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Macro Australian Economy

When the US Capitulates, What of the Aussie Stock Market?

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By Sam Volkering, Friday, 15 May 2020

We’re tied to the US whether we like it or not. And if that’s the case, then there will be some buying opportunities coming as the markets begin to finally realise the situation the world’s largest economies are in, and reflect that far more rationally than they have been....

It’s a rough week on the markets around the world.

Overnight the UK markets crapped themselves. The FTSE 250 was down almost 4% in early afternoon trading. Brutal stuff, and akin to mid-March just a couple of short months ago.

There’s every chance that Friday markets will be brutal across the board, across the world.

Not to worry.

This is exactly what we expect markets to continue to do for at least another month or two. Finally, we might be seeing some rational behaviour come back to the market.

That’s not to say that things aren’t ripe for stock pickers. Heck, I don’t think there’s ever been a greater time to be an active investor — but boy, do you need to do so with a fair bit of trepidation!

The situation may seem dire. Economic recession is here and it’s everywhere.

Australia isn’t escaping this one like we did ‘technically’ in 2008 and 2009.

I’m expecting that governments around the world will play the stupid game of tax hikes (whether it be GST, income tax, or other hidden taxes like pensions and super). What it all means is the taxpayer will once again be bailing out themselves thanks to the incompetence of the government.

And it also means the middle gets squeezed harder and the gap between the rich and poor will get massively wider. And then we’ll find even greater social unrest and you guessed it, the socialists call for the end of capitalism (again).

Worth noting, that it’s not necessarily the fault of capitalism that’s the root of the financial system’s problems. It’s the fault of power.

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Frankly, the US is rooted

It’s this idea of power and where it exists, who has access to it, and how they use that power that has distorted the world’s economies, the whole financial system, and even non-financial system networks.

Therein lies the problem. The problem of major decisions impacting the largest number of people, taken and made by the fewest number of people.

That’s where the real distortion lies.

This is the by-product of what we refer to as ‘democracy’. But in reality, democracy is a fallacy. It is after all the idea of you having a choice to make a choice. And that choice is usually a bunch of options you never chose in the first place and frankly don’t want to choose from anyway.

But if you don’t choose, then you’re breaking the law.

So much for democracy. You also don’t get a say in the massive decisions that get made by these ‘elected’ representatives. And then in many cases you haven’t even appointed them to office.

When the government and central bank decides to print money, rampantly slash rates, force lockdown on the masses, do you recall the mechanism you had to approve that?

As the financial system has been destabilised over the last 12 years, at what point were you able to choose how that took place?

Rhetorical question.

You never had choice. You never will. Not for the current systems of power, control, and influence.

What you end up with is power brokers pushing and pulling the strings to have control, power, influence, and often also end up with the lion’s share of wealth.

As I heard during the week, the rise in stock prices of Amazon and Netflix doesn’t put food on the table of the millions of Americans heading into destitute poverty.

And boy, is it about to get dramatically worse for the US. Jobless claims for the week came out yesterday. Another couple of million claiming unemployment. That takes the total to over 36.5 million. And, don’t forget that’s conservative.

That’s just the numbers that have made a claim. There will be more that haven’t claimed, either because they don’t know how, haven’t got access, or just haven’t had claims recorded yet.

The working age population size in the US is about 205.5 million. That means about 17.7% of working Americans are now out of work. And it’s going to get worse before it even comes close to getting better.

Unemployment during the Great Depression peaked at around 24.9% in 1933. Goldman Sachs are now forecasting the real jobless rate (people who want a job but have given up finding one) will peak around 35%.

And at the same time, it’s expected Jeff Bezos is about to become the world’s first trillionaire.

I’ve got nothing against Bezos. And good on him for building the incredible company he has; he deserves whatever the spoils of his work are…

But you can’t deny the ridiculous disparity between the two book ends of global socioeconomic divides.

This situation never leads to great outcomes.

Patience, there will be another chance

I’m convinced that the US markets are in for another major crash. That the recent rebounds are about to be viciously unwound. And that the lows of mid-March will be met and passed in the next few weeks.

There is simply no feasible way the US economy comes out of this without either a deep recession, or a depression that lasts through the rest of this year and 2021. Maybe, just maybe they recover through to 2022.

But their issues are systemic, from Wall Street to their healthcare system. They’re a mess, and it’s going to drag on the world’s markets as we’ve already begun to see this week.

And thanks to the close ties of the Aussie market to the US and China, we’re once again stuck between that proverbial rock and hard place, where it’s not going to be smooth sailing.

What this means for you as an investor is simple. Don’t get too tied to the idea the Aussie stock market is through the worst.

We’re tied to the US whether we like it or not. And if that’s the case, then there will be some buying opportunities coming as the markets begin to finally realise the situation the world’s largest economies are in, and reflect that far more rationally than they have been.

Regards,

Sam Volkering,
Editor, Money Morning

PS: In this free report, Money Morning analyst Lachlann Tierney reveals two assets set to benefit as the ‘corona crisis’ worsens. Click here to claim your copy today.

All advice is general advice and has not taken into account your personal circumstances.

Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

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