Friday, December 4, 2020

The Future Is Deflationary

We are witnessing the largest headfake reflation rally in human history, compliments of epic amounts of misallocated capital creating its own imaginary recovery...

Hendry's iron law of Disney markets is leading them straight into depression:
"The worse the reality of the economy becomes, the more we take on the reflexive belief in further and dramatic monetary expansion and the more attractive the stock market looks"

The story of this week was rising inflation/reflation:

Finally indeed - because all of the other times it was a fakeout. And yet, of all of the times in the past decade to believe that reflation will take place, now is the LEAST credible moment in history. No question, central banks have amply proven they can generate asset inflation and asset bubbles. However, they have yet to cross the Rubicon into actual economic reflation. They have perfected reflation for billionaires, at the expense of the economy. 

Globalized capitalism is inherently deflationary, as evidenced by the decline in Treasury bond yields for forty years straight. Now at the lowest levels in U.S. history. The pandemic accelerated the deflationary trends that were already in place, and yet the vast majority of investors expect reflation will be the theme of 2021. Somehow after decades of deflation, they haven't figured out that true middle class economic reflation is never returning under the current paradigm. Until policy-makers and their useful idiots understand that the "system" has failed, nothing will change and we will see mass unemployment on an unprecedented scale. That revelation of failure will require a market crash and the destruction of the virtual simulation of prosperity and its acolyte QE.

There are several sources of deflation in the Globalized economy:
>Trade imbalances/outsourcing
>Continuous cost cutting/profit seeking

Add to this list the most deflationary factor of 2020 - the pandemic and its attendant lockdowns and mass unemployment. Also add political gridlock and the refusal of the GOP to bailout the middle class. Which will be the theme of 2021 until such time as they are "incentivized" to change. Pending crash. These two factors alone will ensure that the economic multiplier from "stimulus" will remain muted. How do you stimulate a part of the economy that is not allowed to operate? Which is why fiscal stimulus today is not stimulative, it's merely life support. 

Writing on Friday morning, today's jobs report was an unmitigated disaster. However, as per normal, the futures ramped on the revised fairy tale that bad news is good news and will move Congress closer to a stimulus deal. When bulls are adequately lathered up, they can fabricate any excuse to buy stocks.

Among the factors that have accelerated deflation, one of the key themes of 2020 was the realization of the virtual economy. The concept of a no-touch economy in which millions of jobless consumers buy everything online and have it drop shipped to their doorstep. Zero human contact required. Sadly, contrary to popular belief, there is no such thing as a virtual economy. I've discussed this fictional jobless consumer many times in the past - the mythical beneficiary of all free trade agreements. However, never before has it been more of a delusion than right now. Going forward, this accelerated automation of the economy will stifle job creation for the foreseeable future. Worse yet the ultra low deflationary interest rates of today are accelerating automation and job destruction. Because capital is essentially "free" versus labor which is relatively expensive. Deflation is generating more deflation. 

The debt overhang from the pandemic I've discussed several times. Debt is inherently deflationary and is a claim on future consumption.

The other main risk to the deflationary fantasy is of course political gridlock. Or as I put it political ideology. The Senate runoff race in Georgia on January 5th will determine which party holds the balance of power in government. If the Democrats pull out a miracle, then serious stimulus will take place in early 2021 after inauguration. However, if as expected the GOP wins, then the result will be inadequate stimulus throughout 2021. 

My view is that even the Democrats don't really understand what it will take to pull this economy out of this deflationary crater. These current stimulus discussions are way behind the curve and we will know how far behind in the coming weeks as the collapsing economic data finally catches up with the Casino.

This week's fake reflation was compliments of an oil rally into the OPEC meeting which was a clusterfuck as usual. The purpose of the meeting was to NOT raise production, which they couldn't agree upon, so they reached an agreement to raise it instead. 

Meanwhile, hedge funds have been piling into oil futures:

I think we all see where I'm going with this - it's the usual Ponzi inflation. Asset speculation feeding back into the economy:

Bloomberg put out a note yesterday indicating that the market is extremely over-extended and likely to "correct" before the end of the year. Basically all of the charts show the same thing - gamblers way over their skis on risk:


Of those five charts, I won't re-create them all, however, one chart shows the 5 day equity put/call ratio at a 20 year low. I show the inverse which is the call/put ratio. Notice the last time the ratio was in this vicinity was just prior to Flash Crash 2010.

Which is what I expect now - A massive unexpected crash out of nowhere, compliments of legions of idiots with their heads up their own ass.

“The public is embracing options in a truly unprecedented manner, as you can see from the volumes”

when you are in an up market like we have been experiencing, you can come to believe that the odds really are in your favor"

"Good news, no jobs"

The Brexit clusterfuck is heading for a weekend showdown. A deal failure could be a global risk off event as it was in June 2016.

When the dollar reverses its nosedive, global risk will get duly monkey hammered: