If you bet on daydreams, expect a few nightmares…time to manage risk

Mathan Somasundaram

Deep Data Analytics

Local market had a negative day on solid turnover as local fund managers returned from holiday and locked in profits as risks were rising. Global investors were selling into weakening AUDUSD as well with risk off trade driving USD higher and commodities lower. Major trend was selling into Resources and buying into Banks and Supermarkets as defensive bets.

The local inflation data was stronger than expected despite RBA removing all link to real life cost pressures. This was even more fascinating due to the rise in an environment of rising AUDUSD as well. Inflation in Australia bottomed in mid 2020 and has been rising since then…albeit below levels of concern for now. RBA and the government has been spinning deflation risk to cut rates to nothing in order to steal from savers and retirees to help zombie businesses and property developers. When that did not work, they watered down bank lending standards to trap the first home buyers into unaffordable property market despite an over supplied apartments. There is a early federal election coming as 2022 is setting up to be messy without China bailout.

Inflation is a bigger problem in the US as they are debasing the global reserve currency on top of the economic and pandemic mess.

US Fed meeting will finish tonight and their options are…

  • Plan A > wait for things to get really bad and then money printing and USD debasement.
  • Plan B > wait for things to get really bad and then money printing and USD debasement.
  • Plan C > wait for things to get really bad and then money printing and USD debasement.
  • Plan D > all of the above!

China has been taking the foot off the stimulus pump gradually over the recent months. They slowed down the steel sector and tightened the lending into property market. They are having new waves of pandemic while moving into New Year holiday period when things slow down. Even commodities are likely to see some weakness in the short term as demand fades as Chinese gradually shut down for holiday cycle.

US investors are running on 20 year high index option optimism bets and 10 year high margin lending bets. In the words of the singer Taylor Swift…you'll come back each time you leave. Cause, darling, I'm a nightmare dressed like a daydream. US investors are buying the dip and leveraging to do that as well. History suggests such optimism very rarely ends well…if ever! It is time to hedge your investment. There is a reason Bitcoin is getting a bite. It may be an asset class of the future or may be not, but the logic still makes sense. Bonds, Gold, USD and Bear ETF are good negatively correlated hedge to minimize your risk. This year will be all bout risk management and trading as reflation takes a strangle hold over asset prices. Gold may struggle in a risk off bounce in USD but the inevitable money printing and falling AUDUSD will deliver for Aussie gold miners.

Comments on US market last close > US market was mainly flat with results beating expectations but unable to cover the multiple decline from reflation. There seems to be more uncertainty on vaccine rollout and pandemic while stimulus is getting targeted as conservatives start worrying about debt after Blue Wave. Everything came off a bit...bonds, USD and commodities. RUSSELL was down the most. European markets had a bounce after the hit the night before while Asian markets were down yesterday. Sea freight costs are on a rip and add higher fuel costs...inflation is going higher. IMF upgraded on vaccine and opening up but flagged massive Covid risk with variants. Staples and Property were the best performers while Energy and Utilities were the worst.

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

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Mathan Somasundaram
Founder & CEO
Deep Data Analytics

Over 25 years’ experience in the finance/tech industry. Mathan has worked extensively in all parts of the finance sector (i.e. County NatWest, Citi, LIM, Southern Cross, Bell Potter, Baillieu Holst and Blue Ocean Equities). Currently Founder and...

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