The Wheels Within Wheels Of Biden’s Foreign Policy Can Only Turn The Global Economy Lower: The Geopolitical — Stock Market Connection
Markets are rallying inexorably as the shorts continue to cover their position despite all of their predictions coming true. Poor earnings guidance, persistent inflation and a hawkish Fed all spell intermediate-term doom for equity markets, yet the markets are rallying on hopes of a Fed pivot. While it’s reasonable to think politicians can recognize economic harm early enough to change their policies, this is farfetched in light of the current crop governing America. Not only is the Fed resistant to warnings because of its wildly inaccurate forecasts of the past year, but President Biden is too self-contradictory to even know what policy to change to assuage voters and markets. Consequently I see the intermediate term as negative, while the volatility risk premium is pointing to a range-bound market over the next few days as seasonal optimism makes its initial appearance. Yesterday's cross-asset action brought several positive factors for US stocks. The US yield curve is falling and in the current context that is bullish. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to be range-bound over the next few days before crashing back to new lows in November.
Biden’s double standards and doublespeak on issues ranging from immigration to energy policy have so dispirited Democrats that optimism about the midterms following the Dobbs decision has changed to outright fear. While this is par for the course in American politics, Biden’s quest to play in the center by being consistently self-contradictory may drag the global economy down yet harder in December. The issue is oil, and Biden’s forked-tongue on constraining Russia and their energy exports.
Bloomberg notes “Traders, tanker companies and the world’s most powerful governments are becoming increasingly fixated upon one question in the oil market: can the petroleum industry’s supply chain handle the harshest sanctions on Russian exports in history? A vast shadow fleet of tankers with unknown owners is being amassed to service Moscow’s interests. Intense US-led diplomatic wrangling to soften aggressive European Union sanctions has been going on for months but time is ticking.
The US has been sounding the alarm for months that Europe’s sanctions on Russia could trigger such a shock. It’s pushing for companies to be allowed to access EU services -- especially insurance -- to avoid a price spike before the mid-term elections in November. To do that, buyers would have to sign up to a controversial oil price cap. What looks certain is that a large part of Russian flows will be handled by a complex -- and often secretive -- network of ships, owners, ports and safe passages dominated by entities still willing to deal with Russia. In the run-up to Dec. 5, when the EU is due to ban Russian crude imports and halt the provision of shipping, financing and insurance cover to related trades, the most important question is whether there will be enough vessels.”
Oil prices affect politics as well as consumer spending, and here the issue of Russian supply is paramount. With Biden imploring American fossil fuel companies to produce more while chastising them for making money, and potential sources from the Middle East and Central Asia equally dependent on politics and thus highly uncertain, there’s little chance of supply making up the shortfall from Russia. If supply is uncertain, the trend in oil prices should be rising and indeed oil is rallying this month on OPEC supply cuts and a consolidation in the $US. But I read the trend as negative for the intermediate term, and see the September lows taken out due to declining global demand. Lower demand out of every region but parts of South Asia is already factored in, but the markets are unprepared for dramatic cuts in Russian supply due to declining vessels. Stiffly declining global GDP is also consistent with a stronger $US, and this week has shown us what effect that has on stock prices of big MNCs. The bear market has further to go on the downside as these developments play out with no enlightened political force to reset them.
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.