Hypocrisy Runs Rampant On Guns And Inflation In The Mirror Worlds Of Politics And Markets: The Action For Friday, September 15, 2023
Implicit in this morning’s lead headline in the Times is the match between the Democrats and GOP in outdoing one another in hypocrisy, a theme that similarly runs rampant on Wall Street regarding inflation. That Biden as a gun control advocate should fail to pass the message onto his son is arguably less laughable than the GOP demanding charges against a nonviolent gun owner. That Wall Street should rally on deficit busting spending by a Democrat who follows the protectionist logic of Trump is arguably more profound as it impacts the global economy. Inflation is the enemy of solid economics and capitalism and yet the Bulls look the other way at the clear inflation stoked by Biden’s policies and the inflation to come as a result of yet more government intervention. The bulls are looking straight to the bank and weekend rather than confronting such hypocrisy, and the S&P 500 likely rises over the near term toward a test of the old highs around 4600. But I expect the market to reverse course and fall back to the 4450 level soon as the bulls and bears trade jabs over the superstitious month of September.
The bulls have control for the moment as several indicators reveal confidence in corporate earnings and the macro environment. These include:
MOVE Index Of Bond Volatility: Fixed income volatility is steady and implies modest inflation expectations and stable interest rates to come, potentially bullish for equities and the global economy.
High Yield Credit Spreads: The cost of borrowing is falling for lower-rated firms compared to their AAA siblings, a confident signal of an improving economy.
Zinc Prices: Few commodities are as broadly important as zinc, and rising prices for zinc signal better than expected global demand, which is usually good for equities.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market higher.
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
Quality Of Earnings Trend: Over the past few quarters the largest firms have generally improved credit terms, margins and inventories, signaling future profit growth.
Based on the action yesterday and overnight there are some risks the bulls need to climb over, including:
Volatility of Volatility & Put/Call SKEW Metrics: Derivatives trading in volatility is heightened and signals that active investors are concerned equities are going lower.
Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.
WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy.
Gold Prices: Rising gold prices reflect higher potential inflation but less restrictive interest rates, and concerns about geopolitical risks, which is on net bad for equities.
My current positions reflect my intermediate-term bullish forecast, and include 3M (MMM), Pfizer (PFE), and a large position in UPRO that is largely hedged by an offsetting position in SPXU, which nets out to a long position in equities.