Thread by @BuysideHustle

What can cause the market to crash 70%+? I've been thinking more and more about this question as almost nobody, except @DaveHcontrarian, thinks it's a possibility.

Important thread⬇️for anyone invested in $BTC $ETH $SPY $QQQ #FANG or any other risk asset.

Let's start off by saying that I am in no way giving advice on what to do to prepare for a potential crash in the markets.

I am only giving my thoughts on what could happen that would lead to a massive correction and how I would not be surprised if it did.

Let's take a step back and look at the current environment:
-> Retail speculation at all time highs, look at any highly leveraged stock with worthless equity and madness going on in #crypto land and #NFTs
-> #liquidity near alltime highs, consumers flush with cash from stimmys

-> Every company is having a hard time finding labor, 10 million #job openings in the US and nobody wants to work
-> Unemploy rate rapidly declining back to pre-pandemic levels
-> Huge inventory build needed to normalize levels
-> Ongoing massive stimulus with infrastructure bill

Now let's look at what happens in the next few months:
-> Unemploy. stimulus rolls off and consumer cash levels start to decline
-> Companies continue to raise wages to incentize workers to come back, unemploy. rate declines further
-> Big demand from companies replenish invent.

Economy is literally on 🔥 right now AND STILL the @federalreserve continues its massive #QE program and @JoeBiden and #congress continue heavy deficit spending

So what are the implications of all this?

Simply put, accelerating #inflation. Here are the current signs:
-> CPI at 5.4%
-> PPI 7.3%
-> CPG companies like @KelloggsUS warning accelerating prices in 2H20

And to add icing on the cake, rent inflation is going to double digits. This alone makes up 1/3rd of the CPI basket

Well the government says this is all #transitory. All caused by disruptions from the pandemic, which should normalize right?

I mean inflation hasn't been a problem for the past decade, so why should it be a problem going forward?

Transitory? No chance. If any case, COVID is here to stay, supply chains are forever changed, and #wages are increasing.

For the past decade, we had very little wage inflation. That has changed. Wages are rising massively as there are 10MM jobs open and nobody wants to work.

So why all this talk about inflation? What does inflation have anything to do with market crashes and current valuations?

Let's learn some basic #finance ⬇️

Everything, and I mean EVERYTHING, is driven by rates and monetary conditions (i.e. government $$$ printer) in this market.

Low rates + very easy conditions = best environment for risk assets.

So how does inflation impact this equation?

Let's assume my thought process is right and inflation is not only persistant but accelerating. The @federalreserve is then trapped and has to

1) Increase rates, and/or
2) Stop printing so much money

Otherwise, high inflation will destroy the economy as consumers get crushed

The only thing supporting risk assets right now are very easy monetary conditions. So what happens when this dynamic changes. What happens when the Federal Reserve is forced to do something that it doesn't want to do?

Inflation is a structural issue now and harder to manage.

Every correction in history is caused by increasing rates and tighter monetary conditions.

We are about to go from the easiest monetary conditions I have ever seen in my life, to very tight monetary conditions in short order.

Inflation -> Rates Rising -> Valuation compression

Simple DCF: higher risk free rate, higher discount rate, lower valuation. It's that simple.

Train wreck for bonds $TLT, #equities, any risk asset in general.

Maybe I'm wrong, who knows. But conditions are lining up perfectly for this to happen. Could take six months or two years before the #fed is forced. We will see.

Just my two cents. @42macroDDale @gamesblazer06 @RaoulGMI @42macro @Hedgeye @leadlagreport