US reporting season can’t hide from margin pressures and currency debasement

The local market climbed on two separate global investor buying pumps on a decent turnover day. We had one at the open and one when Asian markets opened at lunch. Tech and healthcare led the global buying, while telecom, energy and banks were the laggards in a day when all sectors were green. The gold sector was on fire again as smart money has been buying the inflation hedge over the past week.

The read-through from the US market may have given the impression that inflation data wasn’t as strong and bond yields came off and that drove growth stocks to outperform. Reality may be far from that. In the game of “Fake it till you make it”, Central Banks are spinning a tale of fantasy that they can keep doing the same thing but yet expect to deliver a completely different outcome. It may be the definition of insanity but that’s above my pay grade. Markets are not stupid and neither are the Central Banks. 

The US Fed has been on a media blitz to flag that inflation was going to be hot. Leading indicators were all flashing hot. The data was actually hot and it beat expectations. Even the continuously fudged core inflation, which does not represent anything remotely linked to the economy, was also a beat. The Fed then jammed up the QE buying to bring down the bond yields by 5-6bps to give the impression that the market expected even hotter inflation. If that wasn’t in play, why would a global investor buy US bonds trading at negative real rates with a declining currency and potentially moving into a bear market as reflation takes over? Well…they wouldn’t. They might if they were doing asset allocation move but equities were up as well. 

Given there was a chunky 30-year issuance in play later that day, it makes no sense for the bond market to ramp up prices to then pay top dollar. The bond market may be greedy, but it's not stupid.

The only player in the game who wants to reduce yield by burning the balance sheet, despite making a loss, is the Fed. It's there to boost asset prices and buy some time, not to save the economy. The more balance sheet that gets burned to delay the inevitable, the more damage it does to the currency. 

The Fed is destroying the biggest advantage the US has had for decades - its global currency status. It is not a mantle you own. It is a mantle you gain through decades of economic and political power. 

The global currency status of the US dollar is being eroded by the Fed, and everyone knows it. China is playing the long game and watching the US trip over itself. All major global powers through time started their decline with currency debasement. We may be seeing that play out right in front of our eyes…time will tell!

US inflation data has broken the down trend that peaked in 2008. The US dollar is in decline. Economies are opening up with historical stimulus while resurgent pandemic, supply side shocks and rising China inflation means costs are going to keep rising. China has been warning about inflation, credit issues and asset bubbles. China has even moved to tighten credit to reduce the damage that is coming. 

The Producer Price Index in the US is at all time high and USD is falling. We are about to start the US corporate reporting season with financials starting tonight. Markets are concentrating on outlook as market multiples need continues upgrades. It is almost certain that every stock will upgrade. That is a norm in US reporting cycle and the market multiples are sitting so high that everyone has to upgrade. Get ready for corporates to start talking about cost pressures. And we are not even going to talk about rising regulation and taxes that are coming with stimulus.

Comments on the US market's last close

The US market had a choppy day before a solid pump in the last few hours in low turnover. NASDAQ +1.05%, S&P +0.33%, DOW -0.20% and RUSSELL -0.22%. A big pump after lunch chasing growth stocks led by Tesla...TSLA +8.6% on a day when input cost and competition rise...go figure! Inflation was a beat on nominal and core...and it's going to keep rising as the US dollar keeps falling. 

An interesting move was that buying into bonds drove yields down around 5bps. I'm not sure if the US Fed or asset allocation trades jammed up the QE buying allocation, but buying into an inevitable bond bear run with falling currency doesn’t sound like a winning strategy - it smells like US Fed action. You are buying approx -1% real yield with sliding currency. US currency fell and pushed all currencies and commodities higher. Johnson  & Johnson's vaccine rollout was paused due to blood clot risks, like AstraZeneca. Gold and utilities were the best sectors while Banks and Staples were the worst. 

The market is going up on low turnover, historic inflows, historic buyback growth and historic margin lending while economic and pandemic reality are diverging. Half the states in the US are experiencing rising COVID cases despite massive vaccine rollout. Despite a huge proportion of Israel being vaccinated, the reality there shows a return to normality will take time...a lot more time. 

It is clear reflation is happening but being ignored for now. When the pump factors subside, reflation will bite. You can’t have enough inflation hedge for the next two quarters.

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

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