The Latest On The Global Economy: America Strives For Immunity Against Global Problems Of Every Stripe

This Friday morning Fed Chair Jay Powell will attempt a metaphysical marvel as he channels Paul Volcker and coalesces expectations of how far America can resist the global economic falloff. While Volcker successfully fixed America’s inflation problem with no regard for other nations’ economic problems back in the 1980s, in this globalized era its unlikely Powell can succeed. Europe and Asia are heading lower in both economic and political terms and the US can only follow suit as a bright summer closes. For now the volatility risk premium points to a market fall over the next few days but my technical reading of key stocks in the S&P 500 is neutral as we await Powell’s speech. But there are several negative factors across global asset classes. The action in currencies signifies $US strength. The US yield curve is bear steepening. Expect the S&P 500 to be range-bound over the next few days before falling as September begins.

Where a few weeks ago the bets were increasingly on a soft landing or no landing at all, global recession is now coming into focus as both economic and political events turn viscerally negative. The US seems relatively immune from both and consequently the $US has been raging, but this only drives global GDP lower, which eventually redounds into lower sales and lower foreign exchange translations for American MNCs. Key to watch is whether the housing market can stabilize, and whether diffusion indices continue to show a moderating economic slowdown rather than a robust downtrend.

But if American CEOs follow global events then it’s s likely the economy downtrends from here, helped along by Fed rate hikes. European indicators continue to worsen and its energy policies bear so much blame that the political mood is likely to sour, further hurting confidence there. Energy prices reflect not just Putin’s games with supply but also the interplay of Sunni OPEC nations potentially cutting supply while rival Iran inches closer to a new nuclear deal that allows more of its fuels to be legally exported. The oil market is consequently consolidating and any rise would guarantee a European recession.

Asia looks just as bleak and potentially volatile. Japan’s recovery is fragile and portends a crisis with the yen that could lead to competitive devaluations as Asian nations slow down and deal with political shocks of their own. Not only is China flailing against declining confidence and putting Xi Jinping’s future in doubt, but the showdown between the Thai Supreme Court and the junta that currently runs the country suggests other non-democratic nations could follow into discord as we continue to deal with the pandemic and new health concerns.

This onslaught of poor economic and political news mostly likely saps investor confidence, and consequently I see the current consolidation in equity markets as simply a prelude to a terrible September. The longer we persist in this bear market rebound the more likely that new lows are made in October.

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