Market Lab Report / Dr. K's Crypto-Corner
by Dr. Chris Kacher
The sharp correction came largely in consequence of China's real estate Evergrande fiasco. Their markets are bouncing as the Chinese government has stated they would pay back local bond holders, but foreign bond holders may not get paid back. There could be a knock-on effect as counterparty risk exists not just with Evergrande but with other real estate companies as China's real estate bubble continues to expand.
History however suggests that markets will slow creep higher from here as the QE bubble remains intact regardless of what central bankers wish to claim with respect to the possibility of tapering later this year. C19 restrictions continue to cripple economic recovery. As one of many examples, supply chains are in disarray due to restrictive rules brought about by C19. Watch once restrictions begin to lift potentially later this year as more get vaccinated. The Fed will take a more hawkish approach wrt tapering especially due to strongly accelerating inflation. Major averages in the U.S. may then have their standard 20% corrections which have run like clockwork since 2010 whenever the Fed tried to taper or QE was removed with the only exception being the C19 black swan in early 2020. In each case, the Fed always stepped in and relaunched or accelerated QE to save the markets. The bullish effect for stocks, bitcoin, real estate, and hard assets has been massive driving populism to record highs.
Two Types of Deflation
Due to QE and recent events, we are seeing both the deleterious type of deflation along with inflation. Deflation can be caused by reduction of currency/coin from the system such as in the case of Ethereum, especially as ETH 2.0 gets underway next year, or from lack of buying due to HODLing from fear such as during the Great Depression of the 1930s. The latter has led to increased money printing which has then led to raging inflation. This has been observed numerous times throughout history.
Fueling the situation, C19 has turned into a raging endemic. It is a politicized pandemic that won't go away as higher order effects take hold. Such effects include spiking social unrest, loss of livelihoods, an indirectly related loss of health, soaring domestic violence, and record rates of depression and suicides.
There has also been a further breakdown of the supply chain as items in major countries including the US and UK are running scarce. In consequence, hoarding is coming back as memories of early 2020 return. Record numbers of cargo ships off key ports such as Los Angeles and Long Beach in California are at a standstill due to pandemic restrictions, labor shortages, and record-high prices for shipping containers.
QE is no match for C19 as the funds cannot be spent to improve the supply chain issues due to restrictions brought on by C19. Nevertheless, QE remains the last straw which has turned the bond market into a mess in a world that is drowning in debt. Indeed, after 13 years of QE, we are finally seeing inflation rear up in a manner that is outside even the control of the manipulated CPI.
As one of many examples showing spiking inflation, according to annual Zillow rent index which mines data on over 100 million housing units and is updated monthly, rental inflation has shot up from 1.5% to 6% over the last year and is showing no signs of slowing its rate of ascent. Contrarily, the CPI Rent Index shows the reverse of 4% down to below 2% inflation, thus more evidence that the CPI is not a real measure of inflation while the Zillow rent index is considered an extremely bonified data source.
Negative yielding bonds now stand at over $18 trillion. In other words, you pay for the privilege to loan your money out. The C19 pandemic fueled much of the global $40 trillion fiscal/monetary stimulus of 2020-2021 which pushed bond yields even lower and bitcoin much higher. Meanwhile, property has been a massively growing bubble in China for years. Real estate comprises 28% of China's economy. While Evergrande only carries $300 billion in debt they cant repay, the financial contagion across other companies could be virulent. As a result, the real estate Evergrande bomb in China could be $XXX trillion in fiscal/monetary stimulus for bailouts galore as China is levered to the hilt and Evergrande is one major domino to fall.