On the wrong path
By Justin Pyvis – Delivered on 15 Nov 2021

Good morning! Thousands of protestors hit the streets yet again in Melbourne on Saturday, chanting "kill the bill" (amongst other slogans) in reference to the state government's proposed pandemic law. Why do we get the feeling that the angst and frustration that has built up in Victoria – and the world's most locked-down city Melbourne in particular – won't be easing anytime soon?

Speaking of lockdowns, Europe seems to be gradually slipping back into pandemic panic mode after the governments of the Netherlands and Austria announced partial lockdowns, ditching crowds at sporting events, imposing a curfew on bars, restaurants and supermarkets and banning the unvaccinated from basically any activity where they might encounter other human beings. Discussing the decision, Austria's Cancellor Alexander Schallenberg said:

"I don't see why two-thirds should lose their freedom because one-third is dithering. For me, it is clear that there should be no lockdown for the vaccinated out of solidarity for the unvaccinated."

If you eyeball case numbers in Europe, it's pretty clear that they tend to peak in the winter months. Vaccination doesn't do much to stop transmission, either – after 6 months its effectiveness is only around 20% (although it remains very good at preventing hospitalisation!), and the Europeans have only just begun to consider booster shots.

In the context of Australia, we may have just got lucky again. Most Australians were vaccinated relatively recently due to the botched ordering process, creating the favourable conditions of a summer reopening (people are outdoors more often), relatively high vaccination rates (Australia already has a much higher rate of vaccination than Austria), and those vaccines are still effective at preventing infection (only 1.3% of Australian were fully vaccinated 6 months ago).

By the time winter rolls around the booster programme should be well established, meaning the pandemic panic that's hitting Europe could be able to be avoided entirely, provided certain Premiers don't obsess too much over an inevitable rise in case numbers.

Fully vaccinated population (aged 12+)


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Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries. The S&P500 is a snapshot 30 minutes before close.

The US S&P500 closed Friday up 0.72% despite a Labor Department report showing US workers left their jobs in record numbers in September and a separate University of Michigan survey indicating that consumer sentiment had hit a 10-year low.

On the latter, consumers were most concerned about the "escalating inflation rate and the growing belief... that no effective policies have yet been developed to reduce the damage from surging inflation".

Locally, the ASX200 finally finished in the black, breaking a 4-day losing streak to close 0.83% higher. Once again it was materials that led the way, rising 2.3% on the back of Thursday's stronger iron ore prices (e.g. BHP +2.8%, RIO +3.4% and FMG +1.9%).

The Aussie dollar hit its lowest level in a month against the greenback as punters bet that following 30-year high inflation the Federal Reserve will be forced to turn hawkish before a very dovish Reserve Bank of Australia, which is still insisting it won't hike rates until late 2023 or even 2024.


Aussieflation: Consumers in Australia expect that inflation will run at 4.6%, according to the November edition of the Melbourne Institute's Survey of Consumer Inflationary and Wage Expectations. However, total pay was only expected to increase 0.5% over the year and was up just 0.4% from a year ago, indicating real wages could already be falling quite dramatically.

Highest since 1974: Producer prices in Germany grew 15.2% from a year ago in October, a level not seen since the OPEC oil crisis in the mid-1970s, rising a whopping 1.6% on a monthly basis (which if continued for a year equates to a rate of 21.0%).

COP that: Global governments came to an agreement to "phase down" coal use (which was changed from "phase out" after a last-minute intervention by India) and produce a "roadmap to limit global warming to 1.5 degrees".

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On the wrong path

Billionaire investor Ray Dalio tore the US government and Federal Reserve a new one on Friday, warning that "we are on the wrong path".

Breaking it down: The focus of Dalio's note was inflation, which is eroding people's wealth because "the government is printing a lot more money; people are getting a lot more money; and that is producing a lot more buying that is producing a lot more inflation".

People are feeling richer "because they are seeing their assets go up in price without seeing how their buying power is being eroded", but those "who have their money in cash" are faring even worse.

Why this matters: Inflation is an insidious beast that hits people on multiple fronts. The obvious one is reduced purchasing power – if wages aren't keeping up with the prices of the things you want to buy (they're not, by the way), you're getting poorer every year. Even if inflation proves to be "transitory", the loss can be permanent – a 0.9% monthly inflation rate (which is what it was in October), held constant for 18 months, represents a 17.5% reduction in people's purchasing power.

The other ways inflation bites is through taxes, where fixed progressive tax rates cause 'bracket creep' – nominal wages rise to offset some of the inflation but the tax brackets remain constant, meaning people get stung by both declining real wages and higher income tax payments due to the rise in nominal income.

Even assets aren't immune. As Dalio mentions, when your investments rise in value it feels good but it could all be illusory. For example, a 14% annual return with inflation running at 11.4% (the current rate) is a real return of 2.6%. However, once you factor in capital gains tax (20% in the US for assets held for at least a year), the real return becomes minus 0.2%.

Looking forward: Governments benefit immensely from inflation for all the tax reasons mentioned above, plus the fact that central banks are currently "printing money" by buying government debt (quantitative easing), suppressing interest payments.

Dalio concludes by warning that unless the focus shifts to productivity-enhancing spending, e.g. "investment and infrastructure... [rather than] printing money and distributing it without being productive", then "misery and turbulence are ahead".

The Wrap Up
    ⚖️Latvia's government banned unvaccinated politicians from voting on legislature and participating in discussions and will dock their pay.
    🐧A penguin travelled 5,000 kilometres from its native Antarctica to the beaches of Christchurch, New Zealand.
    🧱The European Union sided with Poland in its dispute with Belarus over the thousands of refugees camped between the two countries, and would even "consider the possibility of financing a wall at the border".
    🗳️The daughter of outgoing Philippines President Rodrigo Duterte will contest the nation's vice-Presidency in 2022 (in the Philippines the President is elected separately from the vice President).
    🔬Shortly after awarding himself the medal of the National Order of Scientific Merit, Brazil's President Jair Bolsonaro slashed the country's federal science budget by 90%.
    👩‍⚖️A federal appeals court in New Orleans halted the Biden administration's vaccination mandate, on the grounds that it's "a one-size fits-all sledgehammer that makes hardly any attempt to account for differences in workplaces (and workers)".
    🤖Tesla's "Full Self Driving" beta test has been involved in its first major crash "after mistakenly turning into the wrong lane and colliding with another car".
    🛩️According to the UK government, carbon emissions created by the Glasgow COP26 conference were "more than double that of COP25", with around 60% of the emissions coming solely from international flights amid "widespread use of private jets by delegates".
    💸A local government in Denmark spends $US150k every year removing seaweed from a beach "only to dump it back into the sea".
    🕊️Britney Spears was officially freed of her conservatorship after 13 years, meaning she will now have a say in controlling her estimated $US60 million estate and can make her own medical and personal decisions.
    🦘The Wallabies lost 32-15 to England, their eighth straight defeat against the old enemy.
    🏉30-year old Carlton football player Liam Jones elected to retire rather than get vaccinated against COVID-19.
    🦗Ranked 7th in the world, Australia won the T20 World Cup for the first time, defeating New Zealand by 8 wickets (with 7 balls remaining) after Mitch Marsh scored an unbeaten 77.
    💉Australian children aged 5-11 won't be eligible for a COVID-19 vaccine until "early next year".
    🌊A light aircraft crashed into the waves at City Beach, Perth on Saturday with both pilot and passenger "swimming away from the wreckage without a scratch".
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