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MY CLUBHOUSE THESIS: HYPERINFLATION IS CLOSE

Discussion in 'The Kruse Longevity Center' started by Jack Kruse, Mar 11, 2021.

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  1. Jack Kruse

    Jack Kruse Administrator

    When you are investing in macroeconomic trends things can take a long time to play out as this thread shows but inflation is now clearly here now. That’s why you need a good narrative, to shape the way you think about a bet without being distracted by all the noise.

    When it comes to Bitcoin we’ve had a solid narrative for years.
     
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  2. Jack Kruse

    Jack Kruse Administrator

  3. Jack Kruse

    Jack Kruse Administrator

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  4. Jack Kruse

    Jack Kruse Administrator

    Total US debt as a percentage of the broad money supply has been on a persistent downtrend since 2008. Debt is still increasing, but the difference is that money supply is increasing faster than debt. This is one of the many reasons inflation is rising now.
     
  5. Jack Kruse

    Jack Kruse Administrator

    S&P 500 e-MINI FUTURES fall below the 50day moving average.
     
  6. Jack Kruse

    Jack Kruse Administrator

    The next variant will be called Coronation.
    [​IMG]
     
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  7. Jack Kruse

    Jack Kruse Administrator

    10-year Treasury yield at 1.37% in overnight trading. What will the yield curve tell the world?
    You don't lose the game, you just run out of time.
     
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  8. Jack Kruse

    Jack Kruse Administrator

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  9. Jack Kruse

    Jack Kruse Administrator

  10. Jack Kruse

    Jack Kruse Administrator

    The picture is getting worse by the day. Each month they taper we will see slower growth. The macro picture right now is very nasty. I don't know when inflation will break, given the new data. https://www.cnbc.com/quotes/10Y2YS
     
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  11. Jack Kruse

    Jack Kruse Administrator

    Lacy Hunt tune is changing on inflation now as you can see at the 16 min mark. He makes the error that we are tapering when the Fed balance sheet has expanded in the last two weeks. Strap in because 2022 is not going to be nice to anyone.

    Our monetary system faces a paradox. Today, the system relies on more debt being issued continually to keep markets functioning. And yet, the more debt created the more growth slows AND deflation prevails. The dollar shortage is a feature of the debt increase too.

    Lacy Hunt's arguments do not hold water for me now.
    I don't believe he has any clue what's going on frankly. Velocity helps me understand when there is productive credit out in the system. Right now, debt is very unproductive. The dollar is strengthening BUT consumer prices are high and going higher in 2022. Hunt wants us to believe that inflation is a lagging indicator. The problem is inflation is not lagging.......It is rising as we speak.

    FED POLICY HAS STOLEN GROWTH from the middle class. The Fed/Treasury stole $20,000 from middle-class earners in 2021. The Debt has a cost, it just isn't hyperinflation. It's this. Much more pernicious.
    [​IMG]
    It is the combination of both—the debt disease coming first, then precipitating the dollar disease—which works the greatest havoc.

    Debt is a factor of production. Once that factor is overused, growth slows and deflationary forces prevail. The "debt disease" is a disease all its own. Persistent slow growth, low rates, and small margins for profit.

    However, at some point, the "dollar disease" kicks in. A dollar shortage is inevitable with near-zero interest and poor growth. One day, the music stops, and the dollar's value spikes up with a rising DXY.

    The two diseases act and react to each other...Just as a bad cold leads to pneumonia, so over-indebtedness leads to deflation...And, vice versa, deflation caused by the debt reacts on the debt.
    Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debts cannot keep up with the fall of prices which it causes...

    In that case, the liquidation defeats itself. While it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed.
    Then, the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owed.

    Then we have a great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not tending to right itself but is capsizing.
     
  12. Jack Kruse

    Jack Kruse Administrator

  13. Jack Kruse

    Jack Kruse Administrator

    % of new corporate loans extended to companies with debt/EBITDA >6x now at record-high. Negative risk-free real yields, little-to-no volatility and very tight credit spreads push the private sector to take more exposure down the risk curve. Capital misallocation everywhere.
     
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  14. Jack Kruse

    Jack Kruse Administrator

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  15. Jack Kruse

    Jack Kruse Administrator

    The growth of M4 has collapsed from 30.6% in June 2020 to 5.1% as of October. We won’t see M4 growth for December until January 31st to see first evidence of Powell's taper. But we’ll know MUCH more given negative multiplier effect on February 28th.

    M4 money supply is defined as a measure of notes and coins in circulation (M0) + bank accounts. It is a broader definition of money supply because it includes bank accounts and not just notes and coins in circulation.

    M2 went up steadily in the 1970s. GDP followed that money growth.
    Lacy's claim that Velocity matters in analyzing the 1970s and inflation is made in his video above.

    Inflation occurs, to Lacy Hunt's way of thinking, not simply because of M2 growth, but because of separate dollar devaluation policies, he mentions going off the Gold Standard as one such policy. He mentions international trade as another.

    Two interesting questions pop up here:
    1) does velocity actually matter?; and
    2) is the dollar being devalued in the 2020s?

    Central claim by Lacy Hunt here is: Money Supply Growth (M2) is connected to GDP growth. Velocity is the measure of the effect on GDP of each new M2 dollar. (V = GDP/M2)

    [​IMG]
    Why do I think Hunt is wrong?

    When you take Lacy's argument and graph the Velocity of money to GDP from the Fred Database they seems to have little or no correlation with each other. (above pic)

    Money velocity decrease is like the hypoglycemia in a diabetic. Low blood sugar is a common symptom found in diabetes but does not represent the underlying disease itself. The problem is that, in our case, the FED doesn't just boil down to eliminating the hypoglycemia as symptom, with some sugar, but tries to treat diabetes with more sugar. Giving the patient sugar to cure low blood sugar actually increase their cause of death in the future.

    MORE isn't MORE, its less. It "fixes" today's problem by making tomorrow's problem worse.

    To spice things up, really really smart people think that velocity isn't relevant anymore at all like Jeff Snider.

    I believe Lacy would respond with a different graph and analysis than what is in the picture above to save face and prove his point. For example, he'd likely
    look at charting GDP growth PER CAPITA instead of GDP nominal growth.
    [​IMG]

    I took the liberty to map GDP Per Capita annual % change ALONG WITH velocity % change.

    [​IMG]

    Lacy would further highlight that the Loan/Deposit Ration FOLLOWS velocity. Which allows one to infer that as velocity drops, PRODUCTIVE DEBT drops as well. In other words, there are LOTS of zombie companies surviving off of bad loans in our economy.

    MEANING that low velocity indicates low GDP growth. Dropping velocity means dropping GDP growth. Important to note, there is still growth, but growth is weaker and weaker as velocity goes down.
    M2 rises, but
    a) each new dollar has less effect on GDP;
    b) banks lend less.

    What is a secular decline in velocity telling us? Declining velocity is telling us that increases in money supply are not going to goods and services or "final sales" which boosts GDP. The money is rather sitting in financial assets or some financial account.

    If the government increases debt and hands you $100, and you buy shares of the SPY, GDP doesn't budge Velocity captures this on a coincident basis For various reasons and incentives, it makes more sense for people to take $$ and put it into financial assets or accounts.

    Same thing with the money multiplier which is measured as M2/MB. If the Fed increases the MB (what they control) and deposits increase on the other end, there is a 1:1 increase in M2/MB which drags the money multiplier down.
    [​IMG]
     
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  16. Jack Kruse

    Jack Kruse Administrator

    If the MB increases but there is a credit effect from new loans etc, then M2 can rise more than the MB, and the money multiplier increases. When velocity and the money multiplier fall together, that is strong evidence that money is trapped in financial assets/accounts

    That is what is going on right now to drive asset bubbles.

    We have to move forward with the idea that GDP is our best series. If you don't like nominal GDP, there is no data set that will work for you So if we keep nGDP and use M4 divisa including TSY securities as our money supply measure, we see what our new velocity looks like.
    M4 divisa is a broad aggregate, including negotiable money-market securities, such as commercial paper, negotiable CDs, and T-bills. Including TSYs can be informative because, in our system, TSYs are used as money at times.

    If we divide GDP by M4 divisa, we get our new velocity measure which also collapsed after COVID and ticked down again in December of 2020.
    [​IMG]

    If we chop off the COVID decline, we can see velocity in a downtrend, not as serious as M2 velocity but the messaging and signal is consistent that the increases in money supply are less effective at generating GDP = increasing the heroin dose has less effect on the ddict over time.
    [​IMG]

    The same goes for our new measure of the money multiplier. Defining money is very hard and there are a lot of competing measures. All measures, however, show the same trend of declining V and declining credit multiplier.


    [​IMG]


    If we want to fix the long-term trends, we need to figure out how and why new money refuses to go into the real economy and holds a preference for financial assets/accounts.


    DXY showed strength in 2021


    [​IMG]
     
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  17. Jack Kruse

    Jack Kruse Administrator

    The Fed only cares about power and centralization. They could care less about inflation. The central bank believes they can print dollars perpetually without inflationary consequences. This notion became a basic fundamental of Modern Monetary Theory (MMT) They seem to forget that money printing can lead to deflation too. And that is a nasty bugger.

    It appears that MMT is pushing us to a deflationary spiral now. Inflation first followed by hyperinflation quickly, and then massive deflation accross the board.

    Then we have others who point out that today's inflation is not like the 1970s but more like the1940s because when sovereign debt is high, interest rates stay low even if inflation runs hot. That to me is weak sauce because the 1940s and 1950s showed an expansion of increasing GDP. Even the 1970s showed good GDP outside of two years in the decade.

    https://www.thebalance.com/us-gdp-by-year-3305543

    I think today's inflation reminds me of 1929-1933.

    We now have COVID-panicked Twitter MDs & MPHs seem to have gotten everything wrong about this pandemic because they believed the government scientists who were creating their own science to create a facade using COVID to cover the sins of the bankers and the deflationary spiral the debt was really causing.
     
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  18. Jack Kruse

    Jack Kruse Administrator

    I wonder how many people remember it took until 1954 for the DOW to recover the highs of 1929? 25 years. How long do you think it take to recover the 2022 highs in SPY with the levels of debt we have today?

    The FANG overweight in the market now hides a multitude of sins in SPY
    Last week, when the S&P 500 closed at a 52-week high, 334 companies trading on the New York Stock Exchange hit a 52-week low, more than double the amount that marked new one-year highs = symptom of a collapsing GDP
     
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  19. Jack Kruse

    Jack Kruse Administrator

    ^^^^points out why owning an index fund today is pure insanity.
     
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  20. Jack Kruse

    Jack Kruse Administrator

    And now as 2021 sets on this thread.........where will it go in 2022?

    This New Years' blog points out the way.
    My last New blog of 2021 is now out: First, you must think, and then you must act. The eye can only see what the mind can comprehend. If you don't think it first, it will not happen. 2022 NEW YEARS WISHES FOR MY TRIBE.............. https://www.patreon.com/posts/2022-new-years-60434259
     
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