Bulls have been panic buying the reflation trades out of a fear of rising inflation. Now that their own asset inflation is showing up in the lagged economic data they are freaking out over "inflation". The irony can't be overlooked. Too bad no one can warn them they are victims of a hoax perpetrated on themselves.
Again.
Betting against deflation in Japan is called the widowmaker trade. And now it's a widowmaker in the U.S. and Europe as well.
For over 30 years various speculators have bet that all of the stimulus gimmicks deployed in Japan would create inflation and blow up the JGB market. They were wrong, and the speculators were the ones who exploded, not the Japanese bond market. Not only has the JGB yield stayed pinned to 0% despite debt over 200% of GDP, but the Yen is STILL regarded as the world's safest currency. Every time global markets implode, the Yen rallies. That has much to do with the fact that the Yen carry trade is a very popular RISK ON currency swap - borrow in Japan at 0% and buy higher yielding currencies with massive leverage. Then, when markets go RISK OFF, those high yield currencies get monkey hammered sending capital flying back to Japan to make the margin call. The same thing will happen to the U.S. dollar. It's now a ticking time bomb.
It's clear that most investors and pundits are in denial that the U.S. is now in Japanification. Which is why they are betting it all on reflation trades. They are engaged in the new widowmaker trade.
It speaks to tremendous arrogance to follow the exact same path as Japan and yet to expect a different result. It's no wonder Japan has been stuck in deflation for three decades. The World is constantly inundated with the deflationary forces emanating from China and the other Asian tigers all competing for the exact same commodified manufacturing work. Worse yet, COVID accelerated the virtualization of the economy. The trends that were in motion due to Globalization were put on steroids during the pandemic - working from home, shopping online, contactless payments etc. We now have the economy that futurists predicted decades ago - one that needs far fewer people. Underemployment is going to be with us for an indefinite amount of time. Our policy-makers have no solution for it, other than to provide a basic income stipend to the unemployed.
In addition to structural deflation, there is the fact that record U.S. debt now precludes any strong inflation impulse. A true spike in inflation would collapse the bond market and ignite another credit crisis, which would be extremely deflationary. During the 1970s stagflationary period, the U.S. was the world's largest creditor nation. Now, decades of trade deficits later, the U.S. is the world's largest debtor nation. All of this debt would need to be wiped out before a sustained inflation could take place.
What things will look like on the other side of the impending rioting is another question. The crystal ball doesn't see that far. However, needless to say, that when the sheeple realize they got massively conned again. There will be a truly fundamental paradigm shift in economic ideology in the United States. And it won't be friendly to capital. Those who believe otherwise are now engaged in the widowmaker trade. The first of many false dawns to come.
The crowded trade of 2021 is assuming this line will go up forever:
