Tuesday, November 22, 2022


Now we're just waiting for the moment when global risk markets go into what I call "FTX Mode". The point at which a declining asset class spontaneously explodes, totally unexpectedly...

The Minsky Moment:

"Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values"

The era of financialization began with the U.S. abandoning the Bretton-Woods Gold exchange standard in 1971. It was a constraint on unlimited U.S. borrowing, so it had to go. In the event, the U.S. dollar became the world's first fiat reserve currency. Now, decades later we learn that nothing could be more lethal than an unlimited credit card collateralized by "free trade", in the hands of a generation that inherited the greatest economy in history. There goes the industrial sector and the middle class. 

What we got in return was secular deflation. Meaning that global supply far exceeds demand. Yes, even now. What passes for inflation now is end of cycle Ponzi inflation already imploding in broad daylight.

Today's inflation is the very definition of transitory - nevertheless it has been inadvertently conflated as the 1970s horror show "Return Of The Middle Class". Leading to what I call the Volcker gambit - raising rates at the fastest pace in history in the midst of a record global asset bubble collapse. Without question, the dumbest economic event we've witnessed in our lifetimes.

What's holding up the CPI at this late stage is a record increase in home carrying costs (price * interest rate) and record corporate profits. The Fed inflated the housing bubble and then they jacked up rates to make housing totally unaffordable. Driving rents through the roof and back into CPI, where the Fed concludes that rates must go higher.


The Fed is locked in a death spiral of their own making. Far more willing to implode the middle class than the casino class. 

Once again, Milton Friedman's assertion that "All inflation is monetary" was proven right. However, not in the traditional sense. Most economists assume that inflation is due to the expansion of the underlying currency base. Quantitative Easing was devised as a way to inject liquidity into asset markets without directly impacting the economy. The indirect effect of course is via the wealth effect which was put on steroids during the pandemic. 

One of the side effects of this multi-decade experiment in mass financialization is that at the zero bound no idea is too stupid for investment. The entire investment sector has now been 100% Ponzified. Meaning that rate of return is solely predicated upon the number of fools to follow. Therefore, it can come as no surprise that we are surrounded by a surfeit of Bernie Madoff acolytes seeking to steer the marginal dollar into THEIR preferred asset class. EVERY investment class is now a zero sum game.

Today's financial media is a direct reflection of our society - morally weak and inherently corrupt. 

Consider all of that in the context of what is about to happen. 

What I call "FTX mode". The moment at which ALL Ponzified markets meet their Minsky Moment. 

And when it all ends, we can be certain of one thing, there will be nothing left to bailout.