Hangovers Can Be A Mighty Test Of Resilience And The Bulls Will Take That — The Latest On The Global Economy

The financial hangover from this month’s banking collapses feels more like a placid Sunday morning than a harbinger of disaster to come, and consequently the bulls are retaking control and sending both interest rates and equity prices higher. 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 bullish. Yesterday's cross-asset action brought several positive factors for US stocks. Oil's chart is signifying global growth. The US yield curve is rising and in the current context that is bullish. But there was also one negative factor across global asset classes. Inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days.

Resilience cuts both ways in the current schizo environment of mini-banking crises and rising interest rates. A resilient banking sector relieves the world of the consequences of a Fed mistake, but a resilient consumer burdens the world with inflation. Fed vigilance is both justified and risky as it leaves open the question of which domino falls next in a financial system unused to permanently positive real interest rates.

Fortunately the global economy continues to muddle through, as China seems committed to countering a weak reopening with fiscal largesse. The budget deficit is expected to increase by about 20%, focusing as usual on infrastructure investment and support for unproductive local governments. That offers short-term respite to both East Asia and the export powerhouses of Europe (e.g., Germany). And from Japan to Europe to the US the service sector continues to run warm, driving national economies while manufacturing declines in response to higher interest rates. Surveys of confidence among both consumers and firms are ratcheting higher, with Germany driving Europe.

But resilience will only push the Fed to keep rates higher for longer, and this week saw talk of ratcheting rates even higher in the advent of bank stabilization. Housing is showing signs of bottoming, as are durable goods orders, which suggest even the manufacturing slowdown will be slow in manifesting. Higher rates and the cultural trends attenuating productivity are key reasons why the current bear market rally will exhaust itself with one final push higher.

My current positions include a smaller but still large cash position, 3M (MMM), Pfizer (PFE), and the levered ETF UPRO and inverse levered ETF SPXU.