2023: (Fluid) 2-Year Roadmap

End-stage of this 4th Turning = “Long and variable lag” before waterfall

The year started with a lot of happy talk about “soft landing” and “no landing”, — which all came to a screeching halt with first sighting of a Black Swan (aka evidence of the Fed having “broken something”) when Silicon Valley Bank became Bear Sterns 2.0 (i.e. a niche player going insolvent) in the face of a 1930s-style “bank run”, and got taken into FDIC receivership. The combined size of failure is not insignificant by historical standards:

This shouldn’t come as a surprise since every past Fed tightening cycle resulted in a financial crisis (see chart below). Why should this time be different?

There are always multiple victims in a financial crisis. The current candidates are:

The SVB failure was quickly followed by Silvergate, Signature and First Republic. The FDIC, the Fed, and the Treasury jointly introduced a new “emergency lending facility “— BTFP (making the bank “whole” for one year)— in addition to the already existing “discount window”. There was a spike of borrowing from both right after SVB failure in March, but the borrowing seems to be leveling off now:

Speculative shorting of regional banks may have been abated, but “bank walks” continue as depositors move their bank deposits yielding 1% to money market funds yielding 5% at the speed of light (read: on a smart phone). Meanwhile, unrealized losses from long-dated Treasuries are still on the books of all banks:

To keep their depositors, some regional banks raised their interest on deposits but that raised the banks’ cost of capital and put a real squeeze on NIM (net interest margin) and net interest income:

So some banks will likely fail. Will Powell rescue them? Almost certainly not. Per Powell’s tightening plan (to tame inflation with recession, necessarily “breaking something”), all these failed regional banks (source of funding for Main Street) is “a feature and not a bug”. Here’s the irony: Regional banks are being destroyed because of their Treasury holdings (that there were coerced into). Now that they’re dropping like flies, who will buy all the Treasuries (picture chocolate rolling off the assembly line from ever larger government deficit spending and not enough Lucy and Ethel to stuff them in their mouths) just as foreign buyers are drying up (see energy discussion elsewhere in this article)? Answer is, of course, the Federal Reserve will monetize them all, with yield curve control (read: Hotel California). But we won’t be so lucky to wind up like Japan because Japan has been running net massive trade surplus all along and as a result, own a ton of foreign assets (i.e. it has a huge piggy bank). If Japan one day raises rates, investments abroad will simply repatriate. The U.S. has no such piggy bank. The U.S. will wind up more like Argentina.

Perhaps the thing Powell really wants to break is the “cowboy” shadow banking system (read: private equity firms) which leverages up non-viable startups; does not mark to market; unilaterally gates redemptions; and doesn’t play by banking rules. These “ all about outrageous leverage” bad boys who did so well in the zero interest rate environment cannot survive the current 5% environment. Perhaps regional banks are just necessary “collateral damage” in the process. Notice, throughout the process, Global Systemically Important Banks (GSIB)— the likes of JPM, BAC et al which own the Fed—get even bigger and more powerful. Unless credit events threaten GSIB (thus the global financial system, a la 2008), Powell won’t pivot.

Other moral hazards introduced by the Fed/FDIC’s “selective bailouts” beg the question “What happens to pension funds and life insurers whose balance sheets are likewise impaired (the mechanics of US bank il-liquidity is exactly the same as the UK pension fund il-liquidity last year!)?”

To say the least, U.S. regional banks are not the ONLY ones with “distressed debt” problems (can we say “zombie companies”?):

Short-dated Treasury yields (such as the 1Y in the chart below) dropped sharply in March.

This was largely attributable to buying by Japanese savers. As long as Yield Curve Control is in place, the entire Japanese yield curve will always act as a “duration anchor”, — offering zero domestic investment opportunities and forcing investments abroad. With BOJ’s changing of the guard from Kuroda to Ueda and its resultant “policy review”, things can change drastically going into the future. If Japanese ceases to buy sovereign bonds outside of Japan, rates can shoot up everywhere, making for a secular bond (AND equity) bear market. After all, Japanese selling (due to prohibitively expensive FX hedging in the face of sharply rising USD) contributed to much of the sharp decline of long-dated Treasury prices in 2022:

Short-dated Treasury yields gradually creeped back up since April as FFR futures rose with a resolutely hawkish Powell. Short-dated Treasuries are in short supply due to the debt ceiling. As well, temporary “flights from equities” seem to favor the short-end. Thus, prices of bills and notes hold up well. Prices of long-date Treasuries are slipping with rising recession expectations. Thus the yield curve is ever so slightly steepening (see later discussion).

The banking crisis thus far is all about duration blow up. Duration risk is not limited to banks, of course. It exists in enterprises and households. But it blows up only when forced sale (as in the case of the said banks) OR refinancing (from a low existing rate to a much higher current rate) happens. Many enterprises and households are sitting on low-interest long-dated loans (such as home mortgages at <4%). The moment of forced sale or refinancing hasn’t arrived yet. THAT’s why Credit blow ups haven’t happened yet and the “long and variable” lag from rate hikes keeps getting longer.

But Credit blow ups (most likely stemming from the “capital market”, aka private equity or shadow banking sector) will happen. When Zombie companies (not the least of which commercial real estate developers) drop and recession deepens, interest rates (and thus the equity market) may drop precipitously. Ergo, we shouldn’t be deceived by the current calm in the equity market. It is merely in the “eye of the storm” between the liquidity cycle and the credit cycle.

Credit contraction (not just decelerated growth) can already be forecasted for H2, 2023 via surveys of senior loan officers. This will produce the following predictable results:

Noteworthy is that unemployment — though not yet problematic (less than 300,000) — had troughed in Sep, 2022:

And that’s just the physical (Main Street) economy. In the Bizarro financial world, stock prices keep going up because of two key drivers: Passive (401K) contributions mindlessly plough into ETFs which systematically boost the <10 heavily weighted Big Cap Tech stocks, only to be amplified by algo “Volatility Targeting” (self-reinforcing) strategies which lever up ever more in a low volatility regime (making for great capital efficiency as long as stock prices keep going up).

When the direction reverses (selling starts with some Black Swan event), you’ll get margin calls and equity market “waterfall”. For now, the “long and variable” lag takes time to play out So it’s a game of patience for equity shorts who are directionally correct. The s-show won’t begin until H2. For now, liquidity (quantity of money) is the more powerful tool in the Fed’s toolbox than interest rates (cost of money). Liquidity from the new “emergency lending facility” has gone to shore up failing banks’ balance sheets. It is NOT available to fund new financial activities). Thus, unlike QE, it is not inflationary. In fact, QT resumed after a temporary spike in the Fed’s balance sheet:

As long as Powell keeps the financial stability intact with liquidity (in an overly indebted world, it’s all about liquidity enabling refinancing, not affordable interest rates enabling new financing), he can hold rates at current levels to give the impression of vigilance in maintaining price stability (i.e. keeping inflation in check). This stance is consistent with Walter Bagehot’s “lend freely to sound institutions at high interest rates”. The Fed just plugged a liquidity hole, but now reactionary movements in the financial markets may expose credit risks even faster (Warren Buffett's proverbial “tide going out revealing people swimming naked”). And the telling sign? Money Supply (M1, M2 or some blended measure) is fast shrinking:

Given the enormity of shadow banking these days, arguably liquidity should not be measured by M1/M2 (retail money supply like deposits). If one goes strictly by the Fed Balance Sheet net of TGA and Reverse Repo reserve, then clearly the equity market is “fighting the Fed” by its steadfast belief of imminent “pivot”, despite the Fed’s “higher for longer” verbiage:

But let’s not forget the “stealth liquidity” provided by the fiscal side to offset monetary tightening. Basically, private sector savings (from depositors) left the banks post SVB (banks didn’t go under because of BTFP by the Fed) into subsidizing deficit spending (via new Treasury auctions) that delays an otherwise recession. In essence, this is Biden’s version of MMT:

More importantly, if one goes by “global liquidity” including institutional money supply (read: capital market driven by the likes of private equity firms), then the number is gargantuan:

And some argue that the current global liquidity (created by central banks, commercial banks, shadow banks, and cross border capital flow) cycle bottomed in late 2022 (thus risk assets are already poised for another up cycle in 2023):

Arguing for this thesis is that importantly, MOVE is diminishing, which means collateral (created by more government bond issuance from exploding deficit spending) will experience less “haircut” in leveraging up on credit:

Arguing against this thesis is the fact that regional banks are tightening lending in the face of their own liquidity problem caused by shrinking assets (reduced value in long bonds when marked to market) and Net Interest Margins (high cost of funding and low profit margins). Starting Q2, 2023, CFOs of companies that rely on bank borrowing are listing liquidity (and cash flow) among their top 10 concerns:

Further, now that the debt ceiling issue is over, the Federal government — running war time budget deficit (at $1T this year) in peacetime — will issue boatloads of Treasury bonds for which there will be limited buyers. This is on top of total government debt standing at $30T (which was only $800B in 2008!). The Fed is still in QT mode. The biggest foreign buyer — China — is divesting of Treasuries. Japan has to first and foremost buy its own JGB to sustain its perpetual YCC program. So long-bond yields will rise sharply (“bear steepening” of yield curve). And when long bond-yields go up, stocks historically go down:

The long awaited for credit events will happen AFTER long bond yields rise, causing zombie enterprises to go bankrupt when their low-rate debt comes due. Contributing to these credit events will be regional banks exposed to the commercial real estate sector with historic high vacancies and cash flow woes, invariably resulting in bankruptcies. These credit events will then trigger the long awaited for Fed cut. UNTIL then, buying TLT is a fool’s errand.

Elsewhere, “de-stocking” (from overbuilding of inventory in response to supply chain shortages in 2021) is an imperative now for all corporations, especially considering high cost of capital to carry that inventory. This all implies disinflation/deflation, and thus is not good for equities:

The first sign of equities having a LOT to fall is how much it is overpriced right now compared to risk-free yield (white line is 30-y TIPS yield):

Another argument against a new liquidity up cycle is that the Treasury will be issuing ~$1T of short-dated bills/notes to replenish its depleted “Treasury General Account” from the debt-ceiling period, — which will usurp liquidity otherwise available for the equity market. This is a false argument because this replenishment will be almost entirely funded by money market funds (via the reverse repo pool) earmarked for short term debt and not the equity market.

For now, equities are holding up, albeit breadth is lacking (i.e. the entire S&P500 is held up by less than 10 big tech names):

And analysts are optimistically project resumption of earnings growth after two quarters of “technical recession”, per the “soft landing” narrative. Their logic is, “inflation inflates nominal earnings by way of pricing power (inflated revenue exceeds inflated costs)”:

The put-call skew ( measurement off volatility index VIX) has been pinned at a historical low by way of gamma shorting algorithms. When it eventually inflects, the violent upward explosion will be concurrent with market crash:

Finally, market participants are clamoring for Fed rate cuts, arguing that equities rally without fail with rate cuts:

Reality is, the Fed will only cut in the face of disastrous Black Swans which results in waterfall in equities (in other words, we first need to see equities crash before the Fed will pivot):

The leading indicator to watch is really the 2/10 spread (which is currently turning UP, — signaling post-inversion steepening of the yield curve which presages equity downturn):

And those who think 2022 was the end of equity drawdowns have another think coming, —the more severe 2nd down leg is yet to start (probably in Q3):

MOST important of all, it is the post-inversion steepening — not the inversion itself — of the yield curve that tells you the market is sniffing out the recessionary lag effect from past tightening. So regardless of the Fed’s refusal to pivot on FFR, the yield curve is currently going through “bull steepening” after the Fed’s injection of liquidity in response to the banking crisis. Although this may encourage short term leveraging up in equities, it eventually results in steep decline of the SPX, albeit possibly lagging by as much as one year:

My current outlook on equities for the rest of 2023 going into 2024 is this:

Gold (handle of cup started an 8 year bull-cycle) and cryptos both had moonshots the week after SVB, expressing flight from (loss in confidence in) the US dollar. It is also signaling the Fed has lost control (of the sovereign bond market). Gold is currently in major wave 3, signaling the schedule for currency reset has just moved up. I expect the crescendo in 2025, with gold around $8K/oz (which would be a time to sell gold). Going forward, the best gauge of liquidity in the financial system are cryptos: Cryptos up, liquidity up; cryptos down, liquidity down.

Alarmingly, actual gold price movements started to deviate significantly from reliable predictive models since 2020:

I suspect this volatility comes from vastly increased demand for physical by other central banks resulting from Basel III and the Fed’s unwinding of its short position in paper. The sharp spike in gold price in response to bank failures in March suggests the gold market is increasingly pricing in the Fed losing control of inflation (and the bond market) once it is forced to stop hiking. In other words, the gold market may be anticipating Fed “hyper print”. This may not happen for awhile due to the slow rolling recession discussed elsewhere.

The impressive rise in the US dollar in 2022 — due to expectations of interest rate rise — had peaked in Sep 2022. Since then, it has been steadily declining. But I think the trough is in (which means gold may have hit a “local peak”, — although some predict there will come a day soon when gold and USD rise together):

Certainly, the Dollar-Yen strength seems to be a solid trend in place for the new high interest-rate regime (YCC is Japan’s “Hotel California”, and perpetually low JGB yields will always encourage the Yen Carry Trade. — borrowing in Yen and investing in U.S. Treasuries):

As well, an important sign of the USD having troughed and is on an uptrend is China’s “re-opening” story having completely collapsed with the Yuan plummeting:

This is the “dollar wrecking ball” at work: A strong dollar makes it difficult (particularly for emerging countries) to service their dollar denominated debt and forces them to deleverage (which is deflationary). Granted, China (and other emerging countries) do not have as much dollar denominated debt today as the Asian Contagion times. But a strong dollar makes it more expensive to import oil priced in dollar, which curtails demand growth (China is already “tanked up” anyway — i.e. pulled demand forward — with cheaper Russian oil on the heel of sanctions against Russia). This further drives down the Yuan (in a doom-loop). This downward trend in the Yuan directly weakens the Chinese economy, exemplified by its largest component sector — the properties sector:

A plummeting Yuan stopped a rising SPX dead in the track and “caused” it to reverse sharply down TWICE in 2022. It also “caused” an already declining 10Y Treasury to accelerate on the downside. The decline of both SPX and 10TB became sharper as the Yuan dropped below the critical level of 7 (as it is doing now):

The relationship is not truly causal from flow, of course. But a plummeting Yuan is an accurate barometer, historically. Other barometers include the Conference Board Leading Economic Indicators which always preceded major past market crashes (2000 Dot Com Bust, 2008 Global Financial Crisis, 2020 Covid global shutdown):

And a rising US dollar (not just from a plummeting Yuan but shortage of Eurodollars due to a rising Yen and unwinding of the Yen carry trade in EM countries) will continue to be a destabilizing drain of global liquidity and a headwind for risk assets (often leading to global economic slowdown or crisis, — if history is any guidde):

Meanwhile, as a reverberation of bank failures, regional banks are already paring assets (including their loan books) in response to deposit outflow. This will certainly hurt the real estate sector (a big cyclical growth component):

Short term, gold seems to have gotten ahead of itself relative to real yield:

Mass firing of knowledge workers (nobody trusts government labor statistics — distrust in institutions is a hallmark of 4th Turnings; if the labor market is so strong, why is payroll tax withholding on continued nosedive — see chart below?), and soon to surface bankruptcy filings in shadow banks (whose assets when marked to market are even more impaired than the banks’) are no doubt recessionary.

However, firing of workers will boost earnings and thus delay the recession. As short-covering rallies cause equities to break above upper channels in choppy trading, net-short institutions may capitulate. And then equities may turn into a blow-off top before credit event(s) happen, hurting short and then longs back to back for the remaining of 2023.

Meanwhile, de-globalization (shifting from the USD trading bloc to the Global South trading bloc) and persistent proxy war(s) will elevate inflation. Biden’s $6T Covid stimulus (aka MMT) — was let out just as decades of disinflationary forces — globalization and favorable global demographics (think “China rising”) — shifted into reverse, which necessitates further fiscal deficit spending and outright monetization which is inflationary. That $6T python has yet to go through the pig, stoking inflation “flairs”. And then there are supply shocks induced by the Ukraine War, not the least of which shortage in fertilizers and other chemicals that portends food inflation in late 2023 all through 2024. So absent massive flight to safety from equities, longer term rates are unlikely to go much below current levels.

Net/net, I think the next two years or so will see a regime of elevated inflation/interest rate”. This is consistent with the fact that we have exited a two-decade-long regime of “The Great Moderation”, — made possible by the combination of globalization, low inflation/cost of capital, and demographics. We are now going the other direction on all fronts, and the elevated inflation and cost of capital will demand higher risk premia (both in bonds and stocks) which will in turn cause higher volatility (from re-valuation):

This inflation cycle is more like the 1940s than the 1970s because inflation stems from monetizing ever-increasing government deficit spending (insensitive to high interest rates) and not private sector activities from bank lending (highly sensitive to high interest rates). So all the central bank rate hikes thus far may have little impact on bringing inflation down to the target 2% range. Whatever deceleration of inflation thus far is more likely from greatly depressed oil prices (which won’t happen because oil supply is constrained from ESG movement AND shale production is now dwindling) and supply chain problems having been resolved. An “echo wave” of inflation (as the following chart depicts) will resume with ever-larger public sector spending DESPITE inevitable recession (more specifically, the speed of rising energy prices with be greater than the speed of recession in late 2023/early 2024). As someone put it once, “Energy is nature’s discount rate” (of determining the NPV of all long-dated assets).

Accordingly, real interest rates will likely be more negative than now (classic and necessary “inflating the debt away” ala the 1940s), and stay that way for a decade of more.

Rising energy prices translates to buy stocks (inflation protection) and sell long bonds (because of inflation expectations). Add in the rising U.S. dollar and both will be sold (by foreigners sell U.S. assets to raise shortage in Eurodollars per the “Dollar Milk Shake” thesis) at some point in time. Needless to say, dwindling foreign interest in Treasuries is exacerbated by rapid expansion of BRICS alliances, — most importantly China’s long term oil and LNG purchase agreements with the ME countries. For decades, China shipped us goods and we shipped them U.S. dollars, which they then parked in Treasures for later purchases of commodities. Now, they have gone direct, without passing “go” (Treasuries).

Meanwhile, think of the added liquidity from bailout program(s) programs as reaction to liquidity crises but in preparation for credit crises (remember reflexivity is an accelerator; things don’t happen and then all at once) to come (see Q2 heading in chart below). It is time to dust off my 2021 Inflation->Deflation->Hyper-inflation->Currency Reset roadmap, which I now formalize in the following table. In anticipating imminent credit crisis per this roadmap, I need to remember that the Fed can backstop liquidity crisis with relative ease, but it can’t backstop credit crisis without act of Congress (a la 2008).

Bedrock to this roadmap is increasing “duration risk (underscored by SVB!). This means financial markets will be dominated by wildly fluctuating bond rates (regardless of FFR) in accordance to changing inflation outlook, and in response to sudden (post Black Swan) and sizeable flight from risk assets to the safety of bonds. The yield curve will likely be constantly shifting (with term premia). Accordingly, institutional portfolios will be trading convexity to maximize profit from the unexpected, reflected in rising MOVE (which already claimed 4 major hedge funds as victims of rate traders in March):

And let’s always keep in mind how MOVE (even more than VIX) drives SPX:

To the extent there may be one last equity market boom before the current 4th Turning ends, that opportunity will be one of short term trading (particularly of long duration assets) rather than one of multi-year investing. If events and conditions progress at the speed suggested by this table, then:

• The following chart reminds us that the (high inflation high government debt) 1940s — not the (high inflation low government debt) 1970s — are the more appropriate analog for today's predicament. Inflation is caused by fiscal deficit spending (post war rebuild in the 1940s, paid for by other nations rather than monetized by the Fed). It is not caused by money creation by commercial banks (post war family formation in the 1970s). Yet, for lack of will to pare back federal deficit spending, the “authorities” are applying a 1970s solution to a 1940s problem here and now in the 2020s. And as a result, we will vacillate between bouts of recession and inflation— i.e. have low growth but have persistent inflation and elevated interest rates — for years to come, even after the next leg down for financial markets in H2, 2023. There will be no 2009-like V-shaped “recovery”. The equity market will likely chop around ending up flat after a decade (as will it between now and H2). This is a stock picking AND trading environment, except traditional trading signals don’t work anymore with 80% of the market being traded by algos. So forget the long side and short only after recession kicks in H2.)

• The “Commodity Super-cycle” is on hold because “China Re-opening” turned out to be a nothing-burger. Everything — consumer spending, manufacturing, and capital investment — is down in China. The only thing up is youth unemployment. China is in outright deflationary recession. As a result, commodity prices like those of oil and copper continue downward trajectory. SPR release add to that trend. So does high cost of capital which increases inventory carrying cost. So don’t look for the yellow circle to be an inflection point:

The crude shellacking (and commodity meltdown) is not yet done:

Most important of all is Dr Copper cratering, which portends recession in no uncertain terms. That all said, the “Commodity Super-cycle” will begin when re-shoring picks up steam, just like the previous one started with China joining WTO (age of offshoring). Post recession (all recessions end, typically catalyzed by technological advances), global energy demand and marginal cost of energy will go up. And the Shale Boom is killed by the double whammy of lower oil price and higher cost of capital. This is why current inflation is secular and will be sticky (despite temporary amelioration from base effect), — which portends prolonged stagflation.

To watch for inflection of energy prices, bear in mind commodities moves inversely with the 10Y yield and the latter is now creeping up (part of the yield curve steepening story, foretelling recession):

• Boatloads of short dated Bills issued by the Treasury post-budget ceiling standoff will drive up short rates, which means I need to rebalance my dollar-staking holdings. This will suck up liquidity in the financial markets, — not going into the physical economy via fiscal stimulus but merely to replenish the Treasury General Account. This is obviously negative for equities. Meanwhile, banks busy repairing their balance sheets will be selling duration in their loan books, pushing long bond yields up. As well, bouts of inflation flair (not the least from supply shocks in a world of scarcity) will also keep long yields up (implying term premia expansion). Buying TLT (now inversely correlated with SPX, after being positively correlated for all of 2022) in this scenario is a dumb trade. Worse, energy exporters (OPEC, Russia, Iran et al) are decidedly in the “de-dollarization” camp and have stopped buying Treasuries. Energy importers (most notably Japan) need to sell Treasuries to fund secularly more expensive oil (see discussion on Commodity Super-cycle discussion elsewhere in this article). I see a multi-decade secular Treasury bear market ahead. Hence, focus on shorting equities rather bothering with directionally trading long bonds.

Short term, there is a little more upside to the equity market (regardless mounting evidence of deteriorating economic data) ,— not the least due to robotic passive 401K contributions to indexed funds:

The equity market is highly bifurcated (i.e. it lacks breadth). The “S&P 5” is rip-roaring because of the AI boom, while “S&P 495” is essentially flat year to date (with more losers than gainers).

Historically, lack of market breadth has always preceded major market crashes (2000 Dot Com Bust, 2008 Global Financial Crisis, 2020 Covid global shutdown); and the lack of market breadth is currently at historical extreme:

My sector analysis as of May is as follows:

But going into June, I expect equities to start rolling over (active strategies will start selling because of overbought conditions and mounting evidence of impending credit events, — most obviously from the commercial real estate sector).

SRTY has 95% to gain from 3/18/2023 level (remember, smallcap companies are most squeezed by higher cost of capital because their funding channel is the commercial bank and not investment bank at much higher rates):

But…by June, IWM may have bottomed with MOVE subdued:

SQQQ (nowadays regarded as the “new IBM”) has 143% to gain from 3/18/2023 level:

SPXU has 80% to gain from 3/18/2023 level:

While considering these downside targets, let’s keep (long term) mean-reversion in mind:

• Given the shape of the yield curve can change drastically (as previously discussed), keep most of cash between 1TB/6M TB for the rest of 2023. But remember Treasuries will utterly crash with the US dollar before this 4th Turning ends around 2025. So Treasuries are to be rented, not bought.
• Events of the 2008 Great Financial Crisis should remind us that sighting of the first couple of cockroaches guarantees more to emerge:

• It is “Sell in May (not April) and Go Away”.
• Piper Sandler’s Michael Kantrowitz confirms my “hard landing” conviction, because:

His sequence is by way of his “HOPE” (Housing, Orders, Profit, Employment) framework…

We are in the third stage — deteriorating profit margins as predicted by LEADING economic indicators:

And let’s not forget enterprises are all doing “creative accounting” now to overstate earnings per share (remember how corporate buybacks reduce outstanding shares)? Right now, the deviation of S&P EPS is 40% above the Bureau of Economic Analysis reported earnings, — what we saw in 2007 before the GFC and higher than 2000 (the Dot Com Bust). Look below!

Specifically, the price to free cash flow ratio of the “Magnificent 7” is significantly above long term trend line (red line). And free cash flow is rapidly declining because of increased Capex chasing the AI wave:

Net/net, equity prices have only one direction to go — down! And when that happens, corporate layoffs will begin, — possibly as soon as Q4, 2023:

Unemployment is a lagging indicator and the last to show. But it will show when all the zombie companies go belly up (which they already have started, — witness Rite Aid, Bed Bath And Beyond, Yellow, et al). For that, the following “schedule of refinancing” provides insight on timing:

In other words, we are here:

And the thing to remember is…

Finally, circling back to the ever-so-popular “no landing” meme, remember — “no landing” implies we’re already in a new business cycle. A new business cycle ALWAYS follow significant interest rate cuts, which hasn’t happened yet. So we are just waiting for recession (pending on the last variable — the “E” of “HOPE” — right now). As well, a new business cycle is always accompanied by bank credit growth and we are in credit contraction. Continued federal government deficit spending (which crowds out productive capital deployment by the private sector) is also antithesis to a new business cycle — it merely prolongs the end-stage of the current cycle by stimulating spending and stoking inflation (which in turn necessitates continued rate hikes which delays the new business cycle).

And that recession will almost certainly be accompanied by waterfall decline in equities, given their current over-valuation.

As for the “endgame”, forget “Japanization of America”. Japan has trade surplus and we run twin deficits. Japan has huge net-international-investment (read: savings nest egg) and we have negative net international investment (which is being divested in the face of high U.S. dollar). Net-net, our endgame won’t be deflation (financed by trade surplus and savings nest egg) like Japan but hyperinflation (from hyper money printing). Can you say “Argentinian-ization”?