Friday, June 24, 2022


Central banks, pundits, and economists have collaborated to create the perfect conditions for deflationary liquidity trap. With no way out. The CONSENSUS inflation hysteria we are witnessing now is the inevitable ENDGAME for four decades of FAILED Supply Side Economics. MASSIVE supply with ZERO demand...

"A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Among the characteristics of a liquidity trap are interest rates that are close to zero and changes in the money supply that fail to translate into changes in the price level"

Milton Friedman famously asserted that "Inflation is always and everywhere a monetary phenomenon". Currently, global central banks are tightening monetary policy at the fastest rate in history and STILL what do economists and pundits expect? More inflation. 

They believe the Fed has permanently lost credibility and can no longer defeat inflation. I believe the opposite. The Fed will cut off liquidity until there is no liquidity left in markets and the outcome will be cataclysmic both to financial markets and the economy. Ultimately, the Fed's record panic tightening will render monetary policy totally ineffective, as the liquidity trap would predict. The last time a liquidity trap afflicted the U.S. was during the Great Depression of the 1930s. 

From an economic standpoint, the current predictions of simultaneous inflation AND recession AND record tightening are asinine and yet largely unquestioned. As today's experts DIDN'T learn in 2008, this is a CLASSIC end of cycle turning point from inflation to deflation. ALL of the end of cycle indicators are present. And yet, conflict of interest prevents most pundits from  EVER declaring the cycle over.

The University of Michigan surveys "Current economic conditions" are ALREADY at the lowest level in history and that is outside of official recession. Does anyone honestly believe that this current economic situation is the worst case scenario? THIS is the new 1930s? Of course not. This is only a minor taste of what's coming. No question, households are being squeezed by high prices in every direction. However, far too many people are accustomed to spending as much money as possible. The concept of frugality is a relic of a bygone era. Maxing out debt is the new normal.

Here we see via Fred, revolving credit card debt (flow) is sky-rocketing, and average interest rates are now 20%

What's coming is a combination of FALLING incomes and falling asset prices vis-a-vis FIXED liabilities. It's the worst case scenario from an economic standpoint. And at best the Fed will likely have ~2% of dry powder to lower interest rates. Which makes the liquidity trap the most likely scenario:

"The good news from all this bad news is that “contrarian theory” says that when sentiment reaches such historic lows, the only way it can go is up. Capitulation usually comes when sentiment is lowest. That makes record-low consumer confidence, like this, a positive indicator"

Previous lows came at the start of long bear markets"

No one is perfect, but when you say that prior lows came at the START of long bear markets, you are bound to cause mass confusion. One could argue that's a negative indicator, not positive. 

In addition, the assertion that sentiment can only go up from this point is patently ludicrous. So far, this has been largely an inflationary melt-up scenario. The deflationary meltdown phase is only at the very beginning. Consumers have yet to be TRAPPED by crashing asset prices, imploding incomes, and FIXED liabilities. In addition, they ALL have yet to realize that the Fed doesn't enough dry powder to bail them out this time - in markets NOR the economy. Which means the true deflationary "revelation" has yet to occur, and therefore consumer sentiment can only GO DOWN from here. 

The opposite of what is expected. 


So far, quantities aka. volumes are falling across all markets, which is what happens in a low liquidity environment - buyers and sellers move apart leading to less trading activity. In the next phase, "motivated" sellers will cross the spread and "hit the bid". This will lead to a re-evaluation of true price reality, when other sellers realize the market is accelerating lower. 

In the meantime, the Fed will be tightening their balance sheet by an additional $15b/month for the next three months: $60b in July, $75b in August, plateauing at $90b in September for the INDEFINITE future. Meaning they are going to starve ALL markets of liquidity during the summer, which is the lowest liquidity period of the YEAR. Good idea? Not really. $90b/month is DOUBLE the QT that imploded markets in 2018.  

Meanwhile, all this year, investors have been told that "Cash is trash". Which is why retail stock market inflows hit a record in 2021 and have continued at record pace during 2022. 

The collapse in consumer sentiment is definitive proof that social mood is rolling over. Hard. So far, the declines in stocks have been bought ALL the way down. Each rally has been shorter than the last.

Therefore, what is approaching is a global RISK OFF singularity that will suck all liquidity out of markets. When liquidity evaporates, getting out of markets will become impossible. Even small trades can move the market. The low liquidity conditions that have abided so far in 2022 have attended a BUYING spree. These same conditions have yet to be tested in a SELLING spree.  

What is shocking at this point in time is the unanimous consensus among pundits that inflation is the most likely outcome in 2022. 

In reality, nothing could be further from the truth. The conditions are now set to ensure that global deflation in the economy and asset markets is BY FAR the most likely and lethal outcome.

Basically a continuation of the 2008 meltdown, this time sans bailout.

Fittingly, the EXACT OPPOSITE of what is expected by Supply Side economics. The perfect biblical ending for those who NEVER learn. 

"Can you believe, it's ANOTHER housing shortage"