Pandemic waves to hurt Socialist Union Of Europe’s growth outlook

Local market finished the week with a negative day on better turnover as macro risks drove risk off trade. Energy and Tech were the weakest sectors while Miners and Banks were the heavy weights weighing on the market. USD bounced with bond yields to confirm the risk off trade today. The global markets have priced all the positives while US politics, global lockdown restrictions, pandemic new waves, vaccine rollout issues, fading economic recovery and reflation risks are being ignored. It is always a risky bet when you are betting on everything going right in a crowded trade. Media articles point to (1) Covid breaking out in China (2) Japanese Olympic games may get canceled due to Covid (3) Germany, France and UK may lead other EU nations into lockdown restrictions through Q1 (4) Questions about the ability of the vaccine against new Covid variants (5) US struggling to get a handle on the issues plaguing the existing pandemic plans.

Retail sales preliminary data out today and that suggests Australia’s global outperformance was not going to continue as there was a 4.2% decline from November to December. The global trend shows that retail sales have peaked and are fading. Australia was a standout in recent months but it looks like reality is coming through. May be that is why the government and RBA loosened the banks already weak standards to allow first homebuyers load up on a late cycle property play. Is property a post recession bargain or decade long dead investment? post recession late cycle in the 90’s suggests it’s a trap…time will tell. Mark McInnes just stepped down as CEO of Premier Investments after cracker result on government handouts. When top management in top performing business models in a sector retire to spend time with family, it is usually the top of the sector.

EU is on the pathway to becoming an economic ponzi scheme like Japan. Money printing and lack of reforms (i.e. higher taxes) means the economy will not recover and will need more and more stimulus. The charts below show the precarious position of EU nations and the dependencies of them on ECB buying up their bonds. Debt is beyond most countries ability to payback and such that their banking system is beyond their capacity to save as well. The cross funding nature of the banking system in Europe will mean that ECB will be forced to absorb substantial part of the EU banks...more or less socialize the banks. In the end, ECB will be forced to continue to accumulate the debt from each nation and fund the socialized banks. Will we end up creating the “Socialist Union of Europe” by default? Will the new/current/extended lockdown restrictions in EU make this change sooner than later? Time will tell. Don’t get on a high horse….US is knocking on the door to become “United Socialism of America” while Australia is not too far behind without Chinese bailout!

Comments on US market last close > US market was mainly flat with Tech and Retail the only positive sectors. NASDAQ lead while RUSSELL was negative. The dust is settling after inauguration and the reality of weak economy and pandemic mess is starting to take over. Bond yields higher, USD lower and metals higher. ECB on hold and ready for the mess coming as Germany, France, UK et al look like being in lockdown most of Q1. US is expecting to be pandemic affected into summer... that's Q2 as well. US job weekly data was slightly better than expected but still getting worse. Stimulus is the only game in town. Market is caught between buy the dip optimism and economic/pandemic mess. Reflation is going to ramp up as more and more supply issues and currency debasement play out. Market has even priced in the Biden stimulus and it hasn't passed through yet... and ignoring the tax rise to pay for it. Feb/Mar are seasonal weak periods with reporting season reality check.

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

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