The Rippling Effects of Water Scarcity Threaten All But Those Betting On Wall Street: The Action For December 15, 2023
Water insecurity ties the lead articles in this morning’s Times and points to the great disconnect between America and most of the world and its more abstract twin, the disconnect between financial markets and the real economy. The US can afford to leverage water usage to raise material standards of living whereas Israel, China, Germany and much of the rest of the world cannot. That fact underpins the war in Gaza and the filthy arguments made by anti-Semites across the US, but increasingly applies to pockets of America as well. What was investigated in the Hollywood classic Chinatown has yet to be resolved, and scarcity is now putting Californians against one another in real life. The inability of democracy to solve any ecological problem leads to consternation at leftist papers like the Times and more horrific antagonism in the Middle East, but Wall Street sees no consequences from all this to the valuation of capital assets, at least for now. The S&P 500 likely rises early today but backs off by the close as traders take profits ahead of weekend uncertainty.
The bulls have control for the moment as several indicators reveal confidence in corporate earnings and the macro environment. These include:
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market higher.
Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.
Short-Term Treasury Rates: Short rates are falling, a sign of moderate inflation and a dovish Fed, potentially bullish for equities.
Long-Term Treasury Rates: Long rates are falling and that will improve the attractiveness of equities while boosting the housing and auto industries to the benefit of economic growth.
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.
BTP-Bund Spread Of Italian & German Bonds: Italian default risk and a corresponding crisis for the Euro are muted, which is critical for European stability and is good for global growth.
Developed Market FOREX / $US: The dollar is getting weaker against most major currencies (€, ¥ and Renmimbi) and that’s good for global growth.
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.
Aluminum Prices: Aluminium is a critical input for consumer and industrial goods and rising prices signal better than expected global demand, which is usually good for equities.
Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and rising prices signal growth may be better than expected.
Liquidity Metrics: Measures of money flow across the globe are trending upwards lately, which helps equities.
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.
Geopolitical Issues: Developments around the Middle East and Ukraine are a clear negative 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 partially hedged by an offsetting position in SPXU, which nets out to a long position in equities.