When Dark Clouds Shadow For So Long It’s Natural To Look For The Silver Lining — The Latest On The Global Economy

Prospects for a mild winter, a gently slowing economy and decreasing inflation driven by stable commodities and stringent corporate cost controls are buoying the markets this week. But this view selectively ignores other market signals such as the drop in Chinese shares in anticipation of a stronger and more reactionary Xi Jinping, or the persistence of an inflationary mindset among consumers, which corporations exploit by raising average selling prices to make up for declining volume or decreasing supply capacity. For now the bulls are waiting on more data to back up their case and feasting on lower rates and stronger foreign currencies, while the bears rely on the same logic that drove the swoon earlier in the month, with no catalyst to send the market lower except predictably dismal corporate guidance. Consequently 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 several positive factors for US stocks. The action in major currencies indicates the $US is weak. The US yield curve is falling and in the current context that is bullish. Expect the S&P 500 to rise modestly over the next few days before cratering next week.

Global data show a slowing global economy aided by malevolent and inane politics across every region. Of course that sounds like the same old story but what’s new is the dramatic nature of Xi Jinping’s coronation. Pyramidal democracy is nothing new to communist and totalitarian regimes but Xi’s coronation and humiliation of competitors has few comparisons and comes at a novel time: no leader since Stalin has amassed such power via the quasi-legitimacy of election by party elites, and no country in centuries has uplifted economically in so short a time as China. Xi’s statism and chauvinism are bound to set both China’s pyramidal democracy and its capitalistic success back and affect the global economy profoundly.

The data from China is worsening but the US shows much the same, per the recent housing statistics and the preliminary PMI. Even more alarming is the drop in consumer confidence, which shows consumer spending is holding up and keeping inflation persistent, but will cool off in the months to come. That’s the worst possible scenario for the Fed, as it implies stagflation and the need for higher interest rates for longer. And as the Fed remains hawkish other central bankers will be forced to do the same just to maintain their currencies. While the bulls blissfully ignore this logic further poor corporate guidance and inflation data will make this clear to all and send the markets beyond the old lows in the next few weeks.

Yesterday I added to my short position in the S&P 500 with a considerable additional position in the inverse levered ETF SPXU. However, I sold this additional position in the after-hours. Consequently my current positions are unchanged from yesterday morning, and 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.