– I present to you a counterargument for the media blaring narrative.
– Speculate that the interest rate hikes ( Jackson Hole, etc.) are just red herrings. In fact rates may go negative.
– The real shocker is that everybody is positioned for when is at its peak and is indeed transitory. The reflation trade was debt driven and is supported by nothing but hot air.
“Inflation – A continuing rise in the general price level usually attributed to an increase in the of money and credit relative to available goods and services” – Merriam-Webster
Actually global credit impulse is rolling off.
– There are 3 types of that are relevant: Monetary, Consumer Price, Asset. (Lyn Alden, https://www.lynalden.com/inflation/)
“In highly indebted economies, additional debt triggers the law of diminishing returns. This fact is confirmed when the marginal revenue product of debt ( MRP ) falls, where MRP is the amount of GDP created by an additional dollar of debt. In microeconomics, when debt is already at extreme levels, a further increase in debt leads to an increase in the risk premium on which a borrower will default suggesting that the bank or other lender will not be repaid. As the risk premium rises, banks are often unable to price this additional cost through to their private sector borrowers thus the loan to deposit ratio of the banks falls. Combining both the falling MRP with a declining loan to deposit ( LD ) ratio, results in a reduction in the velocity of money. In terms of the impact on monetary activities, a drop in the LD ratio means that more of bank deposits are being directed to the purchase of Federal, Agency and state and local securities in lieu of private sector loans. The macroeconomic result is that funds are shifted to sectors that are the least productive engines of economic growth and away from the high multiplier ones.” – Too Much Debt, Hoisington Investment Management Co.
– Yes, you have consumer price and asset price , but these are largely driven by speculative bubbles. They are not driven by fundamental factors nor underlying conditions. They will regress to the mean by Reflexivity.
– Yes, there are supply chain issues due to COVID + political tensions, but how long will it last? Are the political tensions even necessary? What happened to lumber even with supply chain issues?
– What is even the reason for continued asset purchases by CBs?
IMO, asset purchase tapering is done to engineer a crash in the speculative asset bubbles, so that more extreme monetary policies can be enacted to try to stop the tidal wave of debt.
Once the speculative asset bubble collapses, consumer price will be controlled as well. In fact there will be a dollar shortage, as each dollar is leveraged 50x+ vs. debt.
– CBs don’t care about speculative asset okay? Not a big deal. Bubbles even pop by themselves. Price of Big Mac and used car goes up a little bit, boohoo.
– Evidence to support my thesis is falling expectations. expectations are what drives asset prices up. If is expected to decrease, then the prices of assets are expected to decrease. Why would anyone hold an asset expected to depreciate in price?
Inflationary currency pairs:
Gold – you might see something crazy happen here. This can be the end of a distribution pattern:
– The stock market is one of the last markets to receive liquidity trickling down from the source. Currencies, bonds, lead them and stocks should not be used as an indicator for future expectations over them.
– Right now, the world is positioned for and are looking for interest rate hikes as the signal, but that won’t be catalyst.
– and liquidity flows have been cut off at the source, and now we are at the cliff of the debt driven sugar rush. There must be great suffering in order to justify more extreme monetary policies. Then and only then will you have sticky in a stagflationary environment.
“Inflation is transitory” – Jerome Powell