Australia stuck in Bubble Now Pain Later (BNPL)

Local market delivered a negative day on solid turnover with selling into the close despite US market delivering a positive day that ran up into the close. The power of US dollar collapsing over the last few trading days has pushed AUDUSD from below 76 cents to above 77 cents. Reporting season locally has started a patchy with investors racing to lock in profits than chase the sky-high multiples higher. All sectors were red while yield sectors like Property and Utilities were leading the falls. Gold was the only positive category as Democrats move to push stimulus package through without Republican support. There is still a matter of minimum wage being lifted to $15 per hour coming and that will probably go down the same path. US economy is fading and the vaccine issues are expanding. It is becoming clear that more frequent stimulus packages are needed for Europe and US. Even Australia is on the QE bandwagon.

Australia is in denial of the real economic problem as the government is running corporate handout through debt while RBA is delivering cheap debt by stealing from retirees returns in the future. It looks good now but the reality of the economic mess and rising cost inflation will hit later. Alternative facts on wages growth, corporate handouts, asset bubble pumping and lowering lending standards are not reform nor are they protecting the financial system. CBA will soon deliver a cracker result based on accounting fudge and taxpayer guaranteed dodgy lending. They will even show solid dividend and buyback potential but the underlying model is held together by government and RBA boosted property bubble and nothing else. Banks will do well on global reflation but the actual business models are weak and the management is below par. Remember the Royal Commission into the financial sector where nothing was done. Banks and Property developers are major donors to the government. Not that it had anything to do with it. RBA will have to own this property mess when it unwinds. Oversupplied market with falling rental yield being pushed up by dodgy lending to first home buyers that would struggle to get the funding under responsible lending rules. What could go wrong? Nothing for developers as the banks take the fall. And nothing for the banks as taxpayers will bail them out. Taxpayers will pay higher GST for decades to unwind the mess being created. Global reflation will drive costs up, wages down, growth down and asset prices lower. RBA has already lost control of the currency and property bubble is next on the list. RBA will continue to steal from savers and retirees to prop up the property bubble and zombie businesses…in other words more QE. Could global reflation potentially deliver negative real returns in Australia? RBA is in denial while the Australian government has left the economy on auto pilot for three terms. We should be deleveraging in the current cycle but instead we are leveraging higher. Australia stuck in “Bubble Now Pain Later (BNPL)” strategy!

The positive news as an investor is that there are ways to improve your risk weighted returns while the global passive money flip flops with macro winds. The US inflation outlook (i.e. on page 2) has been climbing over the last year and it is going to pick up pace with rising commodity prices and falling USD. US bond yields are going to rise and that will raise cost of borrowing and that will hurt all asset prices.

The main beneficiary of rising macro risk, rising inflation and falling USD is the Gold sector. It is rebounding from the value territory and will shine as US moves into money printing mode and debase USD. The recent pullback was driven by ETF outflows in late 2020 (i.e. chart above) but that has turned to inflows in January. Time to buy some protection…Gold is back in play!!!

Comments on US market last close > US market moved higher again on optimism and ramped up into the close...that's six days in a row. Investors came into Feb with historical high options and margin lending exposure and it's pushing it higher. Vaccine rollout having logistical issues while variants efficacy is raising questions. Markets are ignoring that and concentrating on stimulus. Bonds were volatile all day and finished mainly flat. USD ticked lower but rising inflation drove commodities higher. Reflation trade had RUSSELL up 2-3 times the other indices. Growth to value rotation speeding up. RUSSELL to NASDAQ performance shows bond yields are going to affect valuations soon. US 30 year bond yield pulled back after touching 2%. Energy, Gold and Financials were the best while Utilities were the only red sector. China is tightening credit and that is red flag for growth when US is stimulating. EU in downgrade mode. Emerging Markets are in Covid limbo into 2022. Gold ETF flows have turned positive... expect the turn to build momentum with inflows.

Remain nimble, contrarian and cautiously pragmatic with elevated global macro risks!!! Buckle up...it’s going to get bumpy!!!