Tuesday, August 30, 2022


Global central banks agreed at Jackson Hole to tighten as quickly and brutally as possible. The exact inverse of the pandemic. What we are watching in real-time is a global coordinated collapse...

The major policy mistake being made globally is believing that inflation is driven by wages and is hence "sticky" and intractable. Today's inflation is driven primarily by asset prices and therefore it will collapse far faster than anyone predicts. Central bankers are already tightening far past the point of "neutral" and thereby collapsing the global debt bubble that has grown inexorably since 2008. You have to be a dunce not to see this coming, hence it's largely unforeseen.

Another widely ignored "feature" of the pandemic and resulting inflation was mass hoarding across every consumer and industrial sector. Buyers responded rationally to the supply side shortages by increasing their inventories. Now we are facing a glut of everything at the same time. What started with toilet paper is now reaching semiconductors, housing inventories, mainline retailers, durable goods, and smartphones. Next it will be automobiles. 

The hoarding artificially inflated profits which sucked in maximal capital. Now, as central banks unwind liquidity, they will force asset values lower which will reverse the wealth effect. This in turn will implode the economy and bring profit margins back down to the historical baseline. The pandemic in effect created an end of cycle bull trap for global capital. 

EM currency crisis is the locus of maximum risk. China is allowing their currency to weaken dramatically. The British Pound is near record lows relative to the dollar. The European central bank is planning to potentially increase rates by .75% on September 8th. Their second shock rate hike in consecutive meetings. Central banks are now competing to see who can raise rates the fastest in order to avoid currency-driven inflation. So far, the Fed and U.S. dollar are winning by a long shot. However, all it would take is for Japan to join this hunt and the Yen carry trade would explode global risk markets spontaneously. There is already talk of currency market intervention to support the Yen. 

The other enormous policy error is not understanding that Quantitative Easing will be inert at the zero bound. All it will do is ensure that asset prices are totally disconnected from the underlying fundamentals. Central banks have no means to bail out the middle class which will lead to extreme societal acrimony. Financial institutions are in no way equipped to deal with the impending level of insolvency. They have not been "stress tested" to withstand a global margin call on a scale larger than 2008. 

As I've said many times, Wall Street analysts have been intentionally slow to re-rate their 2022 earnings estimates. Now this Powell hawkish pivot puts them even further behind the curve. Analysts who had been pounding the table for a Fed pivot, finally got crushed on Friday. It took a Powell sledgehammer to finally get the message across. An indication of the level of denial that has been weaponized against the public. The level of fraud and criminality that is about to be exposed will make 2008 seem like a boy scout jamboree by comparison. 

The likelihood of an economic hard landing just increased dramatically. However most economists still believe that recession can be "avoided", which is to assume it's not ALREADY happening. It would indeed be a miracle if somehow two negative quarters of GDP could be reversed after the fact. Only China's government can pull that off.    

“We’ll definitely have a recession as the lagged impacts of this major monetary tightening start to kick in...They haven’t kicked in at all right now”

“Go back to the type of pain Paul Volcker had to impose on the U.S. economy to wring out inflation. He had to take the unemployment rate above 10%”

We learned recently that half of U.S. companies are already planning to cut jobs and the other half are freezing hiring.

August 18th, 2022:

"Half of respondents said they’re reducing headcount or plan to, and 52% have implemented hiring freezes"

In summary, what investors face is either a markets crash which very quickly brings down inflation and forces global central banks to quickly pivot. Or, central banks will continue tightening monetary policy until an economic depression is a foregone conclusion. Regardless, in either case asset prices will decline to a nadir far below this current level. At which point depression becomes inevitable. Amid all of the sturm and drang surrounding the stock market on Friday, it's shocking that no one mentioned the impact this will have on the already imploding housing market. We face a GLOBAL housing collapse of biblical magnitude. Which will bring far greater economic dislocation than the stock market which is skewed towards wealthy households. 

Of course investors always want to know the precise timing of the event, so they can front-run other investors in and out of the market. What I call the "FIFO" method of investing, as demonstrated on Reddit via Gamestop and AMC. However, this event is binary and it's highly unlikely anyone will "time" it with any sort of satisfactory precision. Suffice to say the velocity of this next decline will make the first half decline - already a record - look gentle by comparison. 

We're all gamblers now and when the music stops what we will face is an epic everything glut at the same time. Spilling out onto the streets alongside rioters.

There it is - the most likely outcome and therefore least predicted.