Biden Pokes Our Allies And Both Ukrainians And Investors Must Brace Themselves For The Return Punch: The Geopolitical — Stock Market Connection

The Midterm results were as unwelcome to Ukrainians as Democrats, since the gains by the GOP will limit future aid to Ukraine as hard right conservatives marry grotesquely with progressives on the Russia issue. Were Europe to make up the difference the Ukrainians might actually feel better, but this is unlikely as Europe is increasingly concerned with US policies and busy dealing with their own dependence on Russia. All this sets up for geopolitical uncertainty that eventually manifests in a return of bearish sentiment. But for now 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 short-term bullish and long-term bearish. Yesterday's cross-asset action brought several positive factors for US stocks. Gold is projecting $US weakness. Copper's chart is signifying global growth. The action in major currencies indicates the $US is weak. 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. But there was also one negative factor across global asset classes. Oil is pointing to stagflationary conditions. Expect the S&P 500 to fluctuate wildly over the next few days before coming back to earth later in the month.

Biden’s uncertainty about his own re-election decision would be welcome news for liberals were it not for the fact the Democrats have no significant voice against statism. The conflation of democracy with statism by Democrats is their contribution to polarization, as it both inflames centrists and Republicans but also attenuates our alliances and makes our foreign policies unprincipled and obtuse. The most recent example of such obtuseness is Biden’s Inflation Reduction Act, which injects the state ever deeper into commerce and is widely regarded as increasing inflation rather than reducing it.

CNBC notes “The European Union has “serious concerns” about the U.S. Inflation Reduction Act, saying it breaches international trade rules, according to an official document seen by CNBC... This is not the first time that Europe has voiced its concerns over the policy. The EU’s competition chief, Margrethe Vestager, said last month that “as a matter of principle, you should not put this up against friends,” as reported by the Financial Times... In essence, the EU is worried about potential new trade barriers on European electric vehicle producers. And they are not the only ones, South Korea, for instance, has also brought up the same concern.”

The unfitness of a statism to American values is readily apparent in the real-time blow up of crypto we’re all witnessing. This infrequently regulated sector has just been judged noncompliant by SEC Commissioner Gensler, who is absurdly answering the cries for crypto regulation by the investor base and Wall Street. This is comical given the obvious ineffectuality of regulation to limit fraud, hyperspeculation and overleverage in securities and commodities markets, all of which manifested in the last few years and even more disastrously 12 years ago during the GFC. Regulation does nothing to address ethical problems in commerce because of one root cause that is obvious to everyone. Instead of addressing ethics regulations simply eat up the Earth’s resources in employing people and technology among regulated firms and government agencies. The reason is simple but profound: in no case is regulation deferred to, since those working in industry think they know more than the regulators. Without deference, regulations are persistently reactive at best, corrupted at worst, since firms don’t regard rules and practices are meaningful, but rather something to be used to limit legal risk and quash small competitors. Regulations simply disguise ethical problems that grow in size until a scandal bursts them into the public spotlight.

Democratic programs to subsidize or directly provide goods and services (e.g., public education) are also subject to the deference principle. In most cases government programs are there because of a gap in the marketplace (e.g., low cost education), and consequently the masses don’t defer to the government but instead expect it to deliver what they get from businesses. The lack of deference means no esprit de corps can be built and so the programs are unproductive and wasteful, persistently backward looking and unreactive to current trends.

Biden’s push for statism adds another gulf to US-European relations which the Russians and Chinese are overtly manipulating for their benefit. Equity valuations depend on macroeconomic certainty and Biden’s adoption of Trump’s trade policies mixed with his own statism erodes that certainty. This is the geopolitical backdrop that ensures the road back to S&P 4800 is rocky, unless and until liberalism reasserts itself in the West.

Yesterday I sold out my position in the levered ETF UPRO (which rises with the S&P), and added to my short position via the inverse levered ETF SPXU. Consequently my current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the ETF SPXU, all of which nets out to a large short position in equities.