Happy Moments Are Here Again, As The Bulls Focus On Solitary Data Points And Ignore Desultory Trends: The Latest On The Global Economy

The flop that was yesterday’s theatrical event of the year in Washington has quickly faded as investors turn to the inflation show and its more predictable thrills and laughs. This morning’s CPI print contains little to change the Fed’s perspective but that certainty is what investors crave now, as politicians across the world play with fire and risk turning an already fragile global economy toward global recession. For now certainty triumphs over politics and 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 one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly to 4210 over the next few days before turning around.

The global economy is growing but at an increasingly low and fragile rate, with only a few EM nations showing resilience while the majors deal with a unholy mix of political problems. Soaring debt in the US and China perversely leads to growing calls for Statism, in turn leading to the debt ceiling impasse and growing fears of capital expropriation or worse in China. The mood music is slowing but liquidity continues to flow out of Asia and feed a profound disconnect in financial markets, which are grinding higher in opposition to consumer and business sentiment.

Across the majors the economic optimism generated by the Chinese reopening has faded. China’s growth has tilted strongly toward services domestic consumption as imports fell and pushed up the trade surplus, an economic negative for countries like the US. In Japan real earnings are falling, while modest global growth isn’t lifting exports enough to give the economy a lift. European data continues to be weak, particularly from the big two economies, France and Germany, resurrecting the spectre of recession. And in the US banks are reporting tighter lending standards and lower credit demand, though the numbers indicate a moderate downturn rather than a severe crunch. This persistence of growth is one reason Fed officials felt confident enough to raise rates and suffered no dissent. GDP is still tracking near 3%, much higher than trend growth and perfectly correlated with the dip in the unemployment rate, but that is certain to fall precipitously as credit declines.

The disconnect between investment bulls and the rest of the world is set to persist until US equities hit resistance, much as Chinese equities recently did. Expect the bulls to exhaust their exuberance as we hit 4210 in short order.

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