Thursday, May 11, 2023


You knew this was coming...

I am officially calling this event "The Super Clusterfuck". It consists of unprecedented fiscal and monetary tightening and massive misallocation of capital to a Tech bubble into a  financial meltdown that is obviously well underway...

On Tuesday, Biden met with Congressional leaders to discuss the debt ceiling. They met for one hour. In the first ten minutes they laid out their polar opposite positions and during the last :50 minutes they waited for the hour to end. It was pure charade. Both sides are hardening their position ahead of the impending "x" date. 

On Wednesday Trump said that the GOP should force a U.S. default if Biden doesn't accept major spending cuts:

“I say to the Republicans out there — congressmen, senators — if they don’t give you massive cuts, you’re going to have to do a default” 

The fact that Trump - who has been wiped out financially several times - is giving debt advice is merely a sign of the times. We've reached level '11' idiocy and we're now in sudden death overtime. 

Sadly, for markets there is no sign that Biden & Co. are going to cave on spending cuts, certainly not of the scale envisioned by the Freedom Caucus. Which means that markets will now decide the fate of the debt ceiling.

Which gets us to monetary policy because the CPI came down a mere .1% annualized (4.9% v.s. 5%) from March to April. However, markets were bid on the belief that this CPI print will ensure the Fed pause. If the Fed pauses here then it's very likely that inflation will re-accelerate because that's what happened in 2008. However markets went into meltdown mode which caused inflation to collapse. It's also what happened to Volcker in 1980 and he was forced to raise rates even faster later in the year.

In either scenario markets will implode. Sooner or later.

However, what is never discussed in the lamestream media is that rate hikes of 5% STILL have not brought inflation under control. Why? Because the Fed balance sheet is 95% correlated to the CPI and lately it's been rising again to counter the incipient banking meltdown.

THIS balance sheet is the epicenter of the Fed's policy error dating from 2020 to now. It increased 100% during the pandemic and it has only come down 5% since the Fed started tightening. It is the SOLE source of monetary inflation. Only a dunce assumes that a 1.5% reduction in interest rates in March 2020 caused 40 year high inflation. Especially now that rates are 3x higher than they were pre-pandemic.

Hence, that is the fatal consensus and it's totally unquestioned. 

Which gets us to Tech domination in stock markets. Bulls have already forgotten that Tech stocks were at the epicenter of the pandemic bubble. They've forgotten about the record 1,000 IPOs/SPACs of mostly junk Tech stocks in 2021. They've forgotten about the pull forward of investment in Cloud technology so everyone could work from home. Therefore they're seeking shelter in a sector that has an earnings decline of -10% year over year. Yes you read that right.  

Tech domination was inevitable at this stage of the cycle, due to the imploding economy and the attendant end of rate hikes. However, Tech is only a good bet in a recession IF it's not the last and largest market bubble.