Bond markets are telling central banks to do “a little less conversation, a little more action”

Local market had a positive flat day on low turnover after local bond yields popped to 1.81% on the back of US bond yields move on Friday night. Tech and miners were the worst performers while health care and property were the best. Miners were taken down by iron ore miners as we start to see some weakness come through. China data remains solid but the recent moves to tighten credit to the property market and reduce steel output are starting to weigh on demand at elevated prices.

The bond market is once again aiming straight at central banks. It looks a simple trade. Sell the bonds into an over supplied US bond market until the US Fed decides to bail them out. Buy the bonds in EU ahead of the ratcheting QE. When US Fed panics and ratchets QE, then you sell the EU bonds into their QE and buy US bonds into their QE. It seems too easy as long as you play the currency risk properly. It does seem easy as long as you assume that they will continue to bail them out. 

Unlike ECB, US Fed has a currency problem as it is a global currency. They need to use their QE wisely or additional QE will create additional currency debasement and drive inflation even higher. It will be interesting to see if US Fed bails out the market or actually stay consistent with their comments and let the bond yields run hot. Yields run hot and market gets hit. Additional QE means currency gets hit and Gold runs. US Fed is the main game for the week. BOJ update too but that becomes a sideshow compared to US Fed.

Currently, all central banks have the same marketing pitch that rates won't go up for a few years at least. It is not based on reality but on adjusted numbers to enforce an existing view pushing asset bubbles. It is like counting a person who works a few hours as employed to boost job creation story. It all comes down to perspective. Despite saying they won't move, we already have a few central banks ratcheting QE for yield control. It is because they don't believe their own spin. Central banks are worried that once the bond market move on reflation, it can really pick up speed and they will lose control. If the core inflation data was real then they have nothing to worry about. But we all know that it is not real and it is just there to justify endless rate cuts and QE. The central bank threshold is the point where QE ratcheting becomes irrelevant and central banks are forced to expand QE. RBA is playing minor league. It only matters what happens in major league...i.e. US Fed, ECB and BOJ. They would have to be throwing trillions and that will further debase their currency and ramp up inflation fears. BOJ has been in a ponzi scheme for decades while EU is mainly there...too late for them to turn back. The US is on the verge of going too far down the rabbit hole. Once they go, it is a slippery slope...no turning back. Economic structural problems and political survival / self-interest mean we are all going to do what will eventually fail. China has been betting on the West failing due to greed. Are we going to prove China right? In the end…China is probably right!!!

The charts show that the chase for growth has been pushing fund managers down the size curve and up the risk curve. Market funds are betting on more small caps and small cap funds are betting on more micro caps. As with any cycle, it works till it doesn’t. Beware the liquidity trap going down the size category and up the risk curve…it gets ugly when the cycle turns.

Comments on US market last close

US market was higher on vaccine rollout and opening up optimism. DOW up 0.9% and a third of that is just the pop in Boeing. RUSSELL next up 0.6% on opening up while S&P flat and NASDAQ down 0.6%, as bond yields hit new 12-month highs of 1.64% before it closed at 1.63%. USD ticked up but gold and copper ticked up with it. Growth to value rotation is flying hot. EU yields down US and UK rising...putting pressure on US Fed and BOE to at least ratchet up QE buying. It’s not going last, as the RBA is finding out, but it looks like you are doing something. The bond market can smell fear and they are taking on the central banks. 

ECB is stuck between a ponzi scheme and recession. Germany just flagged third-wave and Italy just extended restrictions into April. Yield control in EU via QE ratcheting will kill off any bank sector recovery. EU is moving towards socialising their banks in the ponzi scheme outlook. US Fed is stuck as yield control will debase currency and make inflation worse. Bond yields don’t follow core but nominal inflation and that’s rising. US yields are going to go past 2% without a US Fed move. US Fed's hand will be forced as yields run towards 3% with inflation around 4% or more in the next 3-6 months. Tech was the only red sector while property and utilities were the best as market bets on US Fed moving on yield control.

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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