Tuesday, November 9, 2021

Delusion Is Transitory

Gamblers sitting on record unrealized gains at all time highs, now face the ticking time bomb of a Fed and Congress that will continue to remove monetary and fiscal stimulus until the market explodes. Why? Because the delusion implied by record asset prices is that everything is going fantastic. Therefore today's strategy of waiting for reality to catch up with fantasy isn't going to work this time...

This entire endgame gambit is compliments of the enduring economic myth of the jobless consumer. Now featuring record low total employment. Denialists are of the belief that the middle class can be plundered relentlessly without consequence, which has led to today's record divergence between asset prices and the economy. 

Yes, I realize that prices have risen at a fast pace year over, just as they fell last year at a record pace. Although I don't recall hearing too much concern when that happened. Oil negative? Awesome. Much of what passes for today's "inflation" is due to one-time effects such as post pandemic inventory re-stocking, Christmas panic buying, rampant profiteering/price gouging, and of course record speculation in everything.

Case in point, "high" gas and oil prices are a total fabrication. Nominal prices of gasoline and oil are back at 2014 levels, far below the 2008 all time highs. CPI-adjusted prices are even lower. Using year over year price increases to describe "inflation" is highly disingenuous, and therefore unquestioned. 


What would you rather have a 200% increase in oil to $150 or a 700% increase to $85? Based upon today's logic, the majority would find the former far preferable. 

What it all points to is the fact that this Third World aspirational society has conflated a declining standard of living for "inflation". The critical question on the table when recognizing inflation versus deflation at the macro level is:  are debt burdens rising or falling? Inflation benefits borrowers at the expense of lenders. Whereas deflation benefits lenders at the expense of borrowers. We are clearly in the latter paradigm as liabilities both on balance sheet and off balance sheet for households are increasing. The collapse in consumer sentiment is an indication that price elasticity is high and therefore demand is highly sensitive to changes in price.

The lethal question is whether or not this is sustainable. Because if it IS then inflationists are right. But if it's not, then it points to recession amid record asset values. 

No wonder they're in denial. 


Which gets to the primary risk we now face: Monetary policy is no longer functioning. We are now witnessing a record divergence between asset prices and the economy. Which means that the long-term outcome of monetary policy is exactly what one would expect: Lowering short-term interest rates to 0% has incentivized maximum debt accumulation. While lowering long-term interest rates to 0% has incentivized maximum risk exposure. Which is why we now have a massively leveraged economic time bomb with an asset market fuse attached to it. 

Inflationists can be "right" so long as the bomb never detonates. And then terminally wrong from that point forward. All the while blaming "policy error" for their lack of foresight.

Which gets us to the casino.

What I see is a blow-off top within a blow-off top. This latest ramp from the early October lows is the blow-off top for the COVID rally. The COVID rally is in turn the blow-off top for the entire post-2008 rally.

But really, who would know better about these risks than the people who created them in the first place?

"The central bank also said that fragility in China’s commercial real-estate sector could spread to the U.S. if it deteriorated dramatically"

Evergrande Faces Biggest Test To Date As Wednesday Payment Deadline Looms

What gamblers need now is a time machine. Because once they realize they doubled down on a decade worth of risk landing in the fourth quarter, they will be competing with algos to get out the door into a bidless market.