Sunset Strip - 21st September 2020

Local market had another negative and volatile day with lower stimulus, US election uncertainty, EU second wave and China geopolitics weighing on sentiment.

The local market is losing optimism as the government seems to keep recycling the failed tax cuts and infrastructure spending policies with no new reform agenda. The problem with tax cuts is that it is unaffordable and destroying the future funding for the government to pay for essential services. Majority of the tax cuts are going directly to the top end of town and corporates that have delivered very little trickle down economics over the last decade. The velocity of money has crashed globally due to this failed strategy but we do more and more. This has set up a trap where future governments will have to raise taxes and inevitably that will be on groups that do not have lobby groups like the middle to low income and retirees!!! Yes…super and death tax are inevitable in Australia in the next decade. Infrastructure spending is the new rort where everything from unproven energy policies to unsold apartments being converted into rental properties can be classified as infrastructure spending that inevitably runs 100-200% cost above budget. The real unemployment is double digit and the wages growth is unlikely to beat even the weak RBA inflation for years to come. Real inflation faced by consumers are around 4-5% while wages growth won’t beat that in the next decade!!! Betting on more discount and weak regulation to pump property market is like trying to put out the fire with petrol. We are in a deleveraging cycle and RBA/Government want to solve it with more debt. If this wasn’t real, you would have to laugh!!! Given the lack of growth engines in the Aussie economy as we fight with China, we are almost certainly going to repeat the mistakes of the past!!!

US market had another negative volatile Friday similar to EU markets. S&P and NASDAQ lead the falls as the President corrected himself after only a few days ago claiming vaccine will be available next month. Now he agrees with CDC that all Americans won’t get it till back end of Q2....and that hit travel stocks. DOW moved between flat to -100 for the first half of the day before getting hit to -350 and then recovering to close -250. Bonds, US$ and Oil lower while metals were higher...including Gold. All sectors were red with property, utilities and tech leading the pain. Quadruple witching day with stock/index options/futures expiry mess.

Just about every central bank has given an update and common theme is “slow recovery and wait to act if needed”. No US Fed update for nearly 2 months. That means it was the last update before US election. Markets are supported by liquidity to remain elevated from economic reality. We are starting to see some financial stress in recent weeks despite all the money printing. All economies will bounce back hard in Q3 but it’s off a low base after the collapse in Q2. EU is getting into more lockdown problems as second wave bites. China is moving away from US and the world is splitting irrespective of the US election result!!!

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

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