Idea for Macro:
- I present to you a counterargument for the media blaring inflation 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 inflation when inflation 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 volume of money and credit relative to available goods and services” - Merriam-Webster
Actually global credit impulse is rolling off.
- There are 3 types of inflation that are relevant: Monetary, Consumer Price, Asset. (Lyn Alden, www.lynalden.com/inflation/)
Monetary 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 M2 skyrocketing, but compare it with Debt and adjust for inflation. Wow, It did nothing to debt levels. GDP adjusted for inflation barely recovered:
- M2 doesn't exist in a vacuum, but needs to be balanced for deflationary forces. Debt is winning.
- Yes, you have consumer price inflation and asset price inflation, 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 inflation 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 inflation 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 inflation expectations. Inflation expectations are what drives asset prices up. If inflation is expected to decrease, then the prices of assets are expected to decrease. Why would anyone hold an asset expected to depreciate in price?
Signals of falling inflation expectations:
Inflationary yields:
Inflationary currency pairs:
FRED inflation expectation rate:
fred.stlouisfed.org/series/T5YIFR/
Gold - you might see something crazy happen here. This can be the end of a distribution pattern:
Inflationary Commodities:
- The stock market is one of the last markets to receive liquidity trickling down from the source. Currencies, bonds, commodities lead them and stocks should not be used as an indicator for future inflation expectations over them.
- Right now, the world is positioned for inflation and are looking for interest rate hikes as the signal, but that won't be catalyst.
- Inflation 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 inflation in a stagflationary environment.
"Inflation is transitory" - Jerome Powell
GLHF
- DPT
P.S. Disclaimer - I am relentlessly selling risk assets, long volatility and bonds.
- I present to you a counterargument for the media blaring inflation 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 inflation when inflation 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 volume of money and credit relative to available goods and services” - Merriam-Webster
Actually global credit impulse is rolling off.
- There are 3 types of inflation that are relevant: Monetary, Consumer Price, Asset. (Lyn Alden, www.lynalden.com/inflation/)
Monetary 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 M2 skyrocketing, but compare it with Debt and adjust for inflation. Wow, It did nothing to debt levels. GDP adjusted for inflation barely recovered:
- M2 doesn't exist in a vacuum, but needs to be balanced for deflationary forces. Debt is winning.
- Yes, you have consumer price inflation and asset price inflation, 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 inflation 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 inflation 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 inflation expectations. Inflation expectations are what drives asset prices up. If inflation is expected to decrease, then the prices of assets are expected to decrease. Why would anyone hold an asset expected to depreciate in price?
Signals of falling inflation expectations:
Inflationary yields:
Inflationary currency pairs:
FRED inflation expectation rate:
fred.stlouisfed.org/series/T5YIFR/
Gold - you might see something crazy happen here. This can be the end of a distribution pattern:
Inflationary Commodities:
- The stock market is one of the last markets to receive liquidity trickling down from the source. Currencies, bonds, commodities lead them and stocks should not be used as an indicator for future inflation expectations over them.
- Right now, the world is positioned for inflation and are looking for interest rate hikes as the signal, but that won't be catalyst.
- Inflation 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 inflation in a stagflationary environment.
"Inflation is transitory" - Jerome Powell
GLHF
- DPT
P.S. Disclaimer - I am relentlessly selling risk assets, long volatility and bonds.
Trade active:
Debt vs. GDP. Power of Compounding:
Trade active:
"The market value of negative yielding debt globally is back up to the highest since February, at $16.5 trillion." - Lisa Abramowicz
Trade active:
Watch for this, according to oxford economics, Treasury's debt limit should be reached by end of September, with no debt limit lift:
www.oxfordeconomics..../publications/642798
www.oxfordeconomics..../publications/642798
Trade active:
Foreign ownership of US gov't debt fell from 35% end-2012 to 24% end-2020, part of a broad drop in foreign ownership as debt grew and central bank QE stepped in as a buyer. We see this lack of foreign enthusiasm for all the debt we're issuing as a key "market" signal.
What we know for sure is that foreigners bought US Treasury debt in 2009 during the global financial crisis (blue), but sold in 2020 (red), with the Italy & Greece the only places where relative to GDP gov't bonds were sold more. Not a great signal for Treasury safe haven status.
- Robin Brooks
What we know for sure is that foreigners bought US Treasury debt in 2009 during the global financial crisis (blue), but sold in 2020 (red), with the Italy & Greece the only places where relative to GDP gov't bonds were sold more. Not a great signal for Treasury safe haven status.
- Robin Brooks
Trade active:
Some thoughts:
Bitfinex Securities announced today, basically you can just buy stocks directly with crypto now. Tether is printed for free by exchanges.
Bitcoin and Tether - The bottom line is that tether is not so different from subprime mortgage MBS's or CDOs of 08. They are just a new financial instrument marketed to retail to dump infinite margin risk on them. Implosion is inevitable in a credit/collateral crunch.
While I don't fully understand the plumbing of systemic liquidity, and I am not entirely sure if this scenario applies now, but I cant help but think it rhymes:
The proximate cause of the 2008 liquidity crisis was the differentiation of C2 collateral from C1 collateral. The major central banks and treasuries responded to the crisis by both increasing the monetary base and swapping superior for inferior collateral. This led to an exponential rise and subsequent crash in the ratio of total US financial sector liabilities to what we refer to as “ultimate liquidity”.
The nonfinancial sector has gone from holding bank liabilities to holding a diversified portfolio of securitized assets directly. While not backed by D, they were backed by C. As long as there is confidence in the assets comprising C, or as long as C1 remains a significant share of C, it may be assumed that these claims are "liquid", i.e., they can be converted into central bank money at fairly short notice.
This would appear to be happening now with the CB balance sheets effectively interfering with stock markets, and direct bond purchases.
So what happens in that economy when suddenly there are doubts about the underlying value of Exxon shares and other securitized revenue streams? Naturally they lose their attractiveness as investments and as liquid assets that are used as money. Suddenly there is deemed to be a liquidity shortage and this intensifies when it is clear just to what extent the value of pseudo liquid assets in the economy has expanded in relation to central bank money. Other collateral or money may continue to be acceptable, such as U.S. Treasuries, Bunds etc.
So there is a sudden split between cash and certain types of collateral, and everything else.
Everything else ceases to be liquid.
www.imf.org/external...t/wp/2012/wp1295.pdf
Evergrande is rumored to be a non-trivial backer of tether. They are in the process of imploding. We will see how that plays out. I can't see how tether ends happily.
The global credit crunch is confirmed to have already begun, with global credit impulse collapsing. Foreigners and institutions should seek USD + UST as higher quality collateral.
China also does not have a floating currency rate, but it is pegged to the USD, and managed through their purchase of the USD. This is really the deflationary force which will take supply of collateral and drive the dollar higher.
With China beginning monetary easing, it should correlate to a lower CNYUSD, with yuan being sold and dollar being bought, further sending the dollar up and removing supply.
Thinking back on GPIF slashing US Treasurys, the rising yields of foreign institutions had fooled US investors into believing their economy was booming and reflation was accelerating.
With foreigners selling US debt, I don't foresee the Fed being able to stop Treasury purchases any time soon.
The asset bubble will inevitably burst with the dollar rising, and it will be such that bond purchases can continue. US economy can't handle rising yields. There will be a sudden rush for dollars and high quality collateral, for which there is no supply because of the leverage of liabilities on the dollar.
Bitfinex Securities announced today, basically you can just buy stocks directly with crypto now. Tether is printed for free by exchanges.
Bitcoin and Tether - The bottom line is that tether is not so different from subprime mortgage MBS's or CDOs of 08. They are just a new financial instrument marketed to retail to dump infinite margin risk on them. Implosion is inevitable in a credit/collateral crunch.
While I don't fully understand the plumbing of systemic liquidity, and I am not entirely sure if this scenario applies now, but I cant help but think it rhymes:
The proximate cause of the 2008 liquidity crisis was the differentiation of C2 collateral from C1 collateral. The major central banks and treasuries responded to the crisis by both increasing the monetary base and swapping superior for inferior collateral. This led to an exponential rise and subsequent crash in the ratio of total US financial sector liabilities to what we refer to as “ultimate liquidity”.
The nonfinancial sector has gone from holding bank liabilities to holding a diversified portfolio of securitized assets directly. While not backed by D, they were backed by C. As long as there is confidence in the assets comprising C, or as long as C1 remains a significant share of C, it may be assumed that these claims are "liquid", i.e., they can be converted into central bank money at fairly short notice.
This would appear to be happening now with the CB balance sheets effectively interfering with stock markets, and direct bond purchases.
So what happens in that economy when suddenly there are doubts about the underlying value of Exxon shares and other securitized revenue streams? Naturally they lose their attractiveness as investments and as liquid assets that are used as money. Suddenly there is deemed to be a liquidity shortage and this intensifies when it is clear just to what extent the value of pseudo liquid assets in the economy has expanded in relation to central bank money. Other collateral or money may continue to be acceptable, such as U.S. Treasuries, Bunds etc.
So there is a sudden split between cash and certain types of collateral, and everything else.
Everything else ceases to be liquid.
www.imf.org/external...t/wp/2012/wp1295.pdf
Evergrande is rumored to be a non-trivial backer of tether. They are in the process of imploding. We will see how that plays out. I can't see how tether ends happily.
The global credit crunch is confirmed to have already begun, with global credit impulse collapsing. Foreigners and institutions should seek USD + UST as higher quality collateral.
China also does not have a floating currency rate, but it is pegged to the USD, and managed through their purchase of the USD. This is really the deflationary force which will take supply of collateral and drive the dollar higher.
With China beginning monetary easing, it should correlate to a lower CNYUSD, with yuan being sold and dollar being bought, further sending the dollar up and removing supply.
Thinking back on GPIF slashing US Treasurys, the rising yields of foreign institutions had fooled US investors into believing their economy was booming and reflation was accelerating.
With foreigners selling US debt, I don't foresee the Fed being able to stop Treasury purchases any time soon.
The asset bubble will inevitably burst with the dollar rising, and it will be such that bond purchases can continue. US economy can't handle rising yields. There will be a sudden rush for dollars and high quality collateral, for which there is no supply because of the leverage of liabilities on the dollar.
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