Markets are stimulus junkies and Central Banks are the drug dealers

Mathan Somasundaram

Deep Data Analytics

The local market started positive on the US bounce and then was further boosted by the Reserve Bank of Australia's unnecessary quantitative easing. The market was jammed up by mainly global investors on a low turnover day. RBA upgrades growth and talk up recovery and then delivers QE upgrade. QE is the second-level emergency move. Rates are 10bps and staying low for years, wages growth isn't expected for years, more QE has been added, but we have a V-shape recovery. 

Apart from an asset bubble and corporate sector boost to help election cycle for the government, the move makes no sense. The RBA can’t be doing this to bring down AUD/USD. That had already started to play out due to the EU downgrade and market risk off. RBA can’t be doing this to boost wages growth and inflation, because they have been spinning alternative facts since 2015 rate cuts. RBA has the phenomenal ability to badly time rate cuts and QE. Once again this will bail out the top end mates and do nothing for the averaging Australian. It’s a zero-sum game. RBA is taking money from savers, retirees and investors and handing it over to zombie businesses.

Welcome to the new form of capitalism…socialism for the top end being paid by the bottom end, while being dressed up as saving the economy. All the handouts to bail out the corporates in the last year will have to be paid for, and the tax man is going to hit middle- to low-income earners after the election later this year. 

The economy will be too weak in a deleveraging cycle next year, and the government needs to run to an election before the freebees finish and reality bites. It is a matter of time before the RBA starts buying apartments from developers to help the property market and the biggest donors of the government. Ignore the fact that developers cannot actually donate to political parties in NSW. The main question here is: will the effect last? I'd argue probably not…

  1. The US dollar is breaking bad to the upside on risk off and Euro downgrades. That will be a bigger factor in bringing AUDUSD down than RBA. 
  2. Inflation in Australia is irrelevant, as it is all about US. This market is getting inflation and costs are rising. Regardless of what the RBA does, bond yields are going higher on the global inflation outlook. 
  3. Australia is caught juggling multiple asset bubbles – property and markets – but we are not in charge of its destiny.

Reflation is the antidote to asset bubbles and leverage. RBA or the government has not come up with a solution to deleveraging. The lazy answer is add more debt to solve a debt problem. The bond markets are moving and we can see the structural problems in the markets and economy. Short squeeze like Trump is not the reason we have market uncertainty, it is the byproduct and not the reason. Structural problems in the economy being covered up by money printing is just buying time and not solving issues. Markets are stimulus junkies and Central Banks are the drug dealers. Reflation is the deleveraging cycle that will cure the world from stimulus addiction.

Let us look at a few signals…

  1. USD has moved above 50 day Moving Average and breaking the down trend cycle since the pandemic crash…risk off trade?
  2. S&P 500 short interest was near historical lows at mid Jan…and you can only assume it’s even lower now…peak optimism?
  3. Aussie 10 year bond yield hits post pandemic high…reflation taking off?

Comments on the US market's last close

The US market bounced back to a positive day to start February, after a negative January. Putting this in context, the DOW had its fifth positive day out of the last 16 trading days. This bounce was in line with global trends. 

In terms of sectors, Gold and Tech lead the green day. European growth was downgraded, and that dragged Euro down and pushed the US dollar higher. The USD has broken down the trend and will weigh on investor sentiment surrounding commodities. NASDAQ and RUSSELL were nearly matched as bonds climbed. We are in weird times... equities, bonds, USD and Gold were higher. Time to wait for the dust to settle in seasonal weak cycle.

Remain nimble, contrarian and cautiously pragmatic with elevated global macro risks!!! Buckle’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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