The Bear Traps report goes full inflation. The few missing facts include that it was Republicans that ravaged the US budget, no mention of China, no reference to vast deflationary forces. This is Australian extremism not analysis. Ironically, this contrarian is a great contrarian signal. Sell metals!
In 1787, with remarkable foresight, Scottish historian Alexander Tytler laid out his riveting vision focused on the historic life cycle of Democracies. All embraced in phases, he screamed-“from bondage to spiritual faith; from spiritual faith to great courage; from courage to liberty; from liberty to abundance; from abundance to complacency; from complacency to apathy; from apathy to dependence; and from dependence back into bondage.”
This tragedy takes place over about 300 years and we have most recently seen tragedy play out in Greece, Argentina, Venezuela, and Puerto Rico. Can MMT (Modern Monetary Theory) put off this raging storm coming at the United States? From a 30,000 foot macro view-looking out over the next decade, we still want to see clients overweight hard assets. The 2010-2020 era was all about being long financial assets, tech stocks, and bonds. The landscape ahead will shock the masses, we must be prepared for what is coming.
Millennials will inherit $68T from Baby Boomers and Gen Xers, but after a raging feast-youngsters sit at the table as Mr. Waiter hands them the check. A colossal $30T national debt and $165T unfunded liabilities are coming due. If the $68T wealth pool takes a well overdue hit, lookout. This leverage equation explodes higher.Get long HARD assets (commodities) and sell down the 2010-2020 portfolio of expensive financial assets (growth stocks and bonds).
Central banks have been driving inequality to great heights. In response to social discomfort and rising discontent–heading into the 2022 midterms-politicians will fully embrace ModernMonetary Theory over traditional budget cuts and tax hikes. Biden goes Big in “Build Back Better.”Nearly every day, the lessons from the 2010 midterm elections are whispers heard throughout the halls of the White House. We must listen carefully. Back then, Obama–Biden lost 63 House seats, the most since the 1930s. Next, Republicans delivered an austerity-filled Sequester in 2011 (U.S. budget deficits moving from $1.1T to$550B over four years), then the Dems lost 9 Senate seats in 2014. Obama-Biden’s spending dreams were crushed–NOT this time. Team Biden will push the envelope, expand the use of Reconciliation (just 50 votes needed to pass legislation) to the limits of the Constitution of the United States and spend as no President has ever before. Inside the Oval Office, Democratic party leadership views austerity as the main driver of these painful beatings shown above. They are about to go “all-in”to make sure there is NO history repeat in 2022-2024.
“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to generous fiscal policy, which is always followed by a dictatorship.” Alexis De Tocqueville, 1845
The Sexy Metals Bull Case has its roots in politics, mathematically unsustainable promises, an ESG overdose, and a green revolution. The Lehman crisis is connected to today’s enormous monetary and fiscal response to the Covid-19 pandemic, we have been stressing the latter’s unintended consequences i.e. the Cobra Effect. Essentially, the moral of our story can be summed up in the old adage, “The road to hell is paved with good intentions.”We are on the doorstep of runaway inflation with destructive influence over the wealth of every investor. Already in the first inning-meaningful shocks are playing out; A Colossal Failure of Common Sense 2.0 is approaching.
In just 24-months, Uncle Sam has tossed more than 30% of GDP into enhanced fiscal deficits. Looking down the road ahead, the Congressional Budget Office is screaming some blood-curdling data. In 20 years, just about 30% of all yearly fiscal revenues will be forged exclusively to pay back interests on government debt, up from 8% this year. U.S. Currency in circulation increased by $1.5 billion this week, just an astonishing$226 billion surge in the last 12 months. MMT (modern monetary theory and UBI (universal basic income) are in style. Since January 2020, close to 9 million Americans have left the labor force. History tells us – it’s very difficult to take entitlements away once entrenched in society. The COVID crisis has created a structural problem, normalization will NOT come easy. Additional taxes simply won’t be enough to bridge the gap, so pressures to monetize the deficit will inevitably rise over the years. The Fed should be adapting policy today to minimize these risks, but they are in “social justice” mode.
We stressed this in December in our 2021 commodities bull case-when you lose the 2010 midterms by 63 house seats, the most since the 1930s, you don’t take any chances… Dems will GO BIG. While running deficits above $1.3 trillion throughout the next decade, documents obtained by The New York Times show that Mr. Biden’s first budget request as president calls for the federal government to spend $6 trillion in the 2022 fiscal year, and for total spending to rise to $8.2 trillion by 2031. Federal debt as a percentage of GDP is twice what it was in 1990, but interest payments on the debt are only about half as high.”Free Money!? In the fiscal year 2020, the US government’s net outlays for interest totaled $345 billion, Dems make the case that interest costs in the fiscal year 2020 amounted to only 1.6 percent of GDP—just half their peak value. In 2020, the government spent $6.55 trillion. This has a nice spin and ring to it, but a look deeper clearly points to MMT (modern monetary theory)/Fed asset purchases financing this bonanza, NOT international bond buyers. Balance of payments data shows that foreign investors did not step in to buy this additional debt. Instead, they were net sellers of federal government securities, to the tune of $75 billion. This was a change from being net buyers of $226 billion of these securities in 2019.
The Federal government is spending trillions of dollars to support the voters. Before the Pandemic hit, 60% of the budget was already soaked up by entitlements and interest payments on debt. Large-scale U.S. fiscal support is the foundation of the global economy and the U.S. military-powered world order.
With today’s endless central back accommodation-Lehman Brothers NEVER would have failed, fact. That ́s what “un-free markets” have become in a world where Adam Smith’s “invisible hand” has been tied behind his back. When the cleansing process of the business cycle is NOT allowed to function over longer and longer periods of time, the moral hazard buildup will trigger a transformation into another serpent, another beast. The next Lehman awaits, just a different flavor, dressed up in unrecognizable packaging.
The fundamental problem with aggressive accommodation from central banks comes down to a market foundation built on moral hazard. Each day, week, and month the Federal Reserve provides more juice, the leverage piles up in pockets all over the planet. Of course, central bankers often do not see the toxic leverage until it is far too late. We are led by academics, NOT proper risk managers. Herein lies the conundrum. While providing excessive accommodation(the Fed is currently making $120B of asset purchases monthly), when traditional shocks arrive–as they always have-the loose fiscal policy will be untenable and looser monetary policy, inconceivable. The market is ill-prepared today-far less so than under normal conditions historically.
In Jackson Hole last August 2020–Fed Chair Powell just told just that under their “new” framework, the FOMC never would have done the last hiking cycle. It’s clear, we have a far more accommodating central bank today, powering forth into a sea of moral hazards. Ironically, this is a highly similar environment that delivered us the Lehman Brothers fiasco in the first place. Good Lord.
Over the last year, policymakers have struggled valiantly to keep the economy away from theGreat Depression through the historic Pandemic. So illuminating are the cross-generational, political, and social divisions. A fierce struggle is approaching, and that threatens the future of the global financial system once again.
The current monetary fiscal policy excesses are on a hyper-inflation trajectory. Fiat currencies have never delivered true sustainability historically-they face a future of crisis. The unintended consequence of a fiscal and monetary overdose will ultimately kill fiat currencies. As a direct result, an early genesis tailwind is currently being enjoyed by commodities and cryptocurrencies. We expect a generational opportunity for commodities and see a decade ahead-where hard assets and value stocks dramatically outperform financial assets (Big tech’s collapse is near). Every investor must protect their portfolio. The ten-year bear market in commodities is over. There is still more than $16T in the Nasdaq 100–investors must be prepared for the decade ahead.
The Cobra Effect’s profile is inflation, not just of material goods, but of wages. We expect a worse repeat of the late 1970s and early 1980s inflation-which we lived and traded through in real-time, minute by minute. The only way to stop runaway inflation is a Paul Volker (which we describe below) style braking system delivered by central banks. Call it a “worse cure” which comes hand in hand with follow-on depression risk due to the magnitude of global systematic leverage and unprecedented M2 money supply growth in the United States.Just look at the data over the last three months of Core PCE, the Fed’s favorite inflation bellwether is growing at nearly 5%, which is a 30-year high. While economists say this is transitory, we believe inflation is highly sustainable looking forward. The 2010-2020 regime’s chemical makeup was far different than what is out in front of us.
In the end, the main buyer of U.S. government bonds is Uncle Sam himself. Even after trillions spent to support the bond market, again, foreigners have continued to be net sellers of Treasuries. And as inflation perks up, and the Fed will continue to be the deepest bid (buyer)through Yield Curve Control, then real rates will go increasingly negative, further stimulating inflation. A vicious self-reinforcing cycle is approaching which will prove to be ultimately unsustainable.