What today's pundits and gamblers ALWAYS forget is that when asset values collapse, liabilities remain the same. Home values plunge below mortgage balances leaving buyers stranded underwater with no way out. The lesson not learned from 2008.
Forty straight years of deflation later and these people STILL haven't figured out that debt is deflationary. During the pandemic global debt sky-rocketed. No surprise, today's debtors are praying for inflation which benefits the borrower at the expense of the lender. Deflation, just the opposite - debt service grows over time as wage gains stagnate relative to mounting debts.
Here we see via Treasury yields that the speed limit of this economy has been constantly falling over these past decades as debt burdens mounted. Each recovery exhibiting less vigour.
Now the fiscal multiplier has collapsed to a point that a 20% of GDP deficit is expected to produce a mere 5% GDP "growth" over last year's anemic lockdown GDP.
Over 2019's prior peak, 1.8% annualized.
We are seeing typical end-of-cycle indicators with respect to asset values, credit expansion, IPO issuance, and of course "inflation".
Nevertheless, from a borrower's perspective, this delusion can never end.
Yesterday's FOMC non-event somehow shocked markets when they learned that the free money party won't last forever. No one saw that coming. A few minor shifts in tone and no change in policy sent the massively overbought cyclical bubble into a taper tantrum.
For three months stonk investors had been ignoring the bond market's message, compliments of ad-sponsored bullshit issued by media outlets that specialize in monetizing useful idiots.
Inflation isn't just transitory, it's already over.
Cylicals are at key support which has not been violated since the election.
The new fantasy is that Tech stonks will now take back leadership from imploding cyclicals. Never mind the fact that Tech stocks remain multi-decade overbought.
The COVID rally is the current era's analog to the post-LTCM Y2K melt-up. Both were driven by coordinated global central bank liquidity:
This week we got news that during May record margin debt expanded once again. Which coincides with a new low in Rydex cash balances.
Which means this society is record leveraged to a fraudulent Wall Street recovery.
In summary, just as COVID was an ignored warning for an unhealthy society heading down an unsustainable path, so too are all of today's economic and financial signs being ignored.
This society is addicted to debt AND addicted to fiscal/monetary stimulus - a combination that does not work together. Yet, these fools believe they are successfully avoiding reality in every direction. Too dumb to realize how dumb they are.
In for the surprise of a lifetime aka. a re-test of last year's lows.
I would be remiss if I did not point out that of the top ten largest "Skew" readings in history (30 years), an astounding seven are in the past three weeks. Four this week alone. The random chance of that happening is 0%.
Skew measures tail risk as imputed from out of the money options. The range of skew is supposed to be 0 to 150. However, all of these recent readings are in the 160 range:
Top ten sorted by skew:
