Geopolitical Developments: Pundits Fret Biden Is Off-Step But The Markets Are Perfectly Happy With That

Joe Biden’s approval ratings are of marginal interest to the markets, as the only real consequence is whether Biden succeeds so well that the Democrats actually build their caucus in 2022 instead of losing the House as is normal. Should the GOP win the House or Senate back the markets would likely be fine as gridlock has served corporate America for generations. 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), while my technical reading of key stocks in the S&P 500 is bullish. But there is one negative factor across global asset classes. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to be range-bound over the next few days.

Biden may not be winning of late but since his tax and spending package has plenty of unfriendly components for the markets, this isn’t bad news for the bulls. And while Biden must project US interests globally in order to maintain investor confidence, to date his mistakes have been inconsequential to the markets and the fact that he is not Trump has been a boon to confidence.

Biden’s challenge with Democrats concerns both spending and taxes. While Joe Manchin has made it clear he is incredulous at the multi-trillion dollar spending package given inflation concerns, Kyrsten Sinema has recently implied that a major hike in the corporate tax rate is also out of bounds. The markets aren’t terribly concerned with a smaller tax and spend package, but would take more affront if the global corporate tax reform proposal were also to blow up because Democrats can’t agree on anything. Fortunately there is some positive news on that front, as several European nations are planning to end punitive and discriminator Big Tech taxes once the global tax deal takes effect, according to DW. Global tax reform is significant because it signals American diplomatic strength and it removes a major inefficiency in tax collection, which is consequential to corporate spending decisions on matters like R&D or pension adjustments.

But some fear Biden may be losing public esteem and nothing will get done, a view underscored by unease over yesterday’s supposed “misstatement” on TV that Biden would come to Taiwan’s rescue if China attacked. This is a major diplomatic statement as it shifts from the long policy of "strategic ambiguity" re Taiwan. Some feel Biden may have inadvertently given Taiwanese liberals the go-ahead to declare permanent independence from mainland China, a move that would roil the Chinese Communist Party and set markets on edge as investors worried about the CCP losing focus on domestic issues and of course the possible scenario of US-China war. This amounts to an unforced error if the CCP takes any real notice of Biden’s statement, harming Biden’s approval among centrist and conservative Americans.

But key is the CCP’s underlying confidence, which is high at present as evidenced by the fact they are sacrificing economic growth for supposedly macro-prudential security. Biden’s language change probably won’t move the CCP to do anything material since they don’t feel insecure enough to change policies, and they know Biden can restrain Taiwan’s liberals if he so chooses. The CCP will continue to harass its Asian neighbors and offend everybody, but nothing comes of that in the intermediate term, while the long-term consequences are deleterious not for the US but for China’s international stature. Key to watch will be the Shanghai Composite and the Shenzen Component indices, which are not far from their 5-year highs and still uptrending. They have been clearly signaling that Chinese investors are still confident in the CCP’s prudence. And the less China makes of Biden’s the statement the better Biden looks.

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 small net short position in S&P 500 (the levered inverse ETF SPXU).