It All Comes Down to This

I have this chart of crude oil. The horiztonal I have on the chart is at $84.05, in the neighborhood of where there was a lot of trading activity from 2009 to 2012.

I have been looking for energy to turn lower and it should happen this week based on short-term technicals. It could be pushed out to the Fed's official taper announcement next week, but like I said, the technicals tell me traders are ready to front-run the news.

However. When the market doesn't behave as expected, that is often a good sign that the underlying trend is more powerful than anticipated. Depending on what I see on Monday, I may close out my short position because it is heavily weighted towards short-term options. Additionally, what happens if crude oil keeps rising? Crude is overbought on the daily and weekly timeframes, and almost on the monthly. Reversals are born in these conditions, but it's also true that the most explosive vertical moves come under these conditions. If crude keeps rising, $100 could come fast.

Speculators have increased their bets on rate hikes next year. The odds of a hike by June 2022 were effectively zero three weeks ago. Now they are at 70 percent.

If crude runs to $100, it will immediately add about 1.75 percent to the headline CPI. If CPI keeps rising, the headline CPI will be pushing north of 7 percent in November or December, the highest level since the very early 1980s when the 1970s inflation was winding down. President Biden's approval ratings are in free-fall and now the worst of any post-WWII president. If oil jumps to $100, the Baizuo regime will be cemented as Carter 2.0. Instability will rise because all but the most die hard will believe the government is incompetent. The Democrats could lose some of their core constituency as social media becomes impossible to police. Risk of geopolitical disaster will rise because enemies will take advantage of a paralyzed Washington, D.C. For the stock market, the inflation panic will trigger at least a short-term breakdown in long-term bond yields. The odds of a March rate hike will spike towards 70 percent and the Fed might be forced, like in December 2018, to reverse their policy statement days or weeks later. Perhaps they'll announce the taper will finish by March instead of July as Bullard proposed in his public statements last month.

The 10-year yield will spike, with potential run to 3.1 percent in the cards. The downtrend in the 10-year bond yield will be broken if it clears 2.80 percent by the end of 2022.

Leaving aside a long-term term rise in rates and inflation, a short-term pop in yields that takes TLT to a new low, would map to a roughly 10 percent correction in the Nasdaq for starters, plus whatever extra interest rates continue rising. Taking out the lows from this past month would also increase talk of a top in rates.

I don't own a crystal ball. What I can say for certain is that the VIX looks very cheap given the two most likely scenarios I see involve a sharp sell-off in the stock market. One also includes a sell-off in bonds plus political paralyzation of USG.