Sunday, July 12, 2020

Here Comes Extreme Deflation

Global central banks have now squandered their ammo creating a global asset bubble in the midst of economic depression. Global GDP is now inversely correlated to asset prices for the first time in human history. As long as Go Daddy doesn't roll over, this will all be fine...

Global Japanification is now complete: The total reliance upon ever-greater stimulus to give the illusion of a functioning economy. There has been zero inflation in Japan for thirty years straight. Today's global policy-makers are going to have similar difficulty keeping prices from collapsing. 

Good news right? Lower prices for everything. Not when the global debts are tied to today's price levels. In that situation, real liabilities rise. Already, real interest rates are rising despite global interest rates at the lowest level in centuries. Prices can and will go negative, however, negative interest rates don't work in the real world.

This is all setting up the ultimate liquidity trap. Borrowers unwilling to borrow in an extreme deflationary environment. Purchases delayed indefinitely on the expectation of lower prices. We face a global glut of everything. 

Universal basic income which is most likely inevitable, probably won't generate the widely expected inflation either. Why? Because, the universal income would need to exceed today's full employment income in order to create the necessary supply/demand imbalance, and yet that would be a major political hurdle. If the universal income is set at the current median household level ($50k/year), and if unemployment begins rising for high income households, then average incomes and aggregate demand will fall. In the U.S. average income is skewed massively towards the 1%. 

But, won't all that extra printed money remain IN the economy? The money will flow back to the banks in the form of deposits. If the banks can't/won't lend, then the money will go nowhere. The velocity of money will collapse. Again, classic liquidity trap.

All of today's technology and all of this "free" automation has created the lowest capacity utilization in U.S. history. Meaning the highest true unemployment. Whereas the official unemployment rate takes discouraged workers out of the ratio, the capacity utilization indicator doesn't lie:

Today's economists only focus on the quantity of jobs. Over the past several decades, the quality of jobs has collapsed with respect to real wages, benefits, and full time employment. On the basis of the quality of jobs, this post-2008 stimulus sham has been the worst economy since the Great Depression. It took only six weeks under COVID to obliterate an entire DECADE worth of junk jobs. 

“The problem is that quality of the stock of jobs on offer has been deteriorating for the last 30 years,”

 The “whole story” told by the index, he adds, is “the devaluation of American labor.”

Also, in this cycle, reflation peaked at the beginning of the cycle, which is contrary to every other economic cycle since WWII. Typically, reflation peaks at the end of the cycle.

I think we all see where I'm going with this, below. Today's "reflation" is a figment of the imagination. The only reflation is in global asset prices. The only control central banks can now exert is on gambler delusion. Which right now is at a record high relative to reality.

Ironically, as I write this, Tesla just took down the price of their latest car model due to falling demand. In other words, the stock price is going vertical while sales volumes and prices are falling.

As I said, central banks now only have control over misallocation of capital. 

The entire alternative energy sector is on fire currently, as it was at the last top in February. Two delusions for the price of everything:

There has been much discussion recently on this misallocation of capital and what it portends for the future:

"In recent months, the stock market has seen a boom in retail trading. Online brokerages have reported a record number of new accounts and a big uptick in trading activity. People are bored at home, sports betting and casinos are largely off the table, and many look at that $1,200 stimulus check they got earlier this year as free money. Some are taking cues from mainstream sources like the Wall Street Journal and CNBC, others are looking at Reddit and Barstool Sports’ Dave Portnoy for ideas (and entertainment). And commission-free trading on gamified apps makes investing easy and appealing, even addicting."

 A big draw appears to be options trading, which gives traders the right to buy or sell shares of something in a certain period"

“There’s a lot of risk involved, and you can definitely see why people get into the gambling side of things. It’s definitely the rush”

ALL of the MAGA (Microsoft, Amazon, Google, Apple) stocks made new highs this past week. As Barron's points out, due to dumb money indexing, all passive investors are Tech investors now:

"Like it or not, we’re all tech investors now"

The first MAGA crash was -20%, and the second was -35%. I will put this one at -50+%

Switching gears for a moment, today Florida had as many new COVID cases as all of Europe. The death rate typically lags new cases by two weeks. 

In summary, post-COVID crash, central banks have made the dumb money bubble much bigger and much more fragile.  Although they couldn't have done it alone. They had ample help from stay at home gamblers using options to manipulate stock prices. Or have we already forgotten about that trick also evident in late February. 

"Strategists have been cautioning on tight liquidity and fragility for some time, citing everything from the growth of passive investing to high-frequency trading as factors that could exacerbate market stress, particularly when volatility spikes.

Market depth for E-mini S&P 500 futures remains about 60% below levels seen before the March correction"