Saturday, August 14, 2021

Human History's Biggest Sucker's Bet

Deja vu of 2011 the GOP are playing brinkmanship with the Federal debt limit. Once again, the suckers at the table are bluffing with a pair of fours...

Republicans are REALLY pissed off. Partly due to the election fiasco, partly due to the social justice mob rule, but mostly due to self-inflicted problems. I am referring of course to Supply Side trickle down economics which has been the mainstay of Republican policy since Reagan. The theory behind it is that as the rich get richer everyone else gets the bread crumbs falling off the table. Think deck hands on mega yachts and so forth. The "success" of this policy is measured in record wealth which we learned this week is now inversely correlated to consumer confidence. 

It's the inevitable endgame for Voodoo Economics:

For Republicans, consumer confidence is now LOWER than March 2009 when the market had crashed -55%. Which is a harbinger for massive unrest when this collapse takes place.

Needless to say, this collapse in consumer confidence is a disaster in the making given the impending fiscal cliff that will take place after Labor Day which is when Federal unemployment benefits end for 7.5 million people. As we see above, it's all very reminiscent of 2011 when the GOP refused to increase the debt limit for Obama. Consumer confidence collapsed. Republicans say they are refusing to raise the debt ceiling "on principle" however they had no problem raising it for Trump and his massive tax cut for the ultra wealthy. This is rank hypocrisy bluffing with an empty hand, and I predict the cost of it will be measured in trillions of deflated asset wealth.

As a reminder, when this all played out in August 2011, stocks crashed -20% and bonds were bid. The VIX hit 50. Ironically, bond yields collapsed despite the technical default. This time however, the stakes are 10x higher given the amount of leverage that has been added in the meantime. 

In particular, the fragile reflation trade will get monkey hammered and it's already in a precarious position on the verge of third wave down.

This is the WORST time for brinkmanship:

Also getting interesting is the ongoing meltdown in Chinese markets, which has been celebrated as a victory for the U.S. 

This coming week happens to be the same week in August 2015 when the Chinese meltdown spilled over into global markets. 

What could go wrong?

As far as gold goes, the GOP antics in 2011 killed the gold rally.

On the Tech-heavy Nasdaq, Friday saw the largest number of new lows at an S&P 500 all time high in thirty years:

In summary, I predict that Congress will be moved to raise the debt ceiling and extend unemployment benefits, but the cost of the delay will be far more than they can afford.