Geopolitical Developments: China Eases Up But The Long-Term Looks More Like A Long Hard March
News that China’s Communist Party is asking banks to ease mortgage lending points to yet more micro-managing of the private sector, a far cry from the go-go years of capitalistic development that produced the Chinese economic miracle. While the news spurred markets its long-term implications are dour, as China is simply taking on too much in the vein of left-wing governments everywhere but Northern Europe. Increasing statism will harm global markets, even though today the markets are focused on good economic news. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), but my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought several positive factors for US stocks. Copper's chart is signifying global growth. The US yield curve is bull flattening. But there was also one negative factor across global asset classes. Oil is pointing to stagflationary conditions. Taken together, the market looks set to discount further bad news and fall moderately over the next few days.
Case in point regarding China taking on too much, China now has an Afghan problem that it can’t rely on the US to help mitigate. The pugnacious CCP-dominated tabloid Global Times recently noted: “TTP’s enmity toward Pakistan creates risk for Chinese projects.”
This is because the Taliban are unpredictable due to their own internal diversity, and Pakistan doesn’t have great leverage over them. The National Interest notes Pakistan has a difficult and complex relationship with the region because of its support for the first generation Taliban pre-9/11: “As Taliban combatants were fighting the last resistance in Panjshir, a visit by the head of Pakistan’s Inter-Services Intelligence (ISI) led to allegations of Pakistan’s involvement in the Taliban’s offensive. Furthermore, the creation of a non-inclusive or a Pashtun-dominated caretaker government was allegedly linked to the ISI chief’s visit to Kabul...In fact, Islamabad’s regional connectivity ambitions depend on how these differences are managed. The Taliban has opposed the fencing along the Pakistan-Afghanistan border, calling it a “divide,” and have been reluctant to recognize the Durand Line as the permanent border. Engaging with the Taliban government for accessing Central Asian markets and even for east-west connectivity may not be as convenient as anticipated.”
And the Taliban cabinet isn’t ideal for the stability China and Pakistan crave: “That the Taliban’s exclusive caretaker government is in power with only three non-Pashtuns and excludes major ethnic groups like the Hazaras also places Pakistan in a tough position.”
And the effects of the US withdrawal on Middle Eastern nations is similarly complex. The Carnegie Endowment notes: “Given the Jordanian Muslim Brotherhood’s strong support for the Taliban movement, Abdullah will likely face few repercussions from the Biden administration for continuing to clamp down on the organization, despite its implications for Jordan’s democracy. Jordan may also benefit from international attention due to the difficulties in absorbing refugees after the Taliban’s conquest.”
The middle east situation is becoming decreasingly an American problem and more a Chinese one, as they are energy-dependent, not America. Since Chinese growth powers the global economy, the equity markets may be in for years of substandard returns.
My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), Apple (AAPL), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a hedged position in the S&P 500 (UPRO and SPXU).