“Socialise the pain, capitalise the gain" – A lazy option that no longer works

The local market sprinted into the profit-taking cycle globally, as reflation starts to take off. The month-end adjustments in asset allocation seem to have finished and there were no buyers in sight. All sectors were red, with Utilities, Property and Healthcare taking the biggest hits. 

Global passive money is a fickle trade and it flipped from buy to sell in a day. It was selling all day in every sector. Fear Of Getting Out (FOGO) has taken over from Fear Of Missing Out (FOMO) and now the fund managers are in a real hostage situation. Fear Of Getting Out (FOGO) is a crowded risky trade but it is holding major investors hostage due to performance fees. The bond market has decided to move and it’s moving hard. Aussie 10 year bond yield has flown past 1.20% and that was only two days after RBA delivered their expected second QE ahead of the election cycle. RBA doesn’t want to make the tough call like the Federal Government. Australia is sleepwalking into a brick wall with no reform. If money printing solved everything, then why wouldn’t everyone keep doing it. There is a limit to everything and that is reflation. The bond market is flagging it. US Fed will be forced to intervene and expand their balance sheet and that will further debase USD. RBA will end up holding a weak debt bubble economy without growth, reform and high AUDUSD. Don’t worry…there is going to be more QE…not that it will make much difference. New trickle-down economics being pushed by RBA…“Socialize the pain and Capitalize the gain”….What could go wrong? Get ready for years of high taxes, elevated unemployment, negative real wages growth, deleveraging and asset bubble problems. But they will keep printing more…it’s the lazy option.

Let us look at a few signals…

1. US 10 year bond yields continue to rise despite stimulus and pandemic issues…reflation taking over?
2. US 30 year bond yields continue to rise and will start to push up mortgage rates and property market…reflation taking over?
3. Aussie 10 year bond yield hits post pandemic high despite RBA’s QE 2.0…and keeps climbing…reflation taking off?
4. (4) AUDUSD is breaking down due to USD breaking up and Iron Ore falling…not RBA’s QE 2.0…another badly timed move when it was already in play…risk off?
5. Mining Index looks to be breaking lower as China takes the foot off the stimulus accelerator. Is holiday period seasonal weakness not going to help AUD/USD…risk off?

Comments on US market last close: The US market was mainly flat with RUSSELL leading and NASDAQ lagging. ADP data bounced back above expectations after falling to negative number last month. Democrats are moving the stimulus plan through despite Republicans pushing their cut down version. Bond yields are bouncing hard while currencies mainly flat and commodities ticked higher. US 30 year long bond yields has hit 12 months high. Europe is in downgrade cycle and socialism is looking inevitable as former ECB head is about to become Italian PM. Energy was the standout positive sector while Health Care and Retail were the weakest. Looks like the month end asset allocation trade and get out of Euro trades are over. Interesting that NASDAQ did nothing despite healthcare M&A and mega techs beating results.

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

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