Irrational Exuberance Is Turning Into Bumptious Confidence With Few Willing To Play Along — The Latest On The Global Economy

Confidence continues to bifurcate as wavy economic waters roll some boats while others look on with pity. Policymakers too are on different pages both in political and monetary circles and that spells declining confidence across the board as Spring progresses. For today, however, the bulls are rejoicing that Microsoft reported middling numbers that were much better than feared, bidding up equities and waving off low volatility and low volumes. 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 several positive factors for US stocks. The US yield curve is falling and in the current context that is bullish. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there was also one negative factor across global asset classes. Copper is pointing to declining global GDP expectations. Expect the S&P 500 to rise modestly toward resistance at 4200 over the next few days.

Global growth is falling but still positive as it rests on 2 shaky legs, namely the American and Chinese consumer. While many nations like India and Vietnam are growing robustly they account for a modest share of global GDP, and have profound domestic problems which make them confidence-takers rather than makers. And confidence is likely declining, with American consumers growing weary despite persistently low unemployment, and Chinese retail investors selling shares to the Chinese National Team.

American consumers are being realistic and prescient, as manufacturing slides into mild recession while tech firms are laying off highly-paid engineers and overall consumption is trailing off for all but strong brands who draw on consumer wallets with pricing power that keeps inflation elevated. The lower half continue to spend on Mickey D and Starbucks while the upper half buy European luxury goods and real estate. Housing prices have come down but so have mortgage rates, prompting higher than expected housing activity, keeping the overall US economy in stable but low growth.

The rest of the world is trying to recover or acclimate to high inflation. German business expectations are improving from the low levels of the Autumn, keeping Europe in low growth/high inflation mode, often known as stagflation. Japanese inflation remains low but this results in middling economic activity for the same cultural and demographic reasons that have plagued the natioon since the bubble burst in the 1990s. Should the Fed not only raise rates next week but signal persistent vigilance it’s likely that other shoes drop and global growth revises downward. That will help the bears retake the control as the bulls lose confidence along with everyone else.

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.