The US is sliding into a Chinese inflation trap

The local market had a choppy negative day on low turnover. We just started a new week on low turnover, like the last three weeks in the holiday season. Healthcare and telecommunications were the best sectors by default of being green, while banks were the swing factor all day. Banks recovered from early losses to limit the market falls. Miners and property were the worst hit today.

The local vaccine debacle is inline with every disaster/infrastructure project management failure by the Federal Government. It is such a mess, that even the government has no idea when the rollout will occur. We have gone from leading the pack, to the back of the pack. Even our hard-working health care workers can’t bail the country out of this level of mismanagement. But at least we know they won't give up - unlike Canberra.

China sentiment remains weak as markets are worried that China may be about to tighten further to curb credit and slow the economy down. They have been flagging asset bubble risks while the Western economies have been on historical debt binge. We had a weak US jobless data on Thursday and Producer Price Index on Friday hitting all time high. It is logical to assume that inflation is going to be higher sooner than later. The next inflation data point in the US is out in the next few days and then the US reporting season will begin.

If you thought the US Fed wasn’t concerned, well you may be wrong. The US Fed chair has been on a media blitz to keep repeating the mantra that growth and inflation coming but they will fade. Growth to remain solid as long as pandemic control and money printing continues. He also said…“it is unlikely to see a rate rise this year”. I am no genius but that is a million miles away from no rate rises for 3-4 years. I could be wrong but it’s awfully looking like the bond market is smelling blood and the US Fed hunt is on. Further currency debasement is almost certain as economic structural problems will need more fiscal stimulus. Markets have absorbed the positives from US stimulus packages and vaccine rollout while ignoring the negatives in higher regulation, taxes and inflation. Regulations are coming in limiting growth outlook as well as tax avoidance on a global basis. Taxes are going to rise for tax shifting and local corporate rates. The rise from 21% to 28% is planned but most expect a deal to 25%. But that is just the first stage as debt will continue to blow out and will need funding. More tax rises are coming in the future. The latest stimulus package is pushing tax rise and infrastructure spending. Taxes go up soon while spending only kicks in years down the track. US is on the path to cleaning up their structural problems but it won’t be a V shape recovery. Get ready for the W shape recovery as the side effects of stimulus starts to bite!

Over the last decade, China has managed to allow the developed markets to gorge on debt by exporting lower inflation and building up manufacturing market share. 

US bond yields have a better correlation to China Inflation than US Inflation. The reason being China has become the manufacturing engine of the world and such that drive the input cost of most US global giants. When costs go up in China, it goes up everywhere. 

The US has been lazy and it is now a price-taker from China rather than a price maker. China has also allowed the Yuan to strengthen against the USD to allow inflation to remain under control. It is all unwinding now. After nearly six years of falling inflation, China is seeing rising inflation and will also be gradually devaluing Yuan lower against the US dollar. The US may be about to fall into a Chinese inflation trap…time will tell.

Comments on the US market's last close

The market was flat all day before a big pump in mainly DOW stocks in the last hour to finish positive. Producer Price Index was up 4.2% over YOY compared to expectations of 3.8%. Another indicator that inflation is going very strong in the US. Next week we will get the inflation update that will show how much price rises are being pushed through to consumers. Everyone wanted to know the data pre market that the government website crashed. Clear signal that market is worried about reflation. DOW lead with +0.9%, then S&P +0.8%, NASDAQ +0.5% and RUSSELL +0.0%. Bond yields were were up 5bps on PPI data and then finished up...10 year at 1.67%. USD rise hits all commodities and currencies. Health Care, Tech, Retail and Industrial were all up about 1% after the pump at the close while Energy and Staples were the weakest. Vaccine rollout delays are now inevitable and so is more lockdown risks. US government will need to deliver continues handouts to hold the economy together.

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

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