The New Permanent Plateau Of Delusion

If you told anyone thirty years ago that the U.S. deficit would be 6% of GDP, the AI bubble would be bigger than the DotCom bubble, stock valuations would be at all time high, consumer sentiment at a 50 year low, the Strait of Hormuz is shut, the U.S. is waging an ongoing trade war against the entire world, and Donald Trump was president, anyone would think that investors would be panicking. But they're not. All of that risk can be easily swept away by simply ignoring it. The Wall Street Journal may as well be written by Hans Christian Andersen.

It's fairy tales for grown-ups...

Here we see that after one full month of war, investor allocation to stocks remains near cycle highs:

https://www.aaii.com/assetallocationsurvey

Whenever I read a mainstream investment article I have to remind myself that the target readers are buy and hold investors, not traders. Buy and hold is the religion of the retirement class and it represents the majority of assets under management. Which is why somewhere along the way responsible investing morphed into mindless money flow, regardless of risk. And therefore, the financial media industry migrated to fairy tales for investors living in the retirement Twilight Zone. Every investment article is now laden with top down platitudes extrapolating the unprecedented growth in market valuations into happily ever after.

This week in a rare admission of truth, outgoing Fed chair J. Powell warned that the U.S. debt is reaching unsustainable levels:

As we see in the chart below, what is the most scary about the sky-rocketing national debt is that consumer sentiment has collapsed, therefore none of that debt is benefiting the working class. It's all accruing to the wealthy. The wealthy are DIRECTLY benefiting from the bankruptcy of the country through their massive tax cuts.

Compare the 2009 low when wealth and consumer sentiment were correlated versus now when they are massively diverging:

Among the core FALSE beliefs of the buy and hold religion is that central banks have banished all REAL recessions that could implode the unprecedented retirement wealth bubble. Apparently no one remembers that in 2008 central banks dropped rates to 0% AND massively increased their balance sheets, but the bubble still imploded.

But the newest lethal narrative is that AI will implode millions of jobs to the benefit of the stock market. In other words, the retiring class believes that THEIR wealth is now disconnected from the health of the economy. Which explains the chasmic gap between retiree wealth and the ongoing implosion of the working class as indicated in the chart above.

Therefore today's stock bulls have been systematically desensitized by our descent into a Third World country. They have been euthanized by the overuse of monetary policy to levitate markets while the economy collapses.

Which means that the key question on the table is how far will stocks decline in an AI depression: 40%, 50%, 60%?

But the second key question is how will policy-makers restart the economy once it falls into extreme deflation. And the answer is that they will print even MORE money. And the 6% deficit will explode to 15% or more. Which means that even if stocks eventually recover their all time highs, they will do so in a currency that has been effectively destroyed. In other words, the REAL rate of return will remain negative in perpetuity.

Buy and holders will NOT thread this need between incipient deflation and long-term inflation as indicated in the chart below. That would require being mostly in cash now and migrating to gold over time. AFTER the asset bubble collapses.

Which is why I am now saying that stocks have reached their REAL all time high.

At the new permanent plateau of delusion.

And the next 100 years will be nothing like the last 100 years.

Which is the ultimate delusion.