FOGO (Fear Of Getting Out) is a real problem...it is not just a flu!

Local market had a positive day on global reflation/currency trade but back to low turnover. Reflation trade continues to drive investors out of bonds and into equities. US 10 year bond yield is now above 1.10% and above Aussie 10 year bond yield. AUDUSD fell overnight as USD strengthened but during the day it started to move higher and that brought back the currency chasers to buy our market. Health Care and Banks did the heavy lifting but Tech and Retail were the best while Utilities and Property were under pressure the most. Bond markets continue to flag rising inflation risk while Equity markets are pricing in hope, recovery and endless money printing. Equity markets moved up on No Blue Wave, Weak Inflation and Low Bond Yields. In the land of the blind, one eyed man is king. Low inflation and yield supported stretched multiples. But now the markets are running on reflation and higher bond yields due to blue wave. And more market pundits are saying the complete opposite to what they said for months and expect the same outcome…i.e. markets go higher. Historical high equity multiples and rising bond yields can’t co-exist in a fading global economy taking hits from new waves of pandemic. Investors need to deal with FOGO (Fear Of Getting Out) and it is not just a flu. Exactly a year ago I raised the risk of the Covid 19 becoming a pandemic and almost everyone said…don’t worry it is just a flu! Never bet on an outcome that everyone things one way. It can only go wrong and hurt you…like the senate runoff in the US recently. Most pundits have mainly become MOMO (Momentum) traders and that is a form of FOMO (Fear Of Missing Out) disease after a while. FOMO is based on inflation for asset prices. You buy now as it may cost more tomorrow due to falling cost of borrowing. That has changed. Cost of borrowing is going to rise over the next decade and the asset prices are going to fall unless the asset can outgrow the cost of debt. FOGO is a real problem and not just a flu…deal with it!

The US 10 year bond yield is breaking bad for equities as it hits daily new highs since pandemic crash. The bond market is driving the change and the flow on effects through global passive asset allocation is pushing equities higher…irrespective of what the valuations are! This is bad inflation and it’s driven by falling USD and government handouts while good inflation is driven by recovering economic growth creating wages growth and consumer spending growth to drive up prices. The labour market is carrying way too much slack to drive wages growth for the best part of the next decade as technology continues reduce demand. Even the US Fed members are now coming out and saying inflation is going to run faster than expected and they are going to let it run hot before raising rates to hold it. The concept that rates won’t go up till 2023 are not based on current data. The inflation genie is out of the bottle…high multiples are not going to be sustainable now…US Fed is not going to step in till it goes wrong…buckle up! US Fed under new administration will be boosting economy and not the asset prices. Markets will have to fend for themselves.

US market last close > US market was up again on the macro trade out of bonds to equities continuing as reflation takes hold. US 10 year reached 1.09% while US 30 year reached 1.87% overnight. Macro trade is pushing a lot of non correlated moves and getting investors to chase yesterday’s laggards. NASDAQ outperforming with USD. Commodities remain in the sweet spot for reflation but question rising is about demand holding up as more lockdown restrictions come up around the world. Reflation hitting Utilities, Infrastructure and Property sectors as yields rise. Everything that can go right for equities have mainly priced in while ignoring risks. Macro trade likely to run out of steam by the weekend while economic reality doesn’t run out of steam. Non-farm payrolls coming and that could be weak after ADP data showed first private monthly job losses since pandemic.

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

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