The Bulls Are Thriving On Stagflation And Willing To Duke It Out With Central Bankers — The Latest On The Global Economy

Across the globe financial markets have surged higher in contemptuous disdain for the old adage “Don’t Fight The Fed.” The implausible scenario enlivening the bulls is that stagflation is fine for markets as long as it evaporates quickly in the face of central bank tightening. This ignores the 1970s history of persistent stagflation and the negative cultural trends that have resulted in millions of able-bodied workers ceasing to work but continuing to spend. The actual economic data portends continuing stagflation until services consumption declines precipitously, and that will likely take the whole year to play out. But for now the bulls are in charge, and 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 several positive factors for US stocks. Copper and oil charts are signifying global growth. The US yield curve is falling and in the current context that is bullish. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days.

Stagflation for the foreseeable future has failed to dent animal spirits across the globe, despite warnings by Central Bankers that they will fight any signs of undue optimism. Global trade is clearly slowing as given by Chinese trade surplus data, yet the $US continues to trade poorly as if investors expected global trade to rebound. Europe is stagnating in the face of a protracted and horrible war on its Eastern periphery but investors are ginning up equities on relief of warm winter and dismissal of persistent inflation. And in Japan the long-sought after inflation has come but is feared will quickly retreat because the old dynamic of excess saving and economic conservatism pushing down consumption until prices moderate. The result of such conservatism will be an economy that is a hair above stagnation but with all risk to the downside due to the inexorable demographic change of fewer workers supporting ever more retirees.

Topping it off is the uncertain state of the US economy, as both manufacturing and services are showing signs of decline. Investors are vainly hoping the consumer resolves to keep spending despite declining savings rates and satiation with goods, all the while somehow bringing services prices lower. More realistically the US consumer spends on services and keeps inflation going, while manufacturing and exports fall and the fiscal impulse subsides as the right wing of the GOP flex its muscles.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the ETF SPXU, all of which nets out to a large short position in equities.