Guest Post by Karl Denninger

…. the gathering gloom.

Plenty of people — including obviously the stock market and its commentators — believe everything will be ok.

Deficits don’t matter.

The government cannot go broke.

There will never be a loss of confidence.

I travel quite a bit.  Like most people I have my habits — places I like, things I go to do and if I enjoy them I’ll go back and do them again.  This means I see patterns and, unlike many, I tend to notice them immediately.  Perhaps its a blessing — or perhaps a curse.

I just got back after one such trip; one I’ve made before and Sarah and her boyfriend both came as well (her boyfriend has not been on this trip before, but she certainly has.)  They traveled separately but we met up and had a good time.

If you’re in the market you ought to be making up a big fat list of things to be short — or at least be out of the things you’ve had and are long of, particularly when you can get a 5%+ risk free return in the short end (the 13 week bill, for example) of the Treasury market.  I was stunned at the deterioration I saw in consumer behavior from just a month or so ago on my prior trip, and gob-smacked at the change over three months or so back when Sarah and I were out at Wolf Creek, also a place I like to go on a repetitive basis (for skiing, of course.)

There was evidence of it then on our travels which were over a large part of the same path we took back in September for our trip out to the Grand Canyon.  That which was jammed full was not, and yet there wasn’t a serious price delta between those two trips; that is, while there had been lots of inflation over the previous couple of years (and it was obvious) there wasn’t anything that was a sort-of “trigger moment” associated with the change, and being winter .vs. late summer, ok, maybe it was seasonal and frankly, the delta was small.

This time it wasn’t small and in addition there were serious price hikes that were attempted — and appear to have had an instant impact.

I’m talking about sit-down fast-casual places I like when traveling and lots of others do too in that they’re always slammed to the point that if you want to eat there during the dinner hours I hope you like their “get a sort of reservation on their app” thing or sit at the bar if its just one of you — because if not you might be waiting an hour.

Well, that was gone.  And not a little gone either.  The place had plenty of tables with no wait and the parking lot had lots of spaces too.  But it wasn’t one place — on the way home I stopped at another I’ve been in a dozen times over the last five or so years, again, at dinner time, and a third of the tables were empty.

But what else was shocking?  A roughly 40% total price increase over a couple of years ago and of that 10+% that just got tacked on with all the menus having just been reprinted in the last couple of weeks.  It appears that last grab for cash finally hit people’s pain points and they stopped showing up.

I also saw “fast food” style places co-located with fueling stations on the highway shuttered and boarded up — and that’s entirely new, and of other chains I pay some attention to during the same times in the afternoon and evening their parking lots are half-full or less.

Yes, this is “shoulder season” — or is it?  Not really.  Its graduation season and a lot of people are in fact traveling for precisely that reason; in another few weeks it will be the start of “traditional summer” with Memorial Day.

Folks, there are no rate cuts coming because there can’t be into this government spending level without an explosion in inflation.  Without taking on the place in the federal spending game where all the money is going (that’s health care) there is no fix.  Attempting to work around it with more offshoring, more robots, more data centers (and “ai” in them) and similar won’t work either because you can’t print money — you can only print credit and to obtain money someone has to do something of value for someone else in excess of its costs.

When costs ramp that excess closes and eventually goes negative — and at the point it does that activity becomes uneconomic.  If you continue to do it through various machinations such as the government playing handout games you run the risk of an exponential runaway and collapse.

But what you should keep in mind is that never in reasonably-modern history do markets let you get to that endpoint.  They didn’t in 2000 or in 2008 either.  All the hollering about “subprime being contained” proved to be nonsense; the underlying bubble that “supported” the charade was seen through before the endpoint and the market imposed its own view of things whether policy makers liked it or not.

Mature fast casual dining and chip companies selling for 70x earnings are fantasy-land nonsense and yet both are the case right here, right now.

I get it that nobody likes the implications of prices having to collapse by a third to come roughly into line with incomes, but its fact.  Further its at least double that in the capital markets because common stock always has an element of leverage in it (otherwise why would it sell at a “multiple” of earnings at all — and yet it always does, does it not?)

The belief that The Fed “must” or “will” step in and prevent such a reversion to the mean is absurdly common — after all, they have stepped in through the last two decades (or even more) but in doing so each time they’ve made the imbalance worse and now the exponential nature of such deficit spending and debt load are here rather than a future problem.

For those who believe that it will “never fail” or worse, that you’ll get plenty of warning before something serious breaks I have three words for you:

SOLD TO YOU.

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