4- That this broad risk parity framework will blow up in due time and require massive Fed intervention is not a question of IF, but WHEN.
And when it does, that will be a bad day for all...
5- Note that in such a scenario, you certainly don’t want to be caught holding Ponzi companies that trade for 50x make-believe 2023 earnings (or anything of that sort...).
You’d want real assets.
6- And you’d want them soon, since risk parity is already getting a bit... wobbly:
1- We’re seeing a massive and unprecedented expansion of the money supply, and at at alarming rates. I don’t care what you think about M2, this sort of growth should not be dismissed.
Longer term, this will shape up to be ‘Project Zimbabwe’, as @hkuppy has coined it.
2- While this sort of monetary inflation first manifests in the capital markets (most noticeably as a boom in stocks), it eventually raises the prices of goods & services too (imperfectly proxied by CPI).
For this to happen, we need higher money velocity, now at an all-time low:
1- The Fed is fighting deflationary forces because nature is trying to collapse unprofitable zombie companies that specialize in capital destruction. Since our monetary system is debt-based, a collapse of zombie companies creates a collapse in the money supply, i.e. deflation.
2- Deflation can feed on itself because it causes asset prices to fall. When asset prices fall, the asset side of companies’ balance sheets fall. But the liabilities side does not. So equities are wiped out.
3- The Fed is deathly frightened of deflation, which they think are falling prices, because they associate that with the Great Depression of the 1930’s. To offset falling prices they print massive amounts of currency and use it to buy everything in sight to lift asset prices.
Why Inflation Will Kill the Ponzi Sector (and Catalyze the Long-Awaited Sector Rotation from Growth to Value)...
A thread.
This topic was a black box to me a few weeks ago. I will try to crystallize what (I think) I now understand.
Disclaimer: Nothing in this thread is original. It brings together pieces from random tweets and discussions I’ve had recently, most notably with @hkuppy, @pineconemacro, @greekfire23, and @contrarian8888.
1- Inflation causes long term rates to rise. This is illustrated by the Fisher equation, which states that the risk-free long term bond yield (i) equals the real rate (r) plus inflation expectations (π), i = r + π.