The Markets Are About To Get Shanghai’d As Xi Jinping Writes His Version of Mao II: The Geopolitical — Stock Market Connection

The divergence between the S&P 500 and the Shanghai Composite has been dramatic and coincides with Xi Jinping’s coronation as the effective Chairman of Greater China. Given China’s role in the global economy this divergence can only have negative implications and tells me the bear market rally currently underway will give out soon. Not even sparkling earnings guidance from Big Tech can alter the near-term course of a global profits recession. But for now the bears have been whipped and are too exhausted to stop the trend. 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. Yesterday there was one negative factor across global asset classes: inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to be range-bound over the next few days before falling again by month-end.

The markets recognize Xi’s personal limitations and have been unforgiving the more power he has amassed. Now that the top leadership is composed entirely of loyalists who are cognizant of the deep humiliation and pain Xi’s competitors have endured, the markets are punishing China for making such a pusillanimous choice. ING notes “As Liu He has left the group of top government officials, President Xi has more say on economic policy..,Liu He was once Xi's chosen economic advisor, educated in the West, not only responsible for China's external policy but also for plans for future growth. But Liu He did not have a political background, which is one of his weaknesses working in the government…The central bank governor Yi Gang and the banking regulator Guo Shu Qing have also left the top government team.”

Xi has attained this power not only because he is shrewder than anyone else in China but because he has a vision that theoretically makes sense for China and even more saliently, the Chinese Communist Party. Xi wants to change the culture of China into a melange of grandeur redolent of previous imperial dynasties while simultaneously consonant with the moral goals of Marxism. To do this he exhorts both the CCP and the masses in speeches that use metaphor and images combined with straightforward language and policy jargon. But he does without achieving any propinquity with the people, who routinely refer to him with harmless epithets or in the recent case of “Bridge Man,” in heroically defiant language. Xi lacks the elementary capabilities of achieving propinquity with the masses, and that makes his project a colossal waste of resources in a nation already vulnerable to water scarcity, pollution, pandemics, social anomie and global recession.

Xi’s language and physical appearance doom his project at precisely the moment he has accumulated dictatorial power. He personally does precisely the opposite of what he should do in order to effect grand cultural change. He doesn’t realize that the use of lyrically pleasing language combined with the quality of nonverbal communication and a lesser extent, one’s empathetic powers, determine one’s emotional propinquity to people outside of one’s intimates. When dealing with ordinary friends, acquaintances, colleagues, professionals or in politics, people typically rely on natural empathy (i.e., what comes effortlessly, rather than by conscious effort), one’s powers of discernment, pleasing or at least straightforward language, humor, emotive power (i.e., nonverbal projection of the emotions assumed to resonate with others), and depending on their capabilities, pulchritude and sensuality, to achieve propinquity. The larger the setting, the more valuable sophistication in both nonverbal and verbal language is in achieving propinquity. But political leaders typically have little capability to project or perform with sophistication in large settings other than punctuating speeches and discussion with humor; instead most rely on conveying ideas in the demotic style, projecting their capabilities and harnessing coercion to gain and exercise power. Consequently political leaders rarely achieve cultural renown and nearly always fail to achieve their cultural goals. Xi is a case in point.

One Chinese academic study craftily noted “Under the research of some scholars and experts, it is found that Xi Jinping’s speeches are “easily understood by ordinary people”, “using plain words and good at telling stories” and “combined with ancient China’s prosperous cultural elements”, etc.” Even propaganda sites note Xi doesn’t aim for pleasing language (let alone poetic depth) but rather purposefully unsophisticated palaver that one such site describes as “wisdom in simple language that packs a powerful, piercing punch.” Eschewing the risk inherent in inspiring people, Xi instead embraces the risk of sounding bombastic. His power rests on his capability for shrewdness, his political knowledge and the fortuitous growth of the global economy to provide good jobs for the Chinese population. Attempts to break free of the global vulnerability via the dual circulation policy and associated deleveraging have been fruitless and Xi’s recent speeches belie that persistent vulnerability.

So Xi uses cultural metaphors and references to manufacture legitimacy in the vain hope that he and the Party will be resilient to errors of judgment and any global recession. Now that Xi has amassed total power China is leveraged to his performance and he can only fail since he not only lacks the power to inspire but has spent years eschewing any attempt at bold performance. His policy decisions are now all-important and will be even more so if geopolitical events transpire to grow statism across the West and make the global economy less dynamic. China has no modern history of good policymaking and Xi’s reverence for Marxist-Leninist precepts ensure his policies will be suboptimal if not unsound. His zero-COVID policies are the most visceral example of his failure and China’s future. Only by severely curtailing his powers can China become the steadily growing economy it was until the pandemic revealed the technological limitations of its largely domestically educated populace.

It will take a resurgent Europe and the attenuation of right-wing autocrats across the world to make up for China’s shrinking contribution to the global economy. Without that the bull market that eventually resurfaces will be a years-long and unappetitizing slog back to old highs, punctuated with nasty volatility.

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.