The Latest On The Global Economy: Putin Gives His People No Exit From Economic Suffering But The Rest Of The World Can Choose To Bear Short-Term Pain

Inflation is one nonviolent but profound result of Putin’s war on Ukraine, and this sadly impacts the political decisions of the West in thwarting Putin’s army. Inflation usually means higher interest rates and lower equity prices, or worse stagflation which causes deep declines in confidence that take years to earn back. 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 neutral. 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. But there were also several negative factors across global asset classes. Gold is trading as a risk-off asset. Oil is pointing to stagflationary conditions. The action in currencies signifies $US strength. Expect the S&P 500 to be range-bound over the next few days before heading much lower into bear market territory.

Europe is reporting higher than expected inflation and that makes the ECB’s dovishness all the more instructive for the Fed. The ECB reasons that oil impacts inflation on a short-term basis and this effect dissipates as high oil prices lead to demand destruction and in turn price declines and easier labor markets. The key issue for both monetary policy and Putin’s war on Ukraine is whether the German populace takes an emotional approach to current inflation, or a rational one. Since there are few Germans who lived through the hyperinflation of the post-WWI era it’s highly likely the response is rational, allowing the ECB to stay dovish and the German government to continue its anti-Russian and pro-defense policies, which have positive near-term consequences for Ukraine and positive long-term consequences for EU integration.

The Fed likely takes notice and goes easy as well, and we will know for sure this week as a slew of Fed speakers come to bat. The fixed income markets have already taken a sanguine view in pricing down the chance of 50bp rate hike in mid-March to the point that there is even a miniscule chance there will be no rate hike at all. This would be great news for equities as they are fundamental reasons to believe inflation is routinely exaggerated in government data, and thus real rates are much higher than reported. Keeping nominal rates low is key since economic data in the US has been mixed, with consumer confidence falling below key levels while business diffusion indices have been more positive. A key Fed tracker of GDP shows 0% change for the first quarter ending in March, an ominous sign and one demanding the Fed continue easy money.

Unfortunately the oil question complicates matters as there is no clear sense of how high oil prices must go to trigger demand destruction. Since oil traded at negative values just two years ago and benefitted the consumer, it’s harder to gauge at what point car and plane traffic decline because oil/gas prices are too high for the middle class to afford. OPEC + can do little since there is little spare capacity. Today they likely declare they will release 400k more barrels a day going forward but in reality they will only be able to supply another 200k barrels, barely affecting oil prices. More important is Biden’s decision regarding releasing oil from the SPR, and here he clearly disappointed with just a 30m barrel release, which only modestly makes up for declining Russian flows. Unless Biden moves more oil out the US, European and Asian economies will be hit by rising oil and gas prices that finally pull job creation down, further denting consumer confidence and making economic recession a concern. This is one more reason to expect equities to head lower to bear market levels.

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.