The Latest On The Global Economy: The Domino Effect In Asia Is Revisited

Misguided and malevolent policies are driving stagflation and lower equity markets around the world, and this afternoon we will get another taste of this with a large rate hike by the Fed. While equities are poised to rally once this unnecessary medicine in administered, I expect major volatility to return soon after. 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. Copper is pointing to declining global GDP expectations. The US yield curve is bear flattening. Expect the S&P 500 to rise modestly by the Fed announcement but then fall over the next few days.

Dominos continue to fall across the global economy, with stagflation in Europe now reaching Asia and increasingly likely to eventually hit the US. For now US seems immune, based on jobs data that shows a moderate pace of job creation that’s limited mostly by The Great Resignation. But with big rate hikes starting this afternoon the Fed is hell-bent on slowing demand and that means lower corporate profit growth this year and next. Wall Street analysts have begun aggressively pricing this in, and the result is the bear market we’re experiencing.

But the news from Asia can get much worse, as more Chinese cities face lockdown and manhandling by a Communist Party driven to maintain Xi Jinping’s moronic COVID policies for purely political reasons. Zhengzhou has locked down more than 12 million people, and the trends in Beijing look ominous. This hits both demand and supply and yields the stagflation that so worries Australia and India that they surprised the markets with their rate hikes this week. Later this week we get the PMIs from China which are likely to show contraction, a rebuff to the CCP’s optimistic targets of 5%-plus growth.

Germany is seeing its trade surplus erode as demand for its exports declines while its import tag rises from higher commodity prices. This mirrors the burgeoning trade deficit in the US, and foretells stagflation and consequently lower equity valuations here. I continue to expect the S&P to consolidate its losses this week but head towards 3700 later this month.

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.