The Latest On The Global Economy: The Batters Of Demand Are Crushing The Pitchers Of Supply Making Our Wizened Umpire Joe Biden Irrelevant

A consensus has built up that inflation is now more of a pent-up demand phenomenon than a supply-chain and work ethic disruption, implying Jerome Powell will channel his inner Paul Volcker and brake the US economy hard. This is a nightmare for a stock market still trading at greater than 17 times forward earnings. Not only will earnings come down but so too multiples, yielding the classic deep and long bear market instead of the quick and dirty collapse of 2020. 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. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there was also one negative factor across global asset classes. The action in currencies signifies $US strength. Expect the S&P 500 to be range-bound over the next few days and a further move to lower lows by Friday.

Today’s inflation report shows that demand is strong in the US but across oceans and borders the story is less dynamic. The global economy sputters on largely because of headwinds from three disparate sources: the Fed’s hawkish stance on interest rates and QT, the War in Ukraine and China’s disastrous COVID lockdowns. None of these trends are abating for the moment, consequently the sentiment in financial markets is negative while in the real economy it feels like another storm to persevere through.

American diffusion indices valiantly indicate resilient if low growth, but there is only downside risk since equity volatility is high and that usually moves corporate executives to cut back on production or spending. The leaked abortion ruling may yet alter the midterm elections to the favor of the Left, and if so would likely damage sentiment further given the persistent talk of tax hikes. In Europe the economy has been a positive surprise in light of declining expectations and the real effects of commodity inflation. While growth is down the major diffusion indices are holding up better than expected, particularly for the weakest link in the chain, Italy. BTP-Bund spreads measure confidence in Italy and these have risen as bad news accumulates, but still remain well below previous crisis levels.

And in Asia the reopening has kept growth above zero despite China’s zero-COVID strategy. Even in moribund Japan it’s clear pent-up demand is robust and raising spending despite inflation. The big unknown concerns Chinese data, since objective data is hard to glean and the lockdowns are likely to persist until vaccination rates increase. As Xi Jinping concerns himself with winning his Party’s election this November the economy suffers and I expect that to bring global growth down to levels that make current profit expectations unrealistic.

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.