oftwominds-Charles Hugh Smith: First the Deflationary Deluge of Assets Crashing, Then the Tsunami of Inflation 05/07/2020, 12)10 AM

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FRIDAY, MAY 29, 2020

First the Deflationary Deluge of Assets Crashing,

Then the Tsunami of Inflation

Once the pool of greater fools dries up, stocks crash regardless of what the Fed MY YOUTUBE CHANNEL
does or bleats.
My YouTube channel
The conventional view is the Federal Reserve creating trillions of dollars
out of thin air will trigger inflation. Not so fast. Yes, creating trillions of
My Bio dollars out of thin air will eventually devalue the purchasing power of each dollar-- FACEBOOK
what we call inflation--but first all the unprecedented asset bubbles will pop
and valuations will crash. my Facebook page
Oftwominds.com #7 in CNBC's
top alternative financial sites Let's call this a deflationary deluge as unsustainable asset prices are RSS FEED
eroded by a hard rain of reality. To understand the enormity of the current
bubbles, please glance at the charts below. The first chart depicts recent stock
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market bubbles; note the extreme height of the current bubble.

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The next chart shows the S&P 500, and the extraordinary amplification of the
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bubble that reached its apex in February 2020. Note that each ramp higher takes
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AXIS OF EASY points in a mere two months--a move that took roughly 5 years in the early 2000s.
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Axis of Easy: Mark, Jesse and Real estate and other assets have also soared in unprecedented through this Search Box helps
me bubbles. Old bungalows that sold for $150,000 less than 20 years ago are now support oftwominds.com at no
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What made this possible? An equivalent bubble in debt. Every sector--
household, corporate and government--has borrowed astronomical sums of money
Search to keep the bubble economy glued together. In this rising tide of currency and
capital, whatever had scarcity value--real estate, art, stocks--was purchased with
the borrowed money as a store of value and / or as a source of income in a world Search Amazon.com
starved of low-risk yields by central banks that dropped interest rates to near zero.

Followers (666) Next Assets don't have to rise, but the interest and principal on debt has to be
paid. That's the rub with buying assets with borrowed money.

The price of assets is set on the margins. In a neighborhood of 100 houses,

the price of all the houses is set by the most recent handful of sales. If each house
was valued at $1 million, and three houses sell for $800,000, the value of the
other 97 houses falls to $800,000 each.

All bubbles rely on a greater fool willing to pay a higher price than the
previous somewhat lesser fool. The problem is the supply of greater
fools quickly drops to zero when euphoria is replaced by fear and the marginal
buyers are no longer willing to pay outlandish sums for houses, stocks, boats, etc.

Every greater fool who abandons a market sticks a pin in the bubble. As
prices start eroding, those who bought the over-valued assets with borrowed
money start realizing they have to make the interest payments even if the asset is
losing value. The only rational choice is to run to the exit and sell the asset.
Follow

But since so many recent buyers bought with borrowed money, the exit is
BLOG ARCHIVE
quickly jammed with desperate sellers. This triggers market crashes as
marginal buyers desperate to sell will drop their price, while the delusional herd
▼ 2020 (120)
still believes the bubble valuations are not just fair but "under-valued."
► July (3)
This is why the majority refuses to sell until it's too late. They believed the
► June (19) fairy tales that "real estate never drops," Apple is a bargain at $300 (see chart
below), etc., and are unwilling to suspend those beliefs even as the deflationary
▼ May (22)
deluge washes away their wealth.
This Is How Systems
Collapse
By the time they realize the impossibility of getting their wealth back, it's too late
First the Deflationary to do anything other than salvage what's left by selling now rather than later.

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oftwominds-Charles Hugh Smith: First the Deflationary Deluge of Assets Crashing, Then the Tsunami of Inflation 05/07/2020, 12)10 AM

Deluge of Assets
Crashing, ... Bubbles tend to rise and drop in rough symmetry, meaning they tend to
retrace the entire bubble, though the descent is often much faster than the ascent.
Social Media's Plantation of
the Mind
The greatest fairy tale of them all is the Fed has our back. The belief here is
Re-Opening the Economy that all the dollars created out of thin air by the Fed will flow into stocks. But there
Won't Fix What's Broken is no actual causal mechanism in this belief; the Fed can create dollars out of thin
An Economy That Cannot air but they don't have to flow into the stock market; they can go elsewhere. They
Allow Stocks to Decline only flow into stocks because the financiers, banks and other parasites and
Is ... predators are counting on greater fools to pay ever higher prices for stocks based
on their erroneous faith that the Fed's new money magically goes straight into
TINA's Orgy: Anything stocks.
Goes, Winners Take All

Opting Out, American Style Once the pool of greater fools dries up, stocks crash regardless of what
the Fed does or bleats, up to the point that the Fed is given the legal go-ahead
The Pandemic Gives Us to buy stocks directly. That's when the inflation everyone anticipates will begin. But
Permission To Get What inflation is just as unruly a beast as an asset bubble, and control is never quite as
We Al... complete as the Fed claims.
This Sucker's Going Down:
The Destruction of First the deflationary deluge, then the tsunami of inflation. Both destroy the
Demand wealth of believers in fairy tales.
Our Fate Is Sealed,
Vaccines Won't Matter:
Four Lo...

Consumer Spending Will

Not Rebound--Here's
Why

Globalization and
Financialization Are
Dead, and s...

The Collapse of Main Street

and Local Tax
Revenues...

What the Pandemic

Revealed: a Morally
Bankrupt Cul...

The Way of the Tao Is CHS

Reversal

The Fed Is Fueling a Revolt

That It Cannot Control

The Outlines of a Better

World Are Emerging

Surviving 2020 #3: Plans A,

B and C

Surviving 2020 #2: 16

Suggestions

Surviving 2020 #1: Bug-Out

Bunkers, Taoism and
the...

Why Assets Will Crash

Our Inevitable Collapse: We

Can't Save a Fragile E...
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