What Plays Well In Havana Doesn’t Sit Well With Too Many Democrats: The Action For April 30, 2024
This morning’s feel-good story from the front page of the Times features Cuba’s capitalist efflorescence that harkens back to the glamour of Havana before Castro. But the Times also notes the fragility of this private enterprise surge in a longlasting dictatorship, glossing over the underlying issue in Cuba and across America. Capitalism’s success comes largely because public services are typically meaningless when society isn’t ready to compromise and agree on its problems. Democratic discourse doesn’t work when the core literary texts don’t agree on public services, and that leaves capitalism as a provider of services at a price and under the economics of what suppliers are willing to deliver. For the public this is better than nothing and especially good when the services improve over time and/or become cheaper relative to income levels. The intellectual dilemma facing the Cuban Communists is at heart the same facing the Democratic Party, and largely explains why a large plurality of Americans so despise the Democrats they are willing to elect an exterminating angel like the longtime Democrat Trump.
The markets are left to deal with the economic fallout, which at present amounts to huge fiscal deficits and growing polarization, resulting in feckless policies that so frustrate Americans that retail therapy is the only proven therapy available. The markets are hoping consumption holds up but every tick up in rates and every surge in oil prices hammers away at middle class pocketbooks and makes the case for much lower valuations.
The bears have control for the moment as several indicators reveal pessimism on corporate earnings and the macro environment. These include:
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.
Economic Data: The latest economic data regarding employment costs and implicit inflation is worse than expected, a negative sign for equities
Liquidity Metrics: Measures of money flow across the globe are trending downwards lately, which hurts equities.
Geopolitical Issues: Developments around Eurasia are a clear negative for equities.
But based on the action yesterday and overnight there are several factors that could flip the markets around once the bottom of the current trading channel is hit, including:
Russell 2000 Technicals: Small stocks are breaking out and reflect surging confidence in economic growth.
High Yield Credit Spreads: The cost of borrowing is falling for lower-rated firms compared to their AAA siblings, a confident signal of an improving 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.
WTI Crude Prices: Oil and by extension gasoline is getting cheaper and that in itself helps consumers and the global economy.
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.
My current positions include 3M (MMM), Pfizer (PFE), and a moderate position in SPXU, which nets out to a moderate short position in equities.