StoneX' Vincent Deluard: The S&P Is Hiding a Bear Market | #655

Vincent Deluard presents a bearish thesis on U.S. equities despite strong index performance. He highlights a critical technical divergence: over 70% of S&P 500 stocks trade below their 200-day moving average while the index hits all-time highs, suggesting the top may catch down rather than the bottom catching up. This bifurcation reflects concentration risk, with the "Magnificent Seven" tech stocks artificially supporting the index while the broader market deteriorates.

Deluard attributes recent nominal growth to four factors: understated inflation (CPI underestimates true cost increases), government deficits at 6% of GDP during full employment, a 3% of GDP tech capex cycle, and productivity gains. He argues true inflation runs 5-6% based on tax collection growth rates, while real wages have turned negative for four consecutive months. Consumer resilience is artificial, driven by stock market wealth effects and 401k withdrawals, mirroring the 2006-07 setup when home equity extraction sustained spending before the crisis.

On inflation, Deluard contends that any future shock will receive an inflationary policy response because governments lack capacity to raise taxes or cut spending significantly. He focuses on agricultural commodity risks, noting diesel price pass-through to food production, fertilizer supply constraints, El Niño climate disruption threatening crop yields in South America and Asia, and the Black Sea grain situation. He views these conditions as potentially creating a destabilizing agricultural shock globally, particularly threatening countries dependent on imported oil and grain.

Deluard draws an extended parallel between Europe's current position and Japan's 2011-12 situation. Both face aging demographics, falling productivity, limited fiscal capacity, and slowing growth. Japan's solution—systematically weaken the currency via coordinated policy (fiscal stimulus, zero rates, forward guidance, institutional sector directives)—resulted in a 13-year yen decline of approximately 50%. Europe faces the same necessity but lacks Japan's unified governance structure. With 17 countries, differing interests, and current inflationary conditions making currency depreciation unpopular, Europe will experience this adjustment chaotically through sequential crises beginning with France, followed by Germany. A 30-50% euro depreciation may eventually occur, but messily.

On technical indicators, Deluard introduces the "shadow VIX" concept: with only 5% average stock correlation to the index and a third of stocks at negative beta, actual volatility is suppressed. Recalculating VIX with normal 50-60% correlation yields approximately 40, while bond market volatility (MOVE index) sits at all-time highs. This divergence indicates mean reversion ahead, likely through rising equity volatility rather than falling bond volatility.

Regarding capital flows and currency opportunities, Deluard favors Japanese yen and South Korean won. Japan's strong tax collection growth (7% annually), with G exceeding R, means it's exiting its debt crisis. The won benefits from a tsunami of capital inflows: South Korea and Taiwan maintain 25% of GDP current account surpluses with Samsung alone generating $1 billion daily profit. This money eventually leaks into consumer spending and investment, pressuring rates and currency appreciation, creating favorable rates and currency trades.

On emerging markets, Deluard notes his colleagues at StoneX observed significant profit-taking by local managers in Brazil following the recent election, despite foreigners' underweight positioning. While Brazilian fundamentals weren't as dire as Argentina's, locals took risk off due to skepticism about political reform durability. However, for underexposed foreign investors, Brazil's low multiples and political tailwinds remain attractive, particularly through big oil and banking names benefiting from currency appreciation as foreign capital enters.

Deluard provides specific data on crypto adoption, noting South Korea leads globally at 20% of population, followed by the U.S. at 15%, Taiwan, Brazil, and Mexico. This concentration reflects Korean gambling culture, historical banking crises, and capital account repression making alternative assets attractive. He suggests the Korean surplus recycling through bonus payments and government spending will boost crypto prices over a multi-year horizon despite unfavorable macro conditions (rising real yields, Democratic political dominance).

On France specifically, Deluard identifies every marker of a severe sovereign debt crisis: high debt, persistent primary deficit, foreign financing reliance in a non-printable currency, low growth, and politically constrained options on tax increases or spending cuts. France's R minus G gap is the most negative in developed markets, distinguishing it from Germany (which can afford it) and the U.S. (where G is high). He expects political instability and crisis dynamics to drive policy outcomes rather than thoughtful strategic implementation.