Global Politics And The Global Economy Both Lack A Sturdy Truss This Morning, Which Investors Will Soon Come To Rue — What Fixed Income, Currency & Commodity Markets Are Telling Us
Discombobulated financial markets find their perfect analogue in the parlous state of British politics this morning, all of which suggests troubling times ahead. Yet American equities are pushing higher on the notion that no news on the domestic front is no news to be worried about. The poor state of economic and politics has been discounted to a modest degree already, consequently the volatility risk premium points to a higher market over the next few days, while my technical reading of key stocks in the S&P 500 is near-term bullish and longer-term bearish. There are several negative factors across global asset classes. Copper is pointing to declining global GDP expectations. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to be range-bound over the next few days before heading to new lows by month-end.
Financial markets are telling us the world is in poor shape but things could be worse and have a nontrivial possibility of getting worse. Bonds are making new lows that presage yet further lows, while volatility remains high, implying inflation will be persistent over the next 3-6 months and force the Fed to stick to their hawkish tone. But the bearish look of nearly all EM currencies and DM currencies alike implies global growth is slowing to a crawl, yielding stagflation. Only a deep global recession could be worse, since the last stagflationary episode took a deep recession to overcome.
Commodity markets aren’t helping the inflation picture. Fossil fuels are consolidating but trending lower, precious and industrial metals are trying to stave off declines while foods and softs have stabilized in the aggregate and meats are climbing back. Together the commodity complex implies both lower demand and supply constraints, yielding stagflation. Finally the persistently high volatility in equities (measured both by actual and expected volatility) suggest both financial and geopolitical risk are high. The unholy marriage of black swan risk and stagflation explains the bearish backdrop of stocks, while the trivial possibility that nothing shall come to pass but a dull monetary adjustment is stimulating monstrous bear market rallies like what we’re experiencing now. Both logic and market technicals guarantee placid times are not ahead as Autumn turns to Winter.
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.