This is a liquidity trap. There will be a run on the market

by jf286381

Banks are being conservative which might suggest that all of this is “priced in”.

They’re borrowing like crazy with the Fed rate at 0.25% and they’re using that capital to pay down old, higher interest liabilities i.e. collectively, they’re handing it back to the Fed. None of that looks good or sounds good from a short-term perspective; and little of that QE will actually hit mainstreet — at least in the period when it matters. But paying off debt is the only way out of this spiral — especially when investors are scared (saving vs spending mentality), credit risk is poor, and economic growth is stifled. This is a deflationary spiral that could last 3-5 years; and QE can only mask the bleeding so much before it becomes detrimental to our future. Just look at Japan in the 90’s. You can’t fight lack of demand without meaningful control of the price lever.

Point being, the following realities are inevitable:

  • People will hoard the money supply
  • Lending will freeze despite a near-zero interest rate
  • Economic growth will be stifled as demand/investing remain low
  • Most of the money supply will be spent on commodities and debt obligations
  • New bubble will form when the real value of certain assets (housing etc.) gets distorted. This will also form the basis for our breakout
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This is a liquidity trap. There will be a run on the market — JPow has been printing to “price” all that in. For the past three weeks, the Fed has been acting as ballast to buy time for monetary policy to pivot. Now banks are in a strong cash position with foreknowledge of what to expect. So we should expect the floodgates to open and the carpet to finally get pulled. Stocks will crash again (hoarding cash), and harder; followed by a multi-year theta market marked by incremental inflation until we transition to a much needed growth period. Or we’ll try and print our way to inflation — with consumer spending as the operative variable.

Welcome to the debt bubble! FYI, whatever medicine we use to resolve this will ultimately form the cause of our next bubble. So on and so forth…

  • Globalization created cheap external labor which spurred economic investment/growth. This bubble created wage imbalance
  • Wage imbalance resulted in risky/unregulated/low interest lending which was a boon for big banks and consumer spending for nearly two decades. This bubble created debt
  • Debt caused the mortgage crisis of 2008 which resulted in a massive recession second only to the Great Depression. This bubble created QE
  • QE caused the liquidity trap of 2020 which resulted in a massive deflationary spiral akin to the recession. This bubble was created by excess and unnecessary money supply in a period of low demand
  • Wage increase (through Federal stimulus check or other) will get us out of recession. But again, it will also form the cause of our next bubble.
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Cash out high. Assets will be worth less than cash. Then pay down your debt or invest when we finally touch bottom. The environment looks exceptionally bearish for months and years to come. Everyone is scared to say liquidity trap because that will cause equities and lending to tank. But I encourage you to scream it.

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.