The Latest On The Global Economy: Disruptions And Incoherence Everywhere

An unholy mix of discontent and incoherence among political leaders and the broader public is moving global investors out of risk assets and awaiting a capitulation selloff. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), 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 action in currencies signifies risk-off sentiment. Expect the S&P 500 to fall over the next few days.

Supply corrections are not coming fast enough, as Chinese leaders, British laborers and energy companies conspire to offset the return to normal services and manufacturing. China is lurching from one restriction to another due to lack of a sensible COVID strategy, as secondary cities are beginning their version of the Shanghai lockdowns, particularly technology hub Shenzen. Energy inflation also shows now sign of easing as Biden pushes on a string to get more production when the clear bottleneck is lack of refining capacity. The move to renewables via the harassment of the state and preferences of investors is partly to blame for limited capacity, as is the pandemic shutdown which drove oil prices to negative levels back in those dark days. But even more nightmarish than China’s moronic COVID policies are supply disruptions from British strikes. Rail workers and postal workers will soon be joined by barristers and possibly telecom workers and even airline check-in staff to utterly shackle British logistics, a trend which could easily spark strikes across contentious France and Italy. The prospect of Italy further divided is already playing out in the BTP-Bund spread, which last week touched its high from the darkest days of the pandemic. The old fear of Euro denomination risk is girding investors towards maximum pessimism and a capitulation sell-off in the weeks to come.

Supply-driven inflation marries energetically with pent-up demand to drive consumer inflation expectations and the fears that consumers will soon habituate themselves to higher prices. That would be 1970s-style economic dysfunction and force Jerome Powell to pretend he was Paul Volcker, a scenario with zero upside for investors since Powell lacks the intellectual command Volcker had. Overshooting and poor communication would become de rigeur and prolong the bear market in a hyper-volatile facsimile of the dreadful 1973-74 bear that epitomized that decade’s malaise. The political parallel is just as eerie, with Joe Biden looking uncomfortably like a moralizing and myopic Jimmy Carter.

Yesterday I initiated a large short position via the levered ETF SPXU. My current positions are a smaller but sizable cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETFs UPRO and SPXU.