Monday, March 14, 2022


Rule #1 of Japanification: Stimulus is everything...

My biggest mistake after 2008 was being too slow to realize that the U.S. and indeed the World are well down the path of Japanification. Meaning structural deflation at the zero bound. What inflation abides right now is cyclical and almost entirely supply driven. Which means this is not your typical rate hiking cycle that so many pundits and investors believe it is. They are of the consensus belief that this is just the beginning of the rate hiking cycle, when in fact it is very likely the END of the rate hiking cycle.

It's highly biblical that Supply Siders would commit such an egregious and amateur policy error after four decades of middle class obliteration. It's as if someone in charge wants this to end the hardest way possible. 

The mistake I made after 2008 has now been corrected. I've seen the light. Ironically, now all of today's pundits are making the exact same mistake I made i.e. ignoring the rules of Japanification. Of course the consequences of being wrong at this late juncture will be far more dire. The first rule of Japanification is that economic "reflation" is entirely dependent upon continued dramatic fiscal and monetary policy. Which means there will never be another "normalization" of policy, under the current deflationary paradigm. Which is what today's errant policy-makers are now attempting. 

Their failure will be cataclysmic at the zero bound. 

The COVID pandemic was the most deflationary event in modern world history. The first ever TOTAL lockdown of the global economy. Zero international travel, and work from home on a scale never previously even technologically possible. It was the apex of ecommerce and Amazon. It was the full scale realization of cloud computing. It was a "virtual economy". 

The initial onset of the pandemic and its 20 million layoffs saw the mass automation of jobs which was only partially offset by massive fiscal pandemic unemployment stimulus. Without which there would have surely been 1930s level poverty. However, as the pandemic progressed and life returned back to normal, the massive monetary stimulus set-off a round of manic corporate re-hiring. In addition, hundreds of new start-ups were funded via the IPO market all competing for the exact same pool of "gig workers". These factors and the pandemic-related early retirements I've discussed many times, tightened the job market beyond anything we've seen in recent decades. Putting the balance of power in the hands of the employee over the employer for the first time since 1979.

And THAT is why there is currently so much hysteria over "inflation". It is almost entirely ideological in its root cause. The chamber of commerce has informed the Fed that they need to get "inflation" under control ASAP. And hence the Fed is ignoring ALL risk in order to do so.

Here we see that despite the intervening years of population increase and GDP increase, NOMINAL commodity prices are STILL below 1980 levels. In real terms adjusted for wage CPI, these commodity prices are near decade lows (see bottom pane, red).

What people are currently (over) reacting to is the rate of change (middle pane), which is the highest since the 1973 OPEC Oil embargo. This IS a shock, but the bottom pane shows it is NOTHING comparable to what took place in the 1970s on a real income basis.  

Here we see that EVERY CPI spike since WWII preceded recession. 

Given the precarious position of consumer sentiment, we need not assume this time will be different. 

It gets far worse however, because this blinder view of inflation is causing the Fed to ignore ALL other global risks. Including as I've said the collapse of Chinese stock and real estate markets, Russian default, and global growth stock meltdown.

The worst since Russian default, 1998:

Bear in mind that these other spikes took place AFTER the event. Whereas this time Nasdaq lows are near record levels BEFORE a Fed tightening and Russian default. 

In the U.S. we are essentially blacked out from the truth. 

We are behind the Iron Curtain of bullshit and denial.

All of which is where Wall Street criminality comes in handy. Because only true con artists can speak of commodity melt-up and economic meltdown at the same time. Which are both logically and historically mutually exclusive.

Got that? High prices predict recession. And recession predicts low prices. 

So get in and out quick because if you don't front-run everyone else, you will get obliterated.  

That is the type of "trade" only Bernie Madoff could love. And yet, it's essentially the standard advice given on Wall Street - "hide" in inflation trades:

"On Sunday, Tesla CEO Musk tweeted that in times of high inflation, it is “generally better to own physical things like a home or stock in companies you think make good products,” rather than keeping your money in cash"

Elon Musk just took off the table MORE cash than he was worth before the pandemic. He nailed the top. And Warren Buffett is sitting on RECORD cash right now.

Their advice is strictly for people who CAN'T afford massive losses. 

In summary, the entire pandemic bacchanale was a sucker's rally at the end of the cycle, sold to the usual bagholders by the usual psychopaths. 

Under the auspice of being a "new cycle":

Next stop will be hard landing at the zero bound.

And what I call "bailout risk".