“Fake it till you make it” only works in Australia if you have an exit plan or China bailout

Local market started positive for an hour and then rolled over and fell all day to a negative day. Resources and Financials were under the pump while Tech and Health Care were the outperformers. It’s the reversal of the reflation trade from growth to value but this has all the hallmarks of a dead cat bounce. US 10 year bond yield fell from the peak of 1.61% to 1.54% overnight. This is after recovering from 0.51% in early August 2020. It has run 50bps in 2-3 month and its tripled in 7 months. Nothing goes up or down in a straight line. There is always relief reversals in any trend and we are in one now. NASDAQ was up over 5% at one point for 5bps pullback after a 110bps rally in 7 months. The market is jumping at shadows and chasing any speck of positive news to drive higher or panic. IAG share trading yesterday was a classic example of jumping at shadows and the extreme panic status of the market.

US inflation data is out tonight and that should start to flag the pick up we are expecting in 2021. May be that is why all the commodities fell overnight despite weak USD but Gold and Silver popped higher. Over the next 3-6 months, US will be cycling very weak data from pandemic period and that means it could get pretty big. Everyone is saying the inflation pickup will be short term but commodity prices only started to go hyperbolic in the last quarter and if they don’t collapse, we will be cycling higher costs for the next year. We are also ignoring the important fact that USD has been tanking for the past year and that alone should be driving substantial inflation in the US. Even China data today showed their inflation flags are running multi year high…and they have a strong currency compared to the US. China has been tightening and we are starting to see the effect of credit squeeze and pollution control is starting to flow into Iron Ore. Iron Ore has been strong as a house but even houses are not like what they used to be. AUDUSD has broken the up trend and it is starting to look very unstable with Iron Ore starting to roll over. RBA keeps saying they won’t move till inflation picks up and wages growth returns. Forget wages growth as that just isn’t coming without reform creating real jobs. We are creating fake jobs by fudging methodologies. If only the economies were so simple that you can run an endless credit card and have the economy growing forever? “Fake it till you make it” only works if you have an exit plan. It seems like most of the western world, Australia is stuck faking it but not making it. We may be playing without our hail Mary play for the last 30 years…that’s right…there may be no China bailout this time around!

US debt status is heading towards the worse state its ever been. And the problem is not covid and it’s easy to blame that. US was always heading towards prolonged recession well before covid and the massive inequality meant that the only get out of jail free card was to blow out debt to historical terms. It did not matter who won the election last year as both sides only had one play and the other side will complain. It is what Americans do so well. You can always rely on the Americans to do the right thing after they tried everything else. The problem is that the reflation cycle delivers a weak bond market and the debt refinancing means US Fed will be flooding the weak market with issuance at historic levels for decades to come. Just for context, US Fed will be issuing $120b worth of treasuring later this week. On the other hand, number of market pundits are calling that Japanese investors will jump in and finally start buying US treasuries. Just for context, it makes no sense to buy negative real rates with falling currency risk. “Bubble Now Pain Later” is the only strategy but that doesn’t mean it is going to work!

Comments on US market last close

US market was volatile and up. NASDAQ lead with short covering jump above 5% before closing up 3.7% with Tesla up 20% at the peak. Next RUSSELL...up 2.2% on economy opening up and vaccine rollout. DOW was flat while S&P up 1.4% on Tech like Tesla. This massive growth short covering bounce was due to US bond yields coming back to 1.54% after hitting 1.61%. USD, Copper and Oil down while Gold jumped 2%. Getting ready for Feb inflation data coming Wednesday night and $120b bond issuance into a weak bond market later this week. Retail, Tech and Gold lead the market while Energy and Banks were the negative sectors. Expect volatility to remain elevated through March.

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

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