The Bulls Haven’t Awakened To The Socioeconomics Driving Higher Interest Rates And Inflation — What Fixed Income, Currency & Commodity Markets Are Telling Us
While Republicans assail the flimsy intellectual foundations of wokism the bulls have yet awaken to the epic blitzkrieg of higher interest rates and inflation upon the US economy. Most leading indicators point to the economy losing this contest but the recent slow burn in equities and bonds looks set to reverse soon as modest newsflow over the next several days gives the bulls heart to carry on. Modest volatility during the recent downturn is key to resurrecting bullish exuberance, as the volatility risk premium points to a higher 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. The action in major currencies indicates the $US is weak. But there were also several negative factors across global asset classes. The US yield curve is rising and in the current context that is bearish. Inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to make a near-term bottom this week and then mount one last rally until the next set of inflation reports come mid-month.
The bulls make a jejune case for a return to the pre-pandemic economy of high savings, low inflation, understated productivity, global capitalism and labor dynamism. Their case ignores cultural and political factors that simmered in the first two decades of the century and then exploded with the pandemic, aided and abetted by the statist political climate. But since these factors require time and hindsight to prove their importance, the bulls are able to pull cautious investors into the markets after major downmoves and keep this bear market ongoing.
Right now the bulls can point to volatility as a bullish indicator. Volatility hasn’t followed lower equity and bond prices, indicating the selloff is likely to reverse. And the rapid disinflation thesis will get a fillip from commodity prices going forward, as the recent rallies that accompanied a weak dollar look set to end or reverse. Fossil fuels are rising but likely to trade lower, precious metals are falling while industrials are trying to rebound, and foods and softs are stable. Equities are pricey but bonds are close to their lows of October, leading the bulls to believe that valuations are reasonable in the face of persistent central bank tightening. While I see the bulls regaining control for one last stand back to S&P 4200 I also see the bears wresting it back and pushing the index back to 3500 as spring arrives, driven by earnings disappointments that reacquaint investors with the broader factors leading the global order to stasis or worse.
My current positions include a very large cash position, 3M (MMM), Pfizer (PFE) and a small short-term bullish position in UPRO.