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Weekly Writing 2019.04.17

I guess Wall Street just doesn’t understand that our economy is no longer an industrial one, but rather a financialized economy. And why should they? They are a part, in fact the largest part, therefore unable to see the forest because of the trees. What does this mean to us as investors? It means we probably have some time to get our house in order. A reasonable guess would be maybe a couple of years. However, when the light comes on it will undoubtedly be too late.

 

The following excerpt from Realtalk (ZeroHedge) says it well. Please pay attention. Low interest rates and high debt are a killer. All through the 1970s, 1980s, and 1990s we fought inflation. Now it’s gone and we have gotten more than we bargained for—namely deflation, and it will be with us for years.

 

Nomura: "BOOM, Roasted: The Fed's "Clown Car" Experiment Is Now Complete"

By Tyler Durden

 

Now time for some #REALTALK from the philosopher / pseudo-economist deep inside of me:

  1. Low interest rates are (ultimately) deflationary, sustaining zombie-firms in a “liquidity-trap,” which weigh on overall economic performance while also weakening investment.  
  1. Low interest rates and QE are deflationary as you incentivize mal-investment and blow perpetual speculative-asset bubbles, which (ultimately) correct and drive deleveraging—thus the ‘balance sheet recession.’ 
  1. As there is still a lot of debt-related “scar tissue,” you can’t push credit on a string.  This then leads to quick “muscle memory” returns to a defensive posture: “If there is no return on capital, capital should not be deployed.” 

 

Now we see the Fed “stuck on this hamster wheel” because neither markets nor the economy apparently can withstand a rising interest rate environment.  At the same time, we are again seeing the ECB re-engage in another TLTRO scheme (and already previously failed, save for creation of a credit mkt bubble).  Look at the EGB curve.  Look at the JGB curve.  And outside of this nascent tactical “steepening” in UST 5s30s, look at US curves, as we witness the front-end inversions spread like wildfire (particularly my favorite “PRE-EASING” signal ED2-6 spread (which our back-tests told us that since inversion Dec18 that on average we should expect “easing” approx. 8-9m thereafter), inverting effectively back to “peak inversion lows” since Jan08.

 

Realistically in the near-term, the Fed’s now singular “inflation” mandate will allow them to posture in pursuit of reflationary policies, which should then provide near-term upside for inflation-sensitive assets, especially as policy-rate cuts and bond purchases are now implicitly the next move from here.  Powell yesterday: “If inflation expectations are below 2 percent, they’re always going to be pulling inflation down and we’re going to be paddling upstream…’’ (to keep prices up).

 

But I’ve got news for you, Chair Powell.  The Fed hasn’t hit 2 percent inflation on a sustained basis since formally adopting that objective in 2012.  IT AIN’T COMIN’ IF YOU ‘PRICE-TARGET’ OR ‘AVERAGE’ TO ATTEMPT AND ‘RUN HOT’ EITHER, CHIEF

 

Long-term ‘inflation expectations’ will never truly be move higher without full-scale fiscal stimulus (or the future-state of outright ‘helicopter drops,’ shudder)…because debt, disruption and demographic forces are too strong.  #BUYBONDS and #PASSOUT

 

Excerpt from: https://www.zerohedge.com/news/2019-03-21/nomura-lashes-out-powell-

boom-roasted-feds-clown-car-experiment-now-complete

 
  

Near-term may be too bullish!



The Best,

Don S. Peters

Information contained in these commentaries is based upon information obtained from sources both external and internal which we consider to be reliable, but the accuracy of the information and the recommendations contained herein cannot be guaranteed, nor do they constitute a solicitation for the purchase or sale of any securities mentioned herein. Information contained in this commentary may not be reproduced in any form without written permission from Donald S. Peters.