The Bulls Bask Under The Heavy Hand Of Protectionism But History Tells Us A Hard Slap Awaits — The Latest On The Global Economy

American protectionism has given semiconductor companies a leg up via the CHIPS Act, but the last time blatant anti-trade politics infused America a Great Depression ensued. This time around a recession will germinate instead but at current valuations the impact on equities will bring back memories of overdrawn investors scrambling for the exits. For now the bulls are happy to see consumers bearing the cost of tariffs and optimistically hoping for a soft landing. 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 bullish. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there were also several negative factors across global asset classes. The action in currencies signifies $US strength. The US yield curve is inverting deeper. Expect the S&P 500 to buck these cautious macro conditions and rise modestly toward 4200 over the next few days.

The US housing market is tapering off, but services consumption continues strong particularly at the luxury end, in concert with robust employment and wages. Chinese growth is also being driven by consumption rather than investment or skilled production. Technology output was worse than expected, with semiconductors and smart phone production down double digits. Japan continues to muddle through with little sign of increasing competitiveness or dynamism, leading the Bank of Japan to once again walk back its plans to lift interest rates. Europe is much the same but here American protectionism is helping to stifle exports, as Biden’s attempts to reduce inflation have little effect but to limit European electric vehicle exports, advantaging the Big Three Automakers + Tesla in the process.

While Trump-Biden protectionism is driving some investments in manufacturing in the US the data continue to show that consumption is what’s driving the American economy and most of the rest of the world too. That leaves the bulls with a one-legged table to base their optimism, and I expect this to collapse as the full force of Fed hawkishness and the banking credit crunch takes shape.

My current positions include a very large cash position, 3M (MMM), Pfizer (PFE), the levered ETF UPRO and inverse levered ETF SPXU, all of which net out to a modestly long position in large-cap equities