Central banks keep stealing from savers and telling them it’s for their own good

The local market had a choppy positive day on the back of miners, after falling early morning into negative territory. Relatively low turnover continues into the eighth week without a double-digit turnover day. Size mattered as Micro Caps were the best while Mid Caps were the worst. Miners and Energy were the best sectors while Health Care and Industrials were the worst.

Delta waves are hitting everyone. Few states like Florida and Texas is running into hospital capacity soon as Delta spreads. China is starting to flag over 100 different areas as medium to high risk Delta exposure areas. We can forget the rest of Emerging Market as Developed Markets have sucked out the supply well into 2022 before EM Ex China start to vaccinate their way out of the pandemic. Supply side issues are not transient. It may be different this time!

Bond markets are rallying at the same time as Equity markets are hitting all time high. If that is not confusing enough, property markets are hitting new highs while inflation is taking off. Central Banks want us to believe that costs are going to rise but future cost growth will be slower. But recent Fed talker’s confidence in that scenario seems transient, unlike inflation. The current pace suggest inflation over the next 2-3 years will take 4-5 years for wages growth to counter. If we have a stagflation or slow down, then that it will take even longer. We are sitting on asset bubbles in everything and the economy is coming to collect. The problem is the asset and debt bubbles are too big to fail and Central Banks will not even taper stimulus. Rate rise cycle is fairy tale in the current state.

The asset bubbles and stimulus predominantly favour the top end of town while the bottom half barely survive through the mess. It is a zero sum game. The top end of town is stealing from retirees and savers. The stimulus is created by stealing returns from savers and retirees. A decade after the GFC, we continue to bail out bad risk takers over risk averse savers. When did we forget that it has never worked over time? Just like Central Banks have sold the concept that inflation can be ignored as transient, they have also successfully sold it to retirees and savers that stimulus is there to help them when in fact makes hurts their long term outlook. 

History shows that eventually markets see through and realize the emperor has no cloths. Then it’s race to the exit. At this point the market is buying the dream that economic structural problems and historic debt can be covered up by all time low real yield. Bonds, Equities, Property, Commodities, Stimulus and Inflation are on fire while global economic growth fades and pandemic waves return. Where do we go from here? More stimulus? What can go wrong? It may be different this time!

We continue to look at sectors that will benefit from the eventual equilibrium from the conflicting macro signals. Markets are buying the transitory argument from Central Banks for now. When that becomes more persistent and drives downgrades, markets may not be able to ignore inflation. We continue to favour Gold, Supermarkets, Insurance and Agriculture exposures to be eventual beneficiaries from the cycle clarity.

Seasonal cycles suggest the US market peaks this week as the US reporting season deluge hands over control to macro uncertainty. It may be different this time!

Let us run through the main data points released in the last 24 hours…

Producer Prices In the Euro Area increased 10.20% in June of 2021 over the same month in the previous year. Producer prices in the Euro Area rose 1.4% from a month earlier in June 2021, a 13th consecutive month of increase and in line with market expectations. Upward pressure came from energy (3.3% vs 2.1% in May), intermediate goods (1.3% vs 1.7%), capital goods (0.4%, the same as in May), durable consumer goods (0.3% vs 0.4%), and non-durable consumer goods (0.3%, the same as in May). On a yearly basis, producer prices jumped 10.2% in June, a near record rate, reflecting a low base year due to the pandemic and the re-opening of the bloc's economy.

The Logistics Manager’s Index was little changed at 74.5 in July of 2021 pointing to the third-highest growth ever in the logistics sector fueled by metrics from across the index. The gauge for warehousing prices was at an all-time high (88 vs 85.4 in June) mostly because of the lack of available capacity. Inventory levels continued to rise at an above-average rate (66.4 vs 67.8) as firms were abandoning JIT principles and ordering earlier and in larger quantities to avoid stockouts. Also, transportation prices increased (91 vs 87.3) as the strain of this excess inventory was being felt on transportation networks.

Factory orders in the US surged 1.5% mom in June of 2021, following an upwardly revised 2.3% rise in the previous month and beating market forecasts of a 1% gain. Transportation equipment led the gains (2%) followed by machinery (1%), computers and electronics (1%) and electrical equipment and appliances (0.3%). On the other hand, orders for fabricated metal products were down 0.5%. Excluding transportation, factory orders were still up a strong 1.4%. Year over year, orders soared 18.4%.

The IHS Markit Australia Composite PMI decreased to a 14-month low of 45.2 in July of 2021 from 56.7 in the previous month, the final reading showed. It was also the first contraction since August 2020, as private sector output and demand across both the manufacturing and services sectors declined.

Retail sales in Australia declined by 1.8% month-over-month in June 2021, unrevised from the preliminary reading and after a final 0.4% gain a month earlier. This was the first drop in retail trade since February, impacted heavily by stay-at-home orders for multiple states and territories, with the largest falls seen in cafes, restaurants, and takeaway services (-6.0% vs 0.7% in May), clothing, footwear, and personal accessory retailing (-9.5% vs flat reading), and department stores (-7.0% vs -0.7%). Other retailing (-1.6% vs 0.7%), and household goods retailing (-1.3% vs -1.1%) also fell. Food retailing (1.5% vs 1.1%) was the only industry to rise as ongoing and re-introduced coronavirus restrictions required households to substitute eating out for eating at home. For the June quarter, retail trade grew by 0.8%, reversing from a 0.5% fall in the first quarter.

The Caixin China General Services PMI climbed to 54.9 in July 2021 from a 14-month low of 50.3 in June, signaling a sharp and accelerated expansion of services activity amid the successful containment of the recent uptick in COVID-19 cases. New order growth accelerated from June's recent low, while employment rose slightly on the back of a renewed increase in backlogs of work. In the meantime, new export business was broadly stagnant as the pandemic continued to weigh on global demand. On the price front, the rate of input cost inflation quickened notably, while output charges posted the largest increase this year. Looking ahead, business sentiment picked up from June's nine-month low but remained softer than that seen on average over the series history.

Comments on US market last close…

US market had a positive day after two negative days. It was similar move higher in the morning but the afternoon selling didn't come today. RUSSELL +0.37%, NASDAQ +0.55%, DOW +0.80% and S&P +0.82%. VIX pulled back to 18. The reporting season is running through the industrials and they are generally positive backwards looking as the economy is coming off peak growth. Yields fell and then recovered to flat while USD climbed and then faded back to mainly flat. Commodities were weaker on growth worries as delta spreads while Gold was mainly flat. Energy and Industrials lead the green day with Property and Utilities as laggards.

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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