Bubble Now Pain Later is the only strategy but reflation isn’t going away

Local market started strong again on US lead and lost the momentum and faded to finish a positive day. US market was a mixed bag overnight with DOW and RUSSELL up while S&P and NASDAQ down. It was reflation hit versus opening up. California opening up delivered a boost to recovering Disney stock and that lead DOW higher while stimulus moving through boosted RUSSELL. Market is jumping on any bit of good news while ignoring the bad news. Japan just delivered another economic downgrade while Chinese state funds had to get involved to keep Shanghai Composite from rolling over hard. China has been taking the foot off the stimulus accelerator for a bit and markets are showing that. Tech and Resources were the red sectors today while speculation of IAG exposure to Greensill left a fund manager selling hard before day traders jumped into make a good profit. The markets are very edgy and jumping at shadows.

Locally, the federal government will soon be run out of the Canberra hospital grounds at the current rate of ministers running from media scrutiny. At least there will be less taxpayer’s money handed out to lobby groups to hide the miss management blowing up in multiple sectors. RBA has once again wasted a good opportunity to allow the economic cycle to clean out the economy. They chose to weaken lending standards to prop up asset bubbles and bailout more zombie businesses by stealing from savers and retirees. Don’t worry…someone else will have to clean it up later. Peter Costello warned that current macro may create bubbles. Investors should listen as he has track record in failed leadership, forward thinking and reform. He is talking from experience. Australia has truck load of failed politicians and corporate leaders sitting in boards that do nothing but ride the business cycle and get paid for inaction. They are like the brokers that analyze other businesses but are unable to realize their own model is in decline for decades. Sadly, we keep recycling these failed board members from one disaster to another. Federal government is starting to realize that they are up an economic creek without a paddle. Fake reforms are coming thick and fast. You know we are late in the cycle when the federal government has finally realized there is an energy revolution in battery tech. They are finding new ways to pay the wages for their big donor’s workforce. Just don’t try to get details on anything as there aren’t any. Don’t chase them too hard either. Veterans and Refugees can’t get mental health support to save their lives but ministers run off at the first sign of media scrutiny. Australia is a price taker and such that we need to move ahead of the cycle…not after the rest of the world has had 3-4 year head start!!!

US stimulus has been well and truly priced in. Central Banks are all claiming that rates will not go up for years. Reality may be different but let us assume fantasy for now. The main issue is in the US as weak economy needs constant stimulus but yet it needs to control currency debasement and inflation. Bond market is betting they will get it wrong. Bond yields in the US are near 1.60% while most in the market are now moving towards inflation being above 3% in the next 3-6 months at least. Currency debasement and hyper rising commodity prices with constant stimulus is classic examples of inflation going wrong. Even if you look at the last 14 years of US Fed manipulation and analyzed the distribution of the bond yield discount to inflation, 3% inflation will equate to bond yield above 2% even at the extreme low part of the distribution curve. US Fed will be forced to intervene. The question is not if they will intervene but when. Bubble Now Pain Later is the only strategy but reflation isn’t going away!

Comments on US market last close

US market started positive on stimulus and then faded as reality post handouts hit. DOW was up over 600 and finished up 300. RUSSELL held positive while S&P faded to negative as NASDAQ got belted by 2.4%. US bond yields are flying again...10 year hit 1.61%...and USD moving higher. DOW was mainly boosted by a Disney as California reopens. Growth to Value rotation is going hard and historically risky part of the cycle. Banks were the best while Tech was the worst. EU markets were up 2-3% while EM were down a bit. China indices are breaking up trend like NASDAQ. Good news out on stimulus and now markets have to deal with the inflation side effects.

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

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