Central Asia Will Solve The Eurasian Problem But Only When Currency Traders Are Allowed To Finish Punishing Turkey: The Geopolitical — Stock Market Connection
While equities make new lows oil is defying the bearish trend and resting well above its recent lows due to OPEC supply cuts and increasing worry over the situation in Ukraine. That adds to the dispiriting litany of reasons not to invest in risk assets or to be politically optimistic as the 2022 election season hits its climax. The volatility risk premium points to a higher market over the next few days while my technical reading of key stocks in the S&P 500 is bearish. Yesterday saw one negative factor across global asset classes. The US yield curve rose overnight and in the current context that is bearish. Expect the S&P 500 to fall over the next few days and potentially crash as geopolitical uncertainty grows.
Oil is key to the geopolitical balance of power and is back in the news as the Saudi leadership humiliates Biden simply by following its own self-interest in reaction to uncontestable economic trends. Oil will go into a larger surplus unless Saudi cuts its production because recession risks have shifted from short and shallow to long and deep. No matter what happens in Ukraine there is no chance Russia will pivot to western liberalism in the near future, so Russian supply will be highly variable and force American leftists to accept drill-baby-drill as an immediate geopolitical imperative. While this partially benefits the American consumer who relies on gasoline (assuming refining capacity becomes more stable) it also polarizes both Americans and EM nations who America criticizes for over-relying on fossil fuels to catch up with western living standards. The political answer is not more fossil fuel production from rich western nations — whom the EM world logically faults for creating global warming in the first place — but more production from the EM world itself. America’s greatest role is to simultaneously lead the technological change to renewables and foster the cultural change toward high individualism that will correct the materialism, vanity and narcissism that evokes such disdain across Eurasia.
The climate change-denying Heritage Foundation partially tackles this solution in a way rarely heard in the public discourse. It notes “One promising alternative is to push export and energy connections through the “Middle Corridor,” which runs from Europe to Kazakhstan, the Caspian Sea, Azerbaijan, and Georgia, and from there, via the Black Sea, to Turkey. The Middle Corridor, officially known as the Trans-Caspian International Transport Route (TITR), could serve the Europeans just as well as the Russian-controlled Northern Corridor, which until recently was the preferred route for rail freight between the European Union and Asia. China had hoped to monopolize the Middle Corridor as part of its expanding Belt and Road Initiative (BRI). But countries have grown increasingly wary of participating in it. They’ve seen China leave many of its BRI promises unfulfilled. And they also worry that involvement comes with too many geopolitical strings attached and can lead to debt traps.”
The obvious obstacle to this solution is the central role of Turkey and its voters’ willingness to elect and tolerate Erdogan. Not only is Erdogan untrustworthy but his nonsensical economic policies are contributing to economic fragility and making a global hard landing increasingly likely. Erdogan follows an esoteric economic theory of structuralism that suggests interest rates and monetary restraint are inflationary rather than disinflationary, and that state-led growth is superior to private-sector capitalism. No country has ever proved the first proposition and only culturally cohesive nations have ever proven the second. Turkey is not culturally cohesive for a raft of historical reasons and as a member of NATO its economic decline reduces the power of the West. The Turkish Lira has already weakened to historic lows and can only get worse as long as oil prices stay high. Erdogan has limited how much currency traders can short the Lira, but eventually this will end in a rout as currency traders get unshackled from a depleted Turkish economy.
Correcting these problems requires a huge shift in American thinking that could turn Turkish public opinion back to the West. Since Biden and Trump are unlikely to start this shift the twin problems of unpredictable energy supplies and EM currency fragility will dog equity investors and increase risk not only of a long and deep global recession but a long and deep bear market.
My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the inverse levered ETF SPXU, all of which still nets out to a meaningful short position in equities.