In Kashmir The Only Thing That Has Been Revealed Is A New Version Of The Great Game, And Financial Markets Won’t Like Playing It: The Geopolitical — Stock Market Connection

Russian resilience feels like a bad joke to decent people around the world but recent data makes clear Putin and his ilk will hound Ukraine and the West until another revolution hits that sad but proud nation. For global consumers and investors that means high and volatile energy prices for the foreseeable future, and by extension high interest rates. Yesterday the S&P 500 dodged the spike in interest rates to close the day higher despite no meaningful positive developments. I expect that to reverse course by next week, as geopolitics and negative earnings guidance combine to energize the shorts once again. 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 bearish. There are several negative factors across global asset classes, most importantly that the US yield curve is inverting yet more while inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to fall over the next few days and make new lows beyond yesterday morning’s collapse.

The long-term objective of neutralizing Russian malevolence conflicts now with short-term objective of quelling inflation in the US. The link between these seemingly segregated policies is oil. The Fed’s intention to keep interest rates higher for longer hurts both American consumers and EM nations with significant import bills or dollar-dominated debt, and that destroys global unity in constraining Russia. Putin has defied expectations and so has his economy, which appears to be coasting in a mild recession or even modest growth, testing the resolve of the West. Key to Russian resilience is its fossil fuel exports, which find their key buyers in China and India, the latter of which shares the Asian antipathy to America’s recent economic policies.

Joe Biden is losing patience with his Eurasian trading and military partners, as evidenced by his recent semiconductor restrictions on China. But less flamboyant is the slap at India that his embassy in Pakistan delivered in conjunction with the German Foreign Minister. The diplomat notes a recent trip by Embassy staff of both nations to Pakistan-controlled Kashmir, the primary flashpoint of hatred between these nuclear powers:

“For its entire existence, an important goal of Pakistani diplomacy has been to get the world to take its side on the Kashmir issue. And it’s rarely succeeded on that front,” Kugelman pointed out. “Yet now, a senior Western official [Baerbock] calls on her country to play a role in the Kashmir issue. This is exactly what Pakistan wants, and something that rarely happens,” he said, adding that “this is a diplomatic coup” for Pakistan. For Islamabad, Blome’s visit and the German foreign minister’s comments indicate that all is not well between India and its Western allies, particularly over the issue of Russia’s invasion of Ukraine. Arguably, Pakistan is making efforts to exploit this opening to put its bilateral ties with the U.S. and European nations back on track.”

Great Game playing by the US and Russia in small regions like Kashmir does nothing for Kashmiris or anyone else in Eurasia, and if the British-Russian experience of the 18th-19th centuries is any guide, signals that further conflict is likely. Only a full pivot in Russia from Putin and his chauvinistic followers toward Alexei Navalny can alter this context, and that looks unlikely for years. The upshot is limited globalization and high financial volatility as corporate profits become less certain due to geopolitical risks to supply chains, exchange rates and trade laws.

The market is discounting these negative trends and signaling a profits recession in 2023. Consequently I see deeper lows than were made yesterday morning as the Autumn drags on. At some point in 2023 markets will bottom but the race back to old highs will be volatile and likely take years as geopolitics lays waste the best laid financial plans.

Yesterday I added incrementally to my short position via the inverse levered ETF SPXU. Consequently my current positions include a smaller but still 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.