Tuesday, March 2, 2021

An Unrequited Faith In Printed Money

The beginning of every new cycle has always been a leap of faith for investors. However, this time it's a fatal one. What was once standard business cycle investment strategy has now been reduced to Fed sponsored mass deception, at the happy intersection of Wall Street conflict of interest and rampant denial...

The wolves of Wall Street are using the cycle playbook against rube investors and those who should know better, under the fake auspice of a whole new cycle. The question they are all ignoring: Are inflation pressures greatest at the beginning of the cycle or the end of the cycle? At the end obviously. And yet we are seeing cycle high inflation expectations right now. The highest since the end of the last cycle:  

"Early inklings of inflation were evident in data from the Institute for Supply Management this week: Measures of prices paid jumped to their highest levels since 2008"

Which begs the question, can massively over-leveraged credit markets and the global pandemic housing bubble really afford this recovery? 

The answer ironically, is of course, no. We must remain in a permanent state of deflation OR else we will explode the credit market. This current path of ever-growing fiscal stimulus packages is the path of greatest explosion. 

Historically, central banks increased monetary stimulus at the beginning of the cycle to reliquefy markets and buy time until the economy caught up with asset prices. Taking their cue from central banks, markets have always responded ahead of the underlying economy. The leap of faith has been that the economic recovery would follow. In the good old days, monetary policy stimulated BOTH markets and the economy. 

This time however, the Fed has no interest rate ammunition left. Therefore, beyond bidding up asset prices to asinine levels, the only "economic" function of monetary stimulus is to finance never-ending Federal stimmy payments now fully conflated as "GDP". In other words, the role of monetary policy is now to assist with the illusion of recovery. 

This of course is all Japan-o-Nomics on steroids. The overuse and abuse of recurring stimulus gimmicks, preventing any and all policy changes that would be necessary to rebuild the economy. Levitated markets merely provide the illusion that it's all working.

And why would otherwise sane money managers buy into this fraud? Because they have no choice. Global interest rates are so low that money managers are on a constant hunt for "yield" and markets pinned to all time highs give the illusion of perpetual yield. Be that yield from bonds, from dividends, from selling options, selling volatility etc. It all works great as long as the bubble never explodes. Because below the fragile veneer of Disney markets is the dead zone of imploded yield seeking. Which means that "strategies" that work great in an up market, spontaneously explode when capital losses exceed the recurring gains from yield pickup strategies. Today's money managers are nothing more than call options on the cycle. A cycle which in their minds must continue indefinitely via continuous central bank fraud or whatever means necessary.

We have now taken the first inexorable steps down the path towards universal basic income. And the bond market is starting to wake up to this fact. What we saw one year ago in March is that it took substantial effort and several weeks for the Fed to get the Treasury bond market under control in the Japanese tradition. In the meantime, the Fed has ceded control of the bond market to reflationary forces. For all of the talk of QE controlling markets, Fed bond purchases have already failed to keep a bid under their target asset class. All of which means that leaving aside the economy, the first order financial paradigm shift we face is for the Treasury bond market to come to terms with unlimited Treasury bond issuance. A feat they have abjectly failed to accomplish to date, and one they will need to achieve DURING a global market liquidation. Suffice to say, the pikers on the NY Fed bond desk will have their hands full.

I predict it will be an epic gong show. Deja vu of last year we will see extreme two way volatility in the T-bond market. However, ultimately, the Fed will get the market under control. Even if they have to buy all new issuance for the first time in history. In the meantime while the Fed is preoccupied with the Treasury market and the overnight repo market and the basic financial plumbing, all other risk asset classes will spontaneously explode - for no other reason than being too far from the printing press. Contrary to popular belief, Go Daddy and other Tech stocks will not be safe havens from extreme deflation.  If you notice in the background of the chart below is Momo Tech (gray). These stocks have been correlated to rising yields since last March.

Last year, T-bonds were record bid in early March and then they imploded mid-month when the Fed panic cut rates to 0% and launched QE infinity (March 15th). The next day the stock market was limit down at the open. Between March 9th and March 18th the period during which the Fed initially panicked, the T-bond ETF crashed 40 points. 

This year, T-bonds are already back down to the March 2020 lows. You don't have to be a genius to see what could happen if the T-bond market crashes from these levels. EVERYTHING is priced off of Treasuries. 

When Gamestop almost crashed the stock market, that was the sign to get out of Disney markets.