Sunday, March 14, 2021

Fake Recovery: MAX PAIN TRADE 2021

Of all of the massively overbought and overbelieved fantasies in this era, none will be more painful than the falsehood of recovery now being spun by global central banks...

The pain in the Tech trade is well along and primed to accelerate when the stimmy sugar high wears off. However, this consensus end-of-cycle value rotation will be the most abrupt and painful reckoning in the stock market.

As it was in 2008.

Then as now, gamblers and central banks are oblivious. Drugged by the virtual simulation of prosperity and its acolyte QE.  

In a recent post I posited that reflation is no longer possible under the current paradigm of Global Japanification. The Federal fiscal multiplier has collapsed and the virtualized economy is no longer labor dependent. When the U.S. had a sound middle class and tight labor market, sustained inflation was possible. Now, amid mass unemployment, it's no longer possible. 

There are several major structural changes that would have to take place to change my mind. First and foremost the global debt and asset bubble needs to explode, which will be an extremely deflationary event. Secondly we would need to see increased trade protections as currently the U.S. is importing deflation from abroad. Third, there would need to be a recurring basic income which will merely offset rampant poverty. Generally speaking there would need to be an ideological shift towards more labor friendly policies, and then mass unemployment would have to be alleviated. Of course all of this would take a long time and in the meantime deflation will be extreme.

For major debtholders and those who have over-leveraged themselves to this massive con job, it will be quite painful. On the other side of reset there will be a glut of everything which will take time to clear. Given that as background, suffice to say there is no sustained inflation on the horizon. What inflation exists is commodity inflation feeding back into the CPI, mostly through oil prices.

Given all of that, I see the most painful trade being the unwinding of the record short t-bond trade. When the global RISK OFF crash gets out of control, the Fed will obliterate consensus t-bond shorts. I see long-term t-bond yields heading to 0% by the end of this year. The short squeeze will make Gamestop look like chump change. T-bonds are the only asset class that has a guaranteed bid when this all explodes, and the Fed is already getting nervous.  

TLT (Thirty year bond ETF) has substantial upside over the coming months, and will outperform stocks massively in 2021.

In summary, don't fight the Fed. 

Gamble at your own risk.

Or, you could just bet that this will go to infinity.

Because that is what everyone else is doing.