A.I. = Asset Inflation
It's fitting that the A.I. Tech echo bubble is coming at the end of the asset super bubble that began in the depths of 2009. Which is why this monetary experiment is ending amid rampant denial and delusion as to what comes next.
Anyone who wants to understand where this heading, can see what's taking place right now in China. As we see below, China's property bubble is imploding in real time, despite the fact that the PBOC is doing everything possible to stop it from happening. Nothing is working. The pain has only just begun. China is now exporting deflation via their collapsed currency and a glut of cheap exports. The EU is currently mulling a massive 55% tariff on EVs to protect their market.
China property prices. Deleveraging is deflationary, especially to asset prices.
Here we see Chinese large cap stocks. Pundits are calling this a "new bull market". It appears they already forgot about last year's bull market.
China is the new Japan.
Remember China currency devaluation that imploded global markets back in August 2015? Well due to the strong dollar and collapsing every-other-currency, that's back on the table again. By the way, that was a deflationary event:
"The last devaluation, in August 2015, saw China weaken the yuan by more than 3% over a couple of days, a surprise move that sparked a selloff in global stocks and commodities."
"...every day that goes by, the currency policy [supporting the Yuan] they are implementing is constraining their ability to providing sufficient easing to the domestic economy”
What's happening in the U.S. and Europe is following the same trajectory - the over-reliance on stimulus has created a monster asset bubble. The normal sequence of events in a typical business cycle is for the cycle to end with rate hikes which brings about recession and deleveraging. However, central banks decided that can't happen anymore. Back in 2022 the Fed and ECB raised rates, but there was no recession and no deleveraging. So what happened? The Fed and ECB began promising imminent rate cuts. Therefore, instead of the bubble deflating, it has grown far larger in the meantime, following the same pattern as China, prior to meltdown.
This week, we've reached the Volcker Moment when the Fed is forced to pivot back to hawkish in order to quell resurgent inflation. The same sequence of events happened in the U.S. during the early 1980s - the Volcker Fed was too quick to ease, so they had to tighten a second time in a row, and the second tightening crashed the economy.
We have every reason to expect the same will happen right now. In fact, it's likely already happening, because the Fed is using lagged data as their rationale for pivoting back to tightening when the economy is already showing signs of imploding:
"People are feeling pessimistic about the job market, business conditions and they're less optimistic about their family's financial situation, the survey found."
As we see below, U.S. Consumer sentiment is lower than it was in 2019 and in 2021 even though the stock market bubble and the housing bubble have both grown larger in the meantime. Why? Because unlike today's clueless economists, the average American knows this economy is a house of cards built on a mountain of unsustainable debt. They haven't been fooled by the smoke and mirrors attending this debacle. Consumers have a debt-adjusted view of the economy.
All it will take for consumer confidence to final implode is for the Fed to reach the MARKET's breaking point on rates, which is likely happening this week.
In summary, the Asset Inflation (AI) bubble is merely hiding the fragility of a late stage economy on the verge of collapse.
Position accordingly.
