Bailout Capitalism - burning the future to bailout today's failures

Mathan Somasundaram

Deep Data Analytics

The local market was jammed up on lower than usual turnover against the tide, as RBA accelerated QE buying to support the bond market bubble. Given every major Central Bank has been talking about letting inflation run hot to get the recovery going, it is interesting that RBA was taking such an aggressive stance…it may be in vain. Global passive money was forced to buy Aussie shares on currency trade and it bought everything. Even the underperforming miners, after weak China data, were pulled back into the green by the broad market buying. Property, tech and health care were the best while miners were the laggards by a mile.

Let’s put some context on timing. RBA is like a teenager on prom night who tries to more attention than the big boys and then gets beaten up. Rate cuts and QE, for the best part of five years, have been badly timed. 

The Central Bank's upcoming Monetary Policy Meetings: 

  • ECB leads on 11 March
  • US Fed on 17 March
  • BOE on 18 March, and 
  • BOJ on the 19th of March

Late this week China is expected to deliver a budget outlook and that is expected to show tightening, so PBOC is not going to play currency wars with the West. The Chinese economy has recovered and its current path seems sustainable in the medium term. China continues to win over country after country that has been discarded by the West. It is politically easy to blame China but it’s clear that Western greed in recent years has left a lot of poor countries out in the cold. As Russia did in the past, China has followed the path of least resistance and continues to build its global economic empire by adding countries ignored by the West.

RBA did not have to act

The natural order of economic and market cycles were going to force investors from equities to bonds and such that lower yields were coming anyway. The property bubble is frothing on weak to non-existing lending rules, meaning money laundering has found another path of least resistance after bank/casino issues. 

Don’t worry…no one will ever dig into the property market due to the “Lance Armstrong” effect. There are too many people making too much money for that game to be cleaned up. Then why would RBA act now? You could argue that, if delayed, it may be too little too late. But without one of the big Central Banks, it will not make any difference anyway. 

There is only the impending risk in two bubbles that made RBA act…equities and property. Nothing like “Bubble Now Pain Later” to solve all the economic structural problems. 

No wonder the next generation feels like we are stealing from them. That is because we are. 

But in the end, we need the next generation to pay for our retirement. We are stealing from retirees returns and next generations economic growth to bail out our current economic failures. I must have missed that economic lesson where socialism for the select, failed few comes at the expense of stealing from decades of growth and returns is considered capitalism. Alas, this may be another wasted candle in the wind moment for RBA…time will tell.

Instead of rehashing what I wrote a few weeks ago regarding the futile and predictable nature of RBA’s action, refer to these words…

The problem is the underlying Australian economy is weak and the cracks will open up as the handouts fade. As we have said a number of times, the RBA cut rates below 1% pre-pandemic and is on a path to endless QE. Sadly, the RBA has already lost control of AUDUSD and soon the asset bubbles. 

The US is running hard towards stagflation to avoid a double dip recession and USD is the collateral damage. USD likely to pop on short term risk-off trade but will be in downtrend over the medium term as continues stimulus outlook will continue to debase it. If you don’t believe that…maybe you have heard of Bitcoin! 

Cryptocurrencies only exist due to failures of Governments and Central Banks to manage their fiscal and monetary policies. Central Banks have been given a raw deal as most governments in the West have been bad to shocking in policy reform, growth agenda, debt blowout and blatant rorting. At some point in the last 4-5 years, Central Banks should have stopped proving Albert Einstein’s “Theory of Insanity” (i.e. repeating the same process and expecting a different outcome). 

A currency war by plan or by default is still a currency war.

RBA has lost the currency war and now holding onto the strategy of hope that the US doesn’t blow up the asset bubbles. RBA has been pumping assets like a politician on funding rorts. Trickle up economics has left the economy open to global risks. What could go wrong? Well, RBA is stealing from retirees and savers to bail out zombie businesses despite knowing that it will make very little difference on the upside while leaving a massive savings hole in the long term for the economy. We are burning future growth to bailout current failures. See how well that worked out for Japan and EU! Nothing is free as it is always a zero sum game. Newton’s “Third Law of Motion” (i.e. every action has an equal and opposite reaction).

Comments on US market last close

US market had an up and down day, with month-end window dressing fighting against selling pressure. Growth investors were jamming up tech and value investors were jamming up retail...all other sectors were hit hard. 

RUSSELL leads with +0.7% and NASDAQ next +0.6% while S&P -0.5% and DOW -1.5%. USD moving up hard and smashing commodities and currencies. Copper and Oil hit harder than Gold while AUDUSD has fallen to 77 cents...remember it was 80 just over 24 hours ago. Bonds moved higher as well. The volatility is extreme and the market is scared of reflation. 

US Fed has kept saying they won’t play...yet...but pressure mounting. But not sure what more QE will do. 5-year yields have quadrupled since the pandemic and doubled in a month and that’s under QE. It’s cost inflation and fiscal stimulus with more QE will make it go hyper. Just for context, the Aussie market just delivered three positive consecutive months with aggregate price return below 3%... the last time that happened was early 2011 and we had six negative consecutive months to follow. We will start March with a decent hit on global passive money running away on currency trade.

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

Full SUNSET STRIP report with end of day market stats are on the attached link/pdf.

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Mathan Somasundaram
Founder & CEO
Deep Data Analytics

Over 30 years’ experience in the finance/tech industry. Mathan has worked extensively in all parts of the finance sector (i.e. County NatWest, Citi, LIM, Southern Cross, Bell Potter, Baillieu Holst and Blue Ocean Equities). Currently Founder and...

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