Friday, March 31, 2017

Reflation Is A Hoax

Propagated by 7.5 billion people, on 7.5 billion people aka. Social Mood...

The Idiocracy knows all about hoaxes, unfortunately they don't know a real one when they buy it with both hands...

Mutual funds % cash:

Early 2016 saw the nadir in global confidence followed by global coordinated monetary easing aka. "The Shanghai Accord" March one year ago. The "reflationary" boom was off to the races. Post-Brexit, the boom gathered steam, hiccuped into the election and then went vertical. A manic social mood blow-off top after 8 years. 

The violent post-Trump obliteration of global long bonds in anticipation of his vaunted tax cut artificially steepened the yield curve. The Fed wasted no time clambering onboard the fake reflation narrative. They were ALL gamed by Social Mood.

Now, no surprise, the "hard" economic data in no way supports the reflation thesis. Worse yet, two additional Fed hikes have served to flatten the yield curve, commodities, and indeed the entire reflation trade. A self-obliterating prophecy. 

Now, the deflation trade is coming back with a vengeance, only there's a twist. The "low volatility" yield stocks are end of cycle. Furthermore, the rotation from stocks to bonds is only fractionally complete.

The next rotation is not to low beta it's to Treasuries and "cash".

Deflation won. 

Consumer staples % bullish:

Unwinding the hoax

The bond market realizes that Trump is an unmitigated clusterfuck and therefore is taking back all of the capital lost to stocks post-election. Meanwhile, the Fed is boxed in - raise rates tank the economy, or ease back, kill the very reflation trade they helped kindle. All roads lead to obliteration...

Money flowing out of yield stocks back to bonds:

When I say that this is going to be painful, I'm just being polite.

Unlike what this guy said today, they won't be selling high beta stocks to buy low beta stocks, they will be selling ALL stocks to buy bonds. Turning that "leveraged market impact" into a no bid market.

But they've only been doing it for a month straight, so let's wait and see what happens...

Money (out) flow

Shouldn't have to wait long, here is the Nikkei with S&P downside gaps: