The Fed Is As Cold And Undermining As An Iceberg That Every National Economy Vainly Tries Sailing Around — The Latest On The Global Economy

The respite in currency markets following yesterday’s equity market rally is too weak to amount to anything but a shallow counter trend. This morning both equities and currencies are reversing back to the trends from last week, and yielding a portentous signal of the resurrected bear market that will follow earnings reports next week. For now I expect equities to remain volatile and churn higher since 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 neutral and longer-term bearish. Yesterday's cross-asset action brought several positive factors for US stocks. Copper's chart is signifying global growth. The US yield curve is falling and in the current context that is bullish. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there was also one negative factor across global asset classes. Oil is pointing to stagflationary conditions. Expect the S&P 500 to rise over the next few days before crashing back down by mid-month.

The global economy is a cruise ship slowly sinking into recession while a sea of geopolitical waves grows more volatile. Just as inequities on cruise show up viscerally so too do the economic policy effects of the relatively prosperous and stable US on less stable and/or prosperous nations around the world. Whether the root blame lies with Biden or the Fed, the effect is American political leaders stand for no coherent ideology and simply push for specific interests while the rest of the world tries cleaning up the effects.

The fundamental issue is the US driving the world into recession due in large part to reaction of the Fed to the over-stimulus by the Biden administration that yielded not just too much consumption chasing supply chain-constrained product, but heightened wage pressures and an unwillingness to participate in the labor market which further constrains supply. This unwholesome dynamic is not just inflationary but pushes the Fed to oppose the American worker in order to bring back the old system of capital-driven economic growth.

Higher interest rates from the Fed are pushing global rates up and global currencies down against the $US. So the EU has gone from current account surplus to deficit and after struggling with stagflation is now muddling into recession according to the latest PMI data. The rise of the far right on the periphery and the spectacular failure of traditional liberals in the UK attests to the nasty political response to stagflation. The Fed is heedless of this as heard in the by-the-book speeches of its various Governors following the Bank of England’s surreal reversal of QT to save British pension funds. The Fed has both a statutory responsibility to consider nothing else besides the US economy but a cultural prepossession to detest non-participation in the global capitalist system.

Asia presents a tale of multiple countries as both economic and political trajectories follow divergent paths. Japanese inflation is starting to pick up and the economy has been stronger, yet the authorities are keeping easy monetary policy while intervening in the currency markets. This may be questionable economics but good politics and augurs well for Japan going forward. India too has seen strong growth and confidence despite persistent inflation and current account deficits. These bright spots of growth and political stability diverge from China and its politically-driven economic decline and the concomitant drops in South Korea and Taiwan. With energy prices so high the raging $US hurts Asian economies and those lacking inherent political confidence suffer the most.

Yesterday I added incrementally to my short position in US equities via the inverse levered ETF SPXU. 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 still nets out to a meaningful short position in equities.