Central bank fairy tales are unwinding into "Happily N'Ever After"
Local market had another low turnover positive day in holiday period while quarter/year end window dressing has already started with a few days to go. It’s a short week and almost all local fund managers are on holiday. Expect month/quarter/year end macro asset allocation trades to start taking over global markets. Despite equity fund managers would like the markets to remain positive, the asset allocation moves are likely to be out of equities and into bonds. Time will tell if the macro trade plays out before the month end or after…may be after given the US tax period ends on Thursday.
The main positive macro over the weekend were the US cut down stimulus deal passing the White House and Brexit deal getting agreement with almost no details sorted. Trump blocked defense bill is now being sent back with veto busting majority. Trump influence is diminishing but anything is possible for the next few weeks. The markets are in peak optimism level that everything as glass half full while economic and pandemic problems keep pointing to glass half empty. Lack of reform and pre-existing structural problems are weighing on economic recovery and the only solution seems to be more money printing. The economic reality suggests that we should allow the recession cycle to clean out the dead wood to drive real growth and reform but that is not in line with vested interest groups sitting on asset bubbles. Expect more money printing to help the minority at the top end and hurt the majority in the bottom end of town.
RBA has been slashing rates with promise of stronger labour market and wages growth since 2015 despite the data showing the opposite. We had better trend in 2010/11 and 2017/18 but alas that was short lived. Excess Labour Rate shows that we had an 80’s recovery cycle before the early 90’s collapse. The recovery from the early 90’s blowup took nearly 2 decades to get back near 10%. If you adjust for the JobKeeper, we are currently sitting near the peak Excess Labour Rate from the early 90’s. The previous recovery cycle was from a much stronger, better reformed, low debt, higher interest rates, lower technology replacement and younger Australia with the undeniable constant boost from double digit growing China. All of the positive catalyst of the last cycle are not there anymore while China relationship is going to get worse before getting better. Even if you ignore all the reality of the previous cycle, it took nearly over 15 years to normalize the job market back to drive wages growth. Participation rate in Australia has been rising on a on average about 1.5% per decade since the 80’s. Weak wages growth will drive more people back to work and may even add more excess labour to the already over supplied market. RBA and Government will continue to stick to alternative facts, denial and hope as recovery strategy but ignoring economic reality has never been a good strategy. Monetary and fiscal policy has been all about boosting asset prices and nothing to do with reforming economy for the last 4-5 years. Unless we have a proper recession economic cycle to clean out the corporate dead wood, don’t expect wages growth to beat anemic inflation over the next decade!!!
Overnight US markets had a positive day on the back of stimulus bill and Brexit deal getting passed. It was a weird day in trading...S&P lead the indices while Russell ticked into negative. USD and Bonds were mainly unchanged while Oil fell. Gold ticked lower and Copper ticked higher. Energy and Gold were the only negative sectors in a low turnover period while Tech, Retail and Property were the better performers. US and Global fundies look like holding it together for the year end performance and then run for the door before reality hits. Bond yields are high and rising with rising inflation outlook. Growth to value rotation is happening but gradually. Trump volatility is subsiding and January will resolve a lot of key uncertainty. No one is going to make big moves when too many things are moving around. Most are likely to play the wait and see routine over the next few weeks while period end asset allocation trades are likely to be out of equities and into bonds.
Remain nimble, contrarian and cautiously pragmatic with elevated global macro risks!!! Buckle up...it’s going to get bumpy!!!
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