Lance Armstrong effect makes bubbles but they don’t last

The local market had a positive day on low turnover as global investors were chasing a recovering AUD/USD, while local fund managers took the day off to make a four-day long weekend. 

Sydney was as empty as election promises from governments. All sectors except Energy and Industrials were in the positive, while Miners and Supermarkets did the heavy lifting. No trade tomorrow due to the Australia Day holiday, but the US will have almost a quarter of the S&P 500 reporting this week. The US Fed update, in particular, will really add to the risk categories. The Fed is most likely to follow the standard set by the European Central Bank in staying on hold and ready to act when it goes wrong…and that is a matter of time and not if. Markets have priced in vaccine and stimulus as silver bullets to solve the recession by mid-2021. The risk is that even if that plays out, the rise in earnings will not support the current price in a reflation cycle that will reduce the multiples. 

The best way to absorb this in the US markets is via NASDAQ over RUSSELL (i.e. chart in attachment). It shows that reflation rotation driving investors from growth to value has turned but investors are still trying to buy the dip strategy in growth. If there are any issues with vaccine efficacy/production or stimulus timing/size, then all bets are off. Change is always slow at the start and then gets “hockey stick” style aggressive move. Does the pattern remind you of a previous cycle 20 years ago? Time will tell.

Most of Europe is in some sort of lockdown or entering it while others are extending it. Major regions are potentially got their own variant of the virus. The UK has found their variant spreads more and kills more while South Africa and Brazil variants are even worse on both categories. UK and US commented on preliminary data showing that variants reduce vaccine efficacy. The virus always mutates, and the survival nature of anything is to evolve to improve efficiency…even in virus…it is how evolution and cycles work. It is a matter of time that virus variants reduce vaccine efficacy too far and that is the race against time forcing governments to ramp up vaccine delivery. The problem is that the logistics of production and delivery has already hit manufacturers in Europe and the US. It will have bigger problems trying to cover the rest of the world. Geopolitics means the poor nations will not be covered well into 2022 and they will become the hotbeds for new variants. Emerging Markets are being bombarded by vaccines that are yet to be proven to be as effective as claimed while most of their population and economy are in such mess that they have no other choice. COVID-19 will likely cover most of Developed Markets till Q2/Q3 while Emerging Markets will have to live with it till 2022Q3/Q4. The reality of globalization means we are likely to see some variant that has very low vaccine efficacy come back to Developed Markets from Emerging Markets over the next year. The greed in the system will always find ways to raise risk to make profits…even if that means risking lives. It is what you call the “Lance Armstrong” effect. There are too many people benefiting to call the problem out and put up with less profits. The beauty of capitalism is that it will destroy itself when regulations are weak. Everyone knew Lance was cheating in the system but too many people were making too much money to care about the risk. Look at the restrictions on Australian citizens stuck overseas and unable to come home in a pandemic while sporting stars, entertainment stars, ex-politicians on job hunts and wealthy corporates are able to move around the world at ease with their entourage. Australian economy has structural problems, already wasted fiscal/monetary stimulus and now completely dependent on global trade for recovery. Vested interest groups will force the weak government with no reform policy agenda to take risks against public interest. It may be sports, entertainment, international students or vanilla tourism...all of it will carry risk for years to come but we are going to take that risk. Even US has put limits on countries affected by new variants for non-citizens and they are a pandemic mess. Why are we not doing the same? We should be restricting all nations with new variants like UK, South Africa, US etc…but we won’t. We will end up having to live with COVID-19 clusters for few more years at least. If a variant of a variant becomes immune to new batch of vaccines, then all bets are off again. After 2020, I am not betting against that happening in 2021 as well.

We are seeing cost inflation driving the reflation trade and the new waves of pandemic will further drive it higher. Central Banks will inevitably move to more money printing to solve the next problem but that will only make it worse. Every cycle offers certain buffer for manipulation. Once you go past the buffer zone, the cycle takes over and Central Banks lose control. Reflation cycle is a classic example of the cycle taking over endless money printing. US lead the world in stimulus and currency manipulation as it enjoyed the advantage of owning the global currency. That is a knife that cuts both ways. USD is tanking due to structural problems in the US economy. US was headed for recession ahead of the pandemic and now it has wasted historical stimulus to get back to recession risk. It is going to take some masterful socialism to get US back up and running.

Comments on US market last close > US market was mainly negative as pandemic waves hit Asia and Europe. RUSSELL leads NASDAQ in positive territory DOW falls more than S&P in the negative territory. European and Asian markets were down as new variant waves are seen to be more transmissible, more deadly and reduce vaccine efficacy. Even China is doing lockdown in certain regions while major European economies are likely to extend restrictions into Feb/Mar. USD bounce on risk off hit commodities. Property and Utilities were the only green sectors. US stimulus plan may take a month or two to pass with impeachment in play as well. Lots of big reporting stocks and US Fed as job and retail data weakens.

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

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