Hypocrisy Passes The Baton to Confusion Across The Political And Financial World: The Action For October 6, 2023
The spectacle of anti-socialist Republicans helping Moscow is slightly less newsworthy for the Times than Biden’s hypocrisy in extending Trump’s border wall, but the confusion in the reader’s mind pales with that evident on Wall Street. The Federal Reserve is tasked with a dual mandate of low inflation and high employment, which is absurdly self-contradictory in times like these and so many times before, yet such hypocrisy persists and always roils Wall Street the same way. Investors are just as troubled as voters in figuring out where the hypocrisy leads us, but for now the S&P 500 likely falls over the near term. As we head into earnings season next week I expect a violent move back up as consumer firms and banks give some cause for optimism which the retreating bulls take hungrily.
The bears have control for the moment as several indicators reveal pessimism on corporate earnings and the macro environment. These include:
MOVE Index Of Bond Volatility: Fixed income volatility is rising and implies higher inflation expectations and higher interest rates to come, potentially bearish for equities and the global economy.
High Yield Credit Spreads: The cost of borrowing is rising for lower-rated firms compared to their AAA siblings, a portent of potential defaults to come.
BTP-Bund Spread Of Italian & German Bonds: Italian default risk and corresponding crisis for the Euro are heightened, which can destabilize Europe and is bad for global growth.
Emerging Market FOREX / $US: Nations like India, South Korea, the Philippines and Mexico are getting weaker against the dollar, and that’s bad for global growth since many key imports are priced in $.
Gold Prices: Falling gold prices reflect higher potential interest rates, which is on net bad for equities.
Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and falling prices signal growth may be worse than expected.
Tin Prices: Tin is broadly used across goods and industry and falling prices typically signal worsening growth prospects.
Economic Data: The latest economic data regarding rising employment that fuels wage growth above inflation is much worse than expected, a negative sign for equities.
Based on the action yesterday and overnight there are several factors that will soon work to flip the markets around, including:
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
WTI Crude Prices: Oil and by extension gasoline is getting cheaper and that in itself helps consumers and the global economy.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.
My current positions reflect my intermediate-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a large position in UPRO that is largely hedged by an offsetting position in SPXU, which nets out to a long position in equities.