The mean reversion of the 70s inflation was nicknamed by a bubble blowing, thick eye-glassed Fed Chair as The Great Moderation. We all now know the Credit Super Cycle 5th Wave was hardly a moderation in anything. Since The Great Recession, we have seen a consistent rise in what we call The Great Anticipation. For many, this has developed into a cottage industry of predicting “soon to occur” travesty of huge proportion. For others, The Great Anticipation has had a Great Pumpkin flare. If we wait long enough and believe strong enough, good things are coming our way. What if it’s the premise that’s wrong?
The inflation cycle required a massive restriction of credit to turn it back. Several important structural changes had to occur at the same time. Global production and trade increased, contracted wage advances decreased, technology exploded subject to Moore’s law. Volcker has been lionized in Fed lore but he had more going for him than matched sales. At the other end of the cycle was the dark abyss of deflation. It seems logical , in retrospect, that a capitulation would flirt with the polar opposite from where we came. What if the expectation that either of the outcomes we just lived through is about to re-occur is the false pretense?
Consider Mad Magazine. The back cover was always a picture of some complex happening that when folded inward at the tabs revealed the “hidden” message. Suspend your disbelief for a moment and apply the Mad Magazine litmus test to yields. Print a long term chart and “fold in” the 70’s-90’s inflation/deflation cycle. Not much to get all Carly Simon-ed about is it? The Great Anticipation is a symptom of the reality that – for most of us – our experience in the market is aligned with The Great Anomaly of volatility. The risk I worry about? That nothing happens for a very LONG time.