The chart that stains Bernankenstein's underwear:
The Velocity of Money is collapsing. More money in the monetary base, but less is making it into the real economy...
I just read this article on Zerohedge about mega-investor Kyle Bass who is telling us in very cogent terms that inflation is inevitable, therefore (unspoken) everyone needs to buy gold now to protect themselves. In my naive younger days, before having been tricked a few times - ok more than a few times - I would have surely jumped onboard the gold bandwagon and bought as much as possible, or until my wife realized what I was doing (again)...
First off, Kyle Bass like John Paulson, I wrote about recently, made his big money betting against the mortgage market at the height of the housing crisis. He didn't "predict" the subprime crisis, as is asserted, - anymore than I predicted the sun will rise tomorrow. At the height of the subprime crisis they were giving loans to anyone who could fog a mirror. Everyone knew it was only a matter of time before it collapsed. However, like Paulson, he was one of a handful of well-connected investors who found a way to make a profit off of it, using privately traded derivatives. Don't forget that by the apex of the crisis, pretty much all of Wall Street was betting against the housing market which is why Lehman failed and why the Fed bailed out AIG i.e. to be the counter-party for Goldman's bets against subprime.
Where was I - like Paulson, now Bass is sitting on billions and he has to have an investable thesis for his money. So he looks at the chart above of the velocity of money and deludes himself into thinking that at some point that chart will start going up rather than down. What he is really believing - for some unknown reason - is that somehow the middle class who drive this economy, are magically going to gain additional income and spending power and start driving this economy higher, the way they have done for the past 70 years. Yet, like all Wall Streeters, he also forgets that the stock market would not be this high in the first place if profit margins hadn't been outsourced to the highest level in U.S. history. They see no connection between the overwhelming greed of the past four years that liquidated what was left of the middle class, and the fact that economic activity, the velocity of money, and hence inflation are all now deflating. Last time, these greedbots made money when millions lost their homes, this time they are hoping to score big when the middle class loses everything else...
Hedge Funds Are Call Options - heads they win; tails someone else loses...
Meanwhile, he in no way contemplates that a "Minsky Moment" could collapse global assets, because he would have no place to hide. He certainly would not hide in Treasuries which are the lowest yielding instrument on the planet right now. Therefore, he and all of the other inflationists, are left to believe that this entire shit show will continue on a slow burn higher until that one day when inflation takes off and gold heads for $4,000. If he sat in treasuries, he would make no money and lose his investors. If he sits in gold and it goes tits up, he walks away, leaving his investors holding the bag...
Most importantly, if that chart above of the velocity of money is already heading down with the stock market at a five year high and as overbought as it has been since the top in 2007, then wait to see what happens when stocks roll over - hint: it won't be heading higher.
