Euphoria On Wall Street Says Hello To Stern Sobriety On Pennsylvania Avenue — The Latest On The Global Economy

Equities reveal the real-time confidence of the nation and the past month reveals that confidence has morphed from jejune hope to absurd euphoria. That’s at odds not just with the Federal Reserve but the action in most of Asia and Europe, where monetary policymakers express fear and frustration rather than hope and cheer. Eventually the melt-up in equities will collapse and send prices careening back to the October lows but for now euphoria still feels fine for the bulls and depressing for the bears. Consequently the volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), but my technical reading of key stocks in the S&P 500 is neutral short-term but bearish long-term. Yesterday’s action showed one negative factor across global asset classes: inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days toward 4480 before beginning a steep descent.

The fundamental reason to be underconfident in business prospects and the global economy is the marriage of high inflation and declining social efficiency as revealed in the work ethic and political trends. No developed nation exemplifies this quite like the UK. Today’s report of high inflation presages sticky inflation in America too, coincidentally the perspective detailed by Jay Powell in front of Congress today. That the UK is hobbled by BREXIT points to the folly of Biden extending Trumpism in the form of tariffs, nearshoring and subsidies for the tech sector. The Fed is a conservative group of pro-capitalist policymakers and Biden’s extension of Trumpism strikes them as simply inflationary.

Not only does CPI data confirm the stickiness of high inflation but so too does the housing market. Yesterday’s housing data points to inflation and poor supply dynamics more so than economic ebullience. Not only are housing starts and permits rising but the homebuilder survey found that fewer builders have reduced prices to boost sales. If the Fed hasn’t done enough to cool shelter inflation then it has no choice but to do more to dampen the confidence of American consumers, homebuyers and homebuilders.

But other nations have different reasons for underconfidence. Japan is growing faster than normal yet the Bank of Japan lacks confidence in the confidence of businesses and consumers and so monetary policy remains in easing mode, which helps the global liquidity situation and redounds to equity prices. This has to change in order to keep the Yen from depreciating too much, and that change will come regardless of whether confidence surges. Similarly the Chinese reopening falls well short of ebullience and cries out for stimulus, but the CCP lacks confidence in its ability to lever up without triggering the very economic problems that made its system unequal to the task of producing an effective vaccine. As these large economies fail to improve economic efficiency so too the bulls will give up their fanciful ideas of higher productivity down the road and get out of the way of a careening equity market that heads back to the October lows.

My current positions include 3M (MMM), Pfizer (PFE), and a large position in SPXU, which nets out to an extremely short position in equities.