Return of the bond empire - Yield 2.0

The local market recovered from the early bashing to finish down after the second wave of bond selloff hit US growth stocks. There were not too many places to hide today with a lot of big caps stocks going ex-dividends. Financials were the only green place where banks, insurance and property were holding up in positive territory. Health care, miners, supermarkets and tech were getting a bit touched up as the second wave of bond yields starts to work through the markets. 

RBA has played their QE ramp cycle and flagged endless flexible QE. The ECB is next on the timeline (i.e. next week) and likely to talk up bond market support. But the ECB has bigger fish to fry, as most economies are still in lockdown restrictions and will need support in the recovery cycle in Q2. The following week brings US Fed and BOJ updates. We may see some more bond market support but, in the end, we are likely to keep getting new bond yield waves over the next 3-6 months as major economies cycle weak data. The reality of politics is likely to keep central banks repeating the same failed strategies while preparing for the eventual loss of control over the bond market. Don’t worry, they will call it: “letting the economy run hot”!!!

The bond market has decided enough is enough

Endless money printing, historical high debt, currency debasement, global pandemic effects, supply-side disruptions, weak global economies, historical high asset prices, negative real wages growth and historical high inequality, have all meant the bond market is starting to dominate governments' and central banks' policies. Governments and central banks are unable to accept that money printing will not fix a structurally broken economy. The reality is they were just moving the wealth from the bottom majority to the top minority. The beauty of cost reflation is that more fiscal and monetary stimulus will make it worse. The US producer price index is back near 40 year high. Commodities are hitting new highs while currency is hitting new lows. US outlook suggests we may be about to see inflation above 3% in the next 3-6 months. History suggests that will drive US 10 year bond yield towards 2.5% in the anticipation of 3% inflation in the short term.

The global economy had a get out of jail free card in 2015/16 when the synchronised global recovery cycle started. The trade war between US and China broke that cycle with unsustainable tax cuts and corporate handouts. The natural progression for troubled leaders was to cut taxes and deliver massive corporate handouts to hold it all together. The pandemic came around and hit all economies at the weakest spot. It hit the lowest-paid service workers with the least job security. Finally, the world realized that the rich needed the poor to survive to make the world go around. We then proceeded to deliver handout after handouts (i.e. short term fix for long term problems). The problem with this strategy is that it requires endless short term fixes (i.e. regular handouts). Corporates stopped investing in capex for growth and started to pay themselves bigger bonuses during a recession. Now we have governments dealing with weak economies held together with unsustainable handouts, while the revenue base has been decimated by unsustainable corporate tax cuts. Where do we go from here? We can either keep doing the same failed strategy or we can let the economic cycle play out and recover. Corporates want more bailout for them. The public wants more handouts for them. The government is running on the credit cards of our grandchildren. Sadly we are likely to repeat the same mistakes and the bond market knows it. Return of the Bond Empire…Yield 2.0…2.5…3.0? Time will tell.

Comments on US market last close

US market was negative all day and was hit harder into the close to finish on the lows of the day. All indices were red while NASDAQ was bashed 2.7% lower. Bond yields are running again after weak ADP data. Non-farm payrolls on Friday could be volatile...solid read might feed inflation but a weak read could feed a slowdown. USD moved higher on risk off and all metals hit while Oil went against the trend on the hope that OPEC rolls over the cuts. Tech and retail took the big hits while energy and banks were green...and there wasn't many in that colour. The UK raised its corp tax rate to pay down the debt, and that will be the global trend in 2021 with the US following in H2. We won't in Australia, we prefer cutting services on the public as we do corporate handouts. Reflation is hitting markets and the dams are cracking.

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.