It’s my birthday so as a present to myself I’m going to explain to you inflation chuckleheads why you’re going to overcommit and lose your money.

You'll need to be familiar with the below, which details how inflation and deflation are not opposites:
Now that we know deflation and inflation are not opposites, let's look at the Fed's actions through this lens.

The actions tend to be (but aren't necessarily) fairly cyclical, and go something like this:
We've already covered the 'deflationary threat' (which is about solvency, not prices) bit in the thread linked at the apex.

So now let's talk about how the Fed saves us by kicking the can.
Fed-salvation lies in the fact that bonds are a most magical form of collateral, for you see: their size is malleable.

To understand this, we need to first understand how bonds are priced.
The value of a bond is somewhat complex, but ain't nobody got time for that shit so let's sacrifice some accuracy for simplicity.

Bonds are about yield and duration.

The longer the duration, the more moves in yield matter.
Duration acts as a multiplier, so for something like a 30y UST a 1% change in the yield can mean something like 20-30% appreciation in the base value of the bond.

Think about that.

A 1% change in yield swells collateral by massive amounts.

This is how the Fed saves us.
When the ghost of deflation rears its ugly head (like in March) they jam down rates, but it's not about "money printing" it's about

**boosting the asset side of aggregate balance sheets to prevent a deflationary cascade from taking hold**

They are putting out a forest fire.
If this still seems strange, recall from our previous discussion that inflation is about "herd solvency."

Because of this, simply jacking up the asset side of balance sheets (by whatever means available) is an effective firefighting tactic.

But firefighting is not without side effects.

When you boost the aggregate asset side of everyone's balance sheet, you give them more debt capacity.

And if you do this over, and over, and over, the message you send is that carrying a massive balance sheet is fine.
You send a message that solvency is for fools.

That cash on hand isn't worth anything.

This view has a tendency to get supercharged after a Fed dive and save.

Have you heard this message lately?
What do you think happens next?

Ponder for a moment what happens when most people within a society believe that solvency doesn't matter and money isn't valuable.

Well, they will begin to act accordingly.

And they will become price insensitive (fiat is worthless!).
And for a time, this price insensitivity does lead to 'inflation' (I'd take issue with the use of that term, but whatever - prices do go up), but the mechanics driving prices up *are the building blocks of deflation.*

The larger aggregate balance sheets, the bigger the risk.
Remember: balance sheets have been "helped" from a number of different directions.

Yes, the Fed did all the normal shit with rates this time, but consider also the policy maneuvers here to boost household balance sheets.

Those are all ending.
Many households have been simply *not paying* their largest expense: housing.

In surveys, there appears to be no understanding that this is coming to an end and what that means.

Households have maladaptively adjusted their balance sheets over the last year.
Note that currently, as a *result of inflation* P&Ls are under pressure (household and business) and this sort of pressure *will* play through to balance sheets.

As required spend goes up, balance sheets will come under pressure.

Debt loads are already tremendously high.
And so, soon enough, we will quite likely find ourselves back in that tricky position of staving off deflation.

Inflation at this rate of change, with high debt loads, poses serious deflation risks.

That's why this is such a tricky environment.
Prices will rise and give a consistent inflationary signal until balance sheets flip and go underwater.

Eviction moratorium ends now-ish.

Forbearance ends in September.

Labor participation is still low.

Solvency is reviled.

Deflation is about balance sheets.

Good luck.
This should read "...deflation is about..." sorry I got excited.

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More from @coloradotravis

10 Jun
Deflation isn’t real; deflation is a killer.

A long time ago deflation struck suddenly, savagely, and a family lost their house.

And a boy was confused.

This thread is for that boy.
This is Sally. As you can see, she has 100 wealth.

But because Sally lives in a complex world, there are may ways she could have 100 wealth.

She could have it like we see here: just 100 units of assets.
Or she could have a more nuanced net worth.

Like maybe she has 20 debt and 120 assets that make 100, like this:
Read 25 tweets
3 Jun
Thesis: today is July 24th, 2008

In a previous thread (below), we proposed that a repeat of 2008 is teeing up in macro assets. If so, let's play "what day is today?"

I think it's July 24th, 2008

Let's look at some big macro-y things.

Our friend the Dollar, then and now:
Dr Copper, then and now:
Read 7 tweets
25 May
By now everyone knows my favorite chart.

It's a chart of the yield curve (above) and then a bunch of macro stuff below, that shows how last cycle we also had a wild run up in commodities before a huge rinse.

Let's look at it in a bit more detail.
Here's copper. You can see that it made a big, rolling top in 2008 before rolling over.

As far as today, it's a little hard to call. Perhaps we're on track for the same sort of thing, culminating this fall. Or just up forever, who knows.

Inconclusive signal here.
Here's silver. Little more interesting in that both display a sort of sustained plateau (each variants on a Wyckoff distribution) - curious to see if silver rolls.

Definitely one to watch.
Read 10 tweets
23 May
I think one of the big deltas in perceptions around liquidity is that when it’s added, it’s permanent.

My sense is this is what inflation concerns are about: liquidity is seen as a permanent net add to a ‘container.’

I don’t think it works like that.
A better mental model might be that the container more like one of those kids’ playhouses with the fan that keeps them inflated.

“Liquidity,” IMO, is a bit more like “how powerful the fan is” in that scenario.
So if more kids get in the playhouse and it gets a bit saggy, you can turn up that fan some more to make the fabric more taut under the load.

I’m a playhouse that load is kids, in an economy it’s debt.
Read 9 tweets
18 May
Bitcoin and its potential to impact CPI (this is not a BTC bull or bear thread, just chill).

Okay so one of the things that's fascinating about crypto is that it has been a retail-led phenomenon.

Lots of people early into the trade have seen their NW increase by a lot.
So the idea that BTC's rise could be creating a pretty intense 'wealth effect' sort of makes sense.

And while many are dedicated HODLers, certainly not everyone is - people do sell a bit and buy things.

So this BTC bull run could well be a *driver* of recent spending...
But of course given the high volatility, the inverse is also true.

If you're mostly a crypto investor and you've just taken a huge haircut on your portfolio (I know you're still crushing or whatever don't @ me), you're less inclined to spend here and more inclined to wait.
Read 5 tweets
16 May
It's tempting to think of the entire tech sector as groundbreaking stuff. And it is, often, but that's not really the meat and potatoes of tech.

We, like Wall St., are mostly in the repackaging business.
Tech companies tend to start as awesome new stuff and then as they grow larger the marginal return on innovation decreases.

As companies grow, the profit incentive becomes *efficiency* (picking up pennies across the already massive user base) vs. early stage's *attraction*
And so this unfortunately leads them to become increasingly user-hostile. When attraction is what you need to be good at to grow, you invest in UX.

When extraction is how you grow, you invest more in UX but like... the dark patterns & "staff of psychologists" version.
Read 5 tweets

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