Sunday, December 6, 2020

The Big Long 2021

This year has many of the similarities of 2008, and a few fatal differences from that successful bailout...

At this lethal juncture, strip away the monetary heroin induced speculation bubble and all you are left with is lethal delusion on a biblical scale. 

There are several factors that are eerily similar to 2008, and then major differences.

Fake reflation
Bailout/Vaccine false dawn
Clueless leadership
Wall Street criminality
Corporate defaults

Differences (Factors that make this situation far more dire):
Lethal pandemic
Negative global GDP growth
Record layoffs
Record small business decimation
Accumulation of debt versus deleveraging
Record speculation
Extreme overvaluation
Permanently changed consumption patterns

I won't hit all of these similarities and differences, but here are the major ones:

Rewind to 2007. The housing bubble had peaked and was beginning to roll over. The first major blowup was a company called New Century financial which specialized in subprime mortgages. They imploded in April 2007. Two Bear Stearns hedge funds that had invested heavily in subprime mortgages imploded in June 2007. The Fed started cutting rates in August 2007 to offset the credit losses. The stock market peaked in October 2007, led by Tech stocks. Banks had peaked earlier in the year in February. In 2008 the dominoes started falling harder and faster, so the Fed took rates down aggressively. Bear Stearns failed in March 2008, Countrywide failed in July, Fannie Mae and Freddy Mac imploded in early September, followed by Merrill Lynch, AIG, and Lehman Brothers all failing in mid-September. Even after that seminal market event, the Fed was basically clueless. We know in hindsight, that the economy had entered the great recession in December 2007, a full nine months before the September Fed meeting: 

"On the morning after Lehman Brothers filed for bankruptcy in 2008, most Federal Reserve officials still believed that the American economy would keep growing despite the metastasizing financial crisis"

The Fed’s understanding of the crisis, however, was clouded by its reliance on indicators that tend to miss sharp changes in conditions."

One of the main reasons the Fed under-reacted at that critical juncture is because their own monetary easing earlier in the year had sparked a global hunt for yield and speculative stock market mania. Which had the effect of artificially compressing risk premiums in the credit default market, which was the entire plot behind the book/movie ("The Big Short"), and of course the Fed artificially compressed volatility in the stock market.

In addition, all of that cheap money used to stem the burgeoning subprime crisis had sparked transitory inflation via the commodities market, similar to what we are seeing now, only on a much greater scale. The inflation rate in August 2008 was 6.5% as oil soared to $140/barrel. Whereas last month the inflation rate was 1.2% and oil recently reached $45/barrel. Those who are now believing in a sustained breakout in inflation are merely getting headfaked the same way they were in 2008, only by a far less convincing spike in inflation.

September 2008:
"The outlook of Fed officials also reflected a deeply ingrained bias to worry more about the risk of inflation than the reality of rising unemployment"

The transcript for that meeting contains 129 mentions of “inflation” and five of “recession.”

As far as failed leadership, it's the GOP Congress who are clueless this time around. The Fed has been pounding the table for more fiscal stimulus for months now. They know that at the zero interest bound, monetary policy is impotent without fiscal stimulus to monetize. Aside from creating monster asset bubbles, and generating mass complacency, Fed policy is inert. 

Ironically, the GOP leadership has been fooled by the Fed's Jedi Mind Trick. They see their portfolios at all time highs and they assume that the recovery is going just fine.

Meanwhile, as I've pointed out this vaccine delusion is similar to the TARP bailout in October 2008, it gave people a false sense of security. However, far more complacency this time around, than last time, because at peak Baby Boomer retirement, the urgency to believe in fairy tales has escalated dramatically. And that is where Wall Street criminality comes into play, because they are nothing more than a big fairy tale factory. And they exist to monetize willful idiots. 

Those are the similarities, now to the major differences. On a scale of lethality, nothing can compare to the COVID virus itself and the amount of complacency among the general populace. 

Last February, when the virus was just breaking out, Trump ordered a nationwide lockdown. Aside from going to the grocery store to hoard toilet paper, no one was allowed to go anywhere. Shopping malls were CLOSED. Now, with the pandemic at its height of lethality, people are out shopping for Christmas presents. Malls are open, as are restaurants. I am not saying this is right or wrong, only to say that the election and Thanksgiving superspreader events are now being accelerated further by Christmas shopping. 

“This fall/winter surge is combining everything that we saw in the spring with everything we saw in the summer — plus the fall surge going into a winter surge"

The other major difference from winter 2008 is that the stock market had peaked a year earlier and aside from short-covering rallies, was rolling over hard. Stock market valuations were coming down, not sky-rocketing as they are now. Similarly, corporations were de-leveraging whereas now they are piling on record amounts of debt in anticipation of the economic "re-opening" in the spring. 

Why? Because the biggest difference between now and then is that people are even dumber now than they were back then.

And they will believe ANY circus clown when he tells them the economy is great. 

But they won't believe the truth, even if their life depended on it.

"Ackman said he made his new hedge on the day that Pfizer announced its promising new COVID-19 vaccine. Pfizer’s announcement was “actually bearish,” Ackman said, predicting that it will prompt Americans to grow complacent about mask-wearing, allowing the deadly virus to spread even more widely."