Global Synchronized Meltdown

The nature of meltdowns is that you only get out BEFORE the meltdown or AFTER. Never during...

Picture this scenario: Rabid Fed rate hikes implode Emerging Markets, setting off a domino collapse of global risk assets. Everything from commodities, to housing, to cryptos, and of course stocks simultaneously implodes. Liquidity is non-existent, so gamblers are trapped in bad trades. Getting margined out between limit down and circuit breaker halts. Finally, the Fed reverses and takes their puny Fed rate down 1.5%. What happens next? Nothing.

Then the REAL panic sets in. 

When the smoke clears and global markets have cratered, who gets bailed out this time? No one. 

The Fed is pushing the entire world to a global depression and the chance it doesn't happen just became the LEAST likely and most widely expected scenario. 

Any questions?

"Federal Reserve officials in June emphasized the need to fight inflation even if it meant slowing an economy that already appears on the brink of a recession"

Wow. 

Let me get this straight, the Fed is slowing an economy they acknowledge is on the brink of recession, knowing full well that monetary policy has a six month lag. So by the time they've figured out it's a policy error, it's WAY too late. 

No surprise, they have recent experience making this exact same mistake. Recall that the BIG mistake the Fed made last year was using lagged CPI data to set policy while ignoring the bond market which was warning of inflation. So now this year, they are making the SAME mistake but in the opposite direction. Using lagged CPI data to confirm that inflation is coming down while ignoring the bond market. 

Because everyone knows that two wrongs make a right.

"While the market has become fearful, many Wall Street economists do not expect a recession this year"

Economists ALWAYS think they are smarter than the bond market, whereas history confirms their conceit is unrequited.

For now, most of the dislocation from Fed policy has been in non-U.S. markets. The dollar has been sky-rocketing which has been sucking capital out of the rest of the world, which is now collapsing like a cheap tent. We learned today that Emerging Markets have seen four straight months of outflows - the most since 2015. We know the Fed is totally ignoring global markets because EM stocks and EM currencies are now at levels that initiated Fed reversals in 2015, 2018 and 2020:

Meanwhile, as I warned recently, Tech stocks are starting to outperform Cyclicals again on a relative basis, because investors are abandoning the reflation trade. The commodity complex is going bidless at the fastest rate since 2020 and before that 2008.

It was just another Ponzi trade - slowly sucking in capital on the way up and then collapsing on the way down. 

Four months of gains gone in four weeks:

Another reason Tech stocks are outperforming is because they've been heavily shorted and hedge funds are now taking their entire exposure DOWN on the long side and short side. 

The Nasdaq is clinging to the LAST line of support. The line at which the Fed bailed out investors every time since 2008 during economic expansion. Only to be abandoned by the Fed during recession. 

Investors have had AMPLE warning, but they have continued to stick to their hypothesis that the Fed can bail them out of EVERY situation, even a global depression at the zero bound. 

2022 has been the year of the Black Swan event: 

Largest Crypto crash EVER

Largest Tech crash in two decades

Largest commodity spike since 2008

Fastest interest rates increases in three decades

Fastest Quantitative Tightening ever attempted, has started now in July

Largest dollar rally in two decades

Largest global bond collapse on record

And officially the largest two year housing price increase in history:

Still, when their bailout fails, gamblers will say no one saw it coming. Not the crash, just the failed bailout. 

We are witnessing the end of the Efficient Bailout Hypothesis and the requisite belief that printed money is the secret to effortless wealth. 

THE NOOSE IS TIGHT

Everything taking place right now makes perfect sense in the context of a collapsing Global empire, called Globalization...

The consistent theme of 2022 is that as the collapse accelerates, the sugar coated media fall further behind the curve on explaining where this is all heading. 

Every step of the way, bagholders have been tempted into the casino as the noose gets tighter and tighter. 

More fake inflation, more rate hikes, more recession, more lies. 

The one common theme taking place across all media and political platforms right now is denial of reality. Why? Because both sides are making a land grab for how many fools will believe their own one-sided version of the truth. In the process they are accelerating the overall collapse of mental health. Is there anyone at higher levels of power who will tell the unvarnished truth anymore? No. There's no audience for it. Sugar coated pablum is the order of the day.  

The one consistent theme of 2022 is that bad news gets worse AND the media continually fall further behind the reality curve. We've reached a point now where Wall Street has stopped updating their price and profit forecasts. Out of laziness or deception who knows?

"Commendable courage or a refusal to face reality, a receding stock market tide has left Wall Street analysts sitting with price predictions that will take more than a little luck to come true"

The brutal six-month repricing in markets has been met with a significantly less hurried reappraisal of analyst forecasts"

[The inertia around] estimates today is a carbon copy of situations in past bear markets...adjustments have been slow, not just on price targets but also on forecasts on corporate earnings. At $249 a share, their expected 2023 profits for S&P 500 firms have increased by roughly $7 this year, an improvement that’s at odds with growing recession warnings"

The next major gauntlet that today's investors will face is earnings season. The fact that companies and analysts have NOT been warning ahead of time means a lot more land mines are waiting for the market in July. 

"Some of the economic pessimism in the stock market came from the banks themselves, with JPMorgan Chase CEO Jamie Dimon warning of a hurricane coming in the economy"

Back in May the Fed started DOUBLE tightening interest rates and they also announced they would be double tightening their balance sheet by the end of the summer. At that point ALL of Wall Street's predictions for 2022 were TOTALLY null and void. Analysts started this year with a narrative of a strong consumer and a moderate Fed. Halfway through the year and we've seen a collapsing consumer and RECORD rate hikes ALREADY. With more to come. The largest policy error in history is only getting started.

But who will tell the sheeple? No one.

The evolution of rate hike predictions by Goldman Sachs:

The Fed is attempting to repeat what Fed Chair Paul Volcker did back in 1980 - to rapidly raise interest rates, crash the economy, exorcise inflation, and then begin easing to prevent depression. However, this Fed is attempting the same aerial acrobatics at ground level, at the zero bound. In other words, what they are attempting is not improbable, it's impossible. They will be highly successful right up until they crash the economy. After that, they will be dick in hand amid mass panic at 0%. 

Still, so many of today's pundits are bought into the 1980 paradigm that there isn't anyone to warn the Fed that this is Volcker madness. 

Worse yet, all of this "inflation" is hiding weakness in the underlying economy. In the absence of a strong consumer, price increases are offsetting quantity declines. Meaning demand IS falling across both durable and non-durable goods.

The Fed's obsession with % price increases has put them on the path for total disaster: 

On a nominal basis, commodities as a whole are lower than 2008. Adjusted for wage inflation, there is not even ONE commodity that is higher than 2008. During the pandemic, commodity prices collapsed and now the recovery has been conflated as "inflation". The Fed is therefore mistaking a one time price recovery for secular inflation. 

One must ask the obvious question in an election year - how much of this inflation hysteria is purely political? Because if it is, I suggest that those who are propagating this hysteria and otherwise claiming the Fed is behind the curve, are complicit in the largest policy disaster in modern history.

 

If this all sounds like a lot of infantile idiocy, it's because it is. Denial of reality has become a societal addiction. It's clear that people would rather sacrifice their mental health on the altar of consumption addiction than to accept the inconvenient truth. 

I call that consumer choice.

THE EVERYTHING DEFLATION

Investors have been conditioned to believe that prices of everything are going higher. They will soon learn the hard way that while liabilities are "sticky", asset prices can collapse...

Pundits are just starting to realize that recession is inevitable. Most believe that it will happen in 2023. The technical definition of a recession is two quarters of negative growth. This week, final Q1 GDP came in at -1.6% and Q2 real-time GDP crashed down to -2.1%. Which means that technically we've already met the definition of a recession. Theoretically, Q2 could pull out of the nosedive, however Q2 just ended, therefore only backward data revision can save the quarter. In other words, recession will very likely be backdated to the beginning of 2022 and yet most pundits see it happening in early 2023. They are a FULL YEAR off from reality. With forecasting like that, who needs enemies? Somehow, the Fed is even more clueless because they are still holding out hope that recession won't happen at all. 

Then there are the pundits who are saying, Ok recession is inevitable but it will be a "soft landing". They never quite explain what that means. The difference between a soft landing and hard landing is whether or not there is deleveraging of households and corporations. Because mass deleveraging implies major job cuts. Most stock forecasters remain sanguine on further market downside, because they assume a "soft landing", despite the fact that the Fed has the least amount of dry interest rate powder in history. This key assumption makes it easy for them to data mine the past 50 years and find the LEAST painful recessions and bear markets for comparison to the current market. Which has become a very common practice lately.

We are to believe that the LARGEST asset bubble in human history will require the LEAST amount of Fed rate buffer and will be a soft landing.

You have to be brain dead to believe that, hence it goes largely unquestioned. 

Unfortunately for investors they were led to believe that inflation is NOT transitory. However, inflation ALWAYS collapses in a recession. There have been no examples in the past 100 years where it didn't. Which means that inflation IS now  once again transitory, only the pundits and the Fed don't admit it. 

Basically they've all been conned by their own cycle denial. 

Worst of all, inflation is a RISK ON paradigm. It means crowding into commodities, carry trades, and cyclical stocks. This year, investors have been dumping Treasury bonds en masse and buying stocks. In particular they've been buying Cyclicals which are now imploding.

Much has been written about the imploding Tech bubble, and most pundits are in agreement that it will continue collapsing. 

However, what they deny is the fact that Cyclicals are now imploding FASTER than Tech stocks. And now THOSE stocks have the MOST downside. 

Here we see Q2 relative performance for key sectors. The S&P 500 declined the least because recession stocks kept it from imploding. Tech stocks performed the next best. Followed by Cyclicals and Consumer Discretionary. We've been told all this time that the consumer is strong, but we just learned it was a widely believed fabrication. 

June 29th, 2022:

"Consumer spending was weaker in early 2022 than previously believed, a sign that cracks may be forming in a crucial pillar of the U.S. economy."

Amazon, Walmart, Target, Nike and every other retailer ALREADY warned that consumer spending is slowing, but economists like to wait until everything implodes for confirmation. Imagine, as an investor if you had waited for EconoDunces to confirm that consumer spending had slowed more than predicted? You would get obliterated.

Why did so many economists happily ignore the COLLAPSE in consumer confidence that has been taking place throughout 2022? It's because they believe they are far smarter than the average consumer, whereas the opposite is true, they are as dumb as a brick. 

Another lie we've been told is that there are shortages of everything, especially semiconductors. 

This week we learned that there is now a massive glut of semiconductors.

No surprise, semiconductors were the WORST performing sector of Q2 since they are at the intersection of Tech AND Cyclicals.

Commodities of course are a huge part of "inflation". June saw the fastest collapse in copper since 2011, and before that 2008. 

Copper is a key bellwether of the global economy:

Which gets us to the imploding housing bubble.

This news came out two weeks ago:

The Fed's own housing data shows new home prices collapsing at the fastest pace since 2008:

In summary, there are no shortages of ANYTHING. Soon there will be oversupply of EVERYTHING. The shortage lies were told so that companies could jack up prices and create a buying frenzy to pull forward demand. 

It worked great. What's coming is an everything deflation, that will be out of central bank control. And it will give lie to all of the sugar coated bullshit that investors have been SOLD in 2022. 

This past week, the $USD hit the highest level in 20 years. So far, Emerging markets and the rest of the world are bearing the brunt of outflows to the U.S. 

However, June saw the largest overnight S&P futures selloffs since March 2020. Ex-2020, the largest since the Asian Financial crisis:

You don't have to be a genius to figure out what's coming, but you do have to be able to fog a mirror. Which appears to be a bridge too far for most people.

GLOBALIZATION IS FINAL EXPLODING

Globalization has been steadily disintegrating since 2008. Environmental meltdown, mental health breakdown, global pandemic, trade wars, World War III, economic collapse. What can you say, no fool saw it coming. A staggering two thirds of the deadliest mass shootings in U.S. history occurred since 2007. The fact that Biden and Trump are deemed the two most viable candidates should be a wake up call for everyone that the magnitude of this crisis is beyond the scope of politics. Political acrimony is not the solution, it's now the problem, spreading hate and anger virulently. Accelerating mental breakdown. People need to start taking PERSONAL responsibility to accept the inconvenient truth: The consumption oriented lifestyle is over, and the exorbitant cost of denial is about to be revealed...

The common theme of 2022 year to date, is that bad news keeps getting worse. Nevertheless, compliments of monetary euthanasia, the general populace is TOTALLY unprepared for what's coming. Over the past 14 years, the downside risks of economic collapse grew larger, so the lies by definition grew larger as well. Now, we live in a society that is addicted to sugar coated bullshit. Those who have not accepted the truth are NOT mentally prepared for what comes next.

I am not saying this is the end of the world, I'm saying it's the end of a way of life. 

What this society has to learn the hard way is that protecting people from adversity creates what Black Swan author Nassim Taleb calls fragility. We now have latent fragility in every direction, but most imminently in financial markets. 

Throughout the economic expansion the Fed conditioned investors to expect bailouts. Now, going into recession, the Fed has pulled the safety net.

It's beyond idiotic. Today we got confirmation that FINAL Q1 GDP is -1.6% while the Fed is pushing even LARGER rate hikes:

"U.S. stock index futures dipped on Wednesday after several Federal Reserve policymakers made the case for faster interest rate hikes to bring down high inflation"

What Powell said from Europe today was even more troubling. He basically acknowledged that recession is likely and even necessary to bring down inflation:

"Federal Reserve Chairman Jerome Powell said he was more concerned about the risk of failing to stamp out high inflation than about the possibility of raising interest rates too high and pushing the economy into a recession"

It's abundantly clear that Powell on behalf of his corporate overlords views wage inflation to be the biggest threat to corporate profits. And therefore he is willing to implode the economy:

Powell: "You have two job vacancies essentially for every person actively seeking a job, and that has led to a real imbalance in wage negotiating"

There it is plain as day. The first employee-friendly job market in 40 years must be exploded at all cost.

We have clear imbalances in negotiations:

Ironically and fittingly, crushing the job market means that the Fed is NOT going to be bailing out investors this time. In the process of crushing the middle class, the Fed will inadvertently crush the bailout class as well.

Unfortunately, investors are now ADDICTED to bailouts. Several years ago, former hedge fund manager Hugh Hendry predicted that monetary euthanasia would eventually lead investors to embrace risk even while the economy collapsed. He called QE the virtual simulation of prosperity and he predicted that the worse the reality of the economy became, the more investors would eagerly front-run large and dramatic monetary bailout. He was right, because now instead of fearing risk, investors have what I call fear of missing bailout. 

Investor complacency is rampant as indicated by low volumes, low VIX, low skew, and low put/call ratio. I predict that complacency will remain extreme until the explosion, at which point it will be too late to panic. Liquidity will collapse. 

What we are seeing is the extreme version of what happened back in 2008. Recall that in the book/movie "Big Short", Michael Burry was buying Credit Default Swaps (insurance) as a bet that subprime would explode. However, initially the value of those contracts DECLINED, because there were so many large investors writing those contracts to collect the fat default premiums. He lost a lot of premium money before he was ultimately proved right. Well, the same thing is happening now, only on a ludicrous scale. For the first time in U.S. history, financial stress is now INVERSELY correlated to the economy.  

If MASSIVE lies are what the people want, then they came to the right place, because there are no shortage of charlatans today telling the sheeple what they want to hear. File that risk under "confirmation bias" - a groupthink circle jerk taking comfort in the strength of numbers. What NO financial pundit ever tells the people is that the Fed CAN'T bailout the economy this time, because they have the least amount of interest rate buffer in U.S. history, ahead of recession. Which means that investors are complacently sky-diving into pavement:

Incipient recession

Record Fed tightening

Record low consumer sentiment

Imploding housing bubble 2.0 

Collapsing Tech bubble 2.0

EM currency crisis 2.0

Record global bond collapse

There is nothing these people won't believe, except the TRUTH

"What worries everybody is that all the risks are stacked on the downside"

In summary, when this society's thin veneer of fantasy gets ripped away, we are going to see the unvarnished reality. Those who have mistaken their fantasy life for the real one, will have their true selves revealed for the first time. And it won't be pretty. A facade of strength on the outside is no substitute for strength on the INSIDE that only acceptance of reality can bring.

ECON 101: THE FAKE WEALTH EFFECT

What business leaders, investors, and the Fed fear most is a wage price spiral that gets out of control deja vu of the 1970s. Fueling that concern, they see the CPI rising at the fastest pace in 40 years. Therefore it must be 1980 all over again, right? Unfortunately, a one year rise in CPI aside, this time period is nothing like the 1970s. Worse yet, mis-applying the Fed playbook from that era GUARANTEES a hard landing for BOTH markets and the economy...

GDP is a lagged indicator, which is why historically, it takes the Fed several quarters to officially confirm recession. Therefore, the only way they will stop tightening is if markets explode ahead of time. At which point, soft landing becomes no longer an option. 

Not surprisingly, it's Wall Street's base case scenario.

Forty years of deflationary Globalization, mass outsourcing and mass immigration later and today's economic "experts" somehow believe this is 1979 all over again. Back then, the U.S. middle class was at its apex - labor share of GDP was at an all time high and union membership was at an all time high. Fast forward to today and labor share of GDP is near all time lows as is union membership. None of this multi-decade economic carnage shows up in the official (U3) unemployment rate because it's calibrated to remove discouraged workers from the calculation. Meaning the long-term unemployed are systematically taken out of the economic picture. The best way to view the U.S. economy WITH the long-term unemployed, is via capacity utilization. This indicator ALSO takes into account "underemployment", meaning people who are qualified for one type of job but are working in another lower pay type of job. Underemployment is a direct result of serial mass layoffs and it's one of the BIGGEST problems this society faces, hence it's never discussed. 

 

Coming out of the pandemic, there was a ONE TIME surge in wages, which has been conflated as the beginning of "hyper inflation". However, going forward Chipotle workers won't be getting a COLA (Cost of Living Allowance) indexed to CPI. Subsequently, today's experts have ignored the fact that wage inflation is now lagging gasoline prices, food prices, asset prices, and corporate profits. Which is why the middle class is getting crushed like a tin can by the Fed's biggest policy error. Most of today's economic inflation is a result of the Fed's asset bubble. Hence their policy of tightening interest rates at the fastest pace in history is a TOTAL disaster.

Throughout this year, Wall Street has been catastrophically wrong on predicting both the economy and interest rates. At the beginning of 2022 no one was discussing recession NOR were they discussing Fed record tightening. Back in January, Goldman Sachs predicted four quarter point rate hikes i.e. 1% in 2022. The consensus on Wall Street is now at a 4% Fed funds rate by next January. In addition, not even the most bearish pundit i.e. me, predicted the Fed would double tighten their balance sheet in 2022 back in January. 

Granted, no one could have predicted the war in Ukraine, but even since the war started, Wall Street has been behind the curve on predicting where this is all heading. Which is why anyone who wasn't already skeptical of these central bank manipulated markets back in January, is now TRAPPED by  terminal bull shit AND CYCLE DENIAL. 

Today's pundits WRONGLY never questioned WHY markets sky-rocketed during a pandemic, when it was SOLELY due to Fed stimulus. Which is why now they also don't see Fed over-tightening as the BIGGEST risk in bear market either.

The widely believed "Pandemic Investment Hypothesis" has trapped investors in  BOTH the fastest Fed tightening and fastest recession in HISTORY. 

 

Per usual, it will take the Fed several months to figure out the economy is in recession. Therefore their current gambit of tightening at the fastest pace in history is a TOTAL disaster in progress. With each passing day it becomes more likely that markets will explode sooner than later. And when that happens, an economic soft landing becomes the LEAST LIKELY scenario.

And yet it's Wall Street's latest fairy tale to soothe scared investors. And it's the Fed's base case scenario as well:

Barron's June 22nd, 2022:

"The Fed’s focus on price stability “will be relentless” to avoid repeating the mistakes of the late 1960s and 1970s, “whatever the cost in terms of jobs and growth”

“Economic history points to a hard landing”

What happens next does not have recent precedent. The most similar analog is the 1930s. Back then the Fed was constrained by the gold standard from expanding monetary stimulus (aka. printing money). This time, they will be constrained by the zero bound.

History will say that the Fed's biggest error was believing that wages were the primary source of inflation, because, they were too busy trading stocks on their own account to admit their  own asset bubble was the PRIMARY source of economic inflation. 

Hence it will be the fastest demand collapse in U.S. history.

ALL SIGNS POINT TO LIQUIDITY TRAP

Central banks, pundits, and economists have collaborated to create the perfect conditions for deflationary liquidity trap. With no way out. The CONSENSUS inflation hysteria we are witnessing now is the inevitable ENDGAME for four decades of FAILED Supply Side Economics. MASSIVE supply with ZERO demand...

"A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Among the characteristics of a liquidity trap are interest rates that are close to zero and changes in the money supply that fail to translate into changes in the price level"

Milton Friedman famously asserted that "Inflation is always and everywhere a monetary phenomenon". Currently, global central banks are tightening monetary policy at the fastest rate in history and STILL what do economists and pundits expect? More inflation. 

They believe the Fed has permanently lost credibility and can no longer defeat inflation. I believe the opposite. The Fed will cut off liquidity until there is no liquidity left in markets and the outcome will be cataclysmic both to financial markets and the economy. Ultimately, the Fed's record panic tightening will render monetary policy totally ineffective, as the liquidity trap would predict. The last time a liquidity trap afflicted the U.S. was during the Great Depression of the 1930s. 

From an economic standpoint, the current predictions of simultaneous inflation AND recession AND record tightening are asinine and yet largely unquestioned. As today's experts DIDN'T learn in 2008, this is a CLASSIC end of cycle turning point from inflation to deflation. ALL of the end of cycle indicators are present. And yet, conflict of interest prevents most pundits from  EVER declaring the cycle over.

The University of Michigan surveys "Current economic conditions" are ALREADY at the lowest level in history and that is outside of official recession. Does anyone honestly believe that this current economic situation is the worst case scenario? THIS is the new 1930s? Of course not. This is only a minor taste of what's coming. No question, households are being squeezed by high prices in every direction. However, far too many people are accustomed to spending as much money as possible. The concept of frugality is a relic of a bygone era. Maxing out debt is the new normal.

Here we see via Fred, revolving credit card debt (flow) is sky-rocketing, and average interest rates are now 20%. 

What's coming is a combination of FALLING incomes and falling asset prices vis-a-vis FIXED liabilities. It's the worst case scenario from an economic standpoint. And at best the Fed will likely have ~2% of dry powder to lower interest rates. Which makes the liquidity trap the most likely scenario:

"The good news from all this bad news is that “contrarian theory” says that when sentiment reaches such historic lows, the only way it can go is up. Capitulation usually comes when sentiment is lowest. That makes record-low consumer confidence, like this, a positive indicator"

Previous lows came at the start of long bear markets"

No one is perfect, but when you say that prior lows came at the START of long bear markets, you are bound to cause mass confusion. One could argue that's a negative indicator, not positive. 

In addition, the assertion that sentiment can only go up from this point is patently ludicrous. So far, this has been largely an inflationary melt-up scenario. The deflationary meltdown phase is only at the very beginning. Consumers have yet to be TRAPPED by crashing asset prices, imploding incomes, and FIXED liabilities. In addition, they ALL have yet to realize that the Fed doesn't enough dry powder to bail them out this time - in markets NOR the economy. Which means the true deflationary "revelation" has yet to occur, and therefore consumer sentiment can only GO DOWN from here. 

The opposite of what is expected. 

 

So far, quantities aka. volumes are falling across all markets, which is what happens in a low liquidity environment - buyers and sellers move apart leading to less trading activity. In the next phase, "motivated" sellers will cross the spread and "hit the bid". This will lead to a re-evaluation of true price reality, when other sellers realize the market is accelerating lower. 

In the meantime, the Fed will be tightening their balance sheet by an additional $15b/month for the next three months: $60b in July, $75b in August, plateauing at $90b in September for the INDEFINITE future. Meaning they are going to starve ALL markets of liquidity during the summer, which is the lowest liquidity period of the YEAR. Good idea? Not really. $90b/month is DOUBLE the QT that imploded markets in 2018.  

Meanwhile, all this year, investors have been told that "Cash is trash". Which is why retail stock market inflows hit a record in 2021 and have continued at record pace during 2022. 

The collapse in consumer sentiment is definitive proof that social mood is rolling over. Hard. So far, the declines in stocks have been bought ALL the way down. Each rally has been shorter than the last.

Therefore, what is approaching is a global RISK OFF singularity that will suck all liquidity out of markets. When liquidity evaporates, getting out of markets will become impossible. Even small trades can move the market. The low liquidity conditions that have abided so far in 2022 have attended a BUYING spree. These same conditions have yet to be tested in a SELLING spree.  

What is shocking at this point in time is the unanimous consensus among pundits that inflation is the most likely outcome in 2022. 

In reality, nothing could be further from the truth. The conditions are now set to ensure that global deflation in the economy and asset markets is BY FAR the most likely and lethal outcome.

Basically a continuation of the 2008 meltdown, this time sans bailout.

Fittingly, the EXACT OPPOSITE of what is expected by Supply Side economics. The perfect biblical ending for those who NEVER learn. 

"Can you believe, it's ANOTHER housing shortage"

TRAPPED IN DISNEY MARKETS

The post-2008 era of monetary euthanasia has been a con man's paradise. Any false narrative could be bought and sold under the assumption that central banks were standing by to bail out markets. Sadly, none of today's fairy tales will end with happily ever after this time around...

So many fairy tales, where to begin...

During the pandemic lockdown investors were told that the Tech bull market heralded a new "virtual economy". All of the non-profit startup companies were "disrupting" traditional industry, rendering in-person business models soon to be obsolete. Any and all business could be conducted over the internet. They were selling dollar bills for 90 cents, financed by free capital. Then, in early 2021 as the lockdowns ended, left for dead shopping mall stocks and retailers suddenly exploded higher, led by the Gamestop mega short squeeze. We were told it was the new small investor revolution. Retail investors were the new "smart money" and the professional investors shorting stocks were now the "dumb money". Managing risk in the age of central banks, was viewed as foolish and obsolete. The mainstream media quickly ran with this new specious narrative under the guise of "democratized markets". Record new brokerage accounts opened and money flooded into the markets at the fastest pace in history. Throughout 2021, Wall Street mercilessly exploited this playground of non-profit concept stocks and democratized pump and dump schemes, for maximum profit. Featuring the largest issuance of IPOs and SPACs in history. Most of which are now on the verge of becoming worthless. Crypto currencies were bought under the assumption that the Fed money printer would render the U.S. dollar worthless. However, when the Fed "pivoted" to the most extreme tightening regime in history, the narratives never changed. Despite the fact that the rationale for buying no longer existed. Since then, all of the "cheap money" trades have collapsed. Because that's all they ever were - cheap money chasing fantasy narratives. 

This latest housing super bubble is deja vu of the last bubble. Back then adjustable rate mortgages and packaged subprime mortgages were blamed for the 2007 bubble. However, the REAL underlying cause for both bubbles is/was cheap money. Both times industry hacks convinced policy-makers that a shortage of supply was fueling higher prices. Therefore the solution to rampant speculation was to massively increase supply. It was a lie last time and it's a lie this time as well. And yet no mainstream pundits question it. We continue to turn to the same "experts" who were wrong in 2007 to seek their counsel this time as well. Back in 2007, the ratings agencies played a pivotal role in the overall housing Ponzi bubble. They gave the AAA ratings to the exploding packages of subprime mortgages cranked out by Wall Street. The same ones Michael Burry of "Big Short" fame predicted would explode the economy. Now he's predicting the same fate again. However, Fortune magazine instead of asking Michael Burry what he thinks, they are asking Moody's what they think of this housing bubble. No surprise they assume modest downside.

National housing prices rose 30% year over year. But they only see 5% downside on a national basis. Worst case scenario:

In other words, the home gamer fool reads the mainstream media moron who asks the corrupt rating agency if we have a problem. No problem. 

Greed is out of control. Von Misers tell us that greed is not the problem, only government bureaucracy is the problem. Unfortunately, that's another massive lie. Unfettered greed IS the problem and now it has spread to government institutions. During the Gamestop debacle last year, Congress and SEC wanted to know why retail brokers had prevented small investors from buying Gamestop - prudent restrictions which in the end saved people a lot of money. What most people don't realize is that Wall Street came in at the end of the super spike and shorted Gamestop at the top. THEY made the most money. But the common narrative is that small investors made the money at *smart* money's expense. Most small investors came in late and got wiped out. 

When greed is not held accountable then you end up in the situation we are now in, wherein every type of lie now gets bought and sold. Meanwhile government regulators look the other way or help to "democratize" fraud. One wonders how much of this monetary policy error is due to the fact that Fed members were trading stocks LATE into the largest asset bubble in human history. When they were forced to sell, that was the top for stocks. And one wonders how much of the regulatory lapse is due to the fact that Congress is STILL actively trading stocks. 

Last but not least is this cyclical inflation fraud masquerading as secular stagflation. The last and greatest bubble that has aided and abetted record inflows into passive stock market indexes at the apex of the largest stock bubble in history. Coming at a time when Boomers are at peak retirement and hence exposed to maximum risk aka. WORST CASE SCENARIO. 

No one believes this secular inflation narrative more than the Fed despite the fact that they were the last to be converted. Now, their belief in this latest fraud has put the entire system at risk.

Perma-bull Jim Cramer sums up the Fed conundrum:

“If Powell can get this market to go down and stay down, repealing much of those gains, then the rich are less likely to spend aggressively and a lot of people are more likely to remain in the workforce when they might otherwise have retired,”

Wow. That is the most bearish thing Cramer has said in a LONG time. Contrarians would jump all over that and presume that means a bottom. What they ignore is the fact that the Fed has ALL the power to crash this market and it doesn't matter anymore what market participants believe. Otherwise we would believe the current PRIMARY fantasy that the Fed can CREATE massive bubbles, but they can't burst their own bubbles.

Sheer idiocy.  

Cramer's logic is the paradigm shift that occurred last week on Wall Street. The Fed's panic increase in rates by .75% and re-rating of Fed increases through the end of this year has GUARANTEED hard landing. Everyone on Wall Street knows what's coming, which is why they just shorted stocks at the heaviest pace since June 2008. 

And yet, according to Goldman Sachs and Zerohedge, this is bullish.

ZH: Nasty Short Squeeze On Deck

"And predictably, following such massive shorting episodes, what follows traditionally has been a major squeeze: as Goldman's table below shows, returns following 20% S&P 500 declines have typically been positive"

What's scary is that Goldman's table in the article DOES NOT show what happens after each major shorting episode. Instead, it shows what USUALLY happens after each time the market is down -20% - which is totally unrelated. Unless you read that paragraph multiple times, you wouldn't catch it. In other words, they are MISLEADING the reader into believing that heavy shorting leads to big rallies. When in fact, the largest shorting episodes preceded MASSIVE declines. Particularly in 2008.

Had they shown this chart below, then any blind man would have reached the OPPOSITE conclusion, that this shorting and attendant mini short covering rally is THE LAST CHANCE TO GET OUT. 

In summary, anyone can believe whatever they want in Disney markets. Pundits are standing by to satisfy any and all denialistic fantasy. 

Sadly, the middle class can't sustain the high price of EVERYTHING at the same time. Which is why the first order effect we are seeing is falling sales quantity - of homes, cars, and durable goods. The second order effect will be falling prices.

At the aggregate level, Price x Quantity = GDP.

Which means that the Fed is actively crashing the markets AND the economy at the zero bound. 

With ZERO chance of a successful bailout.