The Latest On The Global Economy: Geopolitics Hurts Geoeconomics

The nexus of global economics & geopolitics is clear this week: unequal vaccine distribution, cultural differences within and among nations resulting in low vaccination rates, the horror that is Afghanistan and the consequential threat it poses not just to Biden’s capacity to push through further stimulus but also to European stability and to emerging market currencies, are all weighing on financial markets this morning. The volatility risk premium points to a market fall over the next few days but my technical reading of key stocks in the S&P 500 is bullish. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there was also one negative factor across global asset classes. Copper is pointing to declining global GDP expectations. Taken together, the market looks set to overcome these concerns and rise moderately over the next few days.

The one bullish omen from these global developments is that central bank rate hikes will be farther away than the markets feared last week. A key example is the lockdowns in the Antipodes which this week resulted in rate hikes being put on hold. The Fed and other institutions now know it’s no longer not herd immunity that’s being sought but simply higher vaccination rates to handle the higher loads the variants carry. That implicates cultural issues and geopolitical calculations, like what will it take to move vaccine skeptics to be rational, and what will move the developed world to ease vaccine constraints in emerging markets.

The weight of American cultural problems and its attendant impact on vaccination rates was felt yesterday in the retail sales data. The decline was bad and while the timing of Amazon's Prime Day clearly contributed to it, the broader issue is the drop in confidence. US consumer confidence measures are important during a crisis, and delta covid undoing the gains from stimulus and vaccinations could bring on a crisis. So with Biden’s stature diminished and further stimulus similarly impaired, unless retail spending resumes its strong growth it will be up to the housing market to push US growth beyond trend.

The global economy looks less likely to pull US growth up, largely because of the geopolitical rivalry between the US and China as well as China’s internal dynamics. The unholy combination of US SEC clamping down on Chinese firms listed on US markets, the latest CCP push to regulate unfair competition in the online space, and delta covid shutting down a port, all make it likely Chinese growth is slower than expected. China is critical since Japan is simply muddling through with neither upside or downside momemtum, Europe is in political stasis, and the left is either gaining or consolidating power in LatAm but can do little unless commodity prices rise further (stimulating their exports and bringing in cash to spend on social programs). So if China slows and the US housing market comes off its torrid pace, US growth will return to trend. Still, these concerns may prove transitory to the markets as US firms have a strong capacity to cut costs and grow margins when sales growth falters.

My current market positions are in Facebook (FB), Korn-Ferry (KFY), MKS Instruments (MKSI), Starbucks (SBUX), Titan Machinery (TITN), and nearly hedged position that is net long in the SPX (UPRO and SPXU).