Traders Are Pushing The Global Economy Lower And Voters Aren’t Stopping Them — The Latest On The Global Economy
Extremely volatility is popping up everywhere in financial markets and augurs for a long slump in the global economy beginning this winter. Recent elections point in the same direction, with Europe opting for right-wing populists while Latin America shifts far to the left and the abortion-focused American Democrats look poised to control the Federal Government and promise a return to Jimmy Carter policies and moralizing. With economic data slowly declining it’s clear why equities are heading lower this Autumn, and the volatility risk premium points to a deeper 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. Copper and Oil charts are pointing to declining global GDP expectations. The action in currencies signifies $US strength. The US yield curve is bear steepening. Expect the S&P 500 to fall over the next few days as traders vainly wait for central banks to pivot off their inflation-fighting course.
Indicators of the global economy reveal a gradual slowdown rather than recession, but that sleep-inducing conclusion contrasts sharply with the volatility in every single financial asset class. Not only is volatility high across equity, fixed income, currency and commodities, but it’s been high every single day since April for the S&P 500. This is key for the global economy since corporate spending decisions are based on equity market volatility, particularly among large MNCs.
The reason for this stock market — real economy feedback loop is that corporate executives can’t hire teams of equity market experts to make independent forecasts. Those with equity market experience who get hired by corporations are interpreters rather than forecasters, since the experts make bigger money running money than assisting CEOs. Nor can business executives forecast the economy themselves since they are too operationally focused with too many risks to manage to work full-time as economy-watchers. And as wealthy working people they deal with financial salespeople (e.g., wealth advisors who manage their personal fortunes) and naturally don’t rely on salespeople for forecasts. The equity market as a whole is a forecasting tool and since no one industry touches the broad economic trends in real-time (let alone offers an early read on broad trends) the most objective metric of changes in economic growth is the volatility of financial market valuations.
US equity volatility is forecasting recession and that corresponds with the various US treasury yield curves but not with broad economic indicators. Home sales and pricing data operate with lags and show a slowdown but not a deep recession, so to date we have only anecdotal evidence of a major housing decline. Manufacturing data by contrast is stronger than expected as consumption holds up, while diffusion indices are mixed and pointing to a soft landing or no landing at all. The US foreign trade metrics are actually robust and suggest the effects of the $US rise have been more benevolent than usual.
Data from Europe and Asia is similarly mixed while their markets tell a different story. Germany is slowing as are most European nations but indicators of recession have yet to coalesce and likely only do so by late October. China is slowing while Japan and South Korea are moderating and India is maintaining strong growth despite high interest rates and high inflation. Their equity markets are leading or following the S&P 500 lower and as forward-looking indicators they suggest a deeper slowdown is building up and will be revealed as the Northern Winter approaches.
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.