US heading towards stagflation to avoid recession

Local market started positive on US lead before it was jammed up on low turnover. All sectors were green except for yield sectors like Utilities and Property. Miners and Retail were the big movers higher. There was real pump going into some stocks to get the momentum traders excited. There is no risk tonight as US markets are shut for President’s Day holiday. Few fund managers used this safety net and really jammed up some small/micro caps. It will probably unwind tomorrow as the main cat among the pigeons is the bond market. Its selling off on reflation trade and bond yields are flying. Market multiples are going to get tested in the short term as bond markets flag reflation risk. US economy is drowning in cheap debt, low growth and structural problems delivering years of high unemployment. US looks to be heading towards stagflation and that will require substantial fiscal stimulus to keep the bottom half of the economy afloat. The political solution is to keep printing more money and delay the downswing while the economic solution is to let the cycle play out. History suggest that we will take the easy way out and we will lose control to inflation.

US 30 year long bond yield is now at pre pandemic level above 2%. Aussie 10 year bond yield is 1.32% after bottoming at 0.56% in the pandemic crash. That’s almost 3 rate hikes from RBA. RBA may be planning on layers of QE but that will have very little effect as US is moving into decade of massive fiscal deficits and currency debasement. RBA may be able to deliver more QE as a proportion of the economy but it is still holding a garden hose against the bushfire that is US Fed currency debasement. Similar to the rate cuts we have wasted, we are going to waste a lot of QE. After all it is trickle up economics being sold as trickle down economics. If QE strategy actually delivered economic recovery, Japan and EU wouldn’t be such basket cases. It’s a band aid short term fix that has become the standard central bank lazy weapon of choice. Much like Japan and EU, we will end up creating zombie businesses that last a few years more while stealing from savers and retirees for decades to come.

Japan delivered solid economic data today but they will continue to deliver more stimulus than drive reform and raise taxes. They are also going to be affected by the currency war in play by the US. Yen is going to get jammed up in the medium to long term like AUDUSD. Japanese manufacturing will struggle to compete. And they will revert to more money printing and BOJ buying everything from bonds, shares to property via ETF. Don’t worry…EU is not that far behind. European banks remain solvent while Germany writes checks. ECB will soon have to merge substantial parts of the European banking system and take shares in it. The socialization of the EU banks is inevitable and that will make it hard for anyone to leave the EU in the future.

Comments on US market last close > US market was negative all day on weak results and recent weak economic data before the end of day pump around 150 DOW points squeezed out a slight positive day. Bond yields are flying again with 10 year above 1.20% and 30 year above 2.00%. Reflation sectors like Energy and Financials lead the greens while yield sectors like Utilities were leading the reds. USD ticked up, Gold ticked down but Oil and Copper ticked up. European markets were also a weak positive. The comparison to last year’s cycle is scary. We are in the no man zone where we see seasonal weakness. The trigger point is always hard to pick but numbers are getting worse with reflation.

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

End of day market stats are on the attached link/pdf.