What Financial Markets Are Telling Us: Governments And Global Investors Offer No Respite For The Inflation- Weary

Financial markets are giving no relief to the global economy, as 2022 is starting to look like a labyrinthine version of 2008-2009. That heady time known as the GFC was a clear case of financial market ructions causing earthquakes in the real economy, and the same is happening today but in the context of regressive government policies and previously unthinkable geopolitical angst. Equity markets are signaling falling growth while bonds react to higher inflation, and the combination reveals itself in commodity markets which show pure and simple stagflation ahead. The combination of all this volatility shows up in mammoth moves and reversals in currency markets, where the $US reigns supreme. None of this can be resolved easily unless an exogenous miracle arises like the Fed turning dovish, or Russian government taking out Putin or a coup in North Korea. Consequently the safest bet is for more volatility ahead. 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. The US yield curve is bull flattening. But there were also several negative factors across global asset classes. Copper is pointing to declining global GDP expectations. The action in currencies signifies $US strength. Expect the S&P 500 to fall over the next few days to new lows.

Divergence between the bulwark US economy and the rest of the world seems fated to evanescence as currency and commodity markets wreak havoc on the trade deficit. Blaming Putin for commodity inflation is sensible but blaming the US consumer is myopic, since the Fed and Biden are as much the cause as Putin and his pusillanimous government. By raising rates the Fed is jacking up the $US while making consumers more price-conscious as mortgage & refinancing rates rise along with the price of gas and food. The result is rising import bills that raise the trade deficit and lower GDP. But further harming trade is government energy policy, where years of leftist attack on US energy firms has led to growing inelasticity of supply, forcing energy importers like Europe to rely on Russia and simultaneously suffer drops in demand when prices rise. Lower global demand leads to lower exports from nations like the US. Were the government to cease meddling with the private sector economy and focus on the existential threats from Eurasia the savings and investment gap would attenuate and the trade deficit would consequently ease. This would boost the resilience of the economy and set the nation up for the hard cultural decisions necessary to save us from geopolitical tragedy and ecological devastation.

But the reality is falling global demand and a highly aggressive Fed working together to strangle global equities. Volatility has been so high on an intraday basis that the bond markets are now pricing in the possibility of a Fed put should equities fall much further. The reason is contagion, which last happened during the GFC and centered on intrabank lending and the poor economics of mortgage markets. Now contagion can arise from multiple sources, such as ETFs which cease to price correctly when volatility spikes and arbitrageurs consequently exit, or commodity exchanges which must raise capital via margin requirements just as commodity supplies suddenly tighten or demand craters. Add to this the banking woes in Russia, property woes in China and the lack of liquidity from Western finance firms due to capital regulations and it would take just small changes in one poorly structured financial market to cause fear of other markets falling like dominoes. Talk of contagion is a major reason equities are waterfalling and I see lower lows still ahead.

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.