Markets plunged yesterday on the news that headline and core inflation in the US fell only by a tiny bit, much less than markets had hoped for and optimistically priced in. My post yesterday (before the CPI numbers came out) went into why inflation is not going to go away any time soon, at least not without a massive, deflationary asset price correction, aka a Crash (capitalized on purpose to denote massiveness in the style of 1929 or 1987).
Historically, Crashes only happen when two conditions are met, concurrently:
- A prior new all time high marked by extreme optimism by professionals and the madness of crowds, who come late to the party.
- A credit crunch which makes liquid money very scarce and expensive to use for market leverage.
For perspective, in 2009 Fed assets were "just" $1 trillion and in 2019 "just" $4 trillion compared to today's massive $9 trillion. This deluge of liquidity caused asset price bloat for years and, eventually, resulted in today's spike in consumer inflation.