Honey, I broke the economy. It wasn’t me, it was reflation!

Local market delivered a negative day on low turnover on growth worries with most Asian markets closed for the holidays. Asian holidays meant there weren’t enough global passive money flow while local flows haven’t picked up from the start of the new year. All sectors except Telecom were negative. Telecom, Property and Supermarkets did the heavy lifting to keep the market from falling further in weak volume. Victoria going into five-day lockdown was the expected negative catalyst in the afternoon. It was inevitable as UK variant got out of quarantine hotel despite the processes. The small probability high risk (i.e. reverse lottery risk) is that variant has spread to other states like NSW and Queensland. Due to the fast-spreading nature of the variant and the relaxed attitude of people in other states, it makes us all susceptible to things going wrong. Let’s hope it doesn’t. As usual, the Federal government had no plans on anything…except claiming the good news and go hiding when it’s bad. We should have a unified lockdown standard by now. Like every other policy setting, we had a lot of song and dance but no policy work. There is plenty of blame to go around but Australia has been on DIY policy work for years. Individual states are running their own plans and policies with no coordination at a Federal level. Expect Federal government to go MIA as usual.

We started overnight with another EU downgrade due to extended restrictions. Europe continues to downgrade from historical high multiples. The global investors are forced to keep buying EU exposure due to USD debasement driving EURUSD higher, despite the mess. Then we were delivered with another round of weak US job data, confirming the fading recovery cycle in the economy. US Fed chair, only 24 hours earlier, said the job market was weak and it will take years of accommodative policies to fix. Again, investors are ignoring slowing US economy with the view that substantial money printing will deliver Socialism dressed as Capitalism. 

The Congressional Budget Office showed that budget deficit projected US$2.3 trillion for this year, and that will remain above US$1 trillion for every year in the next decade. It will deliver historical levels of debt and that means massive bond supply coming in a reflation cycle. Inflation is coming via rising costs…as seen from rising prices for services and commodities. Bond yields were already rising for that reflation trade. Now add historic levels of debt over the decade means oversupplied bond market will be flooded with more issuance every year. Expect bond yields to go higher at a faster rate than expected. Rising bond yields and falling growth rates are not a good mix for historical high equity market multiples. Reflation-driven growth to value trade is becoming the consensus view, but a decade of economic cycle manipulation through cheap debt and expanded inequality means the way the current cycle plays out will be different to previous cycles. It is a cost reflation driven deleverage cycle with delayed recession hits…it is different this time!

Central banks are going to do more QE and it will make a minimal positive difference to the bottom half of the population, while the higher taxes to pay it back will hurt them for decades to come. RBA is going to do QE-infinity, but it is trickle-up economics...not trickle-down economics. It delivers more buffer to the top end of town while enslaving the bottom end of town to pay for that buffer over decades of higher taxes, low investment returns, less health/education services and negative real wages growth. Over the next decade, aggregate stimulus including QE will move more wealth from the bottom half to the top 20% of the population. We are following the failed path to becoming another US. We can already see health care and education being financially broken by the governments. The safety net of superannuation is being eroded away. Budgets are structurally broken and inevitably more services to the low to middle income will disappear. It is naïve to think that retirees will be safe from the collateral damage. Australia has already started to create our own economic slaves, like in the US. The natural cycle from that state is to move further into Socialism to cover up for the mistakes of the governments. Have we gone too far to turn back? Can we actually reform policies, tax the rich and drive growth? 

Will the evolving world leave Australia behind like a run-down mining town in the movies?

I don’t have much hope in our governments or central bank but life always finds a way to force change. Pandemic reflation may be the driver that saves Australia from itself. Life always finds a way. Change is coming and it will not be easy…it never is!

Weak US markets an ongoing trend

US market was mainly flat after EU downgraded growth, US job data was weak and CBO forecasts $1 trillion budget deficit per year over a decade before current stimulus plans. Markets that are weak through the day and getting pumped to flat has been the trend of late, and today was no different. Bonds started strong and finished weak with weak demand for new issuance. USD bounced and that hit all commodities. NASDAQ up a bit with S&P up less while DOW and RUSSELL just fall into the red. European markets were patchy and flat after EU delivered another downgrade on restrictions. Tech and health care were the only positive sectors while energy was hit the hardest. Crowded leveraged positions are positive and downgrades are coming in macro. The next few weeks are going to be interesting. More multiple expansion or pullback. Reflation and fading economies are real.

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

End of day market stats are on the attached link/pdf.

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