Central Banks are repeating the same mistakes and expecting a different outcome

Local market was choppy all day and finished a slight positive day like US market. We have gone through a whole month without a double-digit turnover day and today was weak even for that trend. Markets continue to struggle for sentiment as high inflation and fading growth get exaggerated by new pandemic waves. Currency and Bond markets are not supporting Equities but Central Bank fudges to hide the structural cracks are making everything incoherent. Size mattered with Micro Caps being the best while Large Caps were the worst. Health Care and Tech lead the sectors while Energy and Banks were the worst. Global investors dominated the market in a low turnover day while retail investors were exaggerating the volatility in micro caps.

Lets start the elephant in the room. NSW had the Bondi cluster that has now spread around the state and the country. We confused luck and system advantage to management skill and it back fired. The risk of Delta variant and the lack of vaccine supply was known to everyone. It is now looking like restrictions are going to remain in play well into August. Economy will take a hit and economic support will provide some buffer but hard to see small business come out of this cycle without taking a few hits. Most expect unemployment to rise up between 5-6% over the next quarter. Decisions were made against the trend and it hasn’t worked out. The economy and the public will pay the price. It may be different this time!

ECB update overnight was a clear signal that they are completely buying into the Japan style ponzi scheme. Endless stimulus with moving opaque targets that are never met. It is all about feed the asset bubbles while delivering a perception of growth. These are not real growth but paper growth that allows the public to get more debt due to the improved debt to equity ratio. As with any ponzi scheme, it works till it doesn’t. When the bubble bursts…and it always does…the debt to equity ratio blows out and the house of cards collapse. 

Since they have been on this strategy for more than a decade, it is too hard to turn the ship around and do real reform. It is easier to sell the short term fantasy than a long term reform. Parts of EU will sleep walk through another lost decade. It may be different this time!

US earnings season is loaded up with earnings beat. It is currently running at mid 80% beat while historical trend suggested 90+% beat expected. US market was trading at such high historical premium to long term average that even the 90% beat will only bring it back to 20 year high multiple. It may be why the US Fed resorted to reduce bond issuance and jam up QE buying to boost the bond market. Can the US Fed keep the bond yields at such depressed levels? They may be able to keep this charade to hide the symptoms in the short term while mean reversion looks inevitable as historic fiscal debt needs to be financed. It may be different this time!

Central Banks are playing with inflation in a fading growth cycle. They are planning to run the inflation hot with asset bubbles to deliver strong growth. Historic track record is weak to say the least. It may be different this time!

You can view the full Sunset Strip report, with charts and the end of day market stats, on the following link.

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