Geopolitical Developments: Putin Puts On His High Stakes Poker Face While The Markets Watch With A Sardonic Smile
The Russian threat against Ukraine is having a mild effect on investor confidence, as investors gauge whether Biden will capitulate or something more shocking will occur. 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 one positive factor for US stocks. The action in EM currencies indicates the $US is somewhat weak. But there was also one negative factor across global asset classes. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to rise modestly over the next few days.
The list of Russian wins across Eurasia is so impressive that Vladimir Putin is leverage his winnings and betting big that threatening Ukraine will yield concessions. In Syria, Armenia and Belarus the Russian leader has won against NATO members and gained prestige. So Russian threats against Ukraine largely stem from Putin’s reading of the geopolitical situation where the US & Europe are self-absorbed and disunited and esteem for American foreign policy is diminished, thus offering Putin a opportunity to strike. The German Marshall Fund notes “In this context, what Europe should be particularly concerned about is that the Biden administration is also encouraging this epochal change, at least in formal terms. The United States and Russia have been discussing the contours of the European security order on the main stage in Geneva without the participation of the European countries.”
The reason America and the EU are divided boils down to the inability of the American democrats to solidify their power and unite with European social democrats. American democracy prizes individualism over collective action, which explains why the Left is successful at increasing the scope of the government but unsuccessful in changing the tenor of America’s capitalist economy. The American voter sees the problems caused by materialism, inequality and bigotry, and acquiesces to the leftist demand for throwing resources at these problems via the democratic state. But this results in wastage and ecological decline as the problems simply mutate into new variants. Consequently the American right-wing routinely cycles back into power and sabotages the policies implemented by prior leftist administrations and Congress. So America is self-absorbed and has to pick its battles, which Putin is skillfully exploiting. Small European states know this and are powerless to influence it, and division festers across geographic lines. The German Marshall Fund further states “Putin has discussed Russia’s demands for an end to NATO’s eastward expansion with Turkey’s President Recep Tayyip Erdoğan, probably to draw Ankara to Moscow’s side and make consensus in NATO more difficult.”
Expect more market consolidation as investors watch this drama play out and await earnings season beginning next week. Yesterday’s action showed the bears are only able to push the S&P 500 to its lower trendline, at which point the bulls seized control and sent the markets to their highs by the close. This is typical of consolidation patterns, where the markets are waiting to see if the risks that make up the wall of worry are actually materializing or simply festering in the shadows.
Yesterday I added a position in Starbucks (SBUX): my other current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), American Express (AXP), Johnson & Johnson (JNJ), 3M (MMM), Titan Machinery (TITN) and a small net long position in the S&P 500 (the levered inverse ETF SPXU and levered ETF UPRO).