The Latest On The Global Economy: The World Needs A Coordinated Response to Putin To Avoid Another Horrorshow

Echoes of the Arab Spring reverberate on the world economy as Putin’s War on Ukraine raises prices and augurs shortages everywhere. Global investors have been sanguine since the initial shock of war but are now showing signs of realism on the global economy and its pessimistic logic. Yesterday’s reversal in the S&P 500 toward the downside looks irreversible as rising prices marry uncomfortably with rising interest rates courtesy of the Federal Reserve and a handful of central banks around the world. 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 one positive factor for US stocks. The US yield curve fell, though its uptrend remains intact. But there were also several negative factors across global asset classes. Gold is signalling inflation fears. The action in currencies signifies $US strength. Expect the S&P 500 to head lower over the next few days and weeks.

The latest trade numbers show China’s imports from the rest of the world declined, a sure sign China is slowing due to its moronic COVID policy and its property crisis. But exports surged as global trade continues apace on the resilience of the US economy, India and East Asia. Despite lockdowns Chinese lending has surged, indicating the CCP is finessing its policies to ensure growth doesn’t fall to zero. Importantly China approved new video games in a signal that the regulatory strictures of last year have gone far enough.

A stable Chinese economy is important for the world but also for Russia, which hopes Chinese trade will be its safety valve against NATO sanctions. But while Chinese trade with Russia increased, economic cooperation hasn’t, evidenced by multinationals like Huawei laying off Russian staff rather than gearing up for expanded trade. Pressure on Russia to halt its war in Ukraine is critical to ensuring the world doesn’t go into a stagflationary nightmare like what engulfed much of the Arab world prior to the Arab Spring. The horrorshow that followed the Arab Spring is already echoing in Sri Lanka, and would likely spread should the War rage into the Summer. Biden appears to be liberalizing his Ukraine policy in a bid to hasten Putin’s demise, likely because polls show Americans blame Putin for the rise in energy prices, which accounts for a large part of current inflation.

But much more needs to be done on Ukraine to manage the political and economic risks. European economies would be a major casualty of a long war, as evidenced by the steep drop in expectations from German investors this month. And while Americans are rationale about the causes of inflation that doesn’t change their financial calculus, where rising prices and a declining equity market conspire to reduce future consumer spending. According to a survey more than 80% of Americans intend to cut spending because their real incomes have declined. This is a recipe for recession in all but name in the US, and a harbinger for much lower equity prices this Spring.

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.