US to make currency debasement great again!

Local market had another positive day with better turnover on the back of global stimulus optimism and geopolitical stability after the transfer of power in the US without any mess. US economy is in real structural problems and the pandemic has hit it at the weak points. The cracks in the economy have split open a mile wide and recent corporate tax cuts and asset bubble boosting policies have blown out the top 20% to new highs while the 80% fell further into the economic abys. Reform targeted at redistribution of wealth to the low to middle income segments are going to be the key to sustainable recovery. Unfortunately the new administration will soon work out the dire state of the economy after spending tens of trillions as short term fix. They need to deliver trillions of stimulus every quarter and fund it using higher taxes. Stimulus without reform and higher taxes means you end up with a ponzi scheme like Japan. Europe knows all about that as they are further down the rabbit hole. There is more to come out of the US administration change and that will play out over the next week. It will be interesting to see how the Republicans and Fox News react after the event as most logical path for Trump will cut into both their funding cycles. Expect survival mode to kick in and both the Republicans and Fox News to turn on Trump. The move to the new equilibrium in a politically fractured country like US could raise market risk in the short term. As with all big macro events, market takes the optimistic view first and reality comes later. Pandemic waves are hitting everyone and US has already gone past 400,000 deaths. Vaccine rollouts are running into issues as expected but will it get pass the polarized country like US….time will tell.

The main macro point for today domestically is the employment data. It is important to understand the context to know if it is going well or not. Politicians and Central Banks are loaded up on hopium (i.e. hope + opium) as they will always tell you it’s good…irrespective of the facts behind the data. I can make any data look good or bad…the devil is in the details. Let’s dig into the details. Seasonally adjusted we created 50k jobs from Nov to Dec. It’s about 2:1 split between Full Time and Part Time. Let me get pass the pathetically weak benchmarks to be considered Part Tim employed…few hours driving UBER gets you there…ignore that problem. US at peak cycle creates 200k jobs per month and their population is about 14 times Australia. Like for like, if Australia creates on average 14k jobs per month…we are killing it. Supposedly we have created much more jobs for a long time and yet there is no wages growth. The reason might be that these classification are weak to useless and the data is misleading. If we created 50k jobs, that is almost 3-4 times what US does in top cycle. Why is this not delivering wages growth? Why do we still have jobkeeper and rates at 10bps? Why aren’t we killing it? For years we have been fudging the data to give the wrong impression that it is not almost not aligned to reality. The charts below show Excess Labour Rate (%) and Participation Rate (%) using ABS data. Excess Labour Rate is adding back underemployment back to unemployment with adjusted weighting. The chart shows clearly that we have been in a uptrend for real unemployment since GFC with a few cycles of improvement in 2009/10 and 2017/18 when there were synchronized global recovery cycles. Participation rate has been mainly rising for 40 years. Cost of living is rising faster than inflation and that is forcing more people to get into the workforce. As you dig into the data, you realize that reality is a lot worse than what you get from Government and RBA marketing spin!

Now let’s refer to the data delivered by ABS to clear out some context. Australia created 50k jobs near 2:1 split between Full Time and Part Time. At the same time Monthly Hours Worked was up 2m hours. Looking at it through simple maths shows that on average every extra worker worked 40 hours for the whole month. That is less than 2 hours a day per worker. Basically Victoria opened up their economy and Queensland had holiday work as people went over. Apart from that we are just sharing same working hours with more people use jobkeeper. If you talk to small business in Sydney….who have been the least affected…that is what is happening while they uncertain on what they will do in the next few months. They have back payments in rent and utilities to catch up on…and that is piling up. Not sure small business is jumping for joy and they determine majority of the employment swings. Even if you take the ABS numbers on face value, we are down 222k jobs over a year. Even at the current optimistic job creation rate, it will take the best part of a year or two to play catch up. Let’s hope we don’t have the effects of recession hit in that time while the economy struggles with the lack of reform in years.

Now for a change of pace. The market optimism is multi decade high on endless money printing and currency debasement. That has driven interest in non correlated asset classes like Gold and even Bitcoin. I am not going to argue the case for or against it. Cryptocurrencies are quite interesting and have a place while Block Chain technology is big evolution. Will Bitcoin be the answer? I don’t think anyone knows but it is the main one in play. Everything has growing pains and regulation is inevitable. Not that it is all bad as regulation and clarity on turnover will only reduce extreme volatility and support it as a solution. In the meantime, the chart below shows the clear relationship between uptrends and liquidity squeeze. We are currently at multi year high squeeze…if trend is your friend, expect short term weakness!

Comments on US market last close > US market up on Biden's stimulus hope driven pop in Techs. Netflix leading up 17% while most of the FAANG up 5%. Looks like a decent tech short squeeze on a few good results lead by Netflix. NASDAQ leading and RUSSELL lagging. Bond yields and USD ticked lower. Property, Tech and Retail leading the run on stimulus while Financials were the only negative sector. The positive news is nothing went wrong. The negative news is the Biden's camp gets the keys with everything in trouble. Get ready for executive orders to fly to unwind policy changes to set the tone forwards. As with all macro changes, market runs on optimism first and then reality sinks in.

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