Friday, October 08, 2021

Life's a Beach Until the Tsunami Hits: Four Waves Nobody Cares About--Yet

Four monster waves are about to crash onto the Fed's beach party and sweep away the unwary revelers.

Hey, is the water in the bay receding? Never mind, free drinks are on the Federal Reserve, so party on, life's a beach, asset bubbles will never pop, we're safe. Of course you are. The Fed is all-powerful and would never let a rogue wave turn all its precious phantom wealth into broken detritus.

The water is fast receding and a wave is visible if you care to look, but nobody cares to look. Why bother? The Fed is invincible, that's all you need to know to mint another fortune.

Just to keep life interesting, let's look anyway. Gordon Long and I discuss four monster waves that are about to crash onto the Fed's beach party and sweep away the unwary revelers:

1. Declining liquidity: while everyone is focused on the Fed's ceaselessly repeated reassurance that the liquidity spigot will never be closed, never ever ever, so party on, asset bubbles will never pop, never ever ever, other central banks have already started reducing global liquidity while domestically, the Treasury General Account (TGA) is soaking up liquidity to fund the federal government's monumental deficit spending.

2. Declining global growth: long before the pandemic swept ashore in 2020, global growth was faltering: the business cycle had not been abolished, despite Fed assurances that growth and asset bubbles will continue expanding until they reach Alpha Centuri and beyond (Dow one trillion, yowza baby!), growth by any conventional measure (PMI, ISM, industrial production, global trade flows, etc.) had stagnated or rolled over.

Profits had also topped out and the expansion of leveraged debt had started to wobble, hence the Fed's frantic unleashing of a repo flood in late 2019 to cover up the putrid stench of rapidly decaying debt.

3. Global supply shock: as we all know, global supply chains that everyone assumed were unbreakably robust turned out to be extremely fragile, tightly bound systems of endless dependency chains that fell to pieces once any one link snapped.

4. China credit impulse shock: while everyone in America focuses on the Fed's we walk on water claims of unlimited power to inflate asset bubbles forever, the rest of the world lives or dies on China's credit impulse which has long been a reliable leading indicator of global expansion or contraction.

For a variety of reasons, China's gargantuan credit bubble is no longer expanding, and so China is not going to save the world from recession and asset bubbles popping.

It would be easier to put one's faith in the unlimited power of the Fed to inflate asset bubbles if the humans behind the screen weren't hopelessly compromised by self-serving corruption. But alas, they are corrupt and self-serving, and their claims of unlimited power to inflate asset bubbles forever are about to be tested.

Not looking won't stop the waves from washing the beach party away.

Four Tsunami Waves About To Hit At Once (40 minutes)




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