The Latest On The Global Economy: America Is Still The Last Best Hope To Keep The Party Going

Cultural differences are precluding coordinated policies to strengthen the global economy, but with the fundamentals supporting modest growth many equity markets are trading at all-time highs. 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), while my technical reading of key stocks in the S&P 500 is bullish. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days.

The cultural divide in Europe was manifested this week in energy politics as some European nations see nuclear energy as a green savior while economic powerhouse Germany doesn’t. Since energy policy not only affects commerce and consumer inflation but also geopolitical trends (evidenced by the suffering in Pakistan and its effect on Chinese relations, which I discussed yesterday) this European divide prevents confidence from growing and consequently Europe simply trudges along. And with China’s Communists continuing to stoke leftist rhetoric the economy is slowing but with meaningful downside risk as its best companies in the technology sphere tread nervously. Added to this are China’s own pandemic policies which increasingly appear to be causing needless economic suffering and prolonging the inevitable spread of Omicron.

That leaves the US as the most robust engine of growth, and here politics are constraining growth as the BBB program is in doubt due to cultural differences between left and right coast progressives and hinterland centrists who don’t want dramatic social change. So while American growth will settle to its long-run rate of 1.5-2%, that’s fine as corporations wring out efficiencies ands the consumer continues to spend merrily. Diffusion indices remain moderately positive and today’s ADP employment report confirms the tightening of the US labor market, with the great resignation morphing into the great upgrade, as quits are being channeled into new hires at higher paying jobs. America is not the optimal economy but it’s stable, and that keeps global confidence on par and spurs equities to new highs.

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), Titan Machinery (TITN) and a small net long position in the S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).