Codependence Between Consumers And The Bull Market Set The Stage For A Messy Divorce — The Latest On The Global Economy

YOLO consumers keep propping up the global economy despite the threat of job extinction from AI, growing protectionism and declining real wages, and the clear reason is buoyant equity markets. High equity valuations in turn depend on a robust consumer keeping the services sector afloat, and this circular logic has a clear expiry date since productivity is declining rather than increasing. Once investors digest this logic expect a major correction. For now however 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. There are several negative factors across global asset classes. The US yield curve is rising and in the current context that is bearish. Inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to trade in a tight range over the next few days.

The global economy shows no signs of upside risk but plenty on the downside. Chinese manufacturing is effectively stagnating while services are robust and driven by post-lockdown consumer spending. The same is true for Japan. Threats to deglobalization from Biden’s extension of Trumpism and the insecurity of the Chinese Communist Party raise the odds that Chinese and Japanese consumers will tamp down spending as the global economy stagnates with protectionism and geopolitical scenarios dampening confidence.

European manufacturing hasn’t found stability and is slumping, as German exports decline and raise the odds that France, Italy and Spain transition from stagnation to recession. In the US disinflation continues slowly and helped by temporary base effects that slough off by the Autumn, while rising consumer confidence suggests spending will continue until unemployment starts rising and stimulus savings wind down, unless the anticipation of dreaded student loan repayments this Autumn cut down spending prematurely. The consumer is king but the foundation of optimism depends on buoyant equity prices and once valuations correct this house of cards similarly topples.

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