My dear impertinents, dear impertinents,
The CAC40 ended the day’s session down 2.67% to 6,022 points, which is still a significant drop.
What is happening in the markets?
A big correction, prelude to a bearish movement, heralding a nice crash on all assets since we had an “everything bubble” which inflated due to a global policy of free money and liquidity flooding . With rates so low, almost anyone could buy stocks, real estate, and even gold and cryptocurrencies.
Then, liquidities flow back and the central banks decide to break the current inflation. To do it there are not thirty six solutions. They take back the donated cash and raise interest rates.
This will obviously break the growth already badly damaged by the explosion of energy prices as in 2007 and 2008.
Then all assets collapse.
Stocks go down.
Bonds go down.
Cryptocurrencies which are very volatile are collapsing and even Bitcoin lost more than 20% yesterday! Considerable.
Precious metals and gold are bending but not breaking yet.
Real estate has much more inertia, and we are actually going to see the development of several markets. The crash will be above all on the thermal sieves that no bank will want to finance any more in a context of rising rates.
The bubble of everything will correspond to the crash of everything!
Rates are rising all over the world and there is no longer any good solution for central banks.
If they let inflation set in, then we’re heading for hyperinflation.
If they raise rates, they will trigger an unprecedented wave of insolvency. Households in the States will all become insolvent, and this will be accompanied by a terrible recession and a crash of anthology and of the same magnitude if not more than that of 1929 passed to posterity.
The bet of central banks.
The bet central banks are making is this.
They will raise their rates and stop their liquidity injections hoping to be able to break inflation BEFORE causing the insolvency of all economic players.
The bet of the central banks boils down to a time differential. Between the moment when the rise in rates will have broken inflation and the moment when everyone will be bankrupt (in particular the States) several months will pass because the debts are “refinanced” over time and the loans are for example revised annually for households or businesses. For the States, it is only a fraction of the debt which must be renewed each year.
The bet of the central banks is therefore limited to this simple speculation on this time differential.
But, I think that this strategy will largely screw up.
Why ?
Because I think for one of the first times in world economic history, the inflation we are facing is monetary in origin (we have created too much money), but it is a fundamental error that to believe that inflation is “Only” monetary.
This time it’s very different.
We have reached the threshold effects of the scarcity of many products and raw materials.
Raising rates will not magically cause oil barrels to appear.
The only thing we can do is lower the demand very significantly.
It’s simple.
You are doing a Covid containment and you have a recession of 10% of GDP. There, there is no shortage if the demand is suppressed.
We must no longer just reduce demand, we must eliminate it.
It’s not just a question of the amount of money available, it’s a question of the amount of money available and not having enough goods to buy.
These are the two phenomena that coexist and this will reduce the effectiveness of rate hikes against inflation, knowing that central banks can raise rates to 3% but with Italy already at more than 4% we we enter the red zone.
The euro continues to fall against the dollar, which increases inflation even more in Europe and the euro zone.
In short, we are in an inextricable situation, foreseeable for more than 10 years.
Work on your resilience and your autonomy. Now is the time.
It is already too late, but all is not lost.
Prepare yourselves !
Charles SANNAT
“Insolentiae” means “impertinence” in Latin
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