Markets have a habit of climbing the wall of worry.
While it might seem feeble to rely on that at the moment, there is certainly no shortage of things to worry about:
Russia and Europe
Will Europe be able to handle the winter in terms of energy? How bad will the problems be? How resilient and resourceful will Europe be? Will the weather act as friend or foe? Then, the wildcard is Russia's nuclear threat.
So much negativity has been priced in, we may see some relief.
OPEC+ and Oil
The actions of OPEC+ should not surprise anyone, as we are dealing with a globally competitive world, where countries are out for their own best interests and some of our policy "mistakes" of the past (both recent and longer term) are haunting us.
I am worried about how low our strategic reserves have been drained in an effort to fight just prices, not shortages (this could come back to bite us). On the other hand, OPEC+ claims to be seeing demand destruction, which fits my recession narrative.
Again, a lot has been priced in, and if there is less demand, oil could resume its slide, even with the cuts (which would be deemed as good news, until it isn't).
China
We got a taste of China's future when President Xi spoke this weekend.
Hong Kong -- part of China.
Taiwan on the menu (though not necessarily through force).
A more inward looking country.
Look for China to:
- Clamp down on its own citizens and freedoms.
- Expand their "relationships" with commodity rich (autocratic nations) and those who succumbed to too much "belt and road" borrowing.
None of this will be good for trade or the global economy. China remains un-investible.
Inflation
The shelter component of CPI is quite simply bogus. It is a calculation fraught with subjectivity and is skewed towards old data. There is absolutely no chance, in the real world, that the cost of rent in September experienced the biggest monthly jump since 1990!
For many, it is difficult to figure out what to do with this fact, given the acceptance and use of official data for policy, but it is something to think about. Yes, the University of Michigan survey, which again, is something that the Fed supposedly looks at, showed inflation expectations rising, but it is a small, somewhat ambiguously asked survey, which most market professionals largely ignored, at least until recently.
So much inflation certainty is being priced in, even as the data turn (look at leading/real-time indicators, not lagging indicators). While 75 basis points in November is almost a certainty (though I don't think it should be, but then again, I would have stopped QE in the summer of 2021), pricing in a lot for the following meetings is too aggressive.
We will get more impact from the existing hikes and the midterms will be over. I can't help but think the midterms are affecting a lot of things in the market.
Sentiment Versus Positioning
Sentiment is without a doubt, awful. But I'm told by some people that positioning isn't as bearish as sentiment. I could see that, but I think positioning is sufficiently bearish, that coupled with options, gamma, awful liquidity and some sense that there is "value" in stocks and bonds here, it can create a nice little uptick for markets.
Weirdly, despite all the noise, the S&P 500 finished Friday unchanged for the month of October. Given the wild gyrations and the headlines, I'd have guessed it was down.
Bond yields are higher and I think far too high (the U.K., which helped drive bond yields higher, seems to be trying to rectify their recent mistakes).
