Liquidity Triumphs Over Liberalism As The Bulls Ignore The Right-Wing Threat Across The World: The Action For March 15, 2024
The instigator of the Holocaust and the nation-state that emerged from that incomprehensible tragedy are today united in dealing with the problem of the Far Right, a theme unwittingly laid out in this morning’s Times. While Germany and Israel flirt with fascism the financial markets flirt with new all-time highs in defiance of election uncertainty across the world. Should the right-wing triumph in America the likely consequence would be a huge drop in productivity as social unrest increased, putting the bullish thesis of permanently high valuations in peril. But with money sloshing around as a result of both budget deficits and central bank largesse, the bulls for now are just playing a game of rotation and waiting for the megacaps in the S&P 500 to get their turn and send the index past 5200.
That will have to wait for next week as the bears have control for the moment as several indicators reveal pessimism on corporate earnings and the macro environment. These include:
Russell 2000 Technicals: Small stocks are breaking down and reflect declining confidence in economic growth.
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.
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.
Developed Market FOREX / $US: The dollar is getting stronger against most major currencies (€, ¥ and Renmimbi) and that’s usually bad for global growth.
WTI Crude Prices: Oil and by extension gasoline is getting more expensive and that in itself hurts consumers and the global economy.
Geopolitical Issues: Developments around Eurasia are a clear negative for equities.
Based on the action yesterday and overnight there are several factors that will flip the markets around soon, including:
S&P 500 Technicals: The top 40 in the S&P 500 look set to move the market higher.
Volatility Risk Premium: The VRP signals significant upside in the near term as the VIX has declined relative to actual volatility.
MOVE Index Of Bond Volatility: Fixed income volatility is steady and implies modest inflation expectations and stable interest rates to come, potentially bullish for equities and 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.
Copper Prices: Copper makes the energy transition happen but is also a barometer of global growth, and rising prices signal growth may be better than expected.
Tin Prices: Tin is broadly used across goods and industry and rising prices typically signal better growth prospects.
Yesterday 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.