Disinflation Isn’t Easy And The Biden Budget Makes The Fed’s Job Harder And The Bull’s Case Weaker: The Action For March 12, 2024

Despite newsworthy events from every part of the world the Times presents a remarkably anodyne recount of the world’s events this morning, focusing its top right column on the non-event of the Biden budget proposal. This mishmash of leftist programs and taxes only helps make the 2024 election race competitive, and slightly attenuates the Fed’s willingness to lower interest rates. Since Biden will need a strong equity market to ensure it remains morning in America the budget is one more example of misdirection that will eventually result in a drop in confidence. Disinflation is baked into mainstream thinking but as this morning’s CPI report shows, there are many reasons to believe it will stall in the last mile and lead to a major correction in equities.

The bulls have control for the moment as more indicators reveal confidence in corporate earnings and the macro environment than not. These include:

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

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

  • 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.

  • 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:

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

  • Quality Of Earnings Trend: Over the past few quarters the largest firms have generally experienced worsening credit terms, margins and inventories, signaling future profit stagnation or decline.

  • Geopolitical Issues: Developments around Eurasia are a clear negative for equities.

This morning I added to my position in the levered ETF UPRO, consequently my current positions include 3M (MMM), Pfizer (PFE), a large position in UPRO and a smaller position in SPXU, which nets out to a bullish position in equities.

Warmth Is Wealth