Stagflation "Phase 1" Begins As Democrats Scramble To Pass Largest Fiscal Stimulus Of All Time
For all the speculation about the upcoming taper, which we now know will start in November at a pace of $15bn per month and conclude by July...
... the main event this fall, if not this year, may be on the fiscal side, and specifically what is the final shape of the upcoming bipartisan + Build Back Better stimulus avalanche, which as BofA's Michael Hartnett calculates will represent - at roughly $1 trillion in biparstian "infrastructure" spending plus some $3.5 trillion in Build Back Better reconciliation - some $4.5 trillion in "epic fiscal stimulus", which at 20% of GDP will be more than double the size of the previous record stimulus and will represent the largest fiscal stimulus package of all time.
This stimulus, which will pass one way or another, would arrive at a time of 12% GDP growth (if plunging fast), 5% inflation, and 33% deficit.
Furthermore, the final size of the reconciliation package is, in BofA's view, the driver for yields next 3-6 weeks - anything above $2 trillion = higher yields as stimulus shores up weakening US consumption & heightens inflation.
But stimulus or not - and for the sake of the economy and democrats there better be one - the macro backdrop is turning uglier by the day. As Hartnett notes, his macro backdrop for the second half is one of higher inflation, hawkish central banks, weaker growth, i.e. stagflation. At the same time, the investment backdrop is one of rising Rates, Regulation, Redistribution (3Rs)...
... and peak Positioning, Policy, Profits (3Ps).
This means that all else equal, investment returns will be low/negative for both stocks and credit in the second half, while the optimal H2 portfolio is a "barbell" trade of long inflation (e.g. commodities, TIPS, small cap, banks, Japan) & long quality (e.g. cash & defensive utilities, staples, healthcare, REITs).
And speaking of stagflation, Hartnett compares the current period to the three stagflationary phases of the-1960s/70s and concludes that "we are in phase 1 with phase 2 starting in 2022…"
1. 1965-68…inflation & interest rates breakout to upside from multi-year ranges, stock market peaks, but “stagflation” neither visible nor anticipated…equities outperformed via a “barbell” of small cap value and Nifty 50 tech outperform;
2. 1969-73…end of Bretton Woods & oil shock causes sharp rise in inflation ending Nifty-50 bull market & kick-starting volatility & commodity bulls;
3. 1974-81…inflation & real assets outperform all asset classes.
Needless to say, stagflation is hardly what your financial advisor ordered as equity and bond returns tend to be especially ugly during such periods. So will this time be any different? Alas, central banks already blew their load, and while the differential between monetary and fiscal policy remains, (with monetary policy driving absolute returns, while fiscal policy driving relative returns) what is coming is ugly on the absolute return side, since the pace of central bank bond purchases is decelerating from its record of $8.5tn in ’20 to just $2.3tn in ’21, and then to just barely positive $0.3tn in ’22 before turning negative.
This Has To Be A Mistake
This Has To Be A Mistake
While we were digging through the data for today’s household net worth report we stumbled upon something that seem…
While we were digging through the data for today's household net worth report we stumbled upon something that seem beyond ridiculous: the ratio of Household Net Worth to Disposable Net Income. At 786% in the latest quarter, the chart at first appears to be a mistake but we triple checked it, and... well, here it is.
The latest, all-time high print is an increase from 698% in Q1 and also represents the biggest quarterly increase in history!
This number is so ridiculous, it is almost 50% higher than the long-term average of 540%. More importantly, it means that the total net worth number we reported earlier today, which in Q2 hit a record high of $142 trillion, is massively inflated on the back of what is obviously the biggest asset bubble on record.
It also means that if one were to strip away the asset bubble, and net worth was purely a reasonable function of disposable income, then total net worth worth be haircut by 31%, or some $43 trillion, which incidentally, is equivalent to the net worth of the top 1% of US society...
... and which as we showed earlier today is a record 32% of total household net worth.
As an aside, the fact that the top 1% have gained $10 trillion in wealth since the covid pandemic outbreak, is probably just a coincidence, and yet...
Covid has been the best thing ever to happen to the wealthy and powerful. No wonder they don’t want it to end— Hipster (@Hipster_Trader) September 23, 2021
As for the chart which clearly has to be a mistake, we are sad to report that it isn't, and as politicians of both the Democrat and Republican party pretend to fight for the common man, all they are doing is enabling and accelerating the greatest wealth transfer in the world but not for nothing: they too want to be in the top 1%.
“Culture As An Asset”
#CKStrong Stunning. Hedge funds hoovering up trading cards as an “alternative to equities” with the same passion Brooks Robinson hoovered up ground…
Stunning. Hedge funds hoovering up trading cards as an “alternative to equities” with the same passion Brooks Robinson hoovered up ground balls.
This is usually a sign of the endgame for markets, i.e,, the precursor to a bear market. Think the “Great Beanie Baby Bubble” of 1999.
In general, there are two types of assets,
- They can be rare—gold bars, diamonds, houses on Victoria Peak, bottles of 1982 Pétrus, Van Gogh paintings, stamps, beanie babies, or baseball cards or
- They can generate cash flows over time – GaveKal
Creating An Illusion Of Scarcity
Scarcity relative to the money stock is what its all about now, folks.
It probably won’t be long before the Fed has to bailout the baseball card market, no?
Full disclosure, I do own a Mike Trout rookie card.
Given the extreme valuations of all most all asset classes, coupled with the massive amount of money in the global financial system, markets are now really stretching, looking for, and actually attempting to create scarcity as a useful delusion to justify, rationalize, and drive speculation.
Maybe I will start collecting poop as an “anthropological asset,” put it the blockchain and super charge the price ramp by snapping a few pictures of each sample, converting them to NFTs to load up to the internet.
Then again, maybe all this is signaling the start of a big, big inflation cycle and the markets are looking to get out of cash and protect their purchasing power. But that’s too rational.
Can you believe what markets have become, folks? It is hard to see clearly when everybody is making money.
gold inflation markets fed bubble
US Meat Prices To Remain Elevated Amid Depleted Reserves
US Meat Prices To Remain Elevated Amid Depleted Reserves
Beef, pork, and chicken in US cold storage warehouses have yet to recover from pandemic…
Beef, pork, and chicken in US cold storage warehouses have yet to recover from pandemic lows and could continue to support higher prices.
New United States Department of Agriculture (USDA) data shows beef reserves dropped 7.7% from a year ago in August, poultry supplies fell 20%, and pork plunged 44% to their lowest levels since 2017, according to Bloomberg.
Jim Sullivan, commercial director for Stable USA, said low meat inventories would suggest meat prices will stay elevated.
"Prices remain very elevated compared to seasonal expectations," Sullivan said.
Soaring supermarket prices have been on the radar of the Biden administration as working-poor families allocate a high percentage of their incomes to basic and essential items. Higher food inflation eats away their wages and is why Biden recently increased SNAP benefits by a quarter.
Earlier this month, the Biden administration finally addressed inflation as a concern but didn't blame the trillions of dollars in fiscal and monetary policies and labor shortages on increased food inflation but instead placed responsibility on meatpackers.
White House National Economic Council Director Brian Deese said "pandemic profiteering" food companies are driving up supermarket costs for Americans. This is nothing more than a blame game and failed government policies that have not just increased food prices but have left supply chains reeling due to stimulus checks that disincentivized workers from working.
New data of low meat supply at US cold storage facility is more bad news for the Biden administration, who will have to develop a new narrative about why meat prices aren't going down. If food inflation remains elevated into early next year, Americans might vote with their wallets during next year's midterms.
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