Political Malfeasance And Draining Liquidity Are A Pincer Move To Global Recession — The Latest On The Global Economy

Demand and supply are slowly constraining as if pinched by big government politicians across the globe and grinch-like central bankers in the US and Europe. Yet equity markets are taking this in stride as the bulls make the case for a resilient global economy based on nothing more than rising equity markets. The volatility risk premium is pointing to a range-bound market over the next few days, while 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. Copper's chart is signifying global growth. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days before beginning a retest of the old lows in December.

Evidence of declining global demand and persistent global supply issues are obvious from the data. China’s PMIs are still falling, Japan is underperforming despite finally seeing inflation while South Korea is slumping. Across Asia only India and some of the smaller economies are showing resilience. In Europe inflation is around 10% while activity and employment are slowly declining. The US economy is showing modest signs of moderation but this is largely through the housing market. And while US home prices have fallen since the summer they are still much higher than a year ago. So the Fed is unmoved and determined to reduce demand further.

The bulls believe the global economic slowdown has two cures: a falling $US and a climaxing Fed tightening cycle. The stuttering nature of the rally since mid-October belies the hollowness of this argument. The Fed is tightening via balance sheet reduction as well as interest rate hikes and to date the money markets are proving resilient while Fed speeches offer no hope that QT will be eased. The obvious decline in global dollar liquidity is a key reason business confidence is declining and the bulls simply discard this as they try to engineer higher confidence.

Another reason for declining confidence is political: in China and across Europe there are obvious and growing reasons for the public to grow more frustrated rather than optimistic. Only in India can we see signs of increasing confidence, and since India isn’t a player in the manufacture of goods the impact of this confidence is simply to stoke the demand side of the equation, with no effect on the supply side. The Fed is already trying to tame American demand and this works on global demand through dollar liquidity, leaving India as simply one modest force working against the tide of declining confidence.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the ETF SPXU, all of which nets out to a large short position in equities.