The Era Of Artificial Intelligence
It's official, this past weekend Barron's took rate cuts totally off the table for 2024:
"The Federal Reserve isn’t likely to lower interest rates in 2024. Elevated inflation, a resilient economy, and a still-strong, if softening labor market argue against the need for easing monetary policy, especially as these conditions are expected to persist through year end."
Think of the Fed’s policy stance as higher for longer than almost anyone anticipated, because the U.S. economy has been stronger for longer than almost anyone imagined."
Barron's goes on to linear extrapolate today's economic strength past the end of 2024, because what could derail this freight train?
Beneath the surface of this tranquil oasis, there is a lot of pain especially at the lower end of the economic scale. Pain that is masked by high asset values for the ultra wealthy and increasing debt levels for wage earners. The consumer sentiment surveys clearly show the pain but the inflation-padded nominal GDP numbers mask the pain. One thing bulls consistently ignore is the fact that throughout this inflationary era debt balances and asset values have continued rising in lockstep. Up until now everyone who wanted to roll over their debt CAN rollover their debt. Unfortunately, the people who own the assets and the people who owe the debt happen to be two totally separate cohorts. We are now 15 years into the longest expansion in history without any deleveraging and we are to believe that keeping rates high for yet another year will prolong it.
Recall that the entire bull case coming into 2024 was predicated upon rate cuts. Now, according to Barron's rate cuts are pushed out to 2025. In the meantime, rates will stay at two decade highs for another year longer.
In order to keep moving the market higher, bulls really need something to break, but not to break so bad that it causes a cascading waterfall of defaults. Bulls need something to implode to give the Fed cover to cut rates sooner than later. It's what I call, the "We are just like China, but we're not China" gambit.
For their part the Fed could just call it another "mid-cycle adjustment", following their 2019 mid-cycle adjustment which came ten years into the cycle. This one would be 15 years into the cycle. Suffice to say that all of these optimistic predictions are totally unsupported by historical precedent and they do not factor in the continuing accumulation of leverage taking place in the meantime. We are now to believe that the longest debt accumulation phase in history will continue indefinitely and end with a soft landing. Barron's proves that is now consensus opinion.
All of which contradicts Minsky Theory:
"In particular, over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values"
The casino ended May near all time highs. And AAII (Retail) stock positioning in May was the highest since the December 2021 market peak.
Why? Because gamblers bought more time at the permanent plateau of delusion.
What will historians call this era? The era of artificial intelligence.
