The Latest On The Global Economy: The US Labor Market Is Running On Borrowed Time As The Fed Targets Wages More Than Actual Inflation

Discontent will reach a fever pitch as we approach the US midterms and today’s CPI report will only add fuel to the sense of rising inequality. With housing prices rising and energy prices still high the American worker is being hit by lower real earnings and a Fed bent on raising unemployment. That’s a recipe for a bear market, but for now investors are focused on better than expected metrics and the vain hope the global consumer will spend-baby-spend and oil companies drill-baby-drill. The volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is short-term bullish and intermediate-term bearish. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days before consolidating and beginning a steep drop as summer ends.

The Fed’s compulsion to sink the US labor market rests on fears of 1970s-style cost-push inflation and all the sociopolitical dysfunction that decade witnessed. With energy prices likely to remain high due to Putin’s malevolence, it’s understandable that the Fed is mortified by American workers contributing to the problem of rising costs. And with productivity measurements at lows not seen in more than a decade, abrading worker’s sense of compensation entitlement appears reasonable and prudent.

But the socio-political consequences won’t disappear, and the harm done by a GOP victory in November will be far greater than another year of high inflation. This is because a drop in confidence is already baked in, so that regardless of the Fed’s actions the US economy is going to stagnate for years, barring a technological revolution akin to the internet in the 1990s. Business confidence will follow consumer confidence down because of both the volatility in US equity markets, the resurgence of Trumpism and because Europe is in a hopeless bind. There is simply no way for Europe to withstand economic stagnation as its politics fractures and energy supplies remain unsure for the foreseeable future while weather patterns become increasingly unpredictable. Confidence in the West will decline until the world can be sure the Trumpist agenda is off the table, energy logistics matches the shift away from Russian energy, and American leadership can be counted on after Biden leaves office.

As confidence declines in the run-up to the US midterms so the equity markets will follow. The GOP no longer represents the center on economic matters and that will subtly reduce business confidence. And today’s CPI print does nothing to stop workers from demanding higher wages even as their productivity declines, so profit margins will continue to erode and equities will soon reflect that.

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