We are looking at a confluence of negative catalysts for global equities in the near term. This time around it does not exclude US equities.

As I have covered for an extended period, we eventually anticipate an inflationary public policy response earlier and more aggressively than would have occurred in prior times to any material economic contractions. This is due to the growing influence of populist politics and high global debt which inspires self-interested public policymakers to attempt “inflating out of it” stealthily rather than addressing it honestly.

Until that time arrives, it is reasonable to expect a risk-off response in interest rate sensitive financial assets if government bond yields continue to rise sharply, credit conditions tighten, and Sino American trade friction metastasizes into a potential stagflationary economic pressure cooker.

We are beginning to see profit warnings from US companies to an extent not fully appreciated by investors.

100818 profit warnings

Input costs for businesses are rising at a piping hot clip according to a broad range of industry surveys such as ISM Services, PMI’s, regional manufacturing reports, and the Fed’s Beige Book. The labor market is signaling a flirtatious adventure beyond full employment that could prove dangerous to financial stability if left unchecked.

As we continue to point out, and as evidenced by the wreckage in long-term bond prices, central banks are behind the curve in normalizing monetary policy. Catching up will require some “unpleasant disturbances” in volatility and financial asset prices until such a time when they may discover they are not able to prevent significant asset crashes without abandoning inflation targets.

That’s when it gets really interesting.