FULL Japanification
What comes next I call full Japanification. What we've had since 2009 was merely a partial Japanification of markets. Under full Japanification the Fed will ultimately have to take over the Treasury bond market. And until they do, we can expect extreme market dislocation.
Today we got another lower annualized CPI number. In the chart below, it's clear that the 2008 pattern of a late cycle surge of inflation is recurring, except on a much larger scale due to the pandemic. Historians will say that the pandemic inflation hangover obscured the end of the cycle and forced the Fed to keep rates too high for too long. The Fed was living in Paul Volcker's 1980.
What we also see in this chart is that in 2008 when the CPI reached this level the Fed rate was already 2% instead of 5.25% as it is now. Which means that the Powell Fed is way behind the curve and inflation is set to collapse and go negative.
Of course pundits who right this minute are cheering for imminent Fed rate cuts will say after the collapse that this was all due to unforeseen policy error. They will absolve themselves both of the error itself and of failing to see it in taking place in real-time. Unfortunately, history will say that the true policy error pre-dated 2009 which of course was the point at which the U.S. economy entered partial Japanification. The policy error being free trade and Globalization consisting of mass outsourcing and mass immigration both of which displace the middle class. These policies inevitably led to the 0% Fed interest rates that for a decade following 2009 subsidized investment in continual automation and further displacement of the working class. That was the strategic-level policy error.
The tactical policy error following a decade of 0% interest rates, took place during the pandemic and the doubling of the Fed balance sheet. This set-off record asset inflation which remains in place today. Of all of the policies implemented during the pandemic including low interest rates and fiscal stimulus programs, the only policy that has NOT been fully "normalized" since the pandemic ended was the balance sheet. The Fed has now become the BOJ and is using their balance sheet to artificially inflate asset markets and keep them inflated as long as possible. This policy has led to a distortion of the middle class balance sheet by temporarily increasing asset values while permanently increasing liabilities. The outcome of that divergence is now impending. And the end result will of course will be a deflationary ice age.
The other problem that's not priced into markets is the fact that the Tech super bubble is now very likely going to enter recession. As I showed on Twitter, the Cloud data center expansion has now lasted four years and first encompassed the pandemic work from home Tech mania and now encompasses the AI Tech mania. Two manias in one asset bubble. As we see below in the main panel, there was no pullback in demand in between those two manias and the Tech sector dominance ratio (lower pane) only pulled back modestly from the Dotcom level.
Of course this Tech recession I speak of is not priced into ANY Wall Street earnings model because it is taken as an article of artificially intelligent faith that in any type of downturn IT spending will continue to increase. Even though that was not the experience of the Dotcom aftermath as we see below, which had any even smaller demand pull forward.
All of which means that what will fall the hardest and fastest are the earnings of the most over-valued stocks in the entire market.
I predict that Tech earnings inflation will soon turn negative. And I doubt everyone will be happy about it.
