The Latest On The Global Economy: North America Is The Real Engine Of Global Growth Now That Eurasia Is Flailing
The underlying strength of the $US as interest rates rise is a portent of economic decline to come. Yet equity markets are myopically betting that peak uncertainty is over, and matters economic and geopolitical will be resolved by the summer. I see nothing of the sort but note the near-term bullishness has yet to run its course. 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), while my short-term technical reading of key stocks in the S&P 500 is bullish. There are several negative factors across global asset classes. Oil continues to point to stagflationary conditions. The action in currencies signifies $US strength while the US yield curve is rising and in the current context that is bearish. Consequently expect the rally to fizzle out when the S&P 500 hits 4550, setting up for a major downturn toward month-end.
The greenback’s strength paints a picture of the global economy, where outside of North America the risks of a severe drop from growth to zero or even recession are mounting. China continues to flirt with disaster in pursuing a zero-COVID policy of lockdowns, while Japan flails at recovering from its latest bout of geologic volatility. India was the world’s brightest spot but now must abandon any pretext of moral stature by inking deals with Putin to import energy at prices that won’t break its economy. South Korea and other East Asian economies are similarly at the mercy of prices they have no control over. For North America the situation is in some ways the opposite, as the US and Canada are well-diversified economies with large commodity sectors.
US Diffusion indices have recently ticked up, indicating the economy is slowing into a steady state, despite the rise in inflation and Fed hawkishness. Helping the US are political developments in Canada, where Premier Trudeau secured several more years at leader and a national railroad strike was terminated. And should American oil producers get on board with Biden’s exhortations the economy will get an infinitesimal bump (this because production won’t actually start until next year, due to numerous supply problems) but more profoundly will boost confidence that the anti-business Left has lost support in the Democratic Party. Confidence in the US is still strong, as evidenced by the impressive rally in the S&P 500 since Putin’s invasion.
But until Putin is put down by a resolute West and taken out by his inner circle, the global economy is at risk and consequently so too are equity markets. I continue to believe new lows will be made in the next few weeks.
Yesterday I sold a portion of holdings in Titan Machinery (TITN). My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.