(Clifford Bennett – ACY Securities)
For the moment, the world is breathing a little easier regarding the Pelosi visit to Taiwan.
Yet, the real show of force by China is still to come. Both China and US military aircraft were already in close proximity to Pelosi’s plane. China will continue to show just how unhappy it is over this.
This is not a point on the Taiwan situation overall, simply to state that it places additional pressure on the military of all three nations and will most definitely set back US China relations for many years.
ets, there was some appropriate caution in this regard. There is also a feeling of well even if Fed hikes slowed, the economy will be soft to weakening further for some time. This is the market perspective.
My own view is that financial markets generally are grossly under-estimating the dire nature of the US and global economy right now.
Manufacturing is rolling over badly around the world, consumer and business confidence are in some cases plummeting to all time historic lows. This is not an environment where consumers and businesses will continue to spend, let alone party in the manner in which they did post Covid. The very reasons for that brief yet impressive spurt of economic strength, low interest rates and massive government stimulus, they are gone now. Evaporated. And they are not coming back.
The very strong further stimulus to earnings was in the nature of inflation, which was then all about the ability to fatten profit margins in the midst of the malaise that was occurring. The inflation we are now seeing, is of the most insidious kind indeed. Recessionary, with supply shortage price rises in the essential items of food and energy.
Spectacularly accompanied by ever higher official interest rates globally.
There has never been such a harsh economic frontier as the one we currently survey.
The idea that stocks will do another Covid rally because bond yields will decline as per the Covid period, is overtly simplistic and completely misses the point that damaging inflation has now taken hold and business and mortgage borrowing costs are continuing to climb rapidly.
Expect further severe economic retrenchment for perhaps the next 1-3 years, and it could be a very similar story for stocks.
Investors should take note of the recent strong rally in equity markets. It may merely be the opportunity to get out, that so many around the world had hoped for.