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$250 Billion Fund CIO Warns Inflation Is The Path Of Least Resistance

$250 Billion Fund CIO Warns Inflation Is The Path Of Least Resistance

Authored by Tad Rivelle, CIO at TCW,

Picasso’s Napkin: Inflation…



This article was originally published by Zero Hedge

$250 Billion Fund CIO Warns Inflation Is The Path Of Least Resistance

Authored by Tad Rivelle, CIO at TCW,

Picasso’s Napkin: Inflation is the Path of Least Resistance

Imagine you as the lover of art finally going to lunch with the great Pablo Picasso. Lunch is over and the waiter brings the check to the table, and, flush from the encounter, you reach out to pay. Picasso grabs hold of your wrist and says, “Please, allow me.” Pablo scribbles on the napkin, signs his name, and – voila – the meal is paid for. What just happened?

Did Picasso create an enduring art treasure that would be proudly displayed at the Prado? Or, did Picasso “print” a unit of his own currency in exchange for lunch? Whatever your interpretation, the example reveals that “money” – anything we commonly offer in exchange for goods or services – can pretty much take any form that buyer and seller choose. Napkins, digital entries on a block chain ledger, fiat paper money, whatever. So long as the parties to the transaction agree on its value, “currency” can take any form or be denominated in any unit of exchange.

Now, imagine that a whole artist colony moves into town and all sorts of signed napkins are being issued by artists, some notable, some not. New demand for fancy lunches has been created, but where do the additional caviar and extra waiters come from? The one napkin for lunch “trade” inflates to two or three. Or, suppose that no artists move into town, but wily old Picasso stays up nights scribbling on napkins so that he can buy himself a vacation house? How eager would anyone be to part with their seaside views in exchange for his napkins? That will depend upon how useful (valuable) that someone expects those napkins to be when re-offered in some future trade.

Simply put, the value of a currency today depends on people’s perceptions of what that currency will be good for – what it will be worth – in the future. The value of a currency obviously diminishes should it become “excessively” plentiful; alternatively, once the perception establishes itself that the currency will be worth less tomorrow than today, the willingness of sellers of goods to accept the money in that form devalues. What you have is a monetary inflation. Formalizing this a bit, refer to the tautology:

(Money Supply) x (Turnover of Money) = (Average Price of Goods Sold) x (Quantity of Goods Sold)

Adding to the “supply” of money is a simple matter of scribbling on napkins or running a printing press.

But, since Picasso napkins can be ordered up faster and cheaper than can caviar and villas, a monetary system that issues napkins carelessly will, sooner or later, inflate its currency. The new napkins – money – accrete demand. The initial impulse of suppliers is to sell more of what they have at the prevailing price. But, as the new money “floods” in, suppliers find they are overwhelmed. They can’t get the workers they need and their supply chains are jammed with orders. The only way to make the equation balance, then, is for prices to rise.

Unlike our dollars, Picasso napkins are not readily convertible into goods and services. But, are our dollars – or any fiat – subject to a different set of economic laws? Can the U.S. keep running its printing presses full bore and expect no one to notice? This is the implicit policy bet!

The cautionary tale here is that the reason it took a decade or more to extinguish the U.S. inflation of the 1960s is that once inflation gets started, it becomes its own “cause.” As prices rise, people naturally extrapolate the continuation of those price rises. The perceived future value of the currency falls and cascading distrust in the fiat alters the behaviors of buyers, sellers, and investors. If you expect your money to be worth less tomorrow, you will behave accordingly. Saving money will seem futile and foolish. Spending now before the value of your napkins – or your fiat dollars – loses still more value might seem to be the only way to protect yourself from financial ruin. The fear that your savings are being gnawed away by an inflation created, in turn, by the fear of others that the value of a dollar must inevitably drop fuels the inflation. In not recognizing that inflation is fundamentally a human “thing” and not a “technocratic” abstraction, the Fed underestimates how fast inflation can entrench itself in the minds of consumers and businesses.

Now, yield starvation and negative real rates are hardly novel. But as we peer ahead into 2022, bond investors now have to factor in the reality that, after years of trying, the policy regime has opened the tiger’s cage of inflation. And, the mere fact that the Fed tells us not to worry, that elevated inflation is just a transitory humbug, is reason enough to worry. Our national government goes on issuing trillions in “new” dollar “napkins” as it implicitly believes that artificially lifting aggregate demand solves all. The Fed’s asset purchases, which pre-tapering were running at $120 billion net per month, enable the national government to borrow funds free of market constraints, hence without putting any upward pressures on rates. It’s one big, multi-trillion dollar free lunch that never ends! Or does it? The splurge in “unfunded” Federal spending has strained supply chains, driven up commodity prices, and inflated transport costs. Widespread labor shortages have materialized for the first time in decades. These labor shortages are surely not the result of “transitory” transport bottlenecks and with some 80% of the U.S. economy service-based, suggests that wages and prices must rise further.

Mention of Supply Chain Problems by Corporate Managements Have Sharply Elevated

Source: Bloomberg Transcript Analyzer 

The Fed soothes us with the serenade that, should the tiger get loose and start devouring your savings, that they have the “tools” to get the tiger back in his cage. They would pull out their “whip hand” of monetary tightening, lose their fear of being mauled by their critics, and press forward with higher rates until the tiger is caged. So simple – in theory!

Now consider the reality of where the Fed is starting from. Bond market yields have not been this low in our lifetime and can we agree that driving up mortgage rates is no way to win friends and influence politicians?

Bond Market Yields: Never This Low!

Source: Bloomberg, TCW

And, who knew? Asset classes do not exist in vacuo and low rates bolster asset prices everywhere. Cap rates for stabilized multifamily real estate are at record lows. How much would rates have to rise to “wipe out” a capital structure of 70% debt/30% equity?

Cap Rates for Multi-Family Properties: Record Lows

Source: NCREIF, Bank of America

In equities, the story is similar. Take note that all the traditional valuation metrics for stocks are in their upper quintile of historical valuation, if not in their upper decile. That is, all except one: that one is the extra earnings yield that stocks possess over and above the bond yield.

Equity Valuations Expensive by All Metrics – Except One!

*Earnings yield minus 10 year UST yield. Using quarterly data since 12/31/1991 through 9/30/2021.
Source: FactSet, TCW

So, to cage the tiger “all” the Fed has to do is raise rates. Raise them enough and the future perceived value of the dollar stabilizes and inflationary expectations get re-anchored.

And the cost? Higher rates would reset asset values, possibly pricking some of the “bubbles” that have formed. Recession would follow as would higher unemployment giving way to calls that the Fed has “overdone” it and the time to loosen policy was yesterday. Absent vociferous support from elected officialdom, how could the Fed be expected to “whip inflation now?” Alas, the path of least resistance is for monetary policy to stay behind the curve until inflation becomes Public Enemy No. 1.

Is this what the ghost of bond market future foretells? Higher inflation and persistently negative real rates? Well, in the spirit of the season, we’ll channel Scrooge’s question to the ghost of Christmas 2022: “Are these the shadows of the inflation that will be or are they only shadows of the inflation that may be?” Either way, interest rates leave precious little margin for error. Asset allocations for 2022 should be re-evaluated in this light.

Tyler Durden
Tue, 11/23/2021 – 08:44

Author: Tyler Durden


Bullish Island Reversal

You can blame Omicron or elevated valuations or call it a
Fed taper tantrum. Bottom line, the market was overbought entering the
seasonally weak beginning…

You can blame Omicron or elevated valuations or call it a
Fed taper tantrum. Bottom line, the market was overbought entering the
seasonally weak beginning of December. In a year with big gains early December
tax-loss selling, some profit taking and yearend portfolio restructuring is not

All of the above and some geopolitical worries likely
conspired collectively to cause the recent selloff. But today’s action in DJIA
(the oldest reliable benchmark we know) as shown in the chart above created a
bullish island reversal. DJIA also bounced off the uptrend line from the June
and September lows right near the 200-day moving average and above support at 33700.
Today’s rally also closed the island gap near 35600, which is also around support/resistance
at the August high. And to top it off there was a new MACD Buy crossover and
histogram confirmation.

So, technically speaking the market likely found some solid
support here and is poised to rally to continuing new highs into yearend on the
still super accommodative monetary policy and rather robust economic and
corporate readings.

Our outlook remains bullish for the remainder of 2021 and as
long as the proverbial stuff doesn’t hit the fan, new highs are likely before
yearend and we would not be surprised to see the S&P 500 encroach upon the
big round number of 5000. 2022 will likely be a different case and we will
address that thoroughly in our 2022 Annual Forecast to subscribers next week.

Author: Author

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When Idiocy Becomes Hardwired

When Idiocy Becomes Hardwired

Authored by Jeff Thomas via,

At this point, virtually all of us over the age of forty…

When Idiocy Becomes Hardwired

Authored by Jeff Thomas via,

At this point, virtually all of us over the age of forty have encountered enough “snowflakes” (those Millennials who have a meltdown if anything they say or believe is challenged) to understand that, increasingly, young people are being systemically coddled to the point that they cannot cope with their “reality” being questioned.

The post-war baby boomers were the first “spoiled” generation, with tens of millions of children raised under the concept that, “I don’t want my children to have to experience the hardships that I faced growing up.”

Those jurisdictions that prospered most (the EU, US, Canada, etc.) were, not coincidentally, the ones where this form of childrearing became most prevalent.

The net result was the ’60s generation – young adults who could be praised for their idealism in pursuing the peace movement, the civil rights movement, and equal rights for women. But those same young adults were spoiled to the degree that many felt that it made perfect sense that they should attend expensive colleges but spend much of their study time pursuing sex, drugs, and rock and roll.

Flunking out or dropping out was not seen as a major issue and very few of them felt any particular guilt about having squandered their parents’ life savings in the process.

The boomer generation then became the yuppies as they hit middle age, and not surprisingly, many coddled their own children even more than they themselves had been coddled.

As a result of ever-greater indulgence with each new generation of children, tens of millions of Millennials now display the result of parents doing all they can to remove every possible hardship from their children’s experience, no matter how small.

Many in their generation never had to do chores, have a paper route, or get good grades in order to be given an exceptional reward, such as a cell phone. They grew to adulthood without any understanding of cause and effect, effort and reward.

Theoretically, the outcome was to be a generation that was free from troubles, free from stress, who would have only happy thoughts. The trouble with this ideal was that, by the time they reached adulthood, many of the critical life’s lessons had been missing from their upbringing.

In the years during which their brains were biologically expanding and developing, they had been hardwired to expect continued indulgence throughout their lives. Any thought that they had was treated as valid, even if it was insupportable in logic.

And, today, we’re witnessing the fruits of this upbringing. Tens of millions of Millennials have never learned the concept of humility. They’re often unable to cope with their thoughts and perceptions being questioned and, in fact, often cannot think outside of themselves to understand the thoughts and perceptions of others.

They tend to be offended extremely easily and, worse, don’t know what to do when this occurs. They have such a high perception of their own self-importance that they can’t cope with being confronted, regardless of the validity of the other person’s reasoning. How they feel is far more important than logic or fact.

Hypersensitive vulnerability is a major consequence, but a greater casualty is Truth. Truth has gone from being fundamental to being something “optional” – subjective or relative and of lesser importance than someone being offended or hurt.

Of course, it would be easy to simply fob these young adults off as emotional mutants – spiteful narcissists – who cannot survive school without the school’s provision of safe spaces, cookies, puppies, and hug sessions.

Previous generations of students (my own included) were often intimidated when presented with course books that had titles like Elements of Calculus and Analytic Geometry. But such books had their purpose. They were part of what had to be dealt with in order to be prepared for the adult world of ever-expanding technology.

In addition, it was expected that any student be prepared to learn (at university, if he had not already done so at home), to consider all points of view, including those less palatable. In debating classes, he’d be expected to take any side of any argument and argue it as best he could.

In large measure, these requirements have disappeared from institutions of higher learning, and in their place, colleges provide colouring books, Play-Doh, and cry closets.

At the same time as a generation of “snowflakes” is being created, the same jurisdictions that are most prominently creating them (the above-mentioned EU, US, Canada, etc.) are facing, not just a generation of young adults who have a meltdown when challenged in some small way. They’re facing an international economic and political meltdown of epic proportions.

Several generations of business and political leaders have created the greatest “kick the can” bubble that the world has ever witnessed.

We can’t pinpoint the day on which this bubble will pop, but it would appear that we may now be quite close, as those who have been kicking the can have been running out of the means to continue.

The approach of a crisis is doubly concerning, as, historically, whenever generations of older people destroy their economy from within, it invariably falls to the younger generation to dig the country out of the resultant rubble.

Never in history has a crisis of such great proportions loomed and yet, never in history has the unfortunate generation that will inherit the damage been so unequivocally incapable of coping with that damage.

As unpleasant as it may be to accept, there’s no solution for idiocy. Any society that has hardwired a generation of its children to be unable to cope will find that that generation will be a lost one.

It will, in fact, be the following generation – the one that has grown up during the aftermath of the collapse – that will, of necessity, develop the skills needed to cope with an actual recovery.

So, does that mean that the world will be in chaos for more than a generation before the next batch of people can be raised to cope?

Well, no. Actually, that’s already happening. In Europe, where the Millennial trend exists, western Europeans have been growing up coddled and incapable, whilst eastern Europeans, who have experienced war and hardship, are growing up to be quite capable of handling whatever hardships come their way. Likewise, in Asia, the percentage of young people who are being raised to understand that they must soon shoulder the responsibility of the future is quite high.

And elsewhere in the world – outside the sphere of the EU, US, Canada, etc. – the same is largely true.

As has been forever true throughout history, civilisation does not come to a halt. It’s a “movable feast” that merely changes geographic locations from one era to another.

Always, as one star burns out, another takes its place. What’s of paramount importance is to read the tea leaves – to see the future coming and adjust for it.

*  *  *

Polls suggest that a majority of Millennials now favor socialism. And a growing number favor outright communism. Sometime this year, Millennials are expected to surpass Baby Boomers as the nation’s largest living adult generation. This is one of the reasons Bernie Sanders and other socialists are soaring in popularity. And when the next crisis hits, the situation will likely reach a tipping point. That’s exactly why Doug Casey and his team just released this urgent video outlining exactly what’s going to happen… and how you can protect yourself and even profit from the situation. Click here to watch it now.

Tyler Durden
Tue, 12/07/2021 – 17:25

Author: Tyler Durden

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Omicron Study Scare Stuns ‘Face-Ripping’ FOMO Short-Squeeze

Omicron Study Scare Stuns ‘Face-Ripping’ FOMO Short-Squeeze

Everything was awesome today…


Headlines from a South African…

Omicron Study Scare Stuns ‘Face-Ripping’ FOMO Short-Squeeze

Everything was awesome today…


Headlines from a South African study hit, suggesting a 40-fold reduction in neutralization capacity of the Pfizer vaccine vs Omicron... which suggest hospitals will get overwhelmed (due to its hyper-transmissibility) but it is notably less severe (especially for healthy people)…

Omicron’s ability to evade vaccine and infection-induced immunity is “robust but not complete,” said the research head of a laboratory at the Africa Health Research Institute in South Africa.

…and that sent stocks lower late in the day (although still a good day overall)…

And slammed ‘recovery’ stocks relative to ‘stay at home’ stocks…

But then again… it wouldn’t be the US equity market if a last minute total buying-panic didn’t send the Nasdaq up 100 points in 4 minutes…

*  *  *

As we detailed earlier…A China RRR cut? Omicron anxiety easing? Whatever it was, bubble markets exploded higher today…

Source: Bloomberg

But before we all get excited about “what the market is saying”, let’s bear in mind that today also saw the USA, USA, USA suffer its biggest decline in worker productivity since Q2 1960 (yeah 61 years ago!!!)…

Source: Bloomberg

Which is perfect because today saw unprofitable tech company’s best 2-day swing since April 2020 (+13.5%)…

Source: Bloomberg

Today’s melt-up from the moment the US cash markets opened (until around the European close) was impressive to say the least but also note that stonks were bid as China opened… and as Europe opened…

This is The Dow’s best 2 days since Nov 2020! Nasdaq surged 3% today – its biggest daily gain since March. Bear in mind that roughly 66% of the Nasdaq is in a bear market with losses of over 20%, while 35% of the Nasdaq is down over 50%!

The surge in the majors pushed The Dow (and only The Dow) up to unchanged, very briefly, from the Omicron emergence cliff after Thanksgiving. However, everything seemed to run out of momentum at that point…

Nasdaq and The Dow exploded above their 50DMAs, the S&P extended its gains well above its 50DMA. The Dow ripped up to its 100-/200-DMA but couldn’t extend the gains…

The 2-day ‘face-ripping’ short-squeeze off yesterday’s opening lows is the largest swing since March…

Source: Bloomberg

‘Recovery’ stocks notably outperformed today relative to ‘Stay at Home’ stocks as Omicron anxiety fades. They are now well above Omicron emergence levels and starting to erase the European lockdown anxiety losses…

Source: Bloomberg

‘Retail Favorites’ had their biggest day since Jan 2021…

Source: Bloomberg

Treasury yields were higher on the day with the short-end underperforming (2Y +6bps, 30Y +3bps), but as the chart below shows, the selling was all in the US session again…

Source: Bloomberg

The 10Y Yield was higher again but did not breach 1.50%, retracing the move post-Powell hawkish hearing…

Source: Bloomberg

The yield curve flattened notably today (2s30s) as the short-end priced in rate-hikes and long-end priced in policy mistakes…

Source: Bloomberg

The dollar ended lower on the day but again traded in a narrow range…

Source: Bloomberg

WTI topped $73 today, extending the gains from the last couple of days. However, oil prices remain well down from pre-Omicron levels…

And as oil prices ripped higher, so did US Breakeven inflation rates, but remain well down from pre-Omicron anxiety levels…

Source: Bloomberg

Crypto was mixed today with Bitcoin higher (tagging $52k) and Ethereum lower (after topping $4400)…

Source: Bloomberg

Gold ended modestly higher today but still below $1800 and well below pre-Omicron levels….

Finally, despite the equity market soaring unrelentlessly the last couple of days, STIRs have shifted considerably more hawkishly now pricing in 2 rate-hikes by September and a 75% chance of a rate-hike by May 2022 – there is no way the stock market is ready for that…

Source: Bloomberg

And Powell is not about to jawbone that back down.

Tyler Durden
Tue, 12/07/2021 – 16:01

Author: Tyler Durden

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