2016-05-11 2pm EDT  |  #stocks #bonds #inflation

Not much going on this morning. I sound like a broken record, but I continue to be amazed at the negativity regarding the stock market. Even though the S&P 500 is within spitting distance of all time highs, most investors are abandoning equities en masse.

Meanwhile, bonds, even at these absurdly low yield levels, continue to attract inflows.

Every time I open my research feed I am confronted with more doom and gloom. The Reformed Broker Josh Brown sums up this new found pessimism:

I’ve read many books on the history of financial markets (like more than four dozen) over the last 20 years. I eat, sleep and breathe this stuff. One of the common threads of every financial or asset bubble throughout human history is that they all have a repudiation phase - a moment where all the lies that had been built up alongside the excess are aired out in public. Even reputable companies and players get caught up in it.

As Jeff Lebowski said, “New shit has come to light, man.” In the repudiation phase, belief is nowhere to be found. Skepticism becomes the order of the day.

We’re there now. New shit is coming to light every five minutes. Every reputation you thought was untouchable and every omission you’d accepted because it was already accepted by the crowd - all back on the table for discussion (dissection?).

I will never in a million years claim the end of this huge credit expansion super cycle will return us to some sort of normal balanced economy any time soon. I expect it to end badly as much as the next guy, the only question is the form the end game takes. The truth of the matter is that we aren’t as rich as we think. Investors have started to figure it out. A new skepticism has overwhelmed the market. I blame the Federal Reserve. January’s swoon scared a lot of investors. This is the problem with a balance sheet constrained economy. It doesn’t take much to put the fear of a deflationary collapse back into their minds.

Yet investors always hedge for the last crisis, not the next one. They are rushing into risk free Treasury and other sovereign bonds with the idea another 2008 collapse is right around the corner. Meanwhile, every major Central Bank except for the Federal Reserve is expanding their balance sheets at unprecedented rates. And the only reason the Fed isn’t tagging along is because they already did more than anyone else during the 2008-2014 period. Central Banks’ commitment to restarting inflation is much more steadfast than market participants assume. There is simply no way authorities can allow another deflationary collapse. Look at their actions, not their words. They play lip service to the idea of preserving the purchasing power of money, but when the going gets tough, they print. All of them. Even the Germans.

The market’s disbelief that printing will work, only makes the Central Banks need to print more. There will obviously be squiggles along the timeline, but make no mistake, the end game is not a deflationary collapse. No, it will end in a fiery explosion to the upside as debts are inflated away. It has happened for millenniums, and it will happen again.

Investors are busy selling stocks and buying bonds. I will take the other side of that trade…

Thanks for reading,
Kevin Muir
the MacroTourist