Friday, September 2, 2022


Bulls can thank rampant inflation hysteria for initiating global meltdown...


The inflation hypothesis is now extremely well "anchored" in the minds of today's economists. Few if any of them question central bank policy at this juncture. One must ask the obvious question: why is inflation considered structural now versus cyclical as it has been during every recession since 1980? The answer is because there is now an abiding belief among economists that employees have the "upper hand" in job negotiations. Around the U.S., unions are forming at various fast food outlets and service businesses that formerly have never been unionized. All of which is feeding into this manic drive to not only kill inflation but to weaken the job market. 

The main reason the job market remains strong is because real wages are NEGATIVE which means it's highly profitable to keep hiring people. Therefore what none of these pundits is considering is the DEMAND side of the equation.  Negative real wages means that consumers are not keeping up with inflation and therefore they are running down savings and increasing debt. Therefore it's only fitting that having cheered the supply side decimation of the middle class since 1980, these pundits would back the largest monetary policy error in modern history. All because they believe that the middle class has been reconstituted by profit-driven inflation and exploding cost of capital. 


Spot the inflation:

And because inflation is now secular instead of cyclical, these pundits are all willfully ignoring cyclical deleveraging risk.

Which will be their fatal denouement. All indications from markets since Jackson Hole is that the countdown to a global Minsky Moment has now started:

"The U.S. dollar strengthened to a 20-year high against a collection of foreign currencies this week, spelling more trouble for heavily indebted smaller nations around the world. The stronger dollar makes payments on loans owed in U.S. currency more expensive"

"If you look at the history of emerging markets debt crises...All of those periods always coincide with periods of interest rate hikes in the U.S."

"The number of emerging market borrowers that have debt trading at distressed levels has doubled over the last six months"

Here we see the EM currency ETF is camped at a similar level as September 2015 when the Yellen Fed pulled back on a quarter point rate hike. Then in December they went through with it and imploded global markets. This month global markets are facing potentially a .75% hike in Europe and the U.S. $95b/month QT in the U.S.

Alternatively, we can compare to December 2018 when the Fed imploded global markets with a quarter point rate hike and $45b/month in QT:

In summary:

Of course I don't agree with the assertion that inflation is no longer cyclical. But, clearly that's irrelevant. What matters is that the majority of pundits now share this same belief. What it means is that having conditioned investors for fourteen years of expansion to expect bailouts, n
ow in recession, no bailout is forthcoming.

Which means the July "pivot" rally was a bull trap:

"The S&P 500 has slumped 7% since its mid-summer rally in a sign markets are starting to realize inflation isn't cyclical, and investors won't be able to pressure the Federal Reserve into a making a dovish pivot"