The Market’s Magical Thinking Problem | Australian Markets

Another inexperienced week on the markets because the ASX 200 skirts all-time highs.

The indices march larger whereas bond merchants nervously eye ballooning deficits.

It’s a acquainted dance — one the place equity traders whistle previous the graveyard of fiscal actuality.

The problem for you is navigating this disconnect. Why fear about tomorrow’s reckoning when right this moment’s rally beckons?

This chasm between equity euphoria and monetary actuality exemplifies a broader downside: the market’s habit to magical considering.

Below, I’ll provide you with a strategy to navigate this insanity…

But earlier than we do this, let’s take a look at the US’s mounting issues and why they matter.

Return of the Supply-Side Fantasy

Financial elites gathered on the Reagan National Economic Forum final weekend to quietly query the latest incarnation of Reaganomics.

Jamie Dimon warned that extreme authorities spending will finally set off a bond market disaster.

Gary Cohn, architect of the 2017 tax cuts, fretted about a failed Treasury public sale. Yet the market grinds larger, seemingly immune to those issues.

The Trump administration’s financial agenda reads like a best hits album of supply-side economics.

What do I imply?

Tax cuts, deregulation, and promised decrease home spending. All whereas the navy balloons.

The playbook is predictable, as are the outcomes. History doesn’t repeat, nevertheless it actually rhymes.

These insurance policies will inevitably deepen structural deficits which might be already working high.

The Congressional Budget Office initiatives that the latest tax proposals alone would increase deficits by US$3–4 trillion over the subsequent decade.

Meanwhile, elevated navy spending — notably on speculative systems — will additional pressure a stretched price range.

Take the Golden Dome initiative. Loosely promised as a US$175 billion project with scant particulars. A more life like Budget Office estimate places it nearer to US$831 billion.

Senator Jack Reed’s evaluation was diplomatic however damning: ‘Without a detailed plan and transparent budgeting, this initiative risks becoming a costly endeavor with uncertain outcomes.’

Sound acquainted? Reagan’s patriotic Star Wars project was initially billed at an inflation-adjusted US$90 billion.

It ballooned 4,000% earlier than lastly being shuttered. We’re witnessing the identical sample of reckless navy guarantees, coupled with spending cut fantasies.

This brings us to the inevitable problem of magical considering round DOGE.

The DOGE Delusion

Few would deny that the US price range has spiralled out of control — curiosity funds have develop into untenable because the debt-to-GDP ratio rockets above 125%.

Just take a look at how huge these ‘net interest outlays’ are projected to develop into:

But DOGE’s trajectory completely mirrors Reagan’s Grace Commission: it begins with fanfare and ends with a whimper, failing to cut spending meaningfully.

The failure to deal with company seize of authorities continues to undermine any critical slicing campaigns, main as a substitute to additional budgetary pork barrelling within the ‘Big Beautiful Bill’.

For DOGE, the guarantees of US$2 trillion in financial savings look nearer to 4% of that determine as vested pursuits prevail.

This wouldn’t have shocked these watching DOGE carefully, however magical groupthink created a story of success that few dared to query.

Now we’re witnessing the implosion of Musk-Trump’s relationship, with critical questions on what was achieved.

The deficit spending marches on.

Historic Echoes

Today’s similarities to the Regan period shouldn’t be misplaced on readers.

Back then, it was guarantees of tax cuts ‘paying for themselves’ via elevated growth.

Yet, federal deficits tripled beneath Regan.

And now now we have Trump… He’s already spent US$250 billion more than the earlier administration!

No doubt he’s been hobbled by spiralling rates of interest:

But a historic view reveals that no vital tax cuts have ever paid for themselves.

To remedy these issues, the administration promised even more magical concepts to stimulate growth.

Recently, Trump lieutenants like Bessent and Lutnick have shifted towards a ‘growth defeats the deficit’ narrative.

While plans like eradicating income tax and changing it with tariff income, have been described as ‘absurdly off base, since it’s mathematically inconceivable’.

Or the return of manufacturing jobs to the US at a time when a low-skilled labour drive and the inevitable march of automation have long taken their toll.

Finally, tariffs signify the zenith of divine considering. If Trump thinks he can divorce himself from China in a single day, he ought to take into account that almost 40% of US imports from China are intermediate items important to American manufacturing.

And so the social gathering continues… These aren’t remoted incidents. They’re signs of a market more and more divorced from basic evaluation.

When narratives develop into more important than numbers, catastrophe follows.

Debasement is Next

Investors should recognise that governments will proceed to outspend and systematically devalue our money.

This week’s settlement between Trump and longtime rival Elizabeth Warren to abolish the federal debt ceiling dangers eradicating the final significant constraint on fiscal growth.

The story is identical in Australia as our deficit deepens. The arithmetic right here is inescapable.

With curiosity funds consuming an ever-growing share of federal income and political will for significant cuts non-existent, financial debasement turns into the trail of least resistance.

Central banks can be pressured to accommodate fiscal recklessness by money printing, successfully taxing savers and fixed-income holders via inflation.

This setting calls for defensive positioning. Traditional secure havens like authorities bonds offer little safety when governments are the source of financial instability.

That’s why traders need to move back to the ‘classics’.

Gold stays the timeless inflation hedge. Central banks are accumulating gold on the quickest tempo in many years.

Even the establishments recognise the currency dangers.

Here’s the place you may revenue from Australia’s deep bench of gold miners.

Gold demand is on observe for long-term structural demand. But it’s not simply a case of shopping for the most important gold miners. Many have already reached unbelievable heights.

As you may see beneath, the large-cap dominated ASX gold index is already in all-time high territory. But the speculative stocks stay effectively beneath.

Editor Callum Newman has recognized the subsequent small-cap ASX-listed performs on this sector, together with one which may very well be sitting on the subsequent motherload… A hypergiant that may very well be holding the subsequent Australian fortune.

Click right here to be taught how to entry Callum’s ASI ‘5-to-buy’ for 2025.

The equity market’s present euphoria, constructed on fiscal fantasy, can not final. Bond vigilantes are stirring. Reality has a approach of asserting itself.

Markets can stay irrational longer than you may stay solvent. But they will’t stay magical perpetually.

Regards,

Charlie Ormond,
Editor, Alpha Tech Trader and Altucher’s Early-Stage Crypto Investor