Speculation for Macro:
I argue that price and consumer price inflation do not influence equities as much as the dollar. Investors who are betting on stocks because of 'inflation' will be in for a shock. Yields indicate we may be entering stagflation. Economic slowdown and rising dollar will prove a stronger force than consumer price inflation. After all the Eurodollar market is the market. Not used cars, not meat, not even gas. Investors going on margin to buy stocks because of the inflation narrative are making a grave mistake. (Monetary) Inflation and QE are frauds designed to get force investors into riskier assets and distribute risk onto them.
QE does not lead inflation. Credit leads inflation. QE is just a swap of reserves, so even if media is blaring that Fed is 'printing money' and 'hyperinflation' it does not leave the banking system. In fact, commercial banks hoard it all. We can see by reverse repurchase agreements that banks are stuffed with money and would rather take the overnight rate than trade it for risk. Money enters the economy through lending by the commercial banks.
QE does reduce volatility by backstopping banks and guaranteeing solvencies. For a time, it forces investors into higher risk assets to search for yield. It affects investors' psychology and creates speculative bubbles by making them believe they are hedging against inflation. Jerome Powell was even mentioning the VIX in one of his interviews. They watch that.
What is inflationary is credit. Investors, being deluded into complacency and invincibility, will take loans and buy more and riskier assets backed by lower quality collateral. We are not just talking about stocks either, but people will buy bigger homes, better cars, etc. More risk and more liabilities. All will be paid back.
We know that the global credit impulse has peaked and China's Credit Impulse has turned negative. The Credit Cycle is reversing and debt will be called. Debtors at the front of the curve are harvesting their liabilities, and it will create a collapse in the credit bubble. Credit leads the economy. Credit is going down. Recession is coming, as indicated by yields. M2V has collapsed and is not even shown anymore. While seemingly complex, the economy is just a series of transactions. Low velocity of transactions is deflationary and signals a demand for the dollar, rather than goods or services.
Furthermore, QE has a side effect of reducing the top tier collateral (US Treasuries) from the system. When the credit bubble collapses, the low quality collateral which investors have been forced into will suddenly become illiquid and bidless.
The dollar actually rises with QE and the Fed Balance sheet (especially since 2008):
Investors, particularly foreign sovereigns need the dollar to hedge US investments and creates more demand for it. It is the Eurodollar market that drives the price of the dollar and the global financial market. Just an aside, the Eurodollar market is all digital, it is the real Bitcoin. Sovereigns want dollars not Bitcoin. It is the Eurodollar market which drives risk-taking and currencies. QE is a tiny drop in the ocean.
While certain commodities are heating up and there is a lot of 'news' about demand and supply chain shortages, I believe that commodity demand will rather decline to follow the price of the dollar, not the other way around. Shortage expectations are assuming a nation running at full capacity, but productivity is slowing and the labor market is revealing tightness. Shortages are typically followed by gluts. News follows price. Watch for big busts in 2022 similar to lumber in many commodities. It is more a speculative bubble, rather than a fundamental one.
Credit leads the economy, which leads dollar demand, as banks and sovereigns hoard it because they know recession is coming.
Real rates will continue to fall, offshore dollar shortages are showing, as massively leveraged businesses like Evergrande collapse, and it may only be just the beginning. It is a Lehman moment for China. With defaults, there is more forced demand for the dollar. When dollar demand rises to uncontrollable levels, there can be no more lending, and there will be a cascade of insolvencies by junk bond issuers. At this point, yields may indeed spike.
The dollar will continue to rise, and the only thing that can stop it is the US defaulting on its debt. Watch for the debt ceiling, but remember that has been raised almost every year for 100 years. Technically, the dollar is in a demand zone, with a double bottom and testing resistance. Unless the debt ceiling is not raised, I doubt it will go back to 80. When dollar demand rises to uncontrollable levels, there can be no more lending, and there will be a cascade of insolvencies by junk bond issuers. Being long inflation, you are basically short the dollar right now. This cascade can happen slowly... then all at once.
Fund managers are FOMOing into risk, as you can't miss a quarter by being bearish if you are managing money. Damn the consequences. When it blows up, everyone will blow up, and they will be bailed out anyway, right? You aren't in a worse position than anyone else. However, when it ends, everyone will want out, and fast. The first one out wins.
My point is that credit contraction, followed by a rising dollar which is about to break out will crash this bubble.
The bottom line is that there will be a collateral squeeze, as there is more that has been lent out (leverage) vs the high quality collateral that creditors desire, as indicated by margin debt at ATH... While retail believes that the opposite is happening and they willingly destroy themselves by taking on risk for collateral. What is so different from now than 08? NFTs and cryptocurrencies are similar to the CDOs of subprime mortgages. They are just highly leveraged packages of lending backed by low-quality collateral, or even nothing. The product, or ticker, might change, but they are just units of credit, which are dictated by the Credit Cycle.
I've been hearing that the market can't go down until there is a blowoff top. What do you think this is?
When it comes to debt, you can't just 'not pay it back'. Federal budget deficit doesn't have much to do with it. The money that is 'printed' by the Fed is just hoarded by banks, and Treasury and Fed are separate. However, more Treasury debt just means citizens pay more in taxes, as it is paid for by tax revenue as it matures. It will only increase the cost of borrowing for corporations, causing more downward pressure on the economy, which will make banks hoard even more.
Again, on top of that you have default risk (watch the debt ceiling), and reduced government spending outside of debt servicing. Military, social, and economic influence will decline. China just continuously buys US debt to devalue the yuan and gain a trade surplus. Increasing the US federal deficit will increase debt servicing and decrease military spending, and in the case of a default, while China will lose revenue, they will gain share of global influence. That's the game that's being played between them, so you can't just default. What happened in Afghanistan?
In the end, it's really all just a ruse for those that lead the Credit Cycle to harvest more wealth and assets. Since when did people believe markets can't go down, Fed has your back, you have to be in stocks to beat inflation.
It's not different this time.
There is nothing new under the sun.
I guess you could say that inflation was an attempt to use credit to boost the underlying economy, which failed.
The real black swan will be a deflationary shock.
"Inflation is transitory." - Jerome Powell
GLHF
- DPT
I argue that price and consumer price inflation do not influence equities as much as the dollar. Investors who are betting on stocks because of 'inflation' will be in for a shock. Yields indicate we may be entering stagflation. Economic slowdown and rising dollar will prove a stronger force than consumer price inflation. After all the Eurodollar market is the market. Not used cars, not meat, not even gas. Investors going on margin to buy stocks because of the inflation narrative are making a grave mistake. (Monetary) Inflation and QE are frauds designed to get force investors into riskier assets and distribute risk onto them.
QE does not lead inflation. Credit leads inflation. QE is just a swap of reserves, so even if media is blaring that Fed is 'printing money' and 'hyperinflation' it does not leave the banking system. In fact, commercial banks hoard it all. We can see by reverse repurchase agreements that banks are stuffed with money and would rather take the overnight rate than trade it for risk. Money enters the economy through lending by the commercial banks.
QE does reduce volatility by backstopping banks and guaranteeing solvencies. For a time, it forces investors into higher risk assets to search for yield. It affects investors' psychology and creates speculative bubbles by making them believe they are hedging against inflation. Jerome Powell was even mentioning the VIX in one of his interviews. They watch that.
What is inflationary is credit. Investors, being deluded into complacency and invincibility, will take loans and buy more and riskier assets backed by lower quality collateral. We are not just talking about stocks either, but people will buy bigger homes, better cars, etc. More risk and more liabilities. All will be paid back.
We know that the global credit impulse has peaked and China's Credit Impulse has turned negative. The Credit Cycle is reversing and debt will be called. Debtors at the front of the curve are harvesting their liabilities, and it will create a collapse in the credit bubble. Credit leads the economy. Credit is going down. Recession is coming, as indicated by yields. M2V has collapsed and is not even shown anymore. While seemingly complex, the economy is just a series of transactions. Low velocity of transactions is deflationary and signals a demand for the dollar, rather than goods or services.
Furthermore, QE has a side effect of reducing the top tier collateral (US Treasuries) from the system. When the credit bubble collapses, the low quality collateral which investors have been forced into will suddenly become illiquid and bidless.
The dollar actually rises with QE and the Fed Balance sheet (especially since 2008):
Investors, particularly foreign sovereigns need the dollar to hedge US investments and creates more demand for it. It is the Eurodollar market that drives the price of the dollar and the global financial market. Just an aside, the Eurodollar market is all digital, it is the real Bitcoin. Sovereigns want dollars not Bitcoin. It is the Eurodollar market which drives risk-taking and currencies. QE is a tiny drop in the ocean.
While certain commodities are heating up and there is a lot of 'news' about demand and supply chain shortages, I believe that commodity demand will rather decline to follow the price of the dollar, not the other way around. Shortage expectations are assuming a nation running at full capacity, but productivity is slowing and the labor market is revealing tightness. Shortages are typically followed by gluts. News follows price. Watch for big busts in 2022 similar to lumber in many commodities. It is more a speculative bubble, rather than a fundamental one.
Credit leads the economy, which leads dollar demand, as banks and sovereigns hoard it because they know recession is coming.
Real rates will continue to fall, offshore dollar shortages are showing, as massively leveraged businesses like Evergrande collapse, and it may only be just the beginning. It is a Lehman moment for China. With defaults, there is more forced demand for the dollar. When dollar demand rises to uncontrollable levels, there can be no more lending, and there will be a cascade of insolvencies by junk bond issuers. At this point, yields may indeed spike.
The dollar will continue to rise, and the only thing that can stop it is the US defaulting on its debt. Watch for the debt ceiling, but remember that has been raised almost every year for 100 years. Technically, the dollar is in a demand zone, with a double bottom and testing resistance. Unless the debt ceiling is not raised, I doubt it will go back to 80. When dollar demand rises to uncontrollable levels, there can be no more lending, and there will be a cascade of insolvencies by junk bond issuers. Being long inflation, you are basically short the dollar right now. This cascade can happen slowly... then all at once.
Fund managers are FOMOing into risk, as you can't miss a quarter by being bearish if you are managing money. Damn the consequences. When it blows up, everyone will blow up, and they will be bailed out anyway, right? You aren't in a worse position than anyone else. However, when it ends, everyone will want out, and fast. The first one out wins.
My point is that credit contraction, followed by a rising dollar which is about to break out will crash this bubble.
The bottom line is that there will be a collateral squeeze, as there is more that has been lent out (leverage) vs the high quality collateral that creditors desire, as indicated by margin debt at ATH... While retail believes that the opposite is happening and they willingly destroy themselves by taking on risk for collateral. What is so different from now than 08? NFTs and cryptocurrencies are similar to the CDOs of subprime mortgages. They are just highly leveraged packages of lending backed by low-quality collateral, or even nothing. The product, or ticker, might change, but they are just units of credit, which are dictated by the Credit Cycle.
I've been hearing that the market can't go down until there is a blowoff top. What do you think this is?
When it comes to debt, you can't just 'not pay it back'. Federal budget deficit doesn't have much to do with it. The money that is 'printed' by the Fed is just hoarded by banks, and Treasury and Fed are separate. However, more Treasury debt just means citizens pay more in taxes, as it is paid for by tax revenue as it matures. It will only increase the cost of borrowing for corporations, causing more downward pressure on the economy, which will make banks hoard even more.
Again, on top of that you have default risk (watch the debt ceiling), and reduced government spending outside of debt servicing. Military, social, and economic influence will decline. China just continuously buys US debt to devalue the yuan and gain a trade surplus. Increasing the US federal deficit will increase debt servicing and decrease military spending, and in the case of a default, while China will lose revenue, they will gain share of global influence. That's the game that's being played between them, so you can't just default. What happened in Afghanistan?
In the end, it's really all just a ruse for those that lead the Credit Cycle to harvest more wealth and assets. Since when did people believe markets can't go down, Fed has your back, you have to be in stocks to beat inflation.
It's not different this time.
There is nothing new under the sun.
I guess you could say that inflation was an attempt to use credit to boost the underlying economy, which failed.
The real black swan will be a deflationary shock.
"Inflation is transitory." - Jerome Powell
GLHF
- DPT
הערה:
1. Interest rates are not determined by central banks. There is some control on the short end
2. Equities are unrelated, correlation is not causation
3. Low rates => low growth => low inflation
4. USD is the only currency that matters
5. Fed does not control USD
6. The PBOC is constrained like nearly every other central bank by it's reserves, in USD denominated assets
7. The Fed prints bank reserves and exchanges them for low risk USD assets, bank reserves are not USD
8. Nearly all global trade is in USD
9. Banks create (print) USD when they lend, they do not lend out your deposits
10. The supply of USD is determined by banks globally, nearly all is not controlled by the Fed
11. Without Lending of USD, sustainable inflation is impossible (literally)
- Excerpt from FinTwits
2. Equities are unrelated, correlation is not causation
3. Low rates => low growth => low inflation
4. USD is the only currency that matters
5. Fed does not control USD
6. The PBOC is constrained like nearly every other central bank by it's reserves, in USD denominated assets
7. The Fed prints bank reserves and exchanges them for low risk USD assets, bank reserves are not USD
8. Nearly all global trade is in USD
9. Banks create (print) USD when they lend, they do not lend out your deposits
10. The supply of USD is determined by banks globally, nearly all is not controlled by the Fed
11. Without Lending of USD, sustainable inflation is impossible (literally)
- Excerpt from FinTwits
הערה:
Real economy => rates in a feedback loop, and the US real economy cannot grow, as debt is piled on via QE and gov. deficit spending for growth in the financial economy (not the real economy).
The real economy in the US is driven largely by government spending => Consumption => Imports, and the supply chain disruptions have created a bottleneck in the imports.
- Tamay Ozgokmen
The real economy in the US is driven largely by government spending => Consumption => Imports, and the supply chain disruptions have created a bottleneck in the imports.
- Tamay Ozgokmen
הערה:
The dollar's ascent will not cease. Why? Because it is the World Reserve Currency. Rates are being hiked around the world in nations that do not have access to the dollar, and yields around the world are spiking. Mass insolvencies in EM nations are coming. Such was the extent of the debt monetization of this Debt Bubble that even Greece's yields had become negative. There will be no escape.
"dollar-denominated debt owed by non-Americans (i.e., those in emerging markets, European countries, and China) is about $20 trillion, with a bit less than half of that total being short-term. These dollar debtors will have to come up with dollars to service these debts and they will have to come up with more dollars to buy goods and services in world markets." - Ray Dalio
While China's debt is mostly domestic, and can be printed away, this is a symptom of a global condition. What is important is that High Yield spreads are spiking and overvalued zombie companies will have tidal wave of defaults, creating demand of the dollar.
It is not contained in China, as rates are being hiked, and it is inevitable that low yielding EM junk bonds will default.
This is to be the fate of zombie companies around the world, during debt deflation:
Evergrande was simply the canary. Debt Bust is occurring. The true shortage will be of the dollar.
"dollar-denominated debt owed by non-Americans (i.e., those in emerging markets, European countries, and China) is about $20 trillion, with a bit less than half of that total being short-term. These dollar debtors will have to come up with dollars to service these debts and they will have to come up with more dollars to buy goods and services in world markets." - Ray Dalio
While China's debt is mostly domestic, and can be printed away, this is a symptom of a global condition. What is important is that High Yield spreads are spiking and overvalued zombie companies will have tidal wave of defaults, creating demand of the dollar.
It is not contained in China, as rates are being hiked, and it is inevitable that low yielding EM junk bonds will default.
This is to be the fate of zombie companies around the world, during debt deflation:
Evergrande was simply the canary. Debt Bust is occurring. The true shortage will be of the dollar.
הערה:
A re-test of the breakout seems to be successful. Immense demand here:
הערה:
We are now at levels of the dollar where the UST market last broke:
US Government Securities Liquidity Index is at the lowest point since March 2020:
Bloomberg’s U.S. Government Securities Liquidity Index
MOVE is at levels where VIX had previously been 50+
The Dollar is not likely to stop its ascent. In fact it is likely that it will reach the opposite regression extreme, by Hagopian's Rule:
By Dalio's Principles, the short term debt cycle is controlled by central banks, and interest rates... yet interest rates cannot be lowered anymore! When this happens, governments can reduce spending, reduce debt (default), redistribute wealth, or print money.
We have approached the period where the negative outflows of falling balance sheet expansion of central banks will affect the market, There is a fiscal cliff in 2022:
The printing money option has been utilized, but the problem is that the dollar is rising faster than inflation, making debt burdens actually grow.
Dalio stated that the short debt cycle occurs in a period of about 8 years, and the big debt cycle about 40. The time between 1929 and 1980 is the same as 1980 to 2021, and they are about 40 years.
If interest rates can no longer be lowered and printing money no longer reduces the debt burden, doesn't it follow that a turn of the big debt cycle is imminent?
Now we wait and see if this thesis will be proven right.
US Government Securities Liquidity Index is at the lowest point since March 2020:
Bloomberg’s U.S. Government Securities Liquidity Index
MOVE is at levels where VIX had previously been 50+
The Dollar is not likely to stop its ascent. In fact it is likely that it will reach the opposite regression extreme, by Hagopian's Rule:
By Dalio's Principles, the short term debt cycle is controlled by central banks, and interest rates... yet interest rates cannot be lowered anymore! When this happens, governments can reduce spending, reduce debt (default), redistribute wealth, or print money.
We have approached the period where the negative outflows of falling balance sheet expansion of central banks will affect the market, There is a fiscal cliff in 2022:
The printing money option has been utilized, but the problem is that the dollar is rising faster than inflation, making debt burdens actually grow.
Dalio stated that the short debt cycle occurs in a period of about 8 years, and the big debt cycle about 40. The time between 1929 and 1980 is the same as 1980 to 2021, and they are about 40 years.
If interest rates can no longer be lowered and printing money no longer reduces the debt burden, doesn't it follow that a turn of the big debt cycle is imminent?
Now we wait and see if this thesis will be proven right.
הערה:
Someone mentioned to me what is causing the dollar demand, and why it will not stop:
"In the past US would buy Chinese goods thru trade, and in exchange for those goods, US would give China USD. China would then take that USD and buy US treasuries, financing USA ever growing debt and low prices. China began the Belt and Road initiative 8 years ago (last short term debt cycle).
Instead of recycling dollars back into their new sworn enemies economy, China instead would LEND those US Dollars to other countries in USD denominated debt. China would lend these acquired dollars they gathered from USA trade to smaller countries for them to buildout their power grid, roads, trains, internet, etc.
China would supply the materials, the labor, the parts - pretty much everything - to the developing nation. What this did is it helped employ MILLIONS of the Chinese poor, moving them from sustenance living to a good life working in factories and offices in newly built - and uninhabited - cities. Chinese citizens prospered greatly.
These loans were usually written with non-disclosure terms, & the receiving nation would need to also agree to never go against China at the UN or the WTO. China in essence created debt-vassal states. Most of the projects funded were of strategic importance to China - such as the port in Sri Lanka, or the rail line to Europe, so any default would give China an imperialist edge.
But - what is most interesting of all - is that DOLLAR denominated debt. When a country borrows money that is not in its own currency, that country is at risk of not only currency exchange rate fluctuations, but of the inability to get ENOUGH of that foreign currency to pay that debt. In this case, that debt is USD.
To get those desperately needed dollars, the country must trade with someone who HAS USD in the first place-usually(but not always), thats USA. If America were to have a recession, or a general buyers strike, or a war or embargo broke out-those dollars would be very hard to get. China would seize the asset backing the loan (via contract law, likely w/ 99 year guaranteed lease).
There are over 140 nations that signed on to China's Belt and Road program amassing a estimated $5,000,000,000,000 in USD denominated debt globally, and the rise of the USD is VERY deflationary - which is likely why JPow and company are in QE overdrive continuing their massive balance sheet expansion, even though they have blown thru their stated mandates of Full Employment and Stable prices.
The master stroke is: with all this debt overseas, these countries will be desperate to INCREASE manufacturing & resource mining to get those desperately needed dollars. They likely will also devalue their local currency. This will defeat USA's desire to "contain" china through trade."
These nations cannot pressure China 's currency for these loans as China is not the one that has the ability to print the USD!
"In the past US would buy Chinese goods thru trade, and in exchange for those goods, US would give China USD. China would then take that USD and buy US treasuries, financing USA ever growing debt and low prices. China began the Belt and Road initiative 8 years ago (last short term debt cycle).
Instead of recycling dollars back into their new sworn enemies economy, China instead would LEND those US Dollars to other countries in USD denominated debt. China would lend these acquired dollars they gathered from USA trade to smaller countries for them to buildout their power grid, roads, trains, internet, etc.
China would supply the materials, the labor, the parts - pretty much everything - to the developing nation. What this did is it helped employ MILLIONS of the Chinese poor, moving them from sustenance living to a good life working in factories and offices in newly built - and uninhabited - cities. Chinese citizens prospered greatly.
These loans were usually written with non-disclosure terms, & the receiving nation would need to also agree to never go against China at the UN or the WTO. China in essence created debt-vassal states. Most of the projects funded were of strategic importance to China - such as the port in Sri Lanka, or the rail line to Europe, so any default would give China an imperialist edge.
But - what is most interesting of all - is that DOLLAR denominated debt. When a country borrows money that is not in its own currency, that country is at risk of not only currency exchange rate fluctuations, but of the inability to get ENOUGH of that foreign currency to pay that debt. In this case, that debt is USD.
To get those desperately needed dollars, the country must trade with someone who HAS USD in the first place-usually(but not always), thats USA. If America were to have a recession, or a general buyers strike, or a war or embargo broke out-those dollars would be very hard to get. China would seize the asset backing the loan (via contract law, likely w/ 99 year guaranteed lease).
There are over 140 nations that signed on to China's Belt and Road program amassing a estimated $5,000,000,000,000 in USD denominated debt globally, and the rise of the USD is VERY deflationary - which is likely why JPow and company are in QE overdrive continuing their massive balance sheet expansion, even though they have blown thru their stated mandates of Full Employment and Stable prices.
The master stroke is: with all this debt overseas, these countries will be desperate to INCREASE manufacturing & resource mining to get those desperately needed dollars. They likely will also devalue their local currency. This will defeat USA's desire to "contain" china through trade."
These nations cannot pressure China 's currency for these loans as China is not the one that has the ability to print the USD!
Assuming, accordingly, that, at some point of time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both. Then we may deduce the following chain of consequences in nine links:
(1) Debt liquidation leads to distress setting and to
(2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes
(3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
(4) A still greater fall in the net worths of business, precipitating bankruptcies and
(5) A like fall in profits, which in a " capitalistic," that is, a private-profit society, leads the concerns which are running at a loss to make
(6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to
(7) Pessimism and loss of confidence, which in turn lead to
(8) Hoarding and slowing down still more the velocity of circulation.
The above eight changes cause
(9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.
Deflation caused by the debt reacts on the debt. Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debts cannot keep up with the fall of prices which it causes.
In that case, the liquidation defeats itself. While it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed. Then, the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owed. Then we have the great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but is capsizing.
- Irving Fisher, THE DEBT-DEFLATION THEORY OF GREAT DEPRESSIONS