US Fed is going to walk the fine line between pleasure and pain while Australia prepares for federal election

Local market started negative and kept on falling through the day before making a mini recovery late to finish a negative day. It is all about US Fed update tonight. Bond yields, USD and Gold continues to climb through the day while equities and commodities were under pressure. US markets need more stimulus/QE but US Fed can’t do that without creating more inflation. The lazy solution that has been overused for a decade has reached its inevitable structural end due to the global currency status. What makes US important is what is going to hurt them the most. Cost reflation gets worse with currency debasement. US Fed is going to talk up the economy and vaccine rollout while saying inflation is transitory. Will the market buy that? Time will tell but data does not back that. Inflation is going to go past 3% and likely near 4% in the next few months and bond yields at best will fly past 2% and likely near 3%. US Fed knows that and in context wants a market correction to stamp down inflation. But vested interest groups do not want reality, they want endless QE fantasy. US Fed knows that there is a fine line between pleasure and pain…a fine line between reality and fantasy. Where do they go at this fork in the road? Do what is good for the economy long term and allow the economic cycle to play out and markets pullback or do they keep the fantasy going and let inflation go hyper? History says get ready for hyperinflation but even they must know the jig is up.

Markets are at historical high multiples while economic growth it being sustained through government handout. The public handout is only happening because the economy is broken due to lack of reform and the government could not ignore the majority going under. EU has declared augmented capitalism is the future like Japan. It’s a fake capitalism where almost every part of the economy is based on handout. US has accepted the failure of capitalism due greed and resorted to stimulus that predominantly favoured the minority over the majority. US is going to be moving toward the augmented capitalism soon enough. Let’s not get on the high horse, Australia has had billions of endless handouts and/or tax deductions to every major corporate sector from mining to farming to banking but handout to the middle to lower class has limits and that will end soon. Don’t worry…that is not completely true as the Federal government will be doing pork barreling by the billions of taxpayer’s dollars in the next 6 months to hold together a fracturing economic mess for an early election. Federal government has no choice but to call an early election as the economy is going to be under real stress in 2022. September looks the best bet for the election and media players have been already paid off through Facebook and Google deals. Vaccine rollout was also timed to hit peak cycle into the election cycle to claim another win. Unfortunately, the usual failure in management we saw through draught, floods, bushfires and the pandemic have left the federal government in another political mess of their own making. The federal government is caught between a political mess and an economic mess. They can’t go early and they can’t wait too long. Ready or not…September looks the best risk/return bet for a federal election. Get ready for inefficient and unplanned pork barreling for 6 months….it will be comical to say the least. RBA will do more QE ratcheting and mantra will be job creation. Reality is scarier than fiction.

We are in uncharted territory with central banks and governments continuing to swim in the river denial. Let me refer to something I wrote in a previous note to give some clarity…

The mess we are in reminded me of the speech delivered in a classic movie called The Big Short. This speech had profound meaning for me. Take the time to watch the movie. I thought I would paraphrase it for Australia. It goes something like this…“We live in an era of fraud in Australia. Not just in banking, but in central banks, governments, regulators, rating agencies, media, tech, insurance, investment, education, religion, food, even cricket...What bothers me isn’t that fraud is not nice. Or that fraud is mean. For fifteen thousand years, fraud and short sighted thinking have never, ever worked. Not once. Eventually you get caught, things go south. When the hell did we forget all that? I thought we were better than this, I really did. And the fact that we are not doesn’t make me feel all right and superior. It makes me feel…sad. I just know at the end of the day average people are going to be the ones that are going have to pay for all this. Because they always, always do.”

Comments on US market last close

US market started positive and finished mainly negative. RUSSELL down 1.7% and DOW down 0.4% while NASDAQ and S&P were mainly flat. Bond yields, USD and Gold ticked higher as the US Fed meeting started. We’ll get an update tomorrow. Market needs more QE and words like inflation is transitory while reality is that will make USD depreciate more and drive inflation higher. Short term fix making the problem worse or let the cycle play out. So far we keep reverting to short term fix, time will tell if they keep to their recent jawboning. Most sectors were red with resource sectors leading the falls while tech was the only decent positive mover.

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

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

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