Geopolitical Developments: The Great Game Is Resurrected But Britain & Russia Are Now Just Pawns

This week saw developments that crystalize the “Great Game” being played between America and China and the remarkable financial market linkages from this stygian geopolitical swamp. The economic result is mild bearishness that is taking equity markets lower as the rounding tops in the S&P 500 and Nasdaq were confirmed again yesterday. The volatility risk premium points to a higher market over the next few days, but my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought one positive factor for US stocks. Oil's chart is signifying global growth. Given these contrasting factors I expect the S&P 500 to be range-bound over the next few days.

The pivotal development is the Afghanistan tragedy. Biden’s exit is not a debacle for US foreign policy so much as an obstacle to his domestic economic agenda, since his popularity and stature have dipped. Russia is the one of few genuine beneficiaries since central and south Asian nations will strengthen relations with it as a counter to a slightly diminished America. But that only means Russia continues its murderous mischief internally and across its near abroad, so nothing fundamentally changes from an American perspective. China wants a mischievous Russia to create problems for the US-European-Japan-South Korea alliance, but nothing more since its own interest is in gradual Great Power status, not dramatic changes around the world.

A case in point is Iran. An alliance would seem natural, but China and Iran now have the timeless Afghan problem on their hands and that complicates China’s geopolitical perspective. The Diplomat notes relations between anti-American Iran and quasi-American enemy China are not deep, and likely don’t develop militarily for these reasons:

• China’s refusal to accept Iran as an official member of the Shanghai Cooperation Organization – despite Iran’s removal from Chapter VII of the Security Council in 2015 – shows that Beijing is not ready to turn the SCO into an anti-American organization. Furthermore, from the Chinese point of view, alliances belong to the mentality of the Cold War era and they weaken the independence of Chinese diplomacy in the 21st century. Therefore, China restrains its military relations with revolutionary countries to a certain level.

• China is concerned about the weakening of Iran’s political system and defense power due to U.S. military and economic pressures, but it also takes into account the concerns of Iran’s rivals in the Middle East regarding the proliferation of nuclear weapons

Meanwhile the other two major central/south Asian powers impacted by Afghanistan are Pakistan and India, and there is little China can do there to augment its trajectory toward Great Power status. Pakistan is quasi-military dictatorship but now must worry about Taliban sabotage within its borders. And India is historically antagonistic to China but getting stronger as its economy recovers faster than every major country in the world. What focuses China more is belittling Taiwan, so as to keep its own restive population in Hong Kong, Tibet and Xinjiang from gaining confidence. And here the Chinese are gaining while America watches. Marc Chandler notes “Later this year, Taiwan is likely to lose an ally. Honduras is one of the few countries that formally recognize Taiwan. The opposition is pulling ahead in the polls, and former president Zelaya says that if he wins, he will re-orient its policy toward China.” America’s inability to help LatAm due to ideological differences and a history of grotesque interventions means a small nation like Honduras can hurt America in numerous ways.

China also gains incrementally from the increasing move toward statism and away from faith in the liberal capitalist democracy that America models. Norway’s election shows that Social Democratic parties are taking back Europe, in line with complacency re statism. But China is unlikely to do much as else as it grapples with homemade problems that stem from statism. S&P notes “Lenders in China are building buffers amid concerns of an economic slowdown due to the recent spike of COVID-19 cases linked to the delta variant, the crackdown on some fast-growing sectors and the ongoing trade tensions with the U.S. Their peers in Australia and India too have sought to strengthen their capital to stay comfortably above minimum requirements. Even some regulators have stepped in to ensure that banks stay resilient to any future shocks. New Zealand's central bank has announced plans to implement some of the toughest bank capital standards worldwide…Meanwhile, capital raised via equity issuances — initial public offerings, follow-on offerings and nonconvertible debt — represented just 13.8% of the funds raised in August, according to Market Intelligence data. The offerings included Shanghai Rural Commercial Bank Co. Ltd.'s $1.32 billion IPO in Shanghai, Commonwealth Bank of Australia's $1.07 billion convertible notes issue and India-based Canara Bank's $337.3 million follow-on common offering.”

America is effectively limiting China’s ability to raise equity capital in other markets, forcing China to sacrifice growth for financial stability. Hence America and China jab each other while each maintains overwhelming military and economic superiority to its allies and neighbors. That gives China the room to incrementally increase its Great Power status. The closest American ally that could theoretically advantage the game toward America is Britain, but its gambit in popular democracy via the Brexit referendum has constrained it minor economic and military status.

Yesterday I added a position in Gibraltar Industries (ROCK), and my other current market positions are in Activision (ATVI), American Express (AXP), Amgen (AMGN), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a short position in the SPX (UPRO and SPXU).