Sunday, November 14, 2021

Common Prosperity

It's been a long time since I baselined my predictions and assumptions, therefore in this running post I will document my overall hypothesis towards the economy and markets. These assumptions and predictions are not bounded by any specific year/timeframe unless otherwise noted. Therefore I will continue to revisit and refine them over time. My use of charts will be sparse if any, since the goal is to document my underlying assumptions. If people don't want to believe them that's their decision. If it's one thing I've learned all these years it's that no amount of facts and data can overcome denial...

First off, it's already been a crazy year and it's not over yet. The second stage post-pandemic melt-up began a year ago when Joe Biden was elected. Year over year, the S&P is up 48%, which compares to Trump's 38% melt-up into late January 2018. Then as now, the pot of gold at the end of the rainbow was fiscal stimulus - tax cut v.s. infrastructure bill. The market is equally overbought now as it was at the end of Trump's rally. However, for most of Trump's rally the Fed was tightening short-term rates and QE, whereas for the past year the Fed has been pedal to the metal on both ends. They are just starting to taper this month and that will continue through May 2022 at -$15b reduction per month. 

The Ameritrade IMX positioning indicator is equally RISK ON now as it was at the end of the Trump melt-up. Although it's been at the same extreme level now since July. 

I believe China is the new Japan. They've had their supernova real estate melt-up and now they are morphing into a dwarf star emitting continuous deflation. Unlike Japan however, the Chinese government is making serious and painful reforms to their economy instead of merely relying on fiscal and monetary stimulus ad infinitum. So far only their stock market has imploded, but I believe it's only a matter of time before their property market explodes as well. Evergrande being the canary in the coalmine. I believe that China is leading the world towards what they are calling "Common prosperity". Which means that bailing out rich people is a thing of the past. China's nascent Evergrande response is to attempt to protect small investors and households while allowing their oligarchs to go under the bus.

Meanwhile, wealth inequality in the U.S. is reaching its zenith amid the largest global asset bubble in history. For now U.S. policy-makers are ignoring the political risk of this equation. It's only a matter of time before they follow China's lead. 

I believe the global real estate super bubble is on the verge of final explosion. In each cycle it has grown larger and required more stimulus to bail it out. Nevertheless, in keeping with the "Common Prosperity" theme, I believe this crash will be sufficiently large to convince people enough is enough. Of course if I am right then there will be many more dominoes to fall as global central banks which are currently in the process of tightening, will be forced to reverse.

I doubt the Fed will ever increase rates in this cycle. They are now between a rock and a hard place. The lagged data is coming in hot, however consumer demand is likely on the verge of collapse. My deflationary hypothesis - as everyone knows - is that this post-pandemic consumption binge is end of cycle and it's obscuring economic weakness. The middle class is over-leveraged and recent wage gains are not keeping pace with prices. For the moment it's "stagflation" - stagnant economy with inflation. However, this is not an equilibrium state. It will soon morph into outright deflation amid asset collapse. The common belief that wages will spiral out of control is part of the Supply Side mythology that has held this country in a deathgrip since 1980. High debt, low employment, low capacity utilization, record trade deficit, and extreme overinvestment in technology are all structurally deflationary. 

On the long end, the Fed will be forced to reverse their recent taper decision, but they will be (too) slow to react. Back in 2018 Trump forced the Fed to reverse. Biden won't intervene this time.

Bad news for bulls, Powell isn't going to stop mass margin calls. 

No surprise, I view this gridlock in Washington as being deflationary. The economy is now dependent upon continuous and ongoing combined fiscal and monetary "GDP". Without both, it will collapse back into deflation. The parties are at ideological loggerheads, however, during crisis they usually come to some short-term agreement. And that's what it will take. Crisis.  

In keeping with the theme of no bailouts, the pain in markets will be like nothing we've ever seen before. Most Millennials will be wiped out financially. Robinhood will be sued out of existence. Liquidity will be non-existent. Confidence in markets overall will collapse. 

I predict that Tesla will lose 90% of its value, as will Bitcoin. The idea of a crypto Ponzi scheme being a safe haven from inflation is the height of asinine. Then again, we will never find out, because it's extremely highly correlated to stocks and other risk assets on the downside. These people are ALL looking the wrong way down the tracks for inflation, but the freight train of deflation is coming from the other direction. But it's only been 40 years straight of Supply Side economic failure, so how would they know?

My last prediction: The sun will still rise, life will go on.