The Latest On The Global Economy: Maximum Pessimism Is Gripping Markets And Policymakers, Setting Up For A New Bull Market as Summer Rolls Around

Yesterday’s American tragedy ramifies profoundly to families and decent Americans but more broadly it directly impacts geopolitical relations and the global economy as well. The prestige American liberal democracy has long enjoyed marginally eroded since yesterday afternoon. This in turn solidifies the Chinese Communist Party’s cohesion with the vast majority of Han Chinese, and allows the CCP to institute misguided and malignant policies with relative impunity. This ramifies to the global economy in the form of supply chain disruptions from moronic and draconian anti-COVID policies in the major Chinese cities. Supply-driven inflation marries uncomfortably with pent-up demand to create stagflation, which further erodes the cohesion of the West and ramifies to Russia’s brutality in Ukraine. In the end a resilient US equity market is the last immediate source of American confidence and resolve, and unfortunately the near-term trend continues to be bearish. 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 neutral.

Yesterday's cross-asset action brought one positive factor for US stocks. The US yield curve is bull steepening. This will likely reverse as the Fed shows little signs of bending, consequently I expect the S&P 500 to be range-bound over the next few days before declining precipitously by month-end and through early June. The bear market looks set to end soon as the Fed eventually bends to a slowing economy driving by diving equities, and at that point confidence will return with billowing strength.

The US economy is slowing too much for executives and consumers to maintain confidence, leaving equity markets as the one progressive forward-looking indicator to buttress American politics and geopolitics more broadly. Right now equities are responding to spectacular declines in retailer performance, which reflect both shifts in consumer spending and supply constraints. But diffusion indices & expectations indices across the US and Europe show modest but persistent growth across industries. Pent-up demand is still driving sales and inflation, and this will last until the fiscal stimulus from the pandemic era erodes. Bank balance data suggest this is still some months away, so for the now the Fed is maintaining its hawkishness and I predict it will turn dovish when equities make another leg lower. At that point the Fed will worry that the wealth effect destroys consumer confidence entirely, and ease up. Assuming no more horrific geopolitical events arise in the meantime, we are approaching the moment of maximum pessimism and consequently the start of a new bull market.

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.