Geopolitical Developments: The Economy At The Southern Border Is Biden’s Achilles Heel
Despite sad cultural and political developments the equity markets have made marginal new highs as I predicted. 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. Copper's chart is signifying global growth. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there were also several negative factors across global asset classes. The action in currencies signifies $US strength. The US yield curve is rising and in the current context that is bearish. Taken together, expect the S&P 500 to fall over the next few days.
The one issue that profoundly unites economics and cultural politics is immigration. Biden faces near-universal opprobrium on the immigration question because there is no near-term solution while the economic context is driving migration. The root issue is not actually the unholy marriage of the American dream and American thirst for drugs, which the GOP sees as driving migration, but the dysfunction of Mexico. Were Mexico progressing it would not only send fewer Mexicans and be less dependent on remittances, but it would effectively have its own immigration problem from the southern triangle of violent poor nations (Guatemala, El Salvador and Nicaragua).
Mexico is not progressing but arguably regressing under the charismatic leadership of Lopez-Obrador (AMLO) who is gradually showing his ambition to be the next Hugo Chavez or Daniel Ortega. His economic policies are anti-growth and he has overriden democratic norms to get them passed. Fury at AMLO has prevented his energy plans from being fully carried out, as noted by the credit ratings agencies. BnAmericas notes “Two of the three major ratings agencies have kept their credit ratings for the Mexican sovereign unchanged in periodic reviews announced only days after debate over controversial constitutional reforms to the electric power sector was pushed back to 2022…In giving its rationale for maintaining the ratings for Mexico, Fitch Ratings said the sovereign is “supported by a prudent macroeconomic policy framework, stable and robust external finances, and stable government debt/GDP projected at levels below the 'BBB' median.” The rating, however, remains constrained by “weak governance, muted long-term growth performance, continued policy intervention affecting investment prospects and the implications for the federal government's finances from its strategy of alleviating Pemex's tax burden…Regulatory quality, one of the six pillars of the World Bank Worldwide Governance Indicators, has consistently deteriorated through this administration,” said Fitch. ”
AMLO is still popular with the majority and will host a referendum in 2022 to nix presidential term limits. If that happens migration will continue and this is what is fueling anger at Biden. The Washington Post notes that under Biden’s BBB plan “Roughly 7 million of the 11 million undocumented immigrants would be eligible to apply for work permits, permission to travel abroad, and benefits like state driver’s licenses, a major step for immigrants from Mexico, Central America and other lands who remain vulnerable to being deported.”
Biden’s political ratings depend more on Mexico turning to pro-growth policies than on the long-term success of his BBB plans. But this is highly unlikely and will lead both progressives and the GOP to sabotage his plans and make him look like another iteration of Jimmy Carter.
My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), American Express (AXP), Goldman Sachs (GS), Johnson & Johnson (JNJ), 3M (MMM), and a small net long position in S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).