The Latest On The Global Economy: It’s Getting Worse Though The US Consumer Doesn’t Know It

The rout in global equities isn’t over yet, but strong economic data out of the US is giving the markets a small reprieve this morning. That won’t last as the global economy is moving in the opposite direction and setting up for a recession just two years after the devastating pandemic-related depression. The volatility risk premium points to a market fall over the next few days, while my technical reading of key stocks in the S&P 500 is bearish. Yesterday's cross-asset action brought one positive factor for US stocks. The US yield curve is falling and in the current context that is bullish. But there was also one negative factor across global asset classes: the action in currencies signifies $US strength. Expect the S&P 500 to fall over the next few days.

Asia had been the bright spot in global trade but that’s now dissipating as China suffers from lockdowns and the effect of the War on commodity prices. Xi Jinping isn’t likely to change his COVID policies so instead we’re seeing modest monetary, fiscal and regulatory stimulus and jawboning of markets as Xi talks up infrastructure spending. The effect is negligible, as the Chinese stock market has fallen hard and is only 10% above where it was at the lows of the pandemic in March 2020. The Yuan has also become suddenly volatile, and there is growing risk of capital flight as both currency worries and political worries make wealthy Chinese uneasy. Confidence in the Communist Party remains robust but the lockdown policies are coming at a bad time, as they contribute to supply-side inflation while sanctions on Russia fuel commodity-based inflation. Should growth falter this will soon become unbearable. Global investors are lowering their estimates of Chinese growth to 4% and lower, well below the CCP‘S vaunted goal of 5.5%. Capital flight boosts the $US and a rising $US drives down the global economy, which hurts the Yuan and stimulates more capital flight. This vicious cycle is bring played out in one of the most trade-sensitive currencies, the South Korean Won.

But it’s also playing out in Europe, as the €is breaking to new lows and erasing gains from lower energy prices. Since much of eurozone inflation is due to energy prices it’s critical that energy prices come down and the €stay level, so that inflation comes down and the ECB isn’t forced to jack up interest rates, which is bad for Germany but deadly for Italy. With the Fed so hawkish it’s hard to see this optimistic scenario playing out, and the risks of global recession growing.

The US won’t be immune and would suffer a recession in all but name only. Growth is solidly trending just above its long-term rate of 1.5-2%. so a drop in the global economy would likely reduce this to just above zero. It never pays to underestimate the US consumer, and the evidence from recent durable goods data, housing data, production diffusion indices and even consumer confidence show the US is humming along even as the world goes through convulsions. So while the US could technically avoid recession, the impact of the growth decline would more profoundly be felt in the markets, which are trading at high valuations based on unrealistic analyst estimates of revenue and profit growth. Consequently I see lower lows as this bear market slowly unfolds.

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.