Monday, February 6, 2017

Deflaut, #Deflation, Not Hyperinflation is Coming #DebtCrisis

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Central banks have 'painted themselves into a corner' with programs of QE, the excessive purchase of government debt. As basically the sole buyer and owner of government debt, they cannot sell in large quantities to the public or private sector. The crisis comes as the bulk of the debt approaches expiration and needs to roll. Who will buy the new debt when central bank reach their maximum holding limit? Will the governments issuing the debt, chronically strapped for cash, be able to repay the expiring debt by issuing more of it? This is were the gears of the perpetual motion machine stop turning.

The outcome will be default. Default is inherently deflationary, not inflationary. Long term dividend cycles, more accurate than PE ratios, skyrocket during periods of deflation. The public goes broke, while smart money is presented with a buy opportunity of a lifetime.

Reader may be wondering if 'smart money" will be hiding in real estate?  Invisible hand says no!

Homebuilders, like financials, have been under performing the broader market since 2009 (chart 1 and chart 2).  Large cap stocks broke their 2007 high in 2013, while homebuilders remain well below it. 

Chart 1: Large Cap Stocks


Chart 2: Homebuilders


Headline: Why hyperinflation is coming

The stage is being set for a central bank-fueled hyperinflation to take place in several years.

Our position has remained the since calling the next turn of hyperinflation in 2012. Here is our epic piece on Zero Hedge. And while we are at it, we fully matched it with our bond call, which is the first pre-requisite.

Yes, we are currently in deflation. I could not agree more, but this time it is different, as assets will fork at a juncture and move beyond the expected behavior—the results of a failed monetary transmission mechanism.

Recall the London whale. What have we learned from it? That unless you bought the whole market, the remaining 5% not owned could derail prices—a situation where the tail wags the dog.


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