Geopolitical Developments: Markets Are Repining But Will Soon Stretch Out And Enjoy The Holidays

Worrisome geopolitical rivalries and increasingly stern central banks are hurting market sentiment this morning, but I see this as reactionary and temporary rather than an acceptance of worsening economic conditions. 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. 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. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days.

The nexus of geopolitics and macroeconomics looks precarious but I don’t see any negative events occurring through the month. Markets are reacting negatively this morning due to rising central bank interest rates across the world while simultaneously the dollar is sailing high, a harbinger of slowing global GDP. China is clearly sacrificing growth for Communist Party (CCP) objectives, and though Japan and South Korea are taking up some of the slack from China other regions aren’t helping, particularly Europe and the US which are working through Omicron and fearing Russian intervention in the Ukraine. Adding to these concerns are rumors the Fed will accelerate its tapering despite declining inflation expectations. Yet the overall market trend reveals little signs of worry, likely because no major nation has any rational incentive to rock the global economic recovery. The only real obstacles to the global economy are irrational politicians and vaccine hesitancy, the latter likely to gradually erode as restrictions become permanent.

Key to the global recovery remaining on track and political leaders refraining from irrational actions is India, which sits at one end of the American geopolitical strategy and comprises more than 15% of global population. India’s economy marginally contributes to global GDP but has an outsized psychological impact on Asian nations through its potential to be both an economic consumer but also a manufacturing competitor. The West and the markets need India to grow strongly and increase its foreign policy influence so that global growth isn’t felled by irrational bellicosity (i.e., Russia, China, Iran, Israel) or statism masquerading as action to limit climate change. The signs point to India growing significantly in 2022 as PM Modi angles towards commerce, but what would really help is if Modi signaled a commitment to the twin powers of economic might: manufacturing and R&D.

Modi has yet to do much to shift India from services to manufacturing, but there much he could do so make India a true R&D powerhouse, commensurate with the esteem the Indian diaspora has in scientific and commercial circles. As the Indian website BusinessLine notes “,,,While India ranked only 46th in the latest Global Innovation report, it has climbed two spots over the previous year’s standing. And, the performance is labelled ‘above expectations’ against the yardstick of the level of development. However, Asian countries like Malaysia, Vietnam, Thailand, and even some of the East European countries like Bulgaria, Estonia, Slovenia and Hungary, scored above India. Thus the notion that Indian entrepreneurs lack innovation culture continues to hold good…at a micro level though, Indian entrepreneurs function effectively in implementing quick fixes, commonly called “jugaad”, which serve as low-cost, innovative workarounds or solutions to problems…while India seems to score low in innovation in multiple areas of technology, there are two sectors that stand apart. These are technologies related to atomic energy and space science. Incidentally, both these areas are under direct control of the Prime Minister’s Office and many of the standard rules of audit, including Right to Information Act, do not apply to them…The R&D in public sector or government labs is governed by standard rules (audit, Right to Information Act, etc), even though, at best, only 5 per cent of the attempted innovations results in success. This is probably true in other countries as well. Thus, one needs to understand that experimenting with innovative ventures can be a total failure…Typically, the committee members responsible for allocating funds for innovation are government employees. So, there is always a chance of them being questioned by the CAG (Comptroller and Auditor General) if there is recurrent failure of innovative ventures. Hence, it is not surprising if they are risk averse and do not support blue sky innovative ventures. The chances of failures are low/limited in incremental innovation and so most of the funding of public R&D centres goes for same. As Indian Space Research Organisation is not governed by mundane rules, the progress of Indian space research has been amazing and on a par with those of developed countries.”

Should Modi opt for further deregulation to spur R&D and the labor markets, India would not only improve its mix of manufacturing and services but spur other nations like archenemy Pakistan to pursue rational policies as well. This would not only serve the markets but the broader liberal geopolitical objectives of peace in West Asia and a cooperative relationship with China and Russia towards greening the global economy.

My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), American Express (AXP), Johnson & Johnson (JNJ), 3M (MMM), and a small net long position in the S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).