Greed makes the world go round
The local market started negative and ground its way back to flat territory before the pump at the close delivered a slightly positive day. The market has been struggling for sentiment in recent days and retail investors are jumping at shadows. The best performing stock yesterday was the worst-performing stock today with no change to the macro or the actual stock.
Size mattered today with micro caps leading the performance while mid-caps were negative. Retail and healthcare led the sectors while energy and utilities were the worst performers.
The main cycle that is spooking the market is the rally in bonds when inflation is taking off. Central Banks have been manipulating the markets so much that all asset classes have become correlated and created a massive problem for large investors trying to diversify to reduce risk. We have mega super funds buying property around the world for rental yield and trying to privatise key listed infrastructure assets to create that non-correlated asset in a correlated world.
The bond market has always been a better risk manager, while the equity market has been a better growth manager and the property market has always been a better yield manager and tax evader. Central banks have created bubbles in every asset class. The historic nature of stimulus and debt in the world has forced central banks into talking alternative facts and burning balance sheets to hide the symptoms of the broken system.
The problem for the central banks is that every market participant is driven by greed. Markets are profiting from the trap that the central banks have created for themselves.
Data clearly shows the global economy has passed peak growth and inflation may have not peaked. Even US Treasury Secretary Janet Yellen confirmed that she expected inflation to keep rising for a few months at least before peaking. We know growth has peaked but we are being told inflation will peak in Q3…at worst Q4…since it’s transitory… supposedly! Even on a simplistic analysis, it would be logical to assume that inflation is going weaken growth as consumer spending will take a hit from rising prices.
The US is likely to be facing rising inflation and fading growth in Q3…may be even Q4. Central Banks are hoping that supply-side issues magically recover and commodity prices magically pullback and pandemic waves magically disappear. It may happen and it may not. The bond market is worried that it may not happen and growth will fade with rising inflation. The good thing is that slowing growth will curb inflation as demand falls. Since we live in a world driven by greed, supply chains are benefiting from higher prices, higher wages and margin expansion. They are not incentivized to increase supply to fill demand.
The most likely equilibrium is seems to be lower demand meeting lower supply than higher supply meeting higher demand. Central Banks are killing growth to save asset prices and that will hurt the majority in order to benefit the minority. It may be different this time!
The other part of the supply/demand greed cycle is a simple fact that stimulus brings forward consumption and debt loading. It is a short term fix to buy time to do structural fixes in the economy. We did the stimulus but not the reform fixes. More than a decade of stimulus and historical level of debt loading has created a valley of deleveraging cycle with very low consumer spending. The consensus view is that there are trillions of cash on the sidelines waiting to hit the retailers and the markets. This assumes that asset bubbles remain elevated forever. In a world drowning in debt, most are in denial of the asset bubble risk. If asset bubbles burst, the debt bubble will deliver a potential lost decade for growth. Central banks are well aware of this mess and will continue to deliver stimulus while denying the reality of the real debt versus asset bubble equity.
Central banks have no choice but to let inflation hit the economy and slow it down. Bond markets are greedy too and they are moving before the market moves to risk off trade. Can the asset bubbles survive fading growth without more stimulus? It may be different this time and I may run 100 metres in five seconds…or maybe not!
We are at the back end of the option/futures expiry week in Australia and the US. History suggests that markets outperform into expiry and underperform after. The NSW mockdown/lockdown has now been extended till the end of July and we have triggered a VIC lockdown. Sorry…We are still in mockdown, but once again the NSW government may move after it’s too late. VIC may go into lockdown and come out before NSW gets out of lockdown. Historical trends suggest the NSW base case is likely to go into mid August. Time will tell.
Key data points released in the last 24 hours
The price index for US imports advanced 1.0% from a month earlier in June 2021, following an upwardly revised 1.4% increase in the previous month and compared with market expectations of 1.2%. Cost for import fuel rose 4.7% (vs 5.5% in May), boosted by higher prices for petroleum and natural gas. Meanwhile, nonfuel import prices were up 0.7% (vs 0.9% in May) on the back of higher prices for nonfuel industrial supplies and materials; foods, feeds, and beverages; consumer goods; and capital goods. Year on year, import prices rose 11.2% in June, following an 11.6% increase in May, which was the largest annual advance in prices since September 2011.
Prices for US exports climbed 1.2% from a month earlier in June of 2021, following a 2.2% advance in May and in line with market expectations. It was the 13th straight monthly rise in export prices. The cost of agricultural products rose 1.5%, as higher meat prices (10.6%) more than offset lower prices in corn (-6.1%); wheat (-5.2%); and soybean (-1.3%). Meanwhile, nonagricultural export charges went up 1.1% from a month earlier, driven by industrial supplies & materials (1.9%); capital goods (0.4%); consumer goods (1.0%); automotive vehicles & parts (0.1%); and nonagricultural foods (0.1%). Year-on-year, export prices hiked 16.8%, easing from an upwardly revised record 17.5% jump in May.
360K people claimed for unemployment benefits in the latest week, less than an upwardly revised 386K in the previous period, and matching market expectations. It is a new pandemic low figure, although initial claims remain almost double the 200,000 levels we saw before the coronavirus pandemic. The four-week moving average, which removes week-to-week volatility, was 382,500, a decrease of 14,500 from the previous week's revised average.
Employers across the country have been complaining about the struggle to fill open positions, citing ongoing labour shortages due to enhanced benefits, concerns about contracting COVID-19 and finding childcare. Many analysts expect labour shortages to ease by the fall, with schools set to reopen to alleviate child care concerns and unemployment benefits set to expire in all states in September.
Industrial production in the US increased by 9.8% from a year earlier in June 2021, easing from a revised 16.1% growth in the previous month, reflecting a low base year and ongoing economic recovery. Production rose at a softer pace for both manufacturing (9.8% vs 17.9% in May) and utilities (2.1% vs 3.5%), while mining output growth accelerated (17.8% vs 17.0%). Industrial production in the US increased 0.4% mom in June of 2021, below a downwardly revised 0.7% in May and market forecasts of 0.6%. Manufacturing output edged down 0.1%, as an ongoing shortage of semiconductors contributed to a decrease of 6.6% in the production of motor vehicles and parts. Excluding motor vehicles and parts, factory output increased 0.4%. The output of utilities advanced 2.7%, reflecting heightened demand for air conditioning, as much of the country experienced a heat wave in June. The index for mining increased 1.4%.
Comments on the US market last close
US market was mainly negative with more than usual non-correlated moves during option/futures expiry week ending. NASDAQ -0.70%, RUSSELL -0.55%, S&P -0.33% and DOW +0.15%. VIX back above 17. Central bank talkers keep saying peak stimulus but at the same time, they have no plan to curb the excesses. You know they are in denial when you are buying tens of billions of mortgage-backed securities with house prices at all-time highs and it’s not a bubble worry!!! J
anet Yellen, Treasury Secretary, has flagged inflation will keep rising for a few months before peaking while living cost rises and house prices worry her. Yields keep falling by 5-7 bps a day.
The US dollar bounced on the move to risk-off and yet metals also went up.
Oil is falling as demand worries in rising COVID restrictions and more supply from a new potential OPEC+ deal.
Asian markets were choppy after data confirmed moderating China growth. European markets were down around 1%.
Utilities and staples were the best sectors, while energy and tech were the worst. We are going into a seasonally weak period with the domestic-facing RUSSELL back at the February level, bonds rallying, inflation running and new waves hurting. Markets tend to be weaker after option/futures expiry.
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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