Sunday, December 20, 2020

The Big Short 2021

The GOP just paved the way for a massive credit crisis in 2021. Which will be the primary economic theme of the year, along with the rise of the Occupy Wall Street movement to ensure there are no more bailouts for criminals. I suggest that the "elites" are not going to have as good a time of "the reset" as so  many seem to believe...

Recall my pre-election war-gaming scenarios below. Unlike Wall Street, I predicted that a divided Congress would not be a "Goldilocks" fairty tale ending, it would be a deflationary clusterfuck.

So far, my prediction is 100% on track, while Wall Street is STILL telling fairy tales to trapped gamblers.

Election scenarios:

Word is that after seven months of non-stop hyper-partisan gridlock, Congress is finally approaching a stimulus agreement. Short-term we should expect two-way volatility as the market "prices in" this event. Knowing that any economic benefit will be pulled forward into 2020 and have little impact on 2021. The pull forward effect will be a function of the starving unemployed using their benefits to pay down debt and to begin repaying landlords for the accumulated back rent. 

Which is why you would have to be seriously deluded to believe that in 2021 GDP will be anything near 2020 levels when the amount of direct fiscal stimulus was just cut in half from $2 trillion to $1 trillion. And on top of that, five years of jobs has been lost.

Where will all of this extra demand come from?

Looking at nominal GDP, we can see what 2021 will look like with $1 trillion less stimulus, assuming a 1:1 multiplier which is a major assumption. Most of this delayed "stimulus" is merely life support. 

But won't the vaccine help? Of course, but it won't repair five years' equivalent job loss. The virtual economy has proven that we don't really need people in this economy after all. And small business will take years to recover.

“We have known there is a large number of people who don’t have $400 to pay for an emergency for a long time, and now the problems that families had before are on steroids,”

Policy responses have primarily focused on temporary measures to get through the current crisis, but unequal labor market benefits and the shortage of affordable child care will persist beyond it"

What it comes down to is that the GOP wants Biden to fail, which is why they are being extremely stingy on stimulus. Arguably this bill only passed because of the impending runoff election in Georgia in early January. However, they made a major mistake which will come back to haunt them personally. One of the major hang-ups in the past week of negotiations was caused by Pennsylvania Republican Senator Pat Toomey who demanded that all of the Fed special powers be rescinded:

"Toomey, a longtime skeptic of the Fed’s power, wants to make sure the CARES Act-related lending programs are permanently ended, because he and other Republicans worry Democrats will give “overly generous loans” to businesses, cities, and states. Republicans want to make sure the programs are ended now to block incoming Treasury Secretary Janet Yellen (assuming she’s confirmed) from using other funds to restart the programs."

Former Fed Chair Ben Bernanke issued a statement over the weekend warning about the potential implications of the GOP’s proposal. He stressed that it is “vital” that the Fed be able to “respond promptly to damaging disruptions in credit markets” and that such ability not be curtailed"

One of the programs that will now be ended is the Fed's ability to buy secondary bond ETFs which is what shored up the corporate bond market last spring. That implicit "bid" under the market set loose unprecedented bond issuance.

I think we all see where I'm going with this - the corporate debt bubble is about to pop, as there is no more implicit central bank bid below the market

Corporate debt, % of GDP:

Pat Toomey may as well be working for Bill Ackman:

November 11th, 2020:

"Bill Ackman just placed another big bet against the credit markets as coronavirus cases surge nationwide. The billionaire investor said he has bought $8 million worth of insurance that will pay off if companies start defaulting on their debts like they did when the virus shut down the economy in the spring."

“We’re in a treacherous time generally and what’s fascinating is the same bet we put on eight months ago is available on the same terms as if there had never been a fire and on the probability that the world is going to be fine.”

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."

We already know that Ackman was right about the downside of the vaccine causing mass complacency. Of course he was assisted by those on the right who still believe this virus is a Democrat hoax. Now we will find out if removing the corporate bond bid at the end of the credit cycle, is a good idea.

Or not.

One thing for certain, the GOP sequesters a lot of carbon