There is no such thing as a free lunch

The local market delivered another volatile positive day on low turnover with global macro trades remaining the main driver. The macro trade was all about currency. US Fed confirmed that they are going to keep printing money and yield control with the view that inflation will be transient. Bond and currency markets disagreed. The bond market was being massaged with ramping up QE-buying to control the rising bond yield. That did not stop the currency market from buying USD higher and selling it down lower as the update played out.

Commodities and AUD/USD were pushed up by the debasement of USD. During the US market time, spot gold started down $10-12 and finished up $5-6. It is becoming abundantly clear that central banks will not reduce QE and tighten until they are forced to do so. There are too many vested interest groups benefiting from unsustainable high asset prices. There is no such thing as a free lunch. 

High asset prices come at the cost of low returns for savers/retirees as well as lower economic growth for years to come. The longer we manipulate the economic cycle, the bigger the mess that we have to clean up on the other side. We can’t have endless stimulus and sustained high growth without hyperinflation.

US Volatility Index (VIX) trading pattern shows that we are at an inflexion point. VIX is too low relative to the past year, despite it breaking its recent short-term downtrend. 

Over the past year, VIX has had a decent recovery cycle and driven market pullbacks on each break in the short term downtrend. History suggests an elevated risk of rising volatility in May as we get to the end of April. Volatility is a knife that cuts both ways. Make volatility your friend and take advantage of the cycle by managing risks and exposures or let the cycle will teach investors a tough lesson.

Mortgage applications in the US fell 2.5% in the week ended April 23rd, 2021, following an 8.6% increase in the previous week which was the strongest gain since early January. Home refinancing fell 1.1% and applications to purchase a home went down 4.8%. The decline came even though the average interest rate for 30-year fixed-rate mortgages fell by 3 basis points to 3.17%, the lowest since mid-February. 

“Even with a few weeks of lower rates, most borrowers have likely already refinanced, which is why activity has decreased in seven of the last eight weeks,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. 

Historical high house prices and rising cost of construction are starting to worry home buyers despite lower cost of borrowing.

The goods deficit in the US trade balance widened to a fresh record high of $90.59billion in March of 2021 from $87.1billion in February. Exports rose 8.7% to $130.7billion, led by double-digit gains in sales of industrial supplies (10.1%) and consumer goods (15.3%) and strong shipments of capital goods (7.3%) and autos (7.2%). Imports were up 6.8 percent to $232.6billion, led by capital goods (5.7%), consumer goods (7%) and industrial supplies (7.6%).

We have falling USD and goods trade balance running into bigger deficits in the US. These are being polished by endless stimulus. Biden camp has another $1.8T fiscal stimulus and US Fed does not want to reduce $120b QE purchase a month despite economy about to deliver multi decade high growth. Still not buying into inflation beating expectations? Time will tell.

Cyclical growth stocks are going to rally in endless stimulus in most regions, driven by the election cycle. High growth stocks are going to have to accept lower multiples. US market performances are dominated by select high growth stocks. Get ready for the “Sell in May, Go away” mantra!

Comments on the US market last close 

The US market was slightly positive before the US Fed update drove it into negative territory. The RUSSELL gained 0.13% and the S&P, NASDAQ and DOW all dropped, by 0.08%, 0.28%, and 0.48%, respectively. 

The US Fed basically repeated the same mantra of uneven recovery, transient inflation and prolonged support. It also knew that the bond market wasn't buying the spin, so QE buying was ramped up to keep yield under control. Bond yields were managed flat, while the US dollar fell from up to down on the news. 

Most inflationary commodities like gold, copper and oil moved higher. Gold was trading down $10 into the update and it's now up by $5. The Biden camp is now pushing a US$1.8 trillion daycare/family stimulus package. 

It is clear that the US has a serious stimulus addiction and inflation is going to take off, and taxes and regulations will rise. Energy and banks were the best sectors, while gold was a standout category. Tech and property were the worst hit. Apple and Facebook reported aftermarket, and they are up. Apple was solid as expected and with US$90 billion buybacks, while Facebook revenue beat on price rises for its ads, with the number of users underwhelming. 

The mortgage rate is sliding back, but demand is waning. The globalisation of cheap labour put India into most supply chains and the pandemic is going to create problems like those experienced by China nearly 12 months ago. All governments are talking big-spending growth plans in a reflation cycle, in line with the election cycle. Inflation is rising in most parts of the economy and ignoring it won't fix the problem.

Full SUNSET STRIP report with end-of-day market stats are available via the attached link.

(VIEW LINK)

Never miss an insight

Enjoy this wire? Hit the ‘like’ button to let us know. Stay up to date with my content by hitting the ‘follow’ button below and you’ll be notified every time I post a wire. Not already a Livewire member? Sign up today to get free access to investment ideas and strategies from Australia’s leading investors.