Central banks can ignore inflation but corporates can’t ignore rising costs

The local market delivered a negative day on decent turnover. It’s the fifth consecutive week without a double-digit billion-dollar turnover day, but today was a day of two halves. Bashing in the first half on every sector, then buying in the second half in healthcare and retail recovered a fair proportion of the losses. Solid retail sales data helped to turn the tide on retail, while a US-dollar bounce got the currency trade going in healthcare. Tech and energy were the hardest hit, while healthcare and industrials were the best sectors. Gold still remains the safety, inflation and currency hedge.

The US market tends to underperform after option expiry due to extreme positive option bets in the market with rising leverage. Margin lending growth has hit a 20-year high while volatility is fading to near decade-low levels. 

Low turnover moves in the market can be exaggerated. When you add extreme leverage, options and buybacks in crowded trades, it could get ugly when the music stops. 

US reporting season continues to raise inflation risk while US Fed comments are starting to contradict on inflation and what they will do. The pandemic keeps rising despite vaccine rollouts, while governments are losing the battle to get the public vaccinated as more side effects start to play out. Double variants are spreading and the worry is the efficacy is much lower, while infection and death rates re much higher. Even the most optimistic person expecting rolling annual vaccine shots looks the most likely scenario, as the majority of the world will not be vaccinated well into 2022.

The economic and property debt bubble and market leverage bubble means that central banks can never raise rates. They just have to keep ignoring it till it hits them in the face. Central banks will keep printing money to control yield and that will continue to debase the currency and make inflation even higher. That is why they have a core inflation measure that has been fine-tuned and adjusted over decades to never go up. But the supply side shocks and currency debasement are creating an environment where inflation could spike while Central Banks keep yield suppressed. 

It is going to get very messy before the real recovery starts. Markets are ignoring reality and accepting fantasy from central banks. Since the dawn of time, solving debt with more debt has never worked…but this time it is supposedly different? Time will tell.

Comments on US market last close

The US market fell from the start and faded through the day. We may be moving into the quarter-end asset allocation move after option expiry weak period. RUSSEL -1.96%, NASDAQ -0.92%, DOW -0.75% and S&P -0.68%. Bond yields pulled back and USD moved higher. Oil and Copper down Gold higher. VIX starting to move higher from multi-year lows. Utilities and Gold were the best performers while Energy and Banks were the worst. Netflix reported after market and was down 11% on subscriber growth slowing. Opening up and more competition likely problems. The usual cycle of asset allocation post option expiry runs negative for a week. US reporting season was set up for massive beats and misses like Netflix and price rises like Coca Cola will test that sentiment.

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

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