Geopolitical Developments: The USA Benefits While The Left Prays For Europe & Asian Nations Take Steps Forward & Backward

Geopolitics continues to favor the US markets since Europe & Asia are being hit by delta covid concerns and the Chinese Communist Party’s minatory stance towards its own growth sectors, while confidence in Biden and the tech-driven economy is strong. 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. There are several negative factors across global asset classes. Copper is pointing to declining global GDP expectations. The action in currencies signifies $US strength. But taken together, the market looks set to overcome these concerns and rise moderately over the next few days.

The Left looks to Europe for leadership on many issues but realistically this is unlikely to happen until a charismatic leader emerges in a major European state (someone with more gravitas and experience than Macron). So that leaves a bipolar world between the US and China, and clearly liberalism favors the US given recent developments.

1) A profound left-right issue that is key to a rising global economy centers on the recovery in Europe, because Europe depends on the health of its banks for its social welfare and ecological policies. Leftists in the US bemoan the securitization of commerce in the US, since it makes workers vulnerable to gyrations in the stock & bond markets, and it incentivizes transactional behavior instead of virtues like empathy, cooperation and compassion: they wish the US were more like Europe where bank lending dominates rather than markets, and relationships matter. The problem is that these banks performed poorly and reforming them isn’t easy as democracies intervene in attempts to make them more healthy and efficient. S&P notes “some of the eurozone's biggest banks would have the weakest capital levels among Europe's lenders in the adverse scenario envisioned under the European Banking Authority's 2021 stress test.” Contrast with the US where banks have rebuilt capital and the capital markets themselves are at record highs. So global bullishness will depend on Asia & the US leading more so than Europe, since its banks can’t afford to take big risks.

2) The left is right to castigate the global capitalist system for relying on stock & bond markets without effective risk management across the board. While competitive firms may be the only organizations that actually implement good risk management, the point is that it’s uneven across the financial landscape. Case in point is the clearinghouse industry, which act as central counterparties (CCPs). Risk.net notes two recent examples: “In June, the Options Clearing Corporation revealed that it had incurred a record $2 billion initial margin breach in the first quarter, driven by a borrowing position in meme-stock GameStop between January 25–27. This means the market was unaware of a serious market event for six months. Another significant problem also came to light with a sizeable delay. The National Securities Clearing Corporation was caught $600 million short of its Cover 1 obligation on one unspecified day between January and March, but reported the shortfall only in June.” Monitoring the health of CCPs is something investors must do routinely to gauge the health of the global economy. Clearly there are underreported risks right now.

3) Another key problem with the US capitalist system is pensions, not just our anachronistic social security system but particularly state/local pensions subject to local democracy. New Jersey, Kentucky and Illinois are perennially among the worst states at underfunding their pension obligations to local government workers. But some rare good news just happened: P&I notes “S&P Global Ratings raised its outlook to positive from stable for New Jersey... The release pointed to ‘efforts to improve pension funding,’ noting that it ‘could result in maintenance of a combined funded ratio of more than 40%, which we consider supportive of a higher rating,’ the news release said.” Solving the state/local pension issue would remove a major risk to the US economy, and this modest upgrade points to another reason to be bullish near term on US equities. And the issue is circular — a stronger US equity market helps solve the pension issue.

4) The shocking riots in South Africa following the clearly corrupt Jacob Zuma being convicted is likely a harbinger of rage at the failure of democracies and autocracies alike to create comprehensive progress. One lifeline for bad African governments is the Eurobond market, as noted in The Conversation by Misheck Mituze. The problem is that African govts spend poorly and worse, “tax revenue in sub-Saharan Africa has been shrinking over the past 15 years in both real and absolute terms, because of weakening fiscal capacity. In a number of economies, the tax revenue collection is below the minimum desirable tax-to-GDP ratio of 15%. Such fiscal capacity is inadequate even to finance basic government budget.” The bond market is clearly sanguine about African governments but this may be a replay of the defaults from earlier decades, and resulting political instability.

5) Despite Indian PM Modi’s personal responsibility for the spread of covid, India’s bull market is on fire. Arguably this is because much of what Modi has done solidifies confidence, even though Indians are aware of the horrific suffering his policies cause. An example is the revocation of Kashmir’s special autonomous status, which at the time was pilloried as it coincided with horrible moves against opponents of the Modi regime. But as the National Interest writes, there have also been some positive developments that augur for eventual tranquility in the overall border region between India, Pakistan & China. “While the change in status meant the application of the Indian constitution and 890 Central laws in Jammu Kashmir, many of these brought progressive change, including the Scheduled Caste and the Scheduled Tribes Act that forbade targeting and atrocities against lower castes; the Whistleblowers Protection Act, and the Right of Children to Free and Compulsory Education Act. Women in Jammu and Kashmir get full rights that Jammu and Kashmiri law had previously denied them.”

Yesterday I added a position in Korn-Ferry (KFY), and my other market positions are longs in Activision (ATVI), Blackrock (BLK), Facebook (FB), MKS Instruments (MKSI), Titan Machinery (TITN), and nearly hedged position that is net long in the SPX (UPRO and SPXU).