Geopolitical Developments: Putin Has Hurt The West Already And Will Soon Back Off To The Relief Of Global Investors
Risks of a Fed mistake are boosting volatility and agita among global investors, and this helps Putin’s global standing since it implies his ability to distract the West has real-world economic effects. Biden’s comments on inflation were politically sound but had the unfortunate effect of forcing Jerome Powell to be overly hawkish on Wednesday. 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. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there were also several negative factors across global asset classes. Copper is pointing to declining global GDP expectations. The action in currencies signifies $US strength. The US yield curve is bear flattening. Expect the S&P 500 to be range-bound over the next few days as it makes a bottom and eventually moves back to old highs in February.
Putin’s strategy in the Ukraine is to foment greater disunity among Western Liberals since this boosts public tolerance for autocrats like himself and more importantly, the Chinese Communist Party (CCP). These Eurasian autocrats are dealing with too many problems to take public support for granted, and neither has the moral standing to stave off a popular revolt if one developed. The Western Liberal emphasis on political choice and theoretically unlimited participation by ordinary people is a direct threat to the CCP and to chauvinistic autocrats like Putin. The CCP’s vision of democracy is a hybrid of modest participative power of ordinary people and heavy intervention by the one-party state in promoting culture, prosperity and security. Consequently the CCP wants Putin to hurt the West up to the point that politically it’s disunited, but not to the point that the global economic order is impacted. Consequently Putin has threatened Ukraine but restrained his cyber and military warriors from a true invasion. While Putin has already slightly cleaved EU-USA unity by exposing the contradictions within German politics, another vector is moving NATO-member Turkey out of the West’s orbit.
Turkey is being hit by the Eurasian axis of Russia/China/Iran through the energy markets. Turkey is important to the West due to its antagonism to the criminal Syrian regime but also in destroying ISIS and thus keeping terrorism from further cleaving Europe along centrist - far right lines. And since Turkey has a modest but genuine democratic tradition, it’s key to stopping Russia, China and Iran from getting a stronger foothold in the middle east that could curtail democracy in the region and around the world.
Oilprice.com notes “At a time when the Turkish economy is already struggling with extreme inflation, high corporate debt levels and mismanagement all-over, a natural gas shortage is the last thing Ankara could use... With Russian dwindling, the Iranian supply cut is coming at a very bad time. Analysts already have stated that LNG is not going to be an immediate solution, as it can only partly supply Turkish demand. In the meantime, high global demand for LNG is pushing prices up in Europe and Asia. At present, Russian and Iranian gas supplies are impossible to replace for Ankara.”
“Taking a bird’s eye view, the lack of additional Russian natural gas supplies to Turkey, combined with the Iranian technical issues, which came shortly after Russian president Putin met with Iran’s leaders in Moscow, could be playing a larger role than many analysts may think. Hitting Turkey, or at least putting Ankara in a difficult position, might be part of the greater strategy of the Moscow-Tehran tandem. Bringing Turkey to a part standstill is also a major setback to any Turkey-NATO support for Ukraine in the coming weeks.”
And Middle East Monitor notes “Iran has announced that it stopped the flow of natural gas to Turkey for ten days, starting from 20 January, due to a "technical failure". This resulted in an electricity crisis for factories in Turkey. Questions have been raised about the validity of the Iranian justification and the reality behind the action. Is it, for example, related to Turkey's recent moves towards reconciliation with the Gulf States?”
Under Erdogan Turkey has limited choices, since his economic views are simply nonsense. Turkey has little ability to fight inflation due to Erdogan’s views and thus its currency is at grave risk. Consequently Erdogan has enlisted friendly nations to support the currency, an effort that looks comical. AI-Monitor notes “After the most recent currency swap deal, signed with the United Arab Emirates (UAE) last month, Al-Monitor has learned that preparations are underway at the central bank for similar deals with the central banks of the Turkic nations of Azerbaijan, Turkmenistan and Uzbekistan, as well as Libya, based on cooperation protocols signed in the past two years…Though the swap deals entail the exchange of local currencies and provide no access to hard currencies such as dollars and euros, they serve to inflate the central bank’s gross foreign reserves in what is, in a sense, window dressing... For foreign financial authorities and investors, this is an indicator of Turkey’s economic fragility. As US investment banking giant Goldman Sachs noted after the deal with the UAE, “We do not see the swap agreement as a meaningfully positive development, as it only boosts the headline gross reserve series but does not add to the [central bank’s] hard currency reserves.”
With the prospects of NATO disunity added to an overly hawkish Fed, the risks to equities are now on the downside. I expect equities to bottom out soon as it becomes clear to the Fed that the global investing public won’t tolerate five rate hikes, and as Putin fails to do anything severe to Ukraine.
My current market positions include a moderate cash position, Amgen (AMGN), American Express (AXP), Goldman Sachs (GS), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.