Monday, November 7, 2022


Impending government gridlock will very likely attend deflationary ice age...

First off, the Wall Street view per Zerohedge is that a "Red Wave" would lead to fiscal reduction which would be deflationary. However, they also believe this would be good for stocks. Sadly, this fact-challenged view ignores all recent history. In the most recent years, the market has performed best when both monetary AND fiscal stimulus were the strongest i.e. 2020 and 2021. Zerohedge admits that deflationary gridlock would lead to a Treasury rally i.e. yield collapse. However, they don't acknowledge that the Tech/deflation trade is already imploding deja vu of Y2K. Which is precisely the impending rotation failure I discussed in my last blog post.

Which is where this all gets interesting. Consider this factoid:

"In 19 midterm election years since 1946, stocks have advanced from late October through year-end every single time except 2018"

2018 happens to be the ONLY year in market history that featured rate hikes, quantitative tightening, and mid-terms - before this year. And leave aside collapsing Tech bubble, collapsing housing bubble, high inflation, and EM currency collapse because no year in history had ALL of today's risks. In other words, these two mid-terms have more in common than any of the past mid-terms. And yet according to Zerohedge, 2018 is the year to ignore. You see, the formula for bulls is to use historical statistics that are blindly ignorant of all correlated risks by assuming that all years are statistically independent. Because if risk variables are NOT independent, then data mining history would be totally useless. Dependent variables do not reduce risk, they compound risk. In other words this blind prediction strategy is a formula for  sounding smart while ignoring ALL risk.

Following Zerohedge logic, we are on the verge of a big Tech/growth rally:  

The other deflation trades of course are recession stocks. And those are played out as well. Something about a one year bond yielding 4.5% will do that. 

THESE are the safe havens:


That covers the market.  

But now more interestingly, consider the inflation trade in particular. When Trump was President the (fossil) energy sector lagged the market massively while the green energy sector sky-rocketed. But when Biden was president AND had Democratic control over House and Senate, the fossil fuel sector sky-rocketed and green energy collapsed. 

Why? Several reasons. First obviously the pandemic. Secondly however, Trump endured the fossil fuel divestment movement which saw massive pension funds and endowments dumping ALL fossil energy stocks to buy green energy stocks. When Biden got elected, the vaccine was rolled out, the economy re-opened, the green energy trade was massively overvalued, and therefore fossil fuel stocks led the market higher for the past two years. 

All of which can be clearly seen in the Energy sector chart below. This shows that Energy stocks massively underperformed the broader market long before the pandemic. And now they are the ONLY sector making new highs. 

Clean energy was bid way before the pandemic and imploded soon after Biden was elected. 

You don't have to be a genius to figure any of this out, but you DO have to be observant of history. In addition, markets are far more intelligent than the typical pundit and they usually react the opposite of what conventional logic would suggest. For example, consider all of the people crowding into Energy stocks AHEAD of a possible red sweep. 

The kiss of death:

The darker side of gridlock is not just impending deflation, it's the fact that gridlock will amplify whatever economic chaos arises from the impending monetary meltdown. Why? Because gridlock will prevent the type of safety net programs which avoided full scale economic depression during the pandemic. 

How long until Zerohedge figures out that after the mid-terms there will be no chance of a Wall Street bailout. Because without combined monetary and fiscal stimulus there will be no middle class bailout.

In other words, this election is the final step towards setting the stage for extreme market and societal acrimony on a scale that no one on Wall Street predicts. 

Because let's face it, no one predicts their own collapse.