The Latest On The Global Economy: Rising Rates And Faster Tapering Is Painful Medicine For Long-Term Economic Health

Medicine from Central Banks in the form of rising rates and faster tapering is intended to normalize monetary policy rather than slow the global economy, and while this is good it can’t address vaccine hesitancy and thus the persistence of COVID, and instead leads to market volatility, which unfortunately does restrain the global economy. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), but my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there was also one negative factor across global asset classes. Copper is pointing to declining global GDP expectations. Expect the S&P 500 to be range-bound over the next few days.

Faster tapering means a stronger dollar and that hinders EM economies, making Fed policy effectively anti-growth, as evidenced by the chart of one of the best global growth indicators, copper. Since electrification is a boon to copper when copper trades poorly it means the global economy is clearly slowing, confirming the poor retail sales and property data out of China. The underlying reason for slowing growth is vaccine hesitancy, which can be seen in Japan’s relatively good economic performance that ties in perfectly with its steep climb in vaccination rates.

Thus the markets are effectively betting that in the US there will be enough restrictions on the unvaccinated to move them to rationality and getting the vaccine. This is a sound belief but it’s subject to future actions and thus little data today that can substantiate it. Consequently the market has been prone to swoons this year rather than a neat uptrend.

My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), American Express (AXP), Johnson & Johnson (JNJ), 3M (MMM), and a small net long position in the S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).