Midterm Malaise Is The New Economic Scourge — The Latest On The Global Economy

While last night’s election results failed to deliver spectacular political headlines the economic implications of the GOP’s tiny victory in the House are harrowing and underreported. The right-wing fringes of the Party now have profound leverage and will likely exact their power in next year’s debt ceiling debates (assuming Biden’s Treasury can push the ceiling out a few months). Had a tidal wave of GOP voters crashed the election then ironically the party leadership could have quelled its fringes and ensured no repeat of previous debacles around the debt ceiling and government shutdowns. Instead the unexpectedly small majority bodes ill for 2023 and is attenuating bullish sentiment today, even as the volatility risk premium points to a higher market over the next few days. My technical reading of key stocks in the S&P 500 remains short-term bullish and long-term bearish, but today’s action in front of tomorrow’s CPI report is crucial . Yesterday's cross-asset action brought several positive factors for US stocks. Gold is projecting $US weakness. Copper's chart is signifying global growth. The action in the € & EM 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 unless we close badly today and tomorrow’s CPI runs hot as widely expected.

The Midterms have one silver lining in that there is a growing possibility of a liberal politician rising by 2024 to replace Biden on the Democratic side. This is because the pure referendum results skewed almost perfectly to liberty causes (e.g., abortion choice, gun choice, marijuana choice). With diffusion indices pointing toward both declining US growth and persistent inflation, a liberal politician who defends free enterprise and individual choice could plausibly win the popular vote. But for now economic conditions are slowly worsening and the midterms simply add to the malaise.

The American consumer is spending to offset the sense of malaise but getting little help from abroad. China is declining so profoundly that the Communist government is once again throwing debt concerns to the wind. On the fiscal front the government is supporting its property market and boosting spending on infrastructure while the PBOC is easing monetary policy, in opposition to the Fed, ECB and almost every other central bank. This is possible since China has very low inflation that partly reflects a weak economy that’s driven by the moronic zero-COVID policy. All this is wasted debt spending as the number of infections is now the highest since April and the private sector is being squeezed by the heavy hand of Xi Jinping.

China’s decline is hurting Asian exports and European manufacturers and all but guaranteeing a global recession ensues in 2023. European leaders can do nothing to abate these trends as their leaders are constantly at cross-purposes on issues ranging from China to Russia to banking reform and migration. That’s girding the same inflation mindset the US is enduring and that means the ECB must hike to keep pace with the Fed. These gloomy mechanics ensure the equity markets make lower lows before a real bull market can get started again.

My current positions include a small cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the ETFs UPRO and SPXU, all of which nets out to a small long position in equities, which I expect to exit in the coming days.