Time to bet against the herd when they are pricing in an uncertain result as certainty

Local market started negative and remained negative despite a mini bounce into the close. All the recent value trade sectors were the worst hit: energy, miners and banks. Bond yields are rock solid and keep climbing as reflation bites while the USD is flip-flopping with market uncertainty. Iron ore and copper are moving hard on reflation as China comes back from holidays. EU is moving into more restriction extensions and US under weather and pandemic cloud. The Federal government is unlikely to call an election cycle near term as more of the mistakes are getting splashed in the media. 

RBA keeps defending their rate cuts and QE as they gradually lose control of the asset bubbles, like currency. The markets are starting to wobble at the same time as it did last year. The market has had its V-shape recovery on trickle-up economics from fiscal and monetary policy, but the economic recovery is far from over. It’s a consensus bet this market won’t fall and Central Banks have got it all under control. A wise man once said to me, “When everyone is pricing in an uncertain result as certainty, the risk of being on the other side of the trade is very little while the return can be very high”. It’s beginning to look like 2020 again. The risk/return is against the consensus herd. Time to take on the herd!

US reflation risk

There are a few factors in play for the US, like reflation, weak economic data, stimulus uncertainty, tax hike outlook and pandemic/weather issues. Weekly jobless claims data was worse than expected and still worse than the bottom of the GFC. Jobless overnight was another reminder that the US economy will fall hard without substantial stimulus - not just stimulus, it needs substantial stimulus - those were the words of Janet Yellen, the current Treasury Secretary and former US Fed chair. She also went onto say that the next layer of stimulus will come from substantial infrastructure plans and tax hikes will pay for some of it. The tax hikes are expected to be announced in the second half of 2021. Democrats only have 18 months to pass all that they want to, before they lose control of one layer of government in the midterm cycle. Markets will have to start pricing in higher tax rates into the future. 

The markets ran up 10-15% on that upside and the logic suggests that may reverse. We still haven’t passed the stimulus package and even that is getting delayed. Climate change or not, parts of US are in weather-related damage and that will make pandemic management even worse. Getting back to reflation, commodities prices are red hot and bond yields are back at pre-pandemic levels while market multiples haven’t adjusted for that yet. Even the strong property market is getting hit with rising costs of building materials and rising mortgage rates. A USD debase on endless stimulus means reflation in a weak economy. Political risk/return suggests they will risk stagflation to avoid recession. History suggests that stagflation drives deleveraging cycle and not the spending cycle most are expecting. Once again…it is better to take on the herd mentality!

Comments on US market last close

US market was down as weekly jobless data confirmed the view that the economy is headed to stagflation to avoid a double-dip recession. Bonds were mainly flat while USD was lower. Oil down, gold mainly flat and copper up. The main commodity driver is supply risk over demand. RUSSELL keeps falling more than NASDAQ in the current slide and that is a high risk for markets. Rising lumber prices and higher rates are flagging the top in the US property market...single-family housing starts drop 12%. Energy leads the falls while utilities and retail were the only green sectors. Just for timing: the end of this week was the peak before the pandemic crash exactly 12 months ago. More IS Fed comments keep repeating about letting it run hot. US 10 year likely to test 1.50% in the next few months as inflation takes off….and 2% in Q3.

Remain nimble, contrarian and cautiously pragmatic with elevated global macro risks!!! Buckle up... it's going to get bumpy!!!

End of day market stats are on the attached link/pdf.