Big Think on Us500 Aus200 2022 and Could the Rba Be in for a Surprise

  • Clifford Bennett, Chief Economist | World’s most accurate currency forecaster at ACY Securities

  • 18.01.2022 01:45 pm
  • #stocks , Clifford Bennett has over 36 years of market trading experience and was named the 'World's most accurate currency forecaster' by Bloomberg New York. He has advised some of the world's largest organisations, billionaire investors, and political leaders and spoken at the prestigious APEC summit on reserve currency issues. Clifford is the Chief Economist at ACY Securities.

Change of Government.

Could it mean a NEW Reserve Bank.

Good morning,

Full respect to Martin Luther King and the reverberations of his and similar will around the world. Making the world a better place for everyone is after all what it is all about.

As per the US500 daily chart below the equity market has been in a washing machine. A washing machine in markets is when you really don't know which way or how strong the next tumble will be. The tendency to chaos during consolidation periods, particularly of this quantum is something I have highlighted to people throughout my career.

Once upon a time, I had the discipline to simply stand outside and watch the tumult, but in this age of fear of missing out, I have been jumping in for a deep dive. Attempting to sell the market again and again only to be stopped out. Even when widening stops there has been the tendency to just be stopped out in a bigger fashion. At the moment though, in my own trading, I seem to be developing a style of managing these huge swings. Weekly movements are what quarterly ranges once were.

The really challenging part has been the back and forth, severe sharp reversals, again and again, on top of each other.

US500 weekly chart 

While the US has gone sideways or slightly higher or lower depending on the indices watched, the Australian market has been more resolutely heavy. That hasn't stopped the local fund managers and day traders frequently, nearly every day, buying the market up on the open, only for the heaviness to return a few hours to a few days later.

It is greatly unfortunate that I must refer to the terrible tragedy of 36 deaths today alone in NSW. That 80% of Covid deaths are now of the fully vaccinated, while side-stepped in most press briefings, is a reality that is increasingly dawning upon the electorate. It will be a factor in the change of government that appears irreversibly locked in now at both the Federal and state levels. I do not see a change of government as a negative for the market. Though some may. Every team needs a big shake up and the taking of a hard look at themselves on occasion.

Our democratic system works and is to be proud of regardless of whether your horse wins the race or not.

Moving forward, I see a very cautious Anthony Albanese government. These are challenging times for whoever is in office, and the volatility of policy over the past two years has probably been more extreme than it needed to be. Certainly the Australian people have tired of the ordeal. Not just the pandemic but the volatility of what has seemed self-serving policy at times.

Living with Covid, but with perhaps a slightly more cautious bent is probably what lay ahead of us over the next 12-18 months. Yes, Covid could still be an issue that far out. Nevertheless, we will be nearing natural herd immunity and be more accepting of a bad flu experience. The economy will tick over more firmly.

That firm toned economy will not however be anywhere near approaching break-neck speed. Below trend growth with a growing inflation threat is the most likely economic scenario before us.

This is why it is so important for the nation to acknowledge that the Reverse Bank of Australia is badly in need of a historic tectonic level review and overhaul.

As highlighted by the OECD suggesting this is an urgent requirement given the RBA's performance.

Hence my frequent reference to the 'Reverse' Bank of Australia. Though I did coin the term over a decade ago. The RBA has been this weird institution that has escaped all reasonable assessment of any kind by anyone for far too long.

The troubles started when the politicians began selecting Governors from the RBA's own ranks. Instead of appointments from outside like most civilised central banks. Subsequently, the Peter Principle personified. A Reverse Bank widely seen as a global laggard of frightening degree.

(The Peter Principle refers to the process whereby bureaucratic institutions keep promoting people until they reach a level of incompetence, and there they remain until retirement.)

With a change of government a great positive surprise would be the undertaking of the OECD urgently suggested review of the RBA. And the immediate removal of the full sitting board. This would be the greatest long term positive shift any new government could achieve for the economy.

AUS200 weekly chart

As for the Australian market at the moment?

Given my view is a steadily firming economy but only to below trend growth, and an increasing inflation wave the current Board of the RBA does not have the capacity to understand or deal with, then may I conclude the Australian equity market is living on borrowed time. After a significant fall it will maintain a heart beat and be resuscitated. Though only after some considerable downside correction risk first.

The US/global equity market has the capacity to sour. The UK market is having a tear away to the upside just now, but this could be quickly diluted should the US market begin to turn south as I believe it will.

Most importantly because the global economic outlook is being downgraded by even the slow moving World Bank forecasting team. The world's two largest economies are in trouble right now, and the third, Europe, has problems too. The look over the valley (its actually an ocean) Nirvana pricing of equities is badly out of step with the real world.

Hence my bearish view. Still.

There are valid arguments for continued equity market upside. Interest rates will remain historically low even as they begin to rise. Generally though, all the bullish arguments are feeling just a bit tired, and are at the very least already fully priced into the many dizzying valuations out there.

What almost no one seems to be considering is a correction this year toward US500 4,050, and AUS200 in the order of 6800 or thereabouts. We cannot be sure these levels would be the end of such a major correction, but they are guideposts.

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