Bullish Imagination Is Crazy When The Economic Fundamentals Are So Hazy — The Latest On The Global Economy
Realism abounds in most non-equity markets but the bulls continue to blithely ignore signs of global economic malaise. This context will continue as the next batch of important data is earnings that trickle through over the course of the next three weeks. 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), while my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought several positive factors for US stocks. Oil's chart is signifying global growth. The action in major currencies indicates the $US is weak. The US yield curve is falling and in the current context that is bullish. Expect the S&P 500 to rise modestly over the next few days toward 4480 before correcting hard.
The global economy possesses no green shoots save for the equity markets, which are effectively trying to change perception rather than reflect the valuation of capital assets. Euphoria over AI reveals this absurdity as proponents claim productivity increases to come while downplaying the obvious rise in costs and unpredictability of results in the short-term. The hope is that acclimation to a bullish market will put people in the mood for working with AI and spending through job uncertainty and thus raise the economy to the market’s expectations. The data to date don’t support that hope and I don’t see 2nd quarter earnings validating optimism either.
Europe has little cause for optimism with the ECB clamping down on liquidity and interminable war on its Eastern front. German sentiment continues to deteriorate as Europe stagnates through a statistical recession. Across Asia only the marginal economies of India and a few other EMs show signs of life, while the heavyweights continue to slog through poor fundamentals. Japan shows mixed signs of returning to normalcy after decades of effective deflation and obvious stagnation, with households still conservative about spending and the recent bout of inflation causing a decline in real earnings. China’s post COVID recovery is faltering and consequently its equity and currency markets are losing ground while the CCP dithers on how much to stimulate the economy. LatAM and Africa take their cue from global commodity markets as domestic confidence stagnates under desultory politics, and the commodity markets reflect economic pessimism rather than the opposite.
Most absurd of all is optimism about the US economy. Despite falling liquidity and rising statism the economy continues to defy expectations of a slowdown, with the Atlanta Fed GDPNow figure running at 2.3% after bottoming in June. Manufacturing has actually started hiring again, offsetting a decline in retail spending. The longer that equities remain in an uptrend the lower the volatility of both equities and the economy. I expect this state to change dramatically as 2nd quarter earnings stream in this month, and to coincide with declining labor market and central bank liquidity. That 1-2-3 punch will restore realism to an overly imaginative equity market.
My current positions include 3M (MMM), Pfizer (PFE), and a large position in SPXU, which nets out to an extremely short position in equities.