Finlandization Leaves Finland For The US And The Bulls Don’t Like It: The Action For Tuesday, September 26, 2023

Finland may be done playing nice to the goliath on its eastern border as the Times notes this morning but Biden’s commitment to Trumpist protectionism operates on the same hoary principle, and the bulls have finally woken up to its nasty consequences. Retreating from globalization only stokes inflation and in the end even equities can’t hedge against volatility in prices and labor productivity. So interest rates inexorably rise and pull equities lower, with the threat of a shutdown adding to the uncertainty. The S&P 500 likely falls over the near term, but I expect the correction to peter out soon as we test key support levels.

The bears have control for the moment as several indicators reveal pessimism on inflation, interest rates and ability of firms to manage corporate earnings in this macro environment. These include:

  • Liquidity Metrics: Measures of money flow across the globe are trending downwards lately, which hurts equities.

  • Inflation Expectations: Investors expect rising inflation over the coming years, implying higher interest rates to come, potentially bearish for equities.

  • Long-Term Treasury Rates: Long rates are rising and that will reduce the attraction of equities while cooling the housing and auto industries to the detriment of economic growth.

  • S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market lower.

  • Russell 2000 Technicals: Small stocks are breaking down and reflect declining confidence in economic growth.

  • Shanghai Composite Technicals: Chinese equities are trading poorly and that bodes ill for the global economy.

  • Developed Market FOREX / $US: The dollar is getting stronger against most major currencies (€, ¥ and Renmimbi) and that’s usually bad for global growth.

  • Emerging Market FOREX / $US: Nations like India, South Korea, the Philippines and Mexico are getting weaker against the dollar, and that’s bad for global growth since many key imports are priced in $.

  • BTP-Bund Spread Of Italian & German Bonds: Italian default risk and corresponding crisis for the Euro are heightened, which can destabilize Europe and is bad for global growth.

  • Gold Prices: Falling gold prices reflect higher potential interest rates & a stronger US dollar, which is on net bad for equities.

  • Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and falling prices signal growth may be worse than expected.

But cross-currents will likely reassert themselves and pull the S&P back to resistance levels, based on the action yesterday and overnight. These include:

  • Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.

  • 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.

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.

Warmth Is Wealth