Stimulus may be the recession vaccine but don’t ignore the side effects

Mathan Somasundaram

Deep Data Analytics

Local market started positive and stayed there with another below par turnover day. After two weeks of below par turnover, we started another holiday week the same way. It was all about Tech bounce and Oil fall. US market popped on low turnover after massive jump in nonfarm payrolls and stimulus package. The tax rises and inflationary pressures are being ignored for now. We are still seeing weak turnover moves on a global basis while quarter end asset allocation moves haven’t really played out yet. As fund managers return from holidays over the next week or two, expect the macro moves to play out. US is currently swimming in a historically high fiscal and monetary stimulus pool. Unlike previous stimulus cycle targeting wall street, the current fiscal stimulus is mainly targeting main street. The difference is that the main street is going to spend it and the bond market is moving to reflation cycle to show that. The supply side issues, currency debasement, decade of fiscal deficit and excessive bond issuance are just cream on the top of the reflation cycle.

The global growth data shows clearly that almost all regions are going to see big growth (i.e. 5%-12%) over the next two quarters. That is no secret. It is consensus. It is also consensus that the growth rates then fade to low levels (i.e. 1%-3%) for most regions excluding China. Why this is important is that inflation is likely to beat 3% in the next 3-6 months and may even get to 4%-5%. If inflation remains strong and growth remains weak, US will lead most developed nations into stagflation. The price of money printing to avoid the double dip recession may be stagflation. The cost of stagflation and mid term elections in the US means that more and more of the US population will become dependent on government handouts. This sounds very much like socialism…but I could be wrong!

Australian property market had the biggest month on month rise since last recession. It was not due to the fundamentals improving but mainly due to regulatory changes to remove “responsible lending” and government handouts. Do you know why all property analysis starts in 2000 and ignores the 90’s? it was a very bad decade for property. If the property market is not a bubble and the government is removing jobkeeper on economic strength, why is the RBA keeping rates at 10bps? In Australia, we jump between commodity and property bubbles. China does commodity bubble and Australia does property bubble. Will history repeat itself? The biggest political donors are linked to the property bubble. Always bet on self-interest in policy setting as it’s a strong indicator of future bubbles.

Comments on US market last close… US market popped higher as catchup for pop in nonfarm payrolls on Friday. Nonfarm best by 300k and that’s pretty much near the jobs created in hospitality industry for the month as most states opened up ahead of the holiday period. NASDAQ lead with +1.7% then S&P +1.4%, DOW +1.1% and RUSSELL +0.5%. It was a pump in growth stocks with Retail and Tech leading while Energy and Property were the laggards. Market index options were positioned for a nonfarm payrolls pop and it played out. Market is paying attention to opening up and stimulus plan while ignoring inflation, tax rises and new waves of COVID. Bonds ticked higher with 10 year at 1.71% while USD pulled back. Oil was hit on OPEC reality of rising supply coming while Gold was mainly flat and Copper moved up. Europe remains in COVID wave while India is the latest EM to lose control of COVID again. US fiscal stimulus packages remove recession risk and bring stagflation risk. Expect PPI on Friday to give another kick to yields. Expect growth to value rotation to continue and cyclical growth to build up steam into 2021.

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

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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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