Biden Isn’t Conciliating So Much As Wedging Into Our Alliances As His Economic Policies Force The Fed To Drive Interest Rates Higher — The Latest On The Global Economy

Today’s Fed press conference will likely catalyze the bears as the Fed tries to roll back Biden’s statist policies with a 75 bp rate hike and strident words about future pain. Higher interest rates are defended by Jerome Powell as necessary to combat high inflation but the reality is his Fed is fighting Biden’s expansionist policies and the sense of worker empowerment that not only drives inflation but bodes ill for future productivity. Global investors tend to favor capital over labor and are selling off equities for this multitude of domestic and geopolitical reasons. The volatility risk premium 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 were also several negative factors across global asset classes. The action in currencies signifies $US strength. 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 markets stairstep back to the June lows.

Policy divergence is driving global GDP steadily downwards, and while Biden trumpets higher approval ratings this divergence is harming American influence abroad. High inflation in the US contrasts with modest inflation across East Asia, and the differential can be explained by the Biden policies that put extra money in the accounts of working people at a time the economy was recovering from the pandemic. Now some our allies are complaining about the CHIPS act and Inflation Reduction Act as little more than sophisticated Trumpism. The result is a US labor market that is strong because there are millions fewer workers and a stock market that’s declining as pessimism sets in for an ever-growing number of geopolitical and economic issues.

Trade in East asia have been softer while the current account surplus in Europe has turned into persistent deficits. The Fed’s relentless hawkishness is leading the ECB to raise rates at a time of economic retrenchment and energy supply uncertainty, driving an invisible wedge into Western unity. The only cure for this geopolitical fissure is a slackening labor market, which the jobless claims and payrolls data suggest is a ways off. And with the housing market showing modest signs of cooling off the likelihood is the Fed keeps on raising rates to 4.5% in order to leave no doubt that the 1970s are not resurfacing.

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.