Striking Out At Capitalism Feels Good But It’s Not Prosperity But A Doom Loop of Higher Prices And Rising Unemployment That’s Right Around The Corner — The Latest On The Global Economy

With a high CPI print shocking the world it’s only poetic that a national rail strike in the US and innumerable strikes across Europe round out September. What feels like justice for workers, however, can only cause a reaction among policymakers that workers are helpless to mitigate. That spells bad news for markets, and despite yesterday’s fall the volatility risk premium still points to a market fall over the next few days, while my technical reading of key stocks in the S&P 500 is bearish. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there was also one negative factor across global asset classes. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to fall over the next few days as the bear market resumes in earnest.

The global economy is now levered to the US labor market as that’s driving Fed policy and in turn the $US. Indebted governments, firms, speculators and consumers have their rates tied in one form or another to US rates and/or the $US, and are highly vulnerable to declining spending. Since the Fed is intent on weakening the labor market any evidence of worker empowerment, such as the impending national rail strike can only move the Fed to raise rates higher and for longer. That spells doom for the global economy due to excess leverage and the disproportionate use of the $US in global trade.

But the rail strike isn’t the only example of worker empowerment. Quiet quitting, ghosting, early disability, illness-related leave and growing unionization among part-time workers with no unity of professional goals and demographics are all working on the mindset of the Fed and its concern for a repeat of the dysfunctional 1970s. Even if the rail strike is averted the damage is already done, with shipments already delayed in anticipation of the strike or due to other issues like supply chain disruptions. All of these trends are in their early innings and supported by a pro-labor President.

And Europe is seeing the same labor action. Dockworkers in England are set to strike and compound Brexit-related disruptions, while social unrest in France and Italy is evident by both strikes in key industries like air transport, rail and the civil service, and the growing support for far-right parties that harken back to the Fascist syndicalism of the 1930s. All of this and the energy troubles are slowing the one great engine of European growth — Germany. Thee latest ZEW survey shows pessimism on par with the depths of the pandemic and the Global Financial Crisis.

That leaves Asia as the major bulwark for global GDP and here the news from China and South Korea is uniformly bad while India shows terrific resilience and Japan outperforms despite the ¥’s precipitous decline. I see Chinese growth falling to near-zero or worse as all policymaking becomes subservient to Xi Jinping’s coronation in October, and that will decimate growth rates across East Asia. This is a recipe for continued $US strength and a consequent fall in MNC earnings that cause the S&P 500 to retest its June lows as Autumn enfolds.

Yesterday I sold a portion of my holdings in the inverse levered ETF SPXU, consequently my current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and SPXU, all of which still nets out to a meaningful short position in equities.