Enlarging NATO And The TAM For AI Fuel This Winter’s Foolish Optimism: The Action For February 27, 2024
The Times looks on the bright side this morning as the enlargement of NATO and the heroic nature of the Ukrainian people contrast sharply with trivial and desultory stories about the American economy, its angry and needy electorate. But if NATO enlargement were a positive thing it would have happened when Putin invaded Crimea or even earlier, when Russian revanchism first became apparent. The unwillingness of Sweden and Finland to join until last year points to the flaws of European integration, which achieves little if any benefit economically and even now relies on the US militarily. Until Europeans agree on the meaning of social democracy such integration will be impossible and dreams of peace and widespread prosperity will rival the dreams of present-day bulls about artificial intelligence. In both cases overoptimism likely leads to negative developments outstripping any positives.
The bulls are reaping irrational exuberance and have control for the moment as several indicators reveal confidence in corporate earnings and the macro environment. These include:
Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.
Shanghai Composite Technicals: Chinese equities are trading well and that bodes well for the global 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.
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:
Short-Term Treasury Rates: Short rates are rising, a portent of higher inflation and/or Fed rate hikes, 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.
Geopolitical Issues: Developments around Eurasia are a clear negative for equities.
My current positions include 3M (MMM), Pfizer (PFE), a large position in UPRO and a smaller position in SPXU, which nets out to a long position in equities.