Debt-fuelled socialism is being dressed up as capitalism, but reflation is coming

Local market delivered a positive day on weaker turnover, where global large cap buy portfolio boosted the market around midday before a slight slide into the close. Markets are trying to work out the new dynamics between reflation and recovery in a post-pandemic world. We are still uncertain when the world moves to post-pandemic. Variants are being reported to have different efficacies while vaccine may not stop you from being a spreader. There is one thing for certain. The virus will continue to evolve and vaccines may have to do the same. 

Big Pharma management continues to echo the comments that we may be in damage control mode with multiple jabs a year for a few years before the pandemic subsides. Even if the vaccines work and the logistics work - that’s a lot of if’s - we are not going to clear developed markets till late Q3, and emerging markets could be another 12 months away. That being said, markets have priced in V-shape recovery for everything from COVID-19, to economy, to job market. The only problem is the best case scenario is that the world returns to the recession bound low growth pre-pandemic status.

Despite the alternative facts being spun by RBA, the simple evidence is that they cut rates below inflation ahead of the pandemic as the economy was a mess and there was no wages growth in sight. Remember that every rate cut since 2015 was about wages growth and inflation, and (not backed up by data) mainly hope. Sadly RBA will keep sticking to fairy tales about inflation and wages growth while pumping asset prices and bailing out the top end of town by stealing from the savers and retirees - but they will never say that - they never do. Insanity is doing the same thing and expecting a different outcome. 

I am not saying RBA is insane but there is something out of whack when you keep doing socialism for the top end and capitalism for the rest and it keeps getting worse. 

Now there is a push about going negative rates. That has worked so well for Japan and EU that we should definitely do it (that was sarcasm!!!). We have already proven insanity. So it is not a huge leap to classify crazy status. Trickle-down economics is the biggest lie in capitalism. If you believe that, then you understand RBA. Capitalism only works with strong regulation to maintain standards and equity within the population. When you start fudging it to get a short term kicker and then it becomes standard operating environment, Capitalism will turn around and destroy itself due to GREED.

Trickle-down economics in weak regulation will force structurally broken economies towards socialism. Western economies are in denial, while almost every sector is swimming in handouts, tax cuts and subsidies. The stupidity is that it becomes a race to increase subsidies to become more profitable. It is the complete opposite to capitalism. Every industry wants a massive subsidy in tough times but never gives it back in good times. In the end, government subsidies are the main driver of industry growth in most of the western economies. We all delude ourselves that the West is so much better than the East but reality is far from it. Don’t expect miracle reforms. Western economies are being taken into socialism by phenomenal debt loading by conservative leaders. What was the odds of that happening? Probably the same as a mid-40 year old quarterback going to a new average team and leading them to a Superbowl win.

Reflation is a key thematic and the markets are waking up to it 

We started talking about reflation in mid-2020 and most fund managers ignored it. The data is blatantly obvious that inflation is about to sky rocket and central banks do not want to talk about it. Ignoring a problem has never been a solution. The major problem with the current reflation is that it’s not driven by demand but purely cost inflation. The weakest link is US and they have rising costs, falling currency and money printing like never before. There is nearly 10 million out of work, compared to pre-pandemic, and rolling 12 month average non-farm payrolls are worse now than at the bottom of the GFC. US will inevitably get dragged into part socialism over the next few years. Currency debasement will inevitably pickup pace. The rising interest in Gold and Bitcoin etc are inevitable!

Few reflation flags from zerohedge…funny how they all point to Central Banks losing control.

The positive news as an investor is that there are ways to improve your risk weighted returns while the global passive money flip flops with macro winds. US bond yields are going to rise and that will raise cost of borrowing and hurt all asset prices. The main beneficiary of rising macro risk, rising inflation and falling USD is the Gold sector. It is rebounding from the value territory and will shine as US moves into money printing mode and debase USD. The recent pullback was driven by ETF outflows in late 2020 but that has turned to inflows in January. Time to buy some protection…gold is shining again!!!

Comments on US market last close 

US market was aimless and flat with bond yields holding elevated levels as reflation bites. Investors are struggling to match up multi-decade high optimism in market bets with stimulus against reflation and weaker economy. Putting it like-for-like against President pandemic data, it is hard to see this optimism last. Once again RUSSELL outperforms the rest as the rotation plays out. USD falls and commodities rise. Bonds mainly flat. European markets mainly patchy and flat. Property and Industrial were the best sectors while Energy and Retail were the worst. Impeachment 2.0 has started in the US and RBA has to be looking at QE 3.0 after AUD/USD moves. Elon Musk pushing up Bitcoin while WHO clearing China lab issues in Wuhan. Hope you have enough protection via gold, etc.

Remain nimble, contrarian and cautiously pragmatic with elevated global macro risks!!! Buckle up...it’s going to get bumpy!!!

Not already a Livewire member?
Sign up today to get free access to investment ideas and strategies from Australia’s leading investors.