British Liberals Can Find The Silver Lining In Their Latest Human Sacrifice And Resurrect Prosperity: The Geopolitical — Stock Market Connection
The humiliation of the liberal British PM Liz Truss hit its apex when the FTSE-100 closed higher on news of her resignation. Missed among the wild gyrations in politics and the markets is the stuttering but unmistakable comeback of liberalism to the British Isles. In every region of the world the left is playing defense or getting offensive with comical ineffectuality, setting the stage for a renewed contest of liberalism vs. statism. The resolution of that contest will determine whether the latter half of this tumultuous decade resolves into a raging bull market or volatility that begets anomie and violence. For now that volatility is on full display as the bear market rally continues despite massive positioning for another downturn. 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, including $US strength, the rising US yield curve and rising inflation expectations. Expect the S&P 500 to be range-bound over the next few days before falling to new lows by month-end.
Reaganomics with a British accent was market-friendly in theory and myopic in practice, as Liz Truss ignored the impact of current account deficits and accumulated debt on current market psychology. But her liberal proposals couldn’t have happened without a popular turn toward liberalism in place of the growing statism of the Brown-Cameron-May-Johnson variety. With the Labour Party divided everything but their esurient desire for Downing Street statism has likely maxed out unless the Tories choose yet another politically-challenged leader. More likely the new leader will be well aware of the growing shift away from the ultimate illiberal act of the modern British era — Brexit.
Bloomberg notes “After years of denying the downsides of Britain’s split from the European Union, the Brexit taboo is starting to lift in the governing Conservative Party and the country’s right-wing press. Brexit has caused a “calamitous loss of international standing” and six years of “damage,” “policy confusion” and “ineptitude,” a columnist for the traditionally Brexit-backing Telegraph newspaper wrote this weekend. The claims of so-called Project Fear — a derogatory term given to pre-Brexit warnings about economic harm and disruption — “have turned out to be overwhelmingly correct,” the Telegraph column said. The opposition Labour Party steers clear of the Brexit subject, fearful of being painted as wanting to overturn the democratic decision of the 2016 referendum result, an attack Boris Johnson used effectively when winning his landslide general election victory in 2019. And though Labour currently has a record advantage over the Tories in the polls, the next general election isn’t likely to happen until at least 2024.”
Brexit was an act of popular democracy against markets, a triumph of statism that fits both the Left and the hard right. Now the British people are turning their back on popular democracy and radical change in favor of sensible politics that emphasizes individualism and commerce. While the UK can’t resurrect EU membership its leadership can get a new agreement that amounts to re-entry in all but name only. Using the triple excuse of the Ukraine war, inflation caused by easy American money and Chinese supply chain shocks due to their moronic zero-COVID policies, British leaders can argue for a new deal that puts the UK economy back into the EU without any political union. Such reentry effectively means adopting the idea of “closer” and “enhanced” cooperation that’s been floated before within the EU, instead of the limited “opt-outs” that the UK previously had before Brexit. Such a framework would need to be rigorous enough not to be frequently used, and thus provide no incentive to other nations to leave the EU. Rather the framework would amount to a general opt-out “in name only,” offering the Brexit voter a sense of economic sovereignty maximized, which is key to having true political sovereignty. This face-saving deal would clear the way for a resurgent Europe riding the backs of valiant Ukraine people and provide the unquantifiable confidence that makes for secular bull markets.
Until that day happens the markets are weighing geopolitical and macroeconomic trends that lean heavily to the negative. Until the Fed gets out of the way the bear market will thrive. Even when the Fed pivots at some point in 2023 the bull market will be volatile and difficult, much like the period following the GFC or the dot-come bubble. The British can change that unappetizing scenario by pivoting back to foundational principles that made the West the envy of all others.
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 nets out to a meaningful short position in equities.