The Bulls See Prosperity While The ROW Sees Stagflation Just Around The Corner — What Fixed Income, Currency & Commodity Markets Are Telling Us

As the global economy, governments and geopolitics make like difficult for American tech titans the equity bulls see their stocks as defensive safe havens, an idea that strains for coherence. But with momentum on their side the bulls are set to retest the 4200 level on the tech-heavy S&P 500, as the volatility risk premium is pointing to a range-bound market over the next few days while my technical reading of key stocks is bullish. Yesterday's cross-asset action brought one positive factor for US stocks. The US yield curve is falling and in the current context that is bullish. Expect the S&P 500 to rise modestly over the next few days.

The action in currencies and commodities implies the no-win economics of stagflation but with risk weighted to the downside. Fixed income volatility echoes this risk but the recent trend lower in rates reflects a more benign picture of a recession-induced drop in inflation to normal levels by 2024/2025. Precious metals are in solid uptrends while industrials are breaking down, suggesting global growth is in danger of slowing further and financial markets via overleveraged governments and markets in danger of falling. Fossil fuels are trading near the tops of their recent trading range, while foods, ags and softs are well-dispersed. The dollar is falling against major currencies but mixed against EM, suggesting that the US economy will weaken materially and help draw global growth lower.

In light of the information revealed across global asset classes the fact that most US equities are trading at normal valuations while the indices are at rich valuations points to significant downside risk. The upside risk, by contrast, is predicated on technologically-driven productivity growth that manages to offset high sovereign leverage rates, deglobalization and the cultural changes weakening both labor markets and comity between Eurasia and the West. Absent an AI-induced miracle in productivity the markets are likely to retest the October lows this Spring as the bulls run out of exuberance to maintain such optimistic valuations.

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.