Multiple Personality Disorder Can Be Entertaining Until Its Violent, As Global Financial Markets Will Soon Find Out — What Fixed Income, Currency & Commodity Markets Are Telling Us
The bizarro world of ultra high valuations in the face of poor corporate guidance and a stern-faced Federal Reserve continues with equities poised to rally through any kind of bad news. Not even concerns over darlings like Netflix or Tesla will dent the exuberance currently inhabiting the bulls. While the outcome will be predictably bad the bulls can ride herd for a while longer, as the volatility risk premium points to a higher market over the next few days 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. Copper's chart is signifying global growth. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days toward 4600 before correcting.
The bizarre behavior of equity markets fighting the Fed and rising during an earnings recession before a real recession hits is now transmitting to global markets. Blatant contradictions like treating megacap tech stocks as if they weren’t cyclical is now finding corollaries across bond, currency and commodity markets, telling me that euphoria and irrationality are set to power markets ever higher before a violent comedown.
The bond markets are suffering from MPD and turning less bearish as rates and volatility decline and high yield spreads tighten, while still maintaining a near 100 basis point inversion. Such an inversion reflects the demand for quality collateral and that’s consistent with recession expectations and rising default rates, which portend widening credit spreads, not tightening. Similarly the currency markets are reflecting dollar weakness except in important places like China, and dysfunctional EM nations like Turkey and Russia. Even in fast-growing and uber-confident India the rupee can’t make any headway against the dollar, while the absurd policies of AMLO in Mexico are correlated with a stronger peso.
Commodities tell a similar dissociative story, as fossil fuels are consolidating after significant rallies, portending higher energy prices and consequent pressure on headline inflation from gasoline. And precious metals are trying to rally back after being battered by the rise in real interest rates since the Spring. But all this is fundamentally contradicted by the action in key industrial metals, which are slanting lower as global demand, particularly out of China falters. Foods and softs largely remain in trading ranges and vulnerable to the unpredictable developments in Ukraine. As the global economy slows to a crawl equity valuations will come down to earth, but only after wringing out the excessive personalities that currently reign.
My current positions include 3M (MMM), Pfizer (PFE), and a large position in SPXU, which nets out to an extremely short position in equities.