The Latest On The Global Economy: Slowing To A Turtle’s Pace But The Risk Is the Shell Of Revenge Spending Is About To Crack

As affluent consumers recognize the limited benefits of revenge travel so too are American workers rueing their support of the Biden stimulus payments now that they face the prospect of permanently higher prices. These negative sentiments bode ill for valuations but for now 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 neutral. 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 reality reasserts itself and markets fall into mid-month.

Across all regions economies are slipping to low growth or recessionary levels. But the bulls argue that valuations reflect this reality, since they’ve not only come down from the highs of January 4 but are supported by strong expected profit growth next year. The issue then is which way the risks bend, and I see downside risk as far outpacing upside risks, since labor markets have nowhere to go but down.

Readings from the JOLTs reports and weekly jobless claims show the US labor market is downtrending from strong levels, while China has large pockets of underemployment due to COVID policies. As interest rates rise and reduce borrowing levels for housing, commercial and industrial purposes the only direction for unemployment is to go up. Only if policy mistakes and geopolitical crises are averted can this downtrend occur slowly enough to make risk and valuations look reasonable.

The markets are clearly betting the risks are behind us for 2022, and can rely on readings of US diffusion indices regarding both retail and wholesale activity, which remain resilient despite the precipitous fall in consumer confidence and elevated equity market volatility. Similarly China’s services and manufacturing continue in expansion mode, while Europe is flatlining. Key to consumer and business spending is energy prices, and here the news is quite bad. OPEC can’t boost output much without taking both operational and economic risks, consequently while inflation may decline as oil prices stabilize, the key issue is that real incomes have eroded to the point that the Biden stimulus was a waste of resources, an indefensible development for a “climate president.” Declining spending and rising unemployment mean valuations are stretched and dreamily reflect a world free of such wastage of resources and human potential.

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.