The Latest On The Global Economy: Divergences And Diversity Are An Omen For Darker Times Ahead

Divergences in policies, perspectives and economic growth among nations are keeping equity markets in a holding pattern, but I see this as unsustainable. 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 bearish. There are several negative factors across global asset classes. The action in currencies signifies $US strength. The US yield curve is rising and in the current context that is bearish. Inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to fall over the next few days as markets await political developments across Europe that hopefully will not turn for the worst.

The global economic slowdown has modestly affected earnings expectations, a reflection of diversity within the global economy. The slowdown is worrisome for some leaders and not at all for others. Europe has seen its wonderful trade surpluses shrink to almost nothing, a consequence of high prices for energy and other industrial commodities. Confidence is falling and a hammer blow could come this Sunday, when the European far right tries again to take control of a Western European nation. Thankfully the polls show Macron is widening his modest lead as the election draws near, but with 4 days left the markets will be on tenterhooks hoping no mistakes are made.

Further West the markets are more sanguine, as the US digests higher interest rates with no signs yet of recession. Growth has slowed to its long-term rate in the 1-2% rate, and with a tight labor market this is seen as sustainable as the American consumer emerges from pandemic restrictions with a restless desire for activity and purchasing. The latest housing data support this optimistic view, as higher mortgage rates have yet to show up in either housing or retail sales data. But confidence measures are down and my reading of the equity markets sees lower lows ahead, which would drag down both consumption and business spending and slow growth to near-zero.

In Asia the slowdown distresses the Japanese but not so much the Chinese. Japan no longer has a trade surplus at all, and relies on investment income to prop up its balance of payments. So a weaken yen is not bad news for economic fundamentals, but more profoundly reflects diminishing confidence, which the Japanese already have little of. Contrast this with China, where the populace has confidence in the Chinese Communist Party and allows Xi to drive autocracy at the expense of freedom. The weakness in the Chinese Yuan reflects declining economic expectations as moronic COVID policies shut down activity, yet this hasn’t caused alarm, as the PBOC recently provided a modest number of stimulus measures that did nothing to stop the Yuan’s slide. The fact is the global slowdown has yet to dent China’s trade surplus, or the confidence of its people in nationalism.

The same can be said of the Russian people, with devastating geopolitical implications. Putin abrogates freedom socially and economically yet Russians support his nationalism, cynically noting the lack of European resolve to cut off Russian oil and gas. I predict this will change as we head into summer and Russian forces find little success in their Eastern offensive. Should Europeans unite to diminish imports of Russian energy this would devastate Russia, not only from a balance of payments perspective but because there are reports Russia actually has modest storage capacity and refining capacity, which would force the vaunted energy industry to slow down as it looked for new markets beyond India to take its product.

Slowing growth and awful geopolitical realities have diminished confidence in the West and much of Asia, and I see nothing to change this trend until the West resolves to tackle the Russian bear by its neck. I expect the markets to reflect this pessimism shortly and take the S&P 500 to new lows.

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.