

Financial Sector Earnings

Within the overall S&P 500 earnings, it is estimated that Technology contributes the most at about 25%, while the second largest is Financials at 19%. The S&P 500’s decline in the SPX has in part been driven by reductions in earnings for the Technology sector. The SIVB fallout could lead to  a reduction in earnings estimates across the financial sector. These downgrades can be driven by a number of factors such as lending margins being squeezed as cost of bank deposits are still catching up with rate rises that have already happened, higher regulatory costs and higher loan loss provisions, just to name a few. This could be another headwind for S&P 500 earnings in the future.

Banks are a transmission mechanism for the economy. To the extent that is hindered, there will be a negative trickle down effect for the economy that are yet to be seen.  Somewhat ironically, the SIVB collapse may help Fed Chairman Powell’s goal to reduce supercore inflation driven by the sticky services component through aggressive interest rate hikes. Albeit clearly not the way he intended.

Technically, the Financials ETF has broken down.

What will the Fed do in the next meeting?

Given the recent CPI data, the Fed has every justification to continue to raise interest rates, which we discussed here. However, will the SIVB failure give them a reason to pause? The futures market has the odds at a resounding no.

And the reason is that under the headline CPI number, we are seeing the 2nd month in a row of 3 MoM annualized acceleration. If you combine the prior 3 months and annualized them, the number comes out to 4.08%, compared to last month’s reading at 3.4%. Furthermore, energy, goods, core, shelter and services all showed similar accelerations.

How to invest in technology in current environment?

In the public markets, the technology sector was already facing headwinds as higher rates impacted valuation. Meanwhile those with consumer exposed businesses have also had earnings impacted. The SIVB fallout adds additional headwinds. SVB’s demise has revealed the extent of the damage rising interest rates might cause on companies and banks that had grown accustomed to years of cheap money. Startups are especially vulnerable to any systemic drop in confidence, given their reliance on investors’ faith in their long-term potential when profitability might be years away.

Private markets will face a tougher funding environment. There is a talk of ‘day-of-reckoning’ for the private equity/venture capital-funded universe and may force PE funds to mark down private books sooner than they’d like to.

Softbank is a good public and sentiment proxy for the private markets. Before the meltdown, Masayoshi Son’s investment powerhouse — which has poured more than $140 billion into names from WeWork to ByteDance Ltd. and DoorDash Inc. — had already been reeling from the post-pandemic economic downturn.

SoftBank, similarly central to the global VC arena, has lost around 7% or $5 billion of its value since news of SVB’s difficulties emerged. Its credit default swaps are surging for the second straight day, and speculation is growing on what asset sales might be ahead should SoftBank need to help out portfolio companies.

SoftBank sees little impact from SVB’s failure on its portfolio companies, a SoftBank spokesperson said, adding that the company expects no impact on its own finances. Most Vision Fund portfolio companies are cash-rich, the company said during its earnings call last month. However, if we look at the chart, the market disagrees, as it is ~63% off its 2021 high, and only ~32% from testing its COVID low.

Attributes of stocks that we are looking for

This past week, I/O Fund analysts held a webinar that discussed “How to Build a Defensible Tech Portfolio.”  Although macro continues to throw curveballs, we believe a defensible portfolio can help alleviate any concerns.

Defensible means the portfolio should be overweight the bottom line. For tech investors, stocks that do not materially cash burn are ideal right now. Per Silicon Valley Bank’s CEO Gregory Becker: “While VC (venture capital) deployment has tracked our expectations, client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted.”

Per the same Reuters report, Silicon Valley Bank is selling assets to position for higher interest rates and faster cash burn: “We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients.”

Elevated cash burn is something the public markets will be very sensitive toward into the foreseeable future. We have found that expanding operating margins and GAAP profitability was rewarded last year, and we believe this is the best way to position for an unpredictable 2023. At the very least, while the FED raises rates, cash burn will continue and we believe it will surprise investors at times just how cash strapped the tech sector truly is. This is why we have built a defensible tech portfolio, as outlined in this webinar here.

SIVB: Unintended Consequences

Posted on by io-fund

We thought it may be helpful to our readers to share our initial thoughts after the SIVB bailout. As we write this, CSFB has reported material weakness in its financial reporting so we’ll see if this will create further stress on the financial system.  

In response to the SIVB collapse, the Fed had no choice but to take decisive action to further stem deposit outflows and the potential risks to the banking system. The Fed’s response was a comprehensive pledging of cash in exchange for all Treasuries, agency debt and mortgage-backed bonds without any discount being applied to face value. Commentators have described these actions as akin to quantitative easing on demand for the financial system.

Below is a chart of the Fed Funds rate dating back to the 1950s. As recent history shows, the Fed had embarked on a policy of ultra-low interest rates – brought on by the GFC and again by the Covid pandemic – that were unprecedented in scale and duration. This created unintended consequences and fueled asset bubbles and inflationary pressures throughout the economy.

Similarly, as the Fed aggressively raised interest rates in 2022, this has also created unintended consequences. The collapse of SIVB. While SIVB’s demise seems not to pose a systemic financial risk at the moment.  Its overnight collapse is a reminder that the banking sector remains vulnerable to sharply rising funding costs after years of operating in a low rate environment.

SIVB’s demise has been well covered in the financial press, we’ll touch upon some salient details. There were red flags, a couple that were somewhat unique to SIVB.

  • Greg Becker, SIVB’S former CEO, served on the board of the Federal Reserve Bank of San Francisco until the day of the collapse. He had lobbied that that banks of SIVB’s size should not be subject to as much regulation as the mega banks
  • In 2018, a bipartisan bill was passed that exempted banks with $100 billion to $250 billion in assets – Silicon Valley's size – from requirements that included regular examinations of how they would fare in tough economic times, known as 'stress tests.'. The 2018 law also provided the Fed with more discretion in its bank oversight. The central bank subsequently voted to further reduce regulation for banks the size of Silicon Valley. In October 2019, the Fed voted to effectively reduce the capital those banks had to hold in reserve.
  • The bank had grown rapidly. Its assets quadrupled in five years to $209 billion, making it the 16th-largest bank in the country. And roughly 94 percent of its deposits were uninsured because they exceeded the Federal Deposit Insurance Corporation's $250,000 insurance cap. That percentage was the second highest among banks with more than $50 billion in assets, according to ratings agency S&P. Signature had the fourth-highest percentage of uninsured deposits – which uncoincidentally also failed. Signature had large exposure to crypto clients.  
  • According to analysis done by UBS. SIVB had 52% of its deposits from venture capital and private equity related businesses and funds.  First Republic Bank, another California-based lender that dropped more than 60% in pre-market trading on Monday, only 8% of its deposits to those types of clients.

Ultimately SIVB’s risk management, or the lack-thereof, proved it’s undoing. It’s not uncommon for banks to have unrealized losses due to their bond holdings. According to Bloomberg,  US banks had booked $620 billion in unrealized losses on their available-for-sale and held-to-maturity portfolios at the end of last year, according to filings with the FDIC. But SIVB’s investment portfolio had swelled to 57% of its total assets. No other competitor among 74 major US banks had more than 42%. It was this toxic brew of a very large unrealized losses on Treasuries and mortgage bonds combined with a concentrated depositor base that proved fatal.

This was exacerbated by SIVB’s failure to hedge the interest rate risk on these holdings and an upcoming  credit downgrade. Once it was made known to the market that SIVB may raise equity to pre-empt the downgrade, this was the catalyst for deposits to be withdrawn which worsened their credit standing. It became a self-fulling prophecy.

So as technology focused investors, how do we assess the current situation?

Let’s start with the macro. I have written extensively on concerns over the broad market from both a technical and macro perspective. The latter namely due to the Fed’s inability to combat super-core inflation and the over-leveraged consumer. I and the rest of the team have been monitoring for further signs of weakness.

Financial Sector Earnings

Within the overall S&P 500 earnings, it is estimated that Technology contributes the most at about 25%, while the second largest is Financials at 19%. The S&P 500’s decline in the SPX has in part been driven by reductions in earnings for the Technology sector. The SIVB fallout could lead to  a reduction in earnings estimates across the financial sector. These downgrades can be driven by a number of factors such as lending margins being squeezed as cost of bank deposits are still catching up with rate rises that have already happened, higher regulatory costs and higher loan loss provisions, just to name a few. This could be another headwind for S&P 500 earnings in the future.

Banks are a transmission mechanism for the economy. To the extent that is hindered, there will be a negative trickle down effect for the economy that are yet to be seen.  Somewhat ironically, the SIVB collapse may help Fed Chairman Powell’s goal to reduce supercore inflation driven by the sticky services component through aggressive interest rate hikes. Albeit clearly not the way he intended.

Technically, the Financials ETF has broken down.

What will the Fed do in the next meeting?

Given the recent CPI data, the Fed has every justification to continue to raise interest rates, which we discussed here. However, will the SIVB failure give them a reason to pause? The futures market has the odds at a resounding no.

And the reason is that under the headline CPI number, we are seeing the 2nd month in a row of 3 MoM annualized acceleration. If you combine the prior 3 months and annualized them, the number comes out to 4.08%, compared to last month’s reading at 3.4%. Furthermore, energy, goods, core, shelter and services all showed similar accelerations.

How to invest in technology in current environment?

In the public markets, the technology sector was already facing headwinds as higher rates impacted valuation. Meanwhile those with consumer exposed businesses have also had earnings impacted. The SIVB fallout adds additional headwinds. SVB’s demise has revealed the extent of the damage rising interest rates might cause on companies and banks that had grown accustomed to years of cheap money. Startups are especially vulnerable to any systemic drop in confidence, given their reliance on investors’ faith in their long-term potential when profitability might be years away.

Private markets will face a tougher funding environment. There is a talk of ‘day-of-reckoning’ for the private equity/venture capital-funded universe and may force PE funds to mark down private books sooner than they’d like to.

Softbank is a good public and sentiment proxy for the private markets. Before the meltdown, Masayoshi Son’s investment powerhouse — which has poured more than $140 billion into names from WeWork to ByteDance Ltd. and DoorDash Inc. — had already been reeling from the post-pandemic economic downturn.

SoftBank, similarly central to the global VC arena, has lost around 7% or $5 billion of its value since news of SVB’s difficulties emerged. Its credit default swaps are surging for the second straight day, and speculation is growing on what asset sales might be ahead should SoftBank need to help out portfolio companies.

SoftBank sees little impact from SVB’s failure on its portfolio companies, a SoftBank spokesperson said, adding that the company expects no impact on its own finances. Most Vision Fund portfolio companies are cash-rich, the company said during its earnings call last month. However, if we look at the chart, the market disagrees, as it is ~63% off its 2021 high, and only ~32% from testing its COVID low.

Attributes of stocks that we are looking for

This past week, I/O Fund analysts held a webinar that discussed “How to Build a Defensible Tech Portfolio.”  Although macro continues to throw curveballs, we believe a defensible portfolio can help alleviate any concerns.

Defensible means the portfolio should be overweight the bottom line. For tech investors, stocks that do not materially cash burn are ideal right now. Per Silicon Valley Bank’s CEO Gregory Becker: “While VC (venture capital) deployment has tracked our expectations, client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted.”

Per the same Reuters report, Silicon Valley Bank is selling assets to position for higher interest rates and faster cash burn: “We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients.”

Elevated cash burn is something the public markets will be very sensitive toward into the foreseeable future. We have found that expanding operating margins and GAAP profitability was rewarded last year, and we believe this is the best way to position for an unpredictable 2023. At the very least, while the FED raises rates, cash burn will continue and we believe it will surprise investors at times just how cash strapped the tech sector truly is. This is why we have built a defensible tech portfolio, as outlined in this webinar here.

Broad Market Update: The FED versus Inflation

Posted on by io-fund

Given the extreme FED action this year that has gnarled the stock market, I think it’s important for investors to look at how we got here to draw conclusions on what may be coming down the line. For brevity, we begin the discussion dating back one year.

In September of 2021, the FOMC decided to keep the Fed Funds rate at 0% and continue their asset purchasing at a regular interval, maintaining a loose policy as a result of the COVID panic. They reiterated rapid growth of the economy into 2022, while most members saw no need for a rate hike in 2022. Some members disagreed that a new tightening cycle would need to be started in 2022, but it was believed that it could be at a slow and tapered pace.

Interestingly, real-time market data related to inflation was flashing signs that inflation was becoming a concern. Here are some examples of data points that contradicted the FOMC’s policy decision at the time:

  • The NAHB Index, which tracks the sentiment within the home builder’s sector, saw a 160% increase from the COVID low into the September meeting.
  • The Case-Shiller Home Price Index was showing a ~25% increase in nation-wide home prices. It further showed the highest YoY reading in its history in July with a greater than 20% increase.
  • The Bloomberg Commodity Index was up 64% since the COVID low into that September, 2021 meeting. This was the highest reading since July of 2015, and also marked one of the steepest increases in terms of rate of change in the Index’s history.
  • Crude oil was up 47% in 2021, going into the meeting. It was also well above the pre-COVID levels.
  • The M2 Money Supply was up around 35% since the COVID low going into the September meeting. The M2 layer of the money supply measures the amount of liquid cash in the system, and historically accounts for inflation within an economy.
  • The S&P 500 was up over 100% from the COVID low going into late September of 2021.

Even the monthly CPI data, which has a built-in lag to some of its metrics, was suggesting inflation was becoming a problem. In February of 2021, the YoY CPI print came in at 1.62%; one month later, it read 2.62%. In September of 2021, it was at 5.3%.

So, what happened, and how could a team of the brightest PHDs, Bankers and Financiers that makes up the Federal Open Market Committee (popularly known as the FED) miss the inflation signals and raise rates so late in the cycle?

The standard policy for central banks is that at the first sign of inflation, they begin a slow and steady pace of rate hikes. For example, in 2004, the FED began their tightening cycle once the YoY CPI print exceeded 3%; in 1999, they began to slowly tighten once it moved above 2%. Even the current Fed Chair, Jerome Powell, started hiking rates in 2017 with inflation around 1%.

In our August webinar, ”This is Still a Warning Sign,” we warned that market risk was high, and that a sharp pullback was ahead. I also mentioned the market was setting up for a reversal going into the CPI print in September, here. Follow me on YouTube here or sign up for the I/O Fund free newsletter to be emailed the weekly webinar.In our August webinar, ”This is Still a Warning Sign,” we warned that market risk was high, and that a sharp pullback was ahead. I also mentioned the market was setting up for a reversal going into the CPI print in September, here. Follow me on YouTube here or sign up for the I/O Fund free newsletter to be emailed the weekly webinar.This is Still a Warning Sign,” we warned that market risk was high, and that a sharp pullback was ahead. I also mentioned the market was setting up for a reversal going into the CPI print in September, here. Follow me on YouTube here or sign up for the I/O Fund free newsletter to be emailed the weekly webinar.

Despite the numerous market indicators pointing towards growing inflation pressures in September of 2021, the FOMC ignored the signs, and instead continue to press their loose monetary policies. They ultimately waited a year after inflation showed up to begin addressing it, putting them much farther behind the curve than investors are used to.

Just over one month after the September 2021 meeting, the FOMC was forced to reverse course. Marking the second sudden policy shift in Jerome Powell’s tenure. As we now know, inflation was not transitory, forcing the FOMC to embark on the steepest rate hike campaign since Paul Volker raised the Fed Funds rate to 20% from a 3-year average of 11.2%.

Rather than engineer a soft landing, the FED did the opposite by raising rates a year too late. What resulted was an aggressive increase and the worst stock market on record in nearly 50 years.

One year later – Inflation is Down, the FED is Up

Fast Forward one year into the recent September, 2022, FOMC meeting, and the same indicators were clearly showing a notable reduction with inflation…

1) Commodities have collapsed, and continue to push lower. Copper prices are down ~30% from their high, while lumber prices have fallen back to pre-COVID levels. Most importantly, Crude Oil is about 16% below its pre-Russia/Ukraine war level, as gas prices declined every day? for 98 consecutive days.

Crude Oil TradingView Chart

2)  Sales of existing homes in August declined 19.9% from August 2021. Furthermore, the Case-Shiller home Price Index showed the largest MoM decline in home prices since 2011.

Case-Shiller Composite 20 Home Price Index MoM Chart

3) The National Association of Home Builders (NAHB) Index fell for 9 consecutive months and is now below the 50. Anything below 50 is a contraction. The president of the NAHB, Jerry Howard, went as far to state that “we’ve given birth to a housing recession.”we’ve given birth to a housing recession.”

The last time we saw the NAHB Index below 50 was briefly around the COVID low and then again in 2014. In fact, the last 9 months saw the 3rd steepest % decline in the NAHB Index since 1990.

United States NAHB Housing Market Index TradingView Chart

4) The M2 money supply is one of the most important indicators of inflation, and is the layer of the money supply that tracks liquid money in bank deposits, CDs, Mutual Funds, etc. In other words, the money that is ready to be used in an economy. After seeing a 35% increase post-COVID, since February of 2022, the M2 money supply has been negative to flat.

Ultimately, inflation is a monetary phenomenon. The more money in the system chasing the same goods, inherently means goods will increase in price. Following the M2 money supply is the most effective way to track if inflation is growing or shrinking.

S&P GSCI Enhanced Commodity (^SECA) Level Chart

The list can be extended into Producer Price Indexes and Manufacturing Costs consistently surprising to the downside. Inflation data does not have a lag built into its calculations, and looks at real-time market information, is signaling a noticeable change in trend with inflation pressures. Yet, just like in 2021, the FOMC appears to have a disconnect between inflation and its policy, except in the opposite direction.

The market was expecting a 0.75% rate hike this round, which it got. What it was not expecting was for the FOMC to raise its target rate, extend the duration for rate cuts, and claim that inflation is still out of control. They further spooked the market by stating that more pain would be needed to bring inflation back to its 2% target. This was backed by lowering their economic growth forecasts for this year, down to 0.2% from 1.7% in 2022, and 1.2% from 1.7% for 2023.

This meeting caught the market by surprise, triggering a sell-off that has pushed the S&P 500 to new lows in just under 2 weeks. I provide weekly webinars that discuss what I/O Fund is buying and selling. We also have a proprietary hedging signal that we monitor in real-time. Following the free analysis, Why The Next 2 Weeks Could Determine The Rest Of 2022 Why The Next 2 Weeks Could Determine The Rest Of 2022 we hedged going into the CPI number for a nice gain in a tough market. That analysis dated September 8th stated:

“Historically, this grid tends to accompany the C wave down in a bear market. However, in 2022, the market exhibited a sell-now-and-ask-questions-later mentality, as we saw the S&P 500 decline by 24% and the NASDAQ-100 decline 34% over a 5.5 month period. These are rare moves, and one has to wonder if the worst is priced in – including the global slowdown in growth? I do believe it’s cavalier to assume that at this point, and prefer to let the broad market prove it to me over the coming month. We will remain cautious until then, and respect the Big Risk-Off grid that we are now in.

If we have, in fact, found a meaningful low, we would not only need to see the S&P 500 give us that 5th wave up, but we would also need to see rates, the USD and oil move down or sideways. Bull markets do not happen in vacuums and tend to be supported by various markets firing in unison. As of today, this confluence of inter-market dynamics is not supporting a direct uptrend in equities.”

Just like in the September of 2021 meeting, the FED appears to be ignoring market signals about inflation. By ignoring the real-time market data regarding inflation, the markets will once again force their hand, as it always does. The only question remains is what will have to break before they flinch? As stated, we believe it is prudent to wait for the clear reversal before getting too aggressive in equities. This is why our service has hedged the majority of September with real-time trade alerts sent to our Members.

SPX Levels to Watch

The S&P 500 is tracing out what appears to be a 3-wave pattern down from the August high. This is important, because it is not suggesting an immediate breakdown from current levels. Instead, we are seeing extreme oversold conditions that tend to lead to a short-term bounce, at minimum.

S&P 500 tracing out what appears to be a 3-wave pattern

If the coming bounce can break above 3800, then a major low is likely developing. However, once SPX pushes into 3730, the risk will be elevated, as the above structure does not look complete until we get at least into the 3550 range.

To further support a bounce, today we saw the broad market make a new low; however, it did so with notable divergences. For one, the VIX did not make a new high, which tends to precede a turn. The market also went down with less stocks making new lows than last week’s low. This was met with the Advance Decline line also not making a new low with price. These are common signs we see prior to a turn.

On the I/O Fund premium site, I provide weekly webinars that discuss what the I/O Fund is buying and selling. We also have a proprietary hedging signal that we monitor in real-time. Following the analysis I provided for free on YouTube last month “This is Still a Warning Sign” and also in this article “Why the Next Two Weeks Could Determine 2022” we hedged going into the CPI number for a nice gain in a tough market and have had a hedge in place most of September.On the I/O Fund premium site, I provide weekly webinars that discuss what the I/O Fund is buying and selling. We also have a proprietary hedging signal that we monitor in real-time. Following the analysis I provided for free on YouTube last month “This is Still a Warning Sign” and also in this article “Why the Next Two Weeks Could Determine 2022” we hedged going into the CPI number for a nice gain in a tough market and have had a hedge in place most of September.I/O Fund premium site, I provide weekly webinars that discuss what the I/O Fund is buying and selling. We also have a proprietary hedging signal that we monitor in real-time. Following the analysis I provided for free on YouTube last month “This is Still a Warning Sign” and also in this article “Why the Next Two Weeks Could Determine 2022” we hedged going into the CPI number for a nice gain in a tough market and have had a hedge in place most of September.

The next premium webinar will be on Thursday, October 6th at 4:00 pm Eastern where I will discuss how I plan to trade the broad market signals discussed in this article plus new information on an important time factor in mid-October which I believe is lining up with the Q3 earnings season. Learn more about Premium I/O Fund Services here.The next premium webinar will be on Thursday, October 6th at 4:00 pm Eastern where I will discuss how I plan to trade the broad market signals discussed in this article plus new information on an important time factor in mid-October which I believe is lining up with the Q3 earnings season. Learn more about Premium I/O Fund Services here.Premium I/O Fund Services here.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.