In a bus crash, everyone gets hurt…are we there yet?

The local market was bashed by global investor selling from the start before fading through the rest of the day to an even lower close. We are in the 9th consecutive week without a single day’s turnover above $8b. The market went up on below average turnover and it is falling in that way too. Local fund managers are not playing a big enough hand to change global trend in the past few months and today was no different. Every sector is red today with Mining and Energy leading the falls. Government has a budget to help corporates and big donors while RBA is pumping asset bubbles and bailing out bad businesses. The average worker is left to fend for themselves in a reflation cycle with falling real wages growth. 

We are heading into the option/vix expiry at the end of the week. We were expecting volatility to pick up soon but it may be that it has already started. In a bus crash, everyone gets hurt. Macro cycles are about to collide and Central Banks are out of bullets. 

Are we there yet? Time will tell.

Let us run through the main data points released in the last 24 hours…

Housing starts in the US tumbled 9.5% to an annualised rate of 1.569 million in April 2021, from last months near 15-year high of 1.733 million and well below market consensus of 1.71 million, likely due to rising cost for lumber and other materials and difficulties to find workers. Single-family housing starts dropped 13.4% to a rate of 1.087 million, while the rate for units in buildings with five units or more increased 4% to 470,000. Housing starts declined in the South (-11.5% to 804,000) and Midwest (-34.8% to 193,000) but increased in the West (9.0% to 400,000) and Northeast (6.2% to 172,000). Rising cost of construction is starting to have real life effects in the housing market and that will affect the overall economy!!!

The Westpac-Melbourne Institute Index of Consumer Sentiment fell 4.7% month-on-month to 113.1 in May 2021 from an eleven-year high of 118.8 in April, due to some disappointment in the federal budget that includes few significant unexpected measures. Both family finance sub-indexes came off levels near eleven-year peaks, with the gauge for the next 12 months declining 6.9% to 109.5 and that for finances compared to a year ago dropping 5.4% to 97.9. Also, the measure for the economy in the next five years went down 6.7% to 115.6 and that for the economy in the next 12 months five fell 3.5% to 121.1. In addition, the gauge for time to buy a major household item decreased 1.5% to 121.5 as the reopening of the economy allowed consumers to spend more freely on discretionary services including travel, accommodation, entertainment, and dining. Despite the RBA fairy tales and government budget pork-barreling, consumer sentiment is being affected by structural problems in the economy.

Australia's seasonally adjusted wage price index rose by 1.5% year-on-year in the first quarter of 2020, compared with market consensus and the previous period's record low of 1.4%. Still, this was the highest reading since the June quarter of 2020, amid regularly scheduled increases and improved business conditions in the wake of the COVID-19 pandemic. Private sector wage growth remained at 1.4% for the second quarter in a row, while the public sector recorded its lowest rate of growth (1.5% vs 1.6%) since the commencement of the series. Across industries, annual wage growth ranged from 0.4% for the rental, hiring, and real estate services industry to 2.2% for the education and training. On a quarterly basis, the wage price index advanced 0.6% in the March quarter, the same as in the fourth quarter. Despite all the fantasy claims, wages have been walling throughout the three terms of the current government and now firmly set below inflation while we are sitting on multiple asset bubbles. RBA’s view on the property market is not based on data or reality. Wages are going backwards in real terms and expected to do so for years to come. RBA’s QE and corporate handouts by the government continuously feeds profit growth and higher bonus for management while delivering no wage growth for workers. In a reflation cycle, wages growth may not beat inflation for number of years to come!!!

Industrial production rose by 1.7% month-over-month in March 2021, compared with the preliminary figure of a 2.2% gain and after a final 1.3% drop a month earlier. Industries that mainly contributed to the rise were motor vehicles (8% vs -5.8% in February), inorganic and organic chemicals (6.5% vs -0.7%), and plastic products (2.9% vs -1%). On a yearly basis, industrial output grew by 3.4% in March, reversing from a 2% fall in February. Japanese recovery is running into USD debasement pushing Yen higher and reflation pushing input costs higher.

It is going to take an extremely tricky dance between fiscal and monetary policy in the US to maintain positive real growth while not letting a hot inflation cycle become a hyperinflation cycle. Fiscal policy needs to keep printing to keep majority of the economy funded while monetary policy needs to absorb the excess bond supply to keep yields controlled. This all needs to happen without triggering substantial USD debasement and market panic. 

We may be at the end of the “Central Bank Put” cycle as the US Fed may not want to risk hyperinflation hitting the economy to save the markets. 

Aussie Gold Miners are offering inflation/safety hedge with currency and sovereign protection from relative value territory.

Comments on US market last close…

US market was weak all day and then dropped lower into the close. Yellen talking about higher taxes to fund infrastructure took the wind out of a weakening sentiment. NASDAQ was in positive territory most of the day and it faded into negative at the close. NASDAQ -0.56%, RUSSELL -0.73%, DOW -0.78% and S&P -0.85%. Japanese and European economic data was painting double dip recession. UK is facing Indian variant becoming dominant virus within weeks. Bond yields were rising before investors moved into bonds from equities to bring yields back to flat. USD is free falling as the USD index hits 6-7 year lows. Despite USD falling, commodities were lower...except for Gold. The collapsing USD side effects are big thematics being ignored. It is going to deliver longer and stronger inflation to the US. Property and Health Care were the only green sectors... albeit weak. Energy, Tech and Banks lead the falls. Option expiry this week and expect volatility to pick up. NASDAQ cycle has turned and it leads market view on multiples and stimulus. The rest of the world follows soon enough.

Full SUNSET STRIP report with end of day market stats are on the attached link.

(VIEW LINK)

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