The Latest On The Global Economy: Steady Growth Faces The Vicious Power Of Monetary Hawks

While the markets rallied modestly following Putin’s seeming come down regarding troops facing Ukraine, the light volume suggests the rally will soon dissipate as economic worries return to the fore. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), but my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought several positive factors for US stocks: Copper's chart is signifying global growth, while inflation expectations are stabilizing based on measures of Treasuries and TIPS. Consequently expect the S&P 500 to rise modestly over the next few days before beginning a new leg down in the current correction phase.

While the global economy muddles along the markets are concerned about a Fed mistake, as the Fed fund futures contracts now predict a 50bp rate hike in March. This is in stark contrast with the outlook in other large economies. In China the PBOC is injecting billions in order to stave off a further slowdown, cognizant of the precarious state of property developers and the fact that global bank loans to this sector are a source of financial contagion. In Japan there is increasing worry of deflation, not inflation, while in Europe the ECB continues to speak out against the need for a rate hike anytime soon. Only in fast-growing economies like India are rate hikes justified by structural inflation and rapid demand-fostered growth, and yet even Indian central bankers are voicing worries about slower-than-expected growth and the need for easy money to continue. The Fed is clearly divided and being pushed by inflation hawks from academia and inadvertently by President Biden into a hawkish tone that contradicts its fundamental belief in the transitory nature of American inflation.

Because inflation comes from numerous sources other than retail there is a belief that the quantity theory of money married to the cultural change euphemized as The Great Resignation will lead to inflation, despite the disinflationary nature of online shopping. This ignores the fact that American consumers are dynamic enough to use new technologies and trends to escape rising prices, a central cultural factor that partly explains the inflation picture pre-COVID. A stunning example is AirBNB, which yesterday beat expectations to show the “share economy” continues to reshape travel despite COVID. Trends like this will only persist as consumers find their wage gains eaten up by inflation and rising gas prices. The inflation hawks that long predicted a bond bear market sometime in the past 40 years will be proven wrong again.

My current positions include a sizable cash position, Amgen (AMGN), Goldman Sachs (GS), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.