Thursday, August 6, 2020

Human History's Biggest Circle Jerk

This fake reflation rally is human history's biggest circle jerk without any comparison. The stock market is now inversely correlated to the economy...

The S&P 500 has now round-tripped back within 2% of the February highs, while consumer confidence is at the pandemic lows:

"Americans grew more worried about the economy toward the end of July after a fresh outbreak of coronavirus cases chipped away at the recovery and cast doubt on how quickly the U.S. will rebound from the worst health-care crisis in a century."

The level of sentiment is now barely above the pandemic low, erasing most of the momentum gained in late May and June as large swaths of the economy reopened."

Forward inflation expectations as imputed via Treasury Inflation Protected bonds have been soaring as investors have been flocking to the TIPs en masse. An advent that has ironically caused the inflation premium to become artificially bid up thereby collapsing real yields (Nominal rates - inflation). 

Not everyone is buying it:

"Treasury Inflation-Protected Securities (TIPS) and gold have lured investors, who reckon unprecedented monetary and fiscal stimulus will eventually produce higher prices. In June alone, investors poured a record $6 billion into TIPS"

“There is a fear that the Fed expanding its balance sheet is going to create an inflationary impulse...I structurally don’t see that right now.”

Basically what is happening is that gold investors and TIPs investors are locked in a happy circle jerk. The more TIPs get bought, the more market-imputed real yields collapse and the more gold investors bid up gold. Why? Because real yields are falling, don't you know?

All in the expectation of another Stimulus package, which if it comes at all will be a pale shadow of the first one.

Here we see that as it was in February, TIPs and gold are 100% correlated and TIPs are more overbought than they were in February:

Which gets us back to what is really going to happen outside of the happy circle jerk:

First, the stimulus-driven sugar high will crash with extreme dislocation. Worse than February. 

Next, defaults and insolvencies will soar, as will mass layoffs.

Collapsed consumer confidence will final implode.

Societal acrimony will rise.

None of which is inflationary.

Soon, even the biggest morons among us will realize Trump is unfit to lead. 

Any questions?

"The US is projected to undergo the biggest increase in economic misery across 60 countries as the nation grapples with heightened unemployment and fresh coronavirus hotspots."

The US was hit by both plunging inflation expectations and spiking joblessness. Economists expect near-term inflation to slide below 1% in the US as a drop in consumer spending drives steady disinflation"

As I said above, the bond market is officially clueless:

Getting back to Trump Casino, tomorrow is the monthly jobs report so who knows which way the algos will push Disney markets short-term. However, into this jobs report and the imminent Stimulus 2.0, shorts have been getting crushed, as everyone who doesn't believe in fairy tale endings gets universally punished. All of which is a necessary and sufficient condition for final explosion.

Who remembers that VIXPlosion 1.0 followed the FOMC meeting, corporate earnings, and the jobs report?

I do.

Move along, nothing to see here:

And the chart of the week is this one. It appears that not everyone will be surprised by what comes next.