Geopolitical Summary: Suffering Across The Globe Overmatched By Confidence In The Pink Floyd Axiom

Geopolitics are creating humanitarian disasters but for the US the story is simply that liberal leadership is back and that limits American risk-taking, while the big bad actors (Russia, China, Pakistan, the DPRK, Iran, Saudi & Turkey) face internal problems that limit their capacity for nastiness and aggression. The petite bad actors — most of Eastern Europe, the Northern Triangle of Central America, Venezeula & Thailand — pose modest risks that make up bricks in the wall of worry the US equity market climbs. The welfare of all of us who are materialistic Americans depends on the confidence projected by the S&P 500, and until a feasible method to actualize high behavioral standards emerges, this situation will continue with dire consequences ecologically and for humane values globally.

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. Still, there are 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. Gold endured a flash crash and broke support levels. But taken together, the market looks set to overcome these concerns and rise moderately over the next few days.

The Wall so elegantly expressed by Pink Floyd in 1979 is something the S&P 500 simply climbs, because the big bad actors are located in an around Central Asia and it’s there that the major geopolitical problems reside. Biden’s actions in the Middle East & Central Asia don’t deal with any of the myriad geopolitical risks, since he’s unwilling to quickly do the one thing he has the power to do: a new deal w/Iran, predicated on both sides publicly admitting large mistakes. This is unlikely of course, but by proceeding cautiously Biden prolongs uncertainty in the broad region, since Iran is already conflicted by its own fraudulent election & consequent social unrest. So we are caught in a catch-22: since Iran’s actions mean more to global security than what happens near-term in Afghanistan, the humanitarian disaster precipitated by the American troop withdrawal is unavoidable and dents American prestige, making Middle East policy even more inefficaceous. So the Iran negotiations drag on and suffering continues across the region.

Without an Iran deal, there is no progress toward solving Asian problems because there no foreseeable path toward rapprochement between the liberal powers (the US, Western & Northern Europe, Japan & the Antipodes) and the big bad actors, or peace between Asian nations (i.e., between India/China/Pakistan, Iran/GCC/Israel, or Turkey/Syria). Still, nuclear war between India/China/Pakistan is unlikely given each country’s immediate domestic & broader foreign policy priorities. Nor will Turkey’s machinations in Syria, Iraq & the eastern Mediterranean drag down the major powers since the countries involved are non-nuclear, and Greece is too much an economic basketcase for the EU to make any further sacrifices for. And tumult in Lebanon and across the Shia Crescent likely doesn’t reach levels that reduce economic confidence in a Chinese/US/German rebound that lifts the global economy. Large Middle east wars are unlikely while the GCC and Israel feel their way toward cooperation, and the Afghani civil war & eventual co-rule by the Taliban is a modest headache for China & entrenches Pakistan’s status quo leadership as it emerges from covid. And even were Myanmar to devolve into civil war that implicates India, that would temporarily raise new China/India tensions and only temporarily reduce confidence and rock the US equity market, since the Tatmadaw is likely to win any civil war.

That leaves only one potential geopolitical risk that could destroy all confidence: Kim Jong Un becoming even more erratic as his economy collapses. But the US equity market regards this as a brick in the wall because the DPRK has no incentive to create war if KJU remains healthy. And should KJU become ill that would unleash a coup/revolt that eventually liberalizes the DPRK political & economic system, since the relatively silent powers there (e.g., the Generals) are no longer ideological and would gain from coordinated support from China, Russia & the liberal powers. Only KJU has the power to destroy, since he alone gets credit from the North Korean people for the DPRK becoming a major geopolitical actor, and only he was picked by the elder Kim to carry on the DPRK sociocultural ideology (juche). His mental health is the one variable that can rock America.

Longer-term the geopolitical risks worsen: prospects for nuclear proliferation, full scale war in West/Central asia among autocrats & the breakup of the EU over Greece/Turkey/Italian/migrant policy are all likely, and would eventually tumble confidence in risk assets. A growing risk is biological/chemical terror that exploits the public health problems revealed by the pandemic, & the possibility that systems will remain too stretched do deal w/another disaster.

Given the short-term bullish nexus between geopolitics, American cultural confidence and central bank liquidity, it’s prudent to have exposure to US equities. My current market positions are longs in Activision (ATVI), Facebook (FB), Korn-Ferry (KFY), MKS Instruments (MKSI), Titan Machinery (TITN), and nearly hedged position that is net long in the SPX (UPRO and SPXU).