Socialism is the inconvenient truth while Capitalism is the reassuring lie

Local market had another positive day on a low turnover with global investors pushing the market higher chasing rising AUDUSD. Local fund managers are still missing in action and they are likely to take Monday off to finish the holidays with an extra long weekend. The main show tonight is the US and their inauguration. Trump camp has managed to everything into a reality TV moment…even the decline of US capitalism and democracy. As much as I would hope nothing dramatic happens tonight, it is US and it is the end of the Trump presidency…anything could happen. It will be interesting to see how the Republicans and Fox News react after the event as most logical path for Trump will cut into both their funding cycles. Expect survival mode to kick in and both the Republicans and Fox News to turn on Trump. The move to the new equilibrium in a politically fractured country like US could raise market risk in the short term.

We received a lot of comments about our view on the transition of Western economies from capitalism to socialism while in denial. Almost everyone agrees it is happening but may be differ on scale of change. But at the same time almost everyone assumes we can switch back…and that may be partly because we are all in denial. My argument is simple...once you show people the easy path to cheap everything, they will not want to go back to how it was…even if they know that it’s not sustainable. Majority of the population is low to middle income earners and they feel that it’s their turn to print money for themselves like the top end of town has done for the last decade. Self serving alternative fact based politicians will always offer unsustainable fantasy based slogans to win votes.

Have you heard of “Jobs and Growth” while in a multi-year rate cutting cycle because there wasn’t enough jobs or growth. Current federal government is the only one in multiple decades to not have a rate rise cycle despite being in power for three consecutive terms. The federal government and RBA knew that artificially bringing forward consumption for the best part of 5-6 years will leave a massive structural mess in an economy already struggling with the lack of reform. Just add a global pandemic and it was never going to end well. In the world of alternative facts and fake news, interest rates are king because you cannot fake it. It is up or it is down…there is no confusion. If the economy is weak, you need to cut rates and we have been cutting and cutting. Australian interest rates were below inflation before pandemic. Our economy was a mess before the world became a pandemic mess. If the V shape recovery is to get back to the mess we were pre pandemic, 2021 is not going to be pretty and don. Expect Federal government to call an election as early as possible before everything starts to slide. Expect RBA to cut rates again by 5-10bps to further help the election cycle with another unaffordable asset bubble booster. The federal government and RBA have delivered massive handout to corporate Australia and in the future tax payers will have to repay all of handouts via higher taxes like hiking GST. Every politician knows that it is easier to deliver a reassuring lie than an inconvenient truth. In the Western economies, socialism is the inconvenient truth while capitalism is the reassuring lie!

Retail sales are key measure of the economy as most are driven around 60-70% by consumer spending. All the major comparable economies are seeing pullback in retail sales while Australia has remained strong due to handouts. Expect Aussie retail sales to start weakening with global trend through the year as handouts subside.

US market last close > US market started over 200 up and finished 116 up. The main catalyst is comments from Yellen suggesting massive money printing or recession. Tax rise after Covid or was it to buy time to get the stimulus passed first. Inevitably debt will blow out. Inflation will rise and push bond yields higher. Currency debasement will continue as economic woes will take time to play out. As the new administration takes charge, they are going to realise the structural problems are worse than expected. Bonds higher, USD lower and commodities better. Republicans are turning on Trump and Netflix positive pop after market result update. Inauguration tonight and executive orders will fly.

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

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