Money printing without reform is just another “Buy Now Pain Later” strategy

The local market flip flopped to be flat by lunch, before a global investor buy on portfolios pushed up all sectors during a relatively low turnover day. The market finished with a solid positive result, despite weak Asian markets. 

Iron ore mining large-caps weighed on the index, as China steel cuts on pollution dragged Iron ore futures down more than 6%. It was strange day in the markets where NZ and Japan were down 1.5% to 2% while the rest of the Asian markets were directionless. 

The market pop from lunch time positioned Energy and Health Care as the best sectors while Miners and Banks were the laggards. The weak iron ore outlook weighed on the Australian dollar / US dollar and that meant buying in the Banks was not as big as other sectors. 

On a day with limited local macro, the only corporate stories were M&A related. Crown got a bid from a major shareholder. It makes complete sense as it is a win/win for all. The major shareholder and bidder is a private equity firm that does not have to report to the market and it can book a win on its existing holding and limit the damage. Federal and State governments do not want the reality of what they did to come out and this buries it. Crown management can walk away and claim they have done the best they can. If you are a long term shareholder, this is a good get out of jail free card. Next time pay a premium for quality management. No one will hear about the unsavoury deals between governments and corporates as this gets buried. 

Moving on to TLS and WOW in the press, with more on their divestment plans. TLS is going to use the divestment to return to growth while WOW offers potential capital management potential. Both divestments offer interesting options and they will continue to attract investors ahead of the split.

Inflation remains the elephant in the room and ignoring it won’t make it go away. The Central Banks are sticking to the transient inflation pop compared to sustainable economic growth pop as we cycle weak periods. Markets were drinking that Kool-Aid as it served the purpose of V shape recovery on just money printing. If only the world was that simple. If money printing without reform to fix inequality could deliver sustainable high growth, Russia and North Korea will rule the world. China would be the biggest thing since slice bread. It is not that simple. When you socialize costs for corporates and create zombie businesses, they do not invest to grow or restructure to be lean and mean, they just become lazy businesses that rely on bailout after bailout. It is the same argument that is put against universal income. History has proven that handout to the majority delivered economic recovery in Australia post-GFC while handouts to the corporates post-pandemic delivered the same economic structural problems that existed pre pandemic but with more debt and deficit than ever before. There is a missing piece in that statement. The 800-pound gorilla that is China is not batting in our corner in this cycle and that is a self-inflicted wound too. China is managing their recovery cycle after leading the world out of pandemic. They are not in a rush to bail out the world on their credit card. The reality of the reflation trade is that everyone is carrying a massive credit card bill and we are all going to have to move towards a prolonged deleveraging cycle. But don’t expect a politician to say that before an election. Australia is heading for a September election cycle and deleveraging cuts to middle to low income groups are coming in 2022. Super has been ransacked for ideological reasons and that is going to create an even bigger retirement plan bill for the government into the future. We have 6 months of pork barreling and fantasy growth stories while RBA will be on high bubble watch. RBA is blatantly pumping asset bubbles but the main threat is the global macro. Reflation is a global problem and if that goes hyper, RBA’s plans will be roadkill. Money printing without reform is just another “Buy Now Pain Later” strategy.

Is the market ready for 2.5% bond yields and deleveraging cycle in 2022 with higher taxes and lower services? Probably Not. Logic suggests growth is unlikely to be strong in deleveraging cycle while Central Banks will be forced to burn currency to keep yields from going too far. We are already seeing Turkey and Brazil get into trouble and the contagion effect is rising. EU is under third wave effects as Paris lockdown clearly shows. Europe and Emerging Markets are going to start the next downgrade cycle that is not in the number yet. Not sure the historical high multiples are going to stack up with downgrades.

Comments on US market last close… US market was more up than down after all the option expiry trades ran into the close. NASDAQ and RUSSELL up while DOW and S&P down. It looked to be a relief day after Thursday bashing but US Fed came out to the market that they will allow the bank capital light pandemic fudge called SLR to expire. That means US banks will hold less treasuries at a time of over supplied bond market. Bond yields popped to recent highs and Banks fell. USD and Gold moved higher. Oil bounced a bit from the bashing the day before but Copper ticked lower. EU markets were down as clear indications of third wave issues while EM are starting to wobble on rising yields as seen from Brazil and Turkey. Banks and Property were the most red while Gold and Retail were the most green. Big money from the stimulus check ran into the market from Bitcoin to Tesla. Historical high margin lending growth means it’ll be tight door when everyone tries to get out. Don’t look for correlated moves today...too many moving parts into the close.

We are in uncharted territory with central banks and governments continuing to swim in the river denial. Let me refer to something I wrote in a previous note to give some clarity…

The mess we are in reminded me of the speech delivered in a classic movie called The Big Short. This speech had profound meaning for me. Take the time to watch the movie. I thought I would paraphrase it for Australia. It goes something like this…“We live in an era of fraud in Australia. Not just in banking, but in central banks, governments, regulators, rating agencies, media, tech, insurance, investment, education, religion, food, even cricket...What bothers me isn’t that fraud is not nice. Or that fraud is mean. For fifteen thousand years, fraud and short sighted thinking have never, ever worked. Not once. Eventually you get caught, things go south. When the hell did we forget all that? I thought we were better than this, I really did. And the fact that we are not doesn’t make me feel all right and superior. It makes me feel…sad. I just know at the end of the day average people are going to be the ones that are going have to pay for all this. Because they always, always do.”

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

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

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