Tuesday, September 13, 2022


Now that every investor is positioned for higher inflation, it's time for the totally unexpected deflationary financial "accident"...


It's clear that whoever writes this crap for Goldman Sachs was recently playing Dungeons & Dragons in their dorm room.  Then Zerohedge charges a premium to read it, which means the reader is paying twice: once for the bullshit, and twice for the failed trade.

The desperation on Wall Street is becoming palpable, as the pandemic pump and dump is turning into a major bust:

Not to say that ZH/GS are alone by any means in late cycle chicanery. It's now becoming clear that today's pundits were only "good" at predicting markets when central banks were guaranteeing a one way trip higher. Now that true price discovery has returned, they can't find their ass with both hands.

On the economy it gets far worse of course because the Fed is now being pushed into making a biblical magnitude policy error. They are using the 1970s demand-side playbook to deal with supply side inflation. 

Today we learned that real wages were FLAT in 2021:

So much for the wage-push inflation theory. Year over year wages flat. And the U.S. Federal deficit has fallen the most in history year over year. And the Fed is tightening the most on both ends in history: They've never simultaneously tightened on the short end and long end by this amount.

As I showed on Twitter recently, the Fed has tightened mortgage rates back to the level of 2008. However, rates rose from a much lower level and at a far greater pace. Whereas in 2007 era, rates rose from 5% to 6.5%. This time they rose from record low 2.5% to 6%. And they did it with home prices at record highs. 

What we are witnessing is extreme RATE SHOCK added on to extreme inflation shock:

Which is why the monthly supply of homes is increasing far faster than the last tightening cycle. Back then, the Fed raised rates by 4% the same amount they plan to raise rates this cycle. However, at the point the Fed stopped raising rates in 2007, the monthly supply of homes was lower than it is today.

And then it kept rising even as rates came DOWN. 

What this all points to is FINANCIAL inflation caused by a combination of asset bubbles and rampant corporate profiteering. Which is why the traditional inflation models are not working.

Therefore policy makers are making a huge mistake deja vu of September 2008 when they were solely focused on inflation. 

“This period of accelerating rate hikes that we’ve seen so far has impacted the real economy because it has squeezed the borrowing costs … for real people, real consumers,” 

“Whereas for Wall Street, money still remains cheap and leverage still remains high in the system, and the Fed’s book still remains just a touch under $9 trillion, which is double what it was going into the pandemic period, and since the financial crisis of 2008.”

Prins argued that by targeting wage inflation when wage rises are failing to keep pace with broader inflation was a mistake"

Yes, it's a huge mistake which is going to lead to deflation. This past week Elon Musk asserted that the Fed policy would be deflationary. Peter Schiff said it would be hyperinflationary. But he also admitted that it will first lead to a massive crash.

Clearly Schiff has never heard of Japan or China, both of which countries are further down the path of deflation than the U.S. Japan is easing at the zero bound and yet they have lower inflation than every other developed nation. Why? Excess capacity and consumer UNWILLINGNESS to borrow. Chinese consumers are just about done on the borrow to buy strategy. And the U.S. is NEXT. 

One could call this central bank induced liquidity collapse a "Black Swan" event, because it's clearly non-linear. However, ALL of the attendant risks are coalescing in broad daylight. So it will be hard to claim that no one saw it coming when Michael Burry has been pounding the table the hardest. Can you imagine these dolts ignoring the exact same guy who became famous calling the last exploding bubble? I can. 

Which gets us to the casino.

The market is no longer oversold. In fact it's as overbought as it was back in June which was the last time the CPI surprised everyone to the upside. As we recall that event took place the week before the FOMC and then the Fed decided over the weekend to upgrade their rate hike from .5% to .75%. A decision that was leaked via the Wall Street Journal. Markets crashed into the meeting. So it is that we find a similar dynamic taking place, with the risk of an accident having increased dramatically. Let's say to September 2008 levels. Fed futures now see a 35% chance of a full 1% rate hike at next week's meeting. 

In summary, the Volcker gambit is going to explode at the zero bound. Which will be highly deflationary when there is no adequate policy response to global meltdown. Bulls will be reliant upon the politics of the day, which are the most divisive in U.S. history. There is no incentive to bailout anyone this time around. 

It took 20 years for inflation to become fully entrenched by the 1970s. Throughout that time the U.S. middle class was ascendant with respect to quality of jobs and benefits. This era is NOTHING like that one. What investors are positioned for right now is the worst "inflation" since 1979. What they are about to receive is the worst deflation since 1929.

Hugh Hendry predicted investors would become addicted to monetary bailouts to the point at which they would create their own fictional market narratives, which he called "Imagined Realities".