Geopolitical Developments: A Big Geopolitical Stage This Weekend Signifies Sound And Fury To The Global Economy And The Markets

The alternating seriousness and glamour of this weekend’s geopolitical events is tremendous theatre and of no practical relevance to the trends in the global economy or financial markets, for reasons that voters would rather not contemplate. The volatility risk premium is pointing to a range-bound market over the next few days, while 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. The US yield curve is falling and in the current context that is bullish, while inflation expectations have stabilized, based on measures of Treasuries and TIPS. Nonetheless expect the S&P 500 to be range-bound over the next few days as low volumes speak to lack of conviction now that the market is marginally higher than in early September.

The battle between high profits and rising interest rates are the key for the market, not the inconsequential efforts of democracies and autocracies to address ecological and political issues. The biggest geopolitical event this weekend is COP26, following on the quasi-virtual G20 summit and President Biden’s meetings with the Pope, Emmanuel Macron and others. Yet environmental activists are interested in disrupting COP26 to show how ineffectual the first 25 have been ( https://www.bbc.com/news/uk-scotland-59071603 ). The issue for the planet is the same as for markets: COP26 will be just as wasteful as COPS 1-25.

The reason is the vicious skepticism the average American voter has about democracy and public services. This skepticism leads to persistent gridlock and consequently political malfeasance which guarantee that even the best efforts from government workers will be wasted.

The American voting cohort is dominated by centrists, and since the Reagan 80s this centrist has been a swing voter. While Republicans win more presidential elections they routinely lose the Senate and/or House when they win, and the same applies to Democrats when they win the White House. The American centrist is only occasionally enthused by the sex and sizzle of a Presidential campaign but even in those instances their enthusiasm dies within a few weeks of the election and the mid-terms witness a check to the President’s power. Knowing this dynamic both parties have an incentive to sabotage the efforts of the President rather than openly monitor and challenge the policies. Sabotage is one reason neither side can claim success in moving the country to their proposed trajectory (i.e., conservative or liberal, capitalistic or ecological).

Even more profound is the fact that public services are not delivered by the military or by agencies that simply follow orders. The issues are too complex for policies to be simply ordered and implemented as if government workers were soldiers or assembly line workers. Because of diversity and multiculturalism, all policies require government workers to exercise wide discretion in how and when the policies are implemented. Since the average American has no incentive to organize and be heard by government workers, and worse still, doesn’t even participate in local democratic elections and forums, there is no way for government workers to get a true and accurate reading on how the masses are impacted by policies. Consequently government workers can listen only to the organized interests who bother to deal with democracy on a consistent basis, but who represent small pluralities rather than the people.

The American centrist know all of this and instead of becoming more participatory in local democracy, simply becomes more skeptical. Consequently government workers are aware of the low reputation they have and are only mildly motivated to handle the enormous complexity of delivering public services like ecological regulations and subsidies. This leads to poor productivity and consequently a public desire for deregulation and cuts to government programs by taxpayers who don’t get bang for the buck but simultaneously don’t put the onus on themselves to dedicate their lives to democratic citizenship.

Brookings notes deregulation was Trump’s ecological agenda and that he was mildly successful in rolling back American commitments to greening the economy ( https://www.brookings.edu/policy2020/votervital/what-is-the-trump-administrations-track-record-on-the-environment/ ). For better or worse the courts blocked some of this deregulation, which in the eyes of the GOP is how the Democrats sabotage their policies. More profoundly, deregulation has been a GOP mantra since 1980 under Reagan, so the American voter knows the cycle and can deduce that the end result cannot be productive. Yet the behavior of both voters, government workers and politicians is not only natural but thoroughly incentivized, consequently when the government tries to provide public benefits it’s actually a net user of resources instead of a provider of resources, and this is ecologically harmful.

America is probably still the planet’s last and best hope, but the political dynamic guarantees that governmental attempts to green our world will fail. That puts the onus on Europe, China, Japan and Russia, which is doubtful given Angela Merkel is leaving, the world doesn’t trust Xi Jinping or Vladimir Putin, and Japan is perennially in a malaise ruled by interchangeable conservative men. For the time being the negative ecological consequences have little impact on earnings, so the markets are consolidating and waiting for a reason to go higher or lower.

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).