Bad News Becomes Good News As Exuberance Replaces Reality — The Latest On The Global Economy

Towers to the sun continue to be demolished and quickly replaced by new tropes of exuberance about the near future. Where once it was China’s return to sanity out of the pandemic now it’s AI-generated productivity that has yet to show up anywhere but in conference calls. For now however exuberance will do as the bulls look forward to yawning through Jerome Powell’s press conference. Save for a Fed shock the markets are headed yet higher, as 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 one positive factor for US stocks. The action in EM currencies indicates the $US is somewhat weak. But there was also one negative factor across global asset classes. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to rise over the next few days in a melt-up of historic dimensions.

Low but persistent economic growth across most of Asia, Europe and North America marries uncomfortably with high inflation in the West and low confidence found everywhere but in equity markets. German business expectations have yet to turn positive and suggest little or no rebound from the technical recession that nation experienced at the turn of the new year. The rest of Europe offers no offset and instead relies entirely on German confidence. China’s reopening has been so disappointing that the PBOC executed a surprise interest rate cut, as private sector lending has slowed and the Communist Party would prefer not to lever up the public sector beyond already high levels. If neither Europe nor China can be the world’s economic engine then the US is the next logical choice, and here the Fed stands in the way of economic exuberance. Sociocultural trends marry monetary trends in producing the opposite of healthy exuberance, namely stagflation.

Yesterday’s CPI report revealed that core inflation remains sticky, while core services inflation not only accelerated but will likely stay high as temporary medical price adjustments factor out. This is critical for the Fed as it underlies their belief that inflation can’t cure itself without a Fed-induced slowdown. This is borne out by the fact that even rental inflation seems sticky, as housing prices defy the Fed and reflect economic reality. The wealth effect from housing helps the upper classes and the recent market melt-up likely keeps services spending on a tear. It’s only a matter of time before the disconnect between rates and valuations settles on the Fed’s side of the ledger.

Over the break I sold my position in the levered ETF UPRO and added a large position in the inverse levered ETF SPXU, Consequently my current positions include 3M (MMM), Pfizer (PFE), and a large position in SPXU, which nets out to an extremely short position in equities.