Geopolitical Developments: Russia Gets To Be The Pugilistic Drunk On Stage While The US And China Market Sober Amity

Geopolitical developments seem a net zero as Europe gets tense while the US and China make a show of ecological cooperation, and that is predictably having little effect on markets this morning. The volatility risk premium points to a higher market over the next few days, while my technical reading of key stocks in the S&P 500 is bullish. There are several negative factors across global asset classes. Gold is signalling inflation fears. The action in currencies signifies $US strength. The US yield curve is bear flattening. Inflation expectations are rising based on measures of Treasuries and TIPS. But taken together, the market looks set to overcome these concerns and rise moderately over the next few days as consolidation continues after the early November rally.

While Russia’s actions against Ukraine and the tension between Belaraus and Poland are dominating geopolitical headlines, as I noted Monday the resolution will likely be tragic since the EU is unable to counter Russia (and by extension its vassal Belaras) and help Ukraine due to its immediate energy vulnerability. The other major issue is whether the US and China have really found room for cooperation as the statement on COP26 indicates.

Two noted foreign policy commentators illustrate the optimistic and pessimistic views: Dani Rodrik in Project Syndicate views US-China cooperation as likely since clear interests are at stake, while Edward Chancellor at Reuters views Xi Jinping’s recent anti-business actions as evidence China’s economic model is floundering and this suggests geopolitical tensions will rise as a distraction. I believe Chancellor is correct as Xi Jinping is effectively bluffing regarding the “Chinese Dream” and has little to offer his subjects other than signs of power and self-confidence. The CCP has little legitimacy after rejecting Chinese history throughout the Mao years and subjecting the Chinese people to unimaginable deprivations. Culture was never the CCP’s strong point and Xi cannot simply make up Chinese culture with any more success than the Bolsheviks in the early Lenin-Stalin years. As Xi solidifies the CCP’s power by robbing Chinese capitalists of theirs, he maintains Chinese confidence in the short-term at the expense of the long-run, since economic growth will suffer as capitalists rethink deploying their capital in China. This will force Xi to be more offensive and brazen toward his East Asian neighbors, challenging the US to live up to its alliances with the Philippines, Thailand, Japan and implicitly with Taiwan. The prospect of ecological cooperation under this tension is as comical as the exclusion of methane from the COP26 announcement.

Yesterday I sold my position in FedEx (FDX), so 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 long position in S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).