CEOs Are Guiding Negative on 2023 And That Makes Economic Weakness A Self-Fulfilling Prophesy — The Latest On The Global Economy
The American consumer hasn’t given up yet but the shrewdest heads in the global economy are increasingly looking uncertainty in the face. Earnings guidance has been mixed but this disparity of winners and losers among the largest firms in the world implies that global recession is painfully far out on the horizon, providing a long runway for equities to come back to earth. The volatility risk premium points to a higher market over the next few days, but my technical reading of key stocks in the S&P 500 is bearish. Yesterday's cross-asset action brought one positive factor for US stocks. The US yield curve is falling and in the current context that is bullish. 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 gyrate wildly and hit 3800 before falling back to new lows by month-end.
The global economy is sputtering with all risk to the downside. No region of the world is immune as even high flyers like India are witnessing rising deficits and falling currencies, implying falling global growth and declining confidence. Monetary aggregates show declining liquidity and that combined with nasty geopolitics leaves no rational room for optimism that a bottoming out is in process. Instead the bad news increases fear of the duration of the bottom while the good news is simply bad news because the political forces driving illiquidity or oppression are immovable until something breaks.
Europe is suffering from the triple whammy of a terms of trade shock, political disunity leading to absurd policies and waning confidence in its export sector due to China’s zero-COVID policy and America’s inflation-focused Federal Reserve. The 2022 Eurozone trade deficit not only reverses the norm but is constantly coming in larger than estimates, revealing a negative rate of change for the global economy. The major European economies are drifting into recession as fears ebb and flow about whether natural gas supplies are sufficient for a cold winter, driving political disunity in turn.
Chinese inflation is a potent example of the good news is bad news phenomenon, as its core inflation is so low that the PBOC won’t turn hawkish once the Party Congress ends, so $US strength will resume shortly. A strong $US reduces global growth since roughly 40% of global trade is conducted in the greenback. Adding to currency headwinds is Biden’s chip action which not only limits China’s move to a high-tech economy but is a clear move away from globalization. The bearish action in chip stocks in the face of the current market rally reflects pessimism about how high tech supply chains will evolve.
Still the bulls contend that America is an island of stability and point to diffusion indices that indicate slow but steady growth. For the Fed this is bad news, since they are concerned more with inflation in the mind of the American consumer than the usual metrics of growth. And good news is short-term as the lagged effect of large Fed rate increases will only manifest in 2023. For that reason the bear market rally will fade by S&P 3800 and raise questions about how long the bottoming process will take.
My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the inverse levered ETF SPXU, all of which nets out to a meaningful short position in equities.