Geopolitical Developments: Biden Confuses Everyone And That Helps The Oil Market

Despite a raging bull market in oil the bulls in equities continue pushing the market marginally higher, albeit on low volume. 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 action across fixed income, currency and commodity markets signified no meaningful changes to the global macro environment. With volume receding and concerns over higher interest rates growing as the Fed begins its taper this month, expect the S&P 500 to be range-bound over the next few days.

Oil is still in a bull market and some see it rising well past $100/barrel, which would likely cut US GDP temporarily since the negative consumption effect would be immediate while the positive supply effect (impacting American energy producers) would occur more gradually. Consequently Biden is calling on OPEC+ to ramp up supply despite the obvious incoherence with COP26. And while releasing a substantial amount of the Strategic Petroleum Reserve would do the trick, it would be imprudent as there is no energy shortage facing America, just higher prices. Whether by design or by fate, Biden is continuing the Trump program of diminishing US global leadership through both exiting long-held positions and projecting multiple personality disorder.

But Biden may be shrewder than voters expected in his Middle East policy as he’s effectively handing over the toxic stew of regional problems to China and India That means the terror threats and policy distractions that have plagued Washington for 20 years will now be deeper in these nations. India is a quasi-ally and as the US exits Afghanistan and more subtly its commitment and influence in Iraq, the increased threat to India will likely move it closer to the US after covid recedes. This threat comes not only from a more powerful Pakistan (who effectively beat the US in Afghanistan) but from a potentially resurgent ISIS. And as China is now a clear cyber enemy anything the US can do to hurt China is worth pursuing.

The ISIS threat is likely to come from Afghanistan. War on the rocks notes “Under a superficial calm reminiscent of 2002, things are simmering, and the alternative to the Taliban is not Karzai, Abdullah, Saleh, or Massoud. It is the Islamic State in Afghanistan” As Biden and others withhold support from the Taliban, ISIS gains supporters across the multi-ethnic Sunni Afghani population. And that may help it regain ground in Iraq.

Exiting Iraq is not official US policy but is effectively happening since Iraq is in a dire position which only an outside power can mitigate. The combined effect of Iranian interference, Iraqi Shia-Shia splits, and the water shortage resulting from Turkish policy and climate change are decimating Iraq’s fragile social order. The US would need a grand strategy to help Iraq and this is clearly off the table, since the political situation is more muddied due to the parliamentary elections last month. Brookings notes “In its electoral debut, the bloc representing the protesters, Imtidad, secured 10 seats out of 329, a remarkable feat for a movement that is subjected to systemic assassinations and contested the elections amid unprecedented voter apathy.” But 10/329 means little to policy, leaving the larger parties to square off without any real support from those who want a unified Iraq (e.g., the courageous protest movement).

Not only is it the historic Shia vs. Sunni Arab vs. Kurd rivalry, but increasingly a Shia-Shia split. Brookings further notes “Iran’s proxies within the Popular Mobilization Force (PMF) — the umbrella militia organization established to fight the self-proclaimed Islamic State — saw their seats reduced to 17, down from the 57 they won in 2018. The organization’s defeat contrasts with the success of their foremost rivals, the Sadrists, who won 74 seats (an increase from the 54 they won in 2018).” This is problematic since the Sadrists didn’t fare too well either and are a malevolent force in Iraq. “The factions that comprise the PMF collectively secured more votes than the Sadrists, but they lacked a viable strategy and consequently struggled to secure as many seats…While the Sadrist movement is also complicit in human rights abuses, the movement can draw on its decades of support to the destitute and disenfranchised, a legacy that preceded their transition to an insurgency in the aftermath of the 2003 invasion and established the infrastructure that has been so critical to their ascension.“

The end result is tragedy in Iraq and Afghanistan, and an enduring stain on US global leadership. That redounds to the benefit of OPEC + and US energy producers, which will eventually prove problematic for equity markets as global GDP suffers accordingly.

Yesterday I added a position in FedEx (FDX): my other 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).