The Latest On The Global Economy: Going Nowhere In Volatile Fashion

Patternless economic data has buffeted equity markets of late, hut that is likely to change later this week as investors grow wary of believing in earnings growth while the world frets and suffers from political, social and health catastrophes. 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 near-term neutral and bearish as we proceed through summer. Yesterday's cross-asset action brought several positive factors for US stocks. The US yield curve is falling and in the current context that is bullish. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. 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 be range-bound over the next few days before beginning a new collapse by end of the week.

The global economy is heading into a sawtooth period where mild ups are followed by mild downs, effectively marking time until there is some resolution to politics in Eurasia and the US. In the US the down moments are represented by depressing consumer confidence and weak equity markets, but the American consumer is still spending. So while the economic data show that a recession is likely here already (per the Atlanta Fed GDP tracker) the labor market remains tight, so it doesn’t feel like a recession so much as a continuation of the strange economic glidepath precipitated by the pandemic.

The most consequential economic news is the Covid flare up in both China and Japan. This is very bad for China but marginal for Japan, which is benefitting from the bizarre disparity in inflation expectations. The Japanese public believes in inflation and will likely spend accordingly, while professional investors don’t see inflation continuing and will likely keep interest rates low. China could benefit marginally from Biden’s tariff moves, but his lowering of tariffs is in reality inconsequential to inflation data and does nothing meaningful but showcase his labile personality and the policies that flow from it.

Europe is as usual hostage to energy markets, and now disruptions from Russia are supplemented by disruptions within Europe and the US. The flamboyant political debacle in the UK can only lead that economy lower and presages similar political failures on the Continent as parties vacillate in the face of the unexpected war in Ukraine. The global economy is thus poised to go nowhere while equity markets cascade as optimistic earnings expectations ratchet down to earth.

My current positions are a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.