We are not in Kansas anymore

The local market delivered another choppy negative day on low turnover. We are on the sixth consecutive week without a double-digit billion-dollar turnover day. The market started negative and trended lower before global investor buying from lunchtime pushed up Resources and Banks on currency trade and reduced the losses. Another day where global macro traders and retail investors were the only players in town. 

Not sure when the local fund managers are going to join the market but sentiment is likely to be negative into the month's end. 

Miners and Utilities were the best sectors while Tech and Industrials were the worst. US Tech reporting cycle is just starting with Tesla underwhelming after market this morning in the US. Investors have been taking money out of the Tech ETFs through the week ahead of the results. We saw selling in our Tech stocks today in line with expectations of a weaker outlook out for the US. Bank of Japan ('BoJ') update was more of the same failed policies while markets are waiting on the US Fed update on Thursday.

BoJ updates

The BoJ left its key short-term interest rate unchanged at negative 0.1% and maintained the target for the 10-year Japanese government bond yield at around 0% during its April meeting. As widely expected. In a quarterly outlook report, the central bank slashed its consumer inflation forecast for the current fiscal year to 0.1% from earlier predictions made in January of 0.5%, amid downward pressure on service spending. Policymakers also warned of lingering risks to the economic outlook as the COVID-19 pandemic continues to hurt consumption. Meantime, the projected rates of rising GDP for the current fiscal year were little changed (4% vs 3.9% made in January). The central bank reaffirmed it would not hesitate to take additional easing measures if necessary. In 2020, the BoJ eased monetary policy twice, mostly by expanding asset-buying and creating a new facility to deliver funds via financial institutions to companies hit by a coronavirus. Nothing shows how good an economic strategy is working like 30 years of consistent failure to drive growth!

The major central banks may be talking down inflation as transient but their actions betray them. Central Banks are expanding the balance sheet to control yield reflation as a clear indication that they accept that the bond market is not buying their fairy tale. The question you have to ask how does this play out? Well, the historical trend suggests that this will end up very badly. Japan was the first test case in the endless stimulus path. Like any addiction, it started off as a short term fix and multi decades later it is now standard operating environment. 

How has Japan made it work so far? 

Basically, the Japanese can borrow at almost no cost of debt and invest in assets in the West and get better returns. They also benefit from a declining population that delivers better growth per capita basis. The problem for Japan is that Europe has now joined them in the endless money printing project and negative or zero rates. The Ponzi scheme still holds as long as the US stays strong. Europe has gone too far down the rabbit hole that they won’t be able to get out. 

It is a bit like a sandpit. The more they struggle, the further they get buried. 

Case in point – take a look at Italy – they now have another recovery plan that involves even more debt. Italian banks are insolvent already. The level of economic reform is too high a political and economic pain that politicians will never follow through. Everyone is happy to do the handout as that is the easy part. Putting up taxes, closing tax loopholes, driving new growth/tech industries, shutting down old dying industries and fading out handouts are hard to do. The problem for Japan and Europe is that the US is on the verge of joining their Ponzi scheme as well. Once the US goes down the rabbit hole, there will be no place of real growth outside China. Stagflation seems to be the path of least resistance for the US!

The US is on the path to a substantial inflation rise due to excessive fiscal and monetary stimulus. Bond and currency markets are reacting. US Fed is trying to fudge these markets but the more they intervene the bigger the problem is going to become. USD is the global currency and that is being debased by US Fed stimulus. US Fed is caught between a rock and hard place. Historic trend suggests that the US Fed will continue to expand the balance sheet in the event of reflation and drive negative real yield. Inflation is being driven by rising costs, supply-side shocks and it’s being made worse by currency debasement. That is not going to be slowed by US Fed without a rate hike…and they don’t want to do that! 

Get ready for US Fed to let inflation run, balance sheets to expand and real bond yields to go even more negative. China is playing the waiting game for the US Fed to get themselves into trouble. Chinese central bank PBOC has the capacity to devalue the Yuan after recent appreciation to manage their risk. US Fed is running out of options and the bond and currency markets can smell the fear. Forget what RBA is doing. Australia is a price taker in a global market in every aspect. If the US or Chinese economy sneezes, we catch a cold. US Fed update coming in a few days and the next US inflation data in a few weeks. It’s going to get bumpy!

Comments on US market last close

US market was mainly positive with domestic stocks preferred in stimulus-driven economic recovery. RUSSELL up 1.15%, NASDAQ up 0.87%, S&P up 0.18% and DOW down 0.18%. Markets are worried about inflation effects on Tech reporting and US Fed meeting update. Inflation was mentioned in the reporting season 3-4 times the previous cycle so far. 

It is clear to see costs are rising...every commodity is on a rip... Corn hits 7 year high while Copper hits 10-year high. Transport costs are ripping higher with asset bubbles on a global basis. 

USD ticked lower, bond yields ticked higher with Gold. Oil has been mainly going sideways for the past month and still trying to absorb more supply coming with pandemic reduction in demand. Energy and Tech were the best sectors while Staples and Utilities were the worst. Growth pop expected to fade by Q3 but inflation is just picking up pace. Globalisation of labour over the last decade has India linked to all parts of the world. Pandemic disaster inevitably will spread as vested interest groups keep borders open. Time will tell. Global inflows, buybacks and margin lending growth are all chasing stimulus while economic fundamentals are being ignored.

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

(VIEW LINK)

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