A runaway inflation reaction – Fat Tail Daily

‘You’re way too pessimistic. Too negative. A wet blanket. A Debbie Downer…’

–A long suffering reader

Yes…when we smell lilies, we look for the open coffin. But you don’t need us to tell you that everything is fine and that all you have to do is buy an S&P ETF and sit tight. You’ve got the president, Congress, and Wall Street for that. They invite you to enjoy the flowers…and look no further.

Our goal is to protect ourselves from the danger neither the White House nor Wall Street will admit…the threat of the Big Loss. You don’t need us for that either; you can peer into the coffin yourself. But it’s more fun if we do it together.

Our macro strategy is simple: avoid the Big Loss and wait until we can buy leading, profit-making companies at very low prices. Not because they are cheap, but when they are cheap. Individual companies can be cheap for a lot of different reasons, some of them terminal. But when the whole market is cheap, we have a good chance that it will be less cheap going forward.

Right now, however, stocks are expensive. After tax, the dividend yield on the S&P 500 is only about 1%. That’s not enough to offset the risk. And the gathering dots suggest that the risks are far greater than most people think.

Total credit market debt today is about $110 trillion — or nearly four times GDP. In 1971, there was only $1.6 trillion in debt…compared to a GDP of $1.9 trillion…or less than even one-times GDP. Either today is freakish…or the 1970s were. But the numbers show debt averaged about 1x GDP…until the US began ‘printing’ money in 1971.

In other words, the real, sustainable value of US credit-funded assets is likely still about 1x GDP – or about $30 trillion. But there, in the casket, is $80 trillion more — zombie assets kept semi-alive by credit infusions. Sooner or later, they will be unplugged, either by default or inflation. That’s the Big Loss we see coming.

News flash, AP:

US wholesale prices surged 4% last month after the war in Iran sent energy prices flying

Just to be clear about it, the feds want inflation. Inflation keeps the bubble expanding…while the real value of its debt actually goes down. Inflate…or let the bubble economy die. That’s the choice. And the feds — as long as they are able — will choose inflation.

Since the feds rarely get what they intend, however, a good guess is that we will see an unexpected sharp deflation…and then an unexpected runaway inflation in reaction.

And here is the answer to the question you didn’t ask. The war in Iran? Why? Illegal tolls? Nuclear bombs? Regime change? Making the world safe for Iranian democrats? Is it because Israel has 324 Congressmen on the payroll? Because Israel’s US moneybags funded Mr. Trump’s election victory…along with the press, and the leading think tanks in Washington? Is it because they also have a very fat and very salacious file marked ‘DJT’?

All of those things may have played their parts. But suppose those conditions did not exist. The US would still need to inflate the economy. And for that, it needs to spend money…and create more credit (money!)…or the bubble economy will die.

Yes, there are deep, ‘primary’ trends that sweep us along, like the plastic bottles on an ocean current. Inflation is not a choice; it’s a must. So far, since the new ‘federal reserve notes’ were introduced in 1971, they have lost 99% of their value (against gold). When the currency loses all of its value, the economy can no longer be inflated by printing more of it. Then, they will need a new currency.

But we are still a long way from that. The empire only peaked out around the turn of the century (1999). Its money peaked out around the same time…in February 2001 you could buy an ounce of gold for just $265. Inflation-adjusted, this was the lowest price for gold since the Funny Money Era began. And then, two decades later came the other key peak — in bond prices. In July 2020, bonds peaked out after a 40-year bull market.

‘There’s a great deal of ruin in a nation,’ said Adam Smith. Squeezing out the rot — like lancing a boil — will be painful and disgusting. And it will take decades.

Fortunately, Dr. Trump is on the job — speeding things up. His budget proposal is part of the plan. If it lacks anything in jackassery, it makes up for it in jackboots. Stephen Semler:

The gratuitous cuts to civilian agencies suggest the goal is smaller government. But that’s not the case — next year’s budget would still be $361 billion larger than last year’s. Trump’s concern isn’t the size of government; it’s what the government does and who it does it for.

So what does Trump want the government to do in 2027? More war, more (militarized) policing, and less of everything else. Based on his budget request, Trump sees little point in government outside performing those first two functions. War and policing receive record funding; funding for all other government functions is cut by $300 billion.

Of the $2.2 trillion Trump requested, 80% — $1.8 trillion — is tied to war and policing.

But don’t worry, Congress will never approve Trump’s budget. Instead, it will increase military and police spending (a matter of national security!), but not cut domestic spending. From a financial perspective, in other words, it will be worse. It will guarantee the two things that are fatal to a great empire — inflation and war.

Stay tuned…tomorrow, how to make a billion dollars.