Central Bank with credibility sounds like a fairy-tale
Local market started negative and kept on sliding through the day to deliver another negative day. The main story of the day was the US Fed update overnight while local job data was another fantasy not linked to reality. The Resource sectors (i.e. Energy and Miners) and Retail were the only positive sectors while Growth sectors (i.e. Health Care and Tech) and Yield sector (i.e. Property) were the worst performers. Gold stock have turned the corner after US Fed confirmed that real rates and real yields are going to be negative for a few years yet. Central Bank credibility is collapsing to the point that it is helping to raise cryptocurrency credibility despite the uncertainties.
US Fed did exactly what we expected them to do. They took the easy way out. US Fed delivered an outlook statements that were lacking clarity or logic within the data itself. Everyone knows that almost every region is going to put out massive growth numbers for the next two quarters as you recycle weak pandemic lockdown cycles. The flip side of that is the costs have skyrocketed and inflation is also going to be massive. The problem for US Fed is the global currency has been steadily decreasing through the year and that will continue to boost inflation longer than growth. US Fed conveniently managed to deliver massive growth bounce and then stabilizing growth with job market steady recovery but yet no real inflation pickup. They did not talk much about the bond market or the currency market. It was a classic update you get from a politician…selective forecasts which lack in details or context. Equity markets are a slow learner and history shows that it takes a few days but Bond markets are quick to pickup that Central Bankers high on “hopium”. Bond yields ran up ahead of the update and then it pulled back on the update before running up again into the close. Bond market and gold price are telling you that US Fed chose more fantasy over reality. It is becoming clear that US Fed is losing control of the Bond markets. Bond markets are like a teenager. Once you lose control, it is going to be a really costly exercise to get control back. As we wrote about before, we expect US inflation to hit 3-4% or higher in the next few months and that will drive US 10 year bond yields to 2-3% or higher. At that point, US Fed will have no choice but to burn multiple trillions of dollars in balance sheet to bring back bond yields in an over supplied market. Bond market can smell fear and taste the sweat pouring out of Jerome Powell as he avoided to talk about them. It was like an angry ex partner after a bad break up. Bond market has broken up with Central Banks after US Fed ghosted bond traders. Central Banks can spin it any way they like but cost inflation is the bubble buster. Structural economic problems, fake economic indicators, lack of reform, blown out inequality, currency debasement, historical debt pile and budget deficits for at least a decade means US Fed has just set up asset bubbles for a world of pain. Question is when, not if.
The second major macro event of the day was the jobs data in Australia. Total employed data from ABS with seasonal adjustment suggests we are back to pre-pandemic. Shouldn’t we be putting interest rates back to pre-pandemic level? No…Federal government claims it as a win as they have no idea about data or budgets or forecasting or even accountability. They do not realize that data has been fudged for so long that it is now completely out of synch with reality. RBA does not talk much about the job data from ABS. They expect job market to take another 2-3 years to reach pre-pandemic level. In simple terms, ABS is making a mockery of the data collection and sampling process. We supposedly created 89k jobs. To put that in context, when adjusted for population…that is like US creating 1.25m jobs for nonfarm payrolls…to put context the best number in the last 4 months was a quarter of that. Let us take it for what it is. We created 89k full time jobs that only added 55% of the hours of a normal full time worker. We added a lot of jobs with enough hours to classify them as full time but it smells like part time. Even if you look past all that, unemployment fell 0.5%...that was mainly moved into a 0.4% rise in underemployment and 0.1 move in participation rate. Government may be clueless when it comes to data but don’t expect RBA to give credibility to ABS data when rates are 10bps. Someone is seriously fudging data or overriding it. Is it the ABS, Government or RBA? They can’t all be right when they contradict each other. Reality is scarier than fiction.
Comments on US market last close… US market was selling into US Fed update and then bought it back to finish positive. Bond yields were ripping higher into the update and then slide back but still on a strong up trend as 10 year US yield is 1.65%. USD fell from gains to loss and boosted metal prices while Oil remains weak. Gold is picking up momentum as negative real rates are here for years. RUSSELL was the best up 0.7% while S&P was the laggard up 0.3%. Gold and Retail were the best sectors while Utilities and Health Care were the worst. Historically it takes a few days for markets to digest US Fed updates. Bond market is not buying the US Fed fantasy projections. Transitory or not, real inflation is going higher...like 3-4%... and bond yields will chase... like 2-3%. US Fed just lost control of the bond market. It’s going to cost multiple trillions to get that back. Financial stress is going to rise. US Fed just chose fantasy over reality and bond market did not buy it.
We are in uncharted territory with central banks and governments continuing to swim in the river denial. Let me refer to something I wrote in a previous note to give some clarity…
The mess we are in reminded me of the speech delivered in a classic movie called The Big Short. This speech had profound meaning for me. Take the time to watch the movie. I thought I would paraphrase it for Australia. It goes something like this…“We live in an era of fraud in Australia. Not just in banking, but in central banks, governments, regulators, rating agencies, media, tech, insurance, investment, education, religion, food, even cricket...What bothers me isn’t that fraud is not nice. Or that fraud is mean. For fifteen thousand years, fraud and short sighted thinking have never, ever worked. Not once. Eventually you get caught, things go south. When the hell did we forget all that? I thought we were better than this, I really did. And the fact that we are not doesn’t make me feel all right and superior. It makes me feel…sad. I just know at the end of the day average people are going to be the ones that are going have to pay for all this. Because they always, always do.”
Remain nimble, contrarian and cautiously pragmatic with elevated global macro risks!!! Buckle up...it’s going to get bumpy!!!
Full SUNSET STRIP report with end of day market stats are on the attached link.
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Over 25 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...