The Age of the Central Banks

The local market started positive on global buying and then faded before another global buying pump finished a positive day. We have gone through a whole month without a double-digit turnover day. Punters were chasing stock specific day-trading ideas on market updates but beware: crowded trades can backfire. 

Markets continue to struggle for sentiment as high inflation and fading growth are exaggerated by new pandemic waves. Currency and bond markets are not supporting equities but the dominant players fudging those markets are central banks. Size mattered with micro caps being the best performers, while mid-caps were the worst. Energy and miners led the sectors while healthcare and property were the worst.

The movements in the bond market continues to confuse investors. That should not be a surprise as central banks are trying to hide the symptoms of the broken economic model instead of fixing it. 

Central banks are jamming up QE buying to bring down bond yields while talking about tapering. They have now become the dominant players in the bond market, funding the fantasy fiscal policies that are being played out. 

Central banks know that the stimulus is mainly boosting asset prices, which is mainly flowing into the top 10-20% of the population. To hide the mess, they will try holding yields as low as possible. This will prop up asset bubbles until inflation bites. The inevitable FOMO pressure will see much of the middle to low-income portion of the market jump headfirst into these bubbles, with very little buffer for when things go wrong. And as with all bubbles, it will eventually burst. 

The top end of town has paid up for high-quality tax avoidance schemes. That means they will avoid the main pain of higher taxes that are needed to clean up the mess that comes with busted bubbles.

The main bubble buster in the current cycle is inflation. Central banks have moonwalked away from tapering while gradually changing the rate high cycle benchmark into something that the economy will never get to. 

Basically, the transition from an inflation target to full employment in asset bubbles is like expecting Elon Musk to act like Warren Buffet. It could happen but it won’t. Full employment in a reflation cycle with asset bubbles is impossible to play out. Central Banks have sold the concept that inflation is transitory. They will just let the inflation run hot and burn the growth and move into stagflation. At that part of the cycle, they will then move into the mantra of more stimulus to drive growth. 

You have to wonder…if it was this simple to run an economy without recession and endless high asset prices, why did we not do this until now? The simple answer is that we can’t do what the central banks are doing over the long term. Inflation will rise and kill the consumer spending from the majority and hence the economy. Some parts of this inflation are cyclical and some are structural. Some parts will fade while others will rise. Inflation will fade but may still be at a premium to growth in the second half.

If you have any doubts, just read about the European Central Bank's plan to change the inflation target tonight. It is very rare that you get to hear a self-satisfying Ponzi scheme being sold as a solution in real-time. This scheme works well for a few countries but badly for the rest. But they are so far down the rabbit hole that it seems easier to keep going - one could also draw comparisons to the behaviour of drug addicts.

Local pandemic management has become a total mess. Everyone knew the Delta variant was more dangerous in its ability to spread, though it seems some governments just Googled it over the weekend. 

Everyone knew the supply of the preferred vaccine will not get here till Q4. 

Everyone also knew that the best suppression method was to move fast to tough lockdowns, as seen from previous clusters. 

We have now managed to deliver multiple layers of mistakes and put the local economy at risk of a double dip recession. Given the complete economic mess in Q3, the federal election cycle will be pushed to Q1. The RBA adding QE and/or taking rates negative ahead of the election cycle looks inevitable. It will end up hurting the people it is supposed to help. It may be different this time!

You can view the full Sunset Strip report, with charts and the end of day market stats, on the following link.

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