Financial Contradictions Make A Desultory Analogue With Political Hypocrisy — The Latest On The Global Economy

As politicians across the West criticize one another for faults they comically share so too the financial markets are revealing unhealthy contradictions that point to a desultory scenario across 2023. The guidance from American corporate CEOs in tandem with Fedspeak yield a clear signal of recession ahead, while equity, currency and commodity markets rage on in unseemly optimism. For now the bears are clawing back gains but it will likely take another week of poor earnings guidance before the bulls lose faith and capitulate. Consequently 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 be range-bound over the next few days.

Contradictions within financial markets are rarely as pronounced as at present. Equity markets are pointing to a soft landing with no recession in corporate earnings, despite overt guidance from US firms that revenues and margins face downside risks this year. In the bulls’ favor are recent economic data which indicate recession hasn’t arrived yet. Germany expectations for soft landing are solidifying, particularly as services growth across the Eurozone has stabilized. Japan is similarly muddling through with marginal growth due to an offsetting decline in manufacturing and upturn in services. Per the Atlanta Fed growth in the US for 4q2022 looks robust at 3.5%. But real-time corporate guidance is suggesting December’s growth was the last hurrah before the downturn gets going.

The yield curve in the US and many European nations is inverted and this contradicts the trend in currencies and commodities, which both imply robust global trade and consequently global GDP as well. Combining the divergent trends yields the unambiguous conclusion that the global economy is profoundly leveraged to a Fed pivot toward cutting rates by the fourth quarter if not sooner. Should the Fed do what its members uniformly say it will do — namely to keep rates higher for longer — then the long end of the yield curve indicates recession will come as real rates plummet to zero or negative values. And with war in Europe likely to intensify as spring returns the chances of Europe doing the economic heavy lifting are nil. Similarly in Asia the downside risk in China far outweighs the upside, as news reports suggest outrageous COVID underreporting. While such underreporting is discounted by Chinese equity investors as irrelevant to the growth trajectory, the key variable is whether confidence will decline as the Chinese pay a harsh price for moronic COVID policies while simultaneously the global economy is slowing down and threatening China’s export machine. No nation stands ready to resolve the contradictions and the global economy is destined to pay the price as recession hits at some point this year.

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.