Progressive Democrats Carry A Torch For Eurasian Autocrats And A Hammer To American Investors: The Geopolitical — Stock Market Connection

The midterm elections ironically produced bullish results since there will not only be gridlock but less political destructiveness now that Mitch McConnell is relegated to minority leader. The bulls are thus riding high and ignoring the obvious economic headwinds that will cut corporate earnings down to size. 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 short-term bullish and longer-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. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next week or so and then begin the long volatile road down in December.

Low consumer confidence coupled with growing layoffs means consumer spending will fall and generate a recession in 2023. The key question is whether the recession will be short and shallow or long and deep, and the determinant will be the level of business confidence that underlies job creation. Business confidence is frangible in that it’s persistent and robust right up to a tipping point and then it becomes weak and fragile. The tipping point is the political situation. Under a left-of-center politician like Bill Clinton business confidence remained robust because Clinton was protean and could manage to be both pro-government and declaim that “the era of big government is over.” Under an even more leftist President Obama business confidence remained robust because Obama was so canny and genuine that he could keep the progressives under control and live with a Republican legislature that mandated gridlock. The problem in 2023 will be whether politics becomes so destructive due to weak candidates that business confidence declines.

Key will be the behavior of progressives. They detest business values and practices and if they gain power then confidence will decline as higher taxes and regulations become likely. The midterms have shown that progressives aren’t productive for the Democratic Party, but under Biden’s weak leadership it’s possible they could come roaring back as unemployment increases under Fed rate hikes. One factor in their favor is the desire of Russia and China to influence progressives to change the American political scene.

Russian influence over progressives became clear with the failed letter urging Biden to seek negotiations with Putin over Ukraine. But even more problematic is Chinese influence. Not only does the US have a bigger and more profound economic relationship with China but Chinese Americans are an honored part of American history and culture. To extirpate Chinese Communist Party influence would be ideal for both the Left and the Chinese-American community, but this will be impossible due to the historical cultural and current economic relationship. Where Chinese foreign policy was once obtuse and counterproductive there is evidence of growing sophistication, as seen in a key Chinese frenemy, Turkey.

Carnegie Endowment For International Peace notes “Chinese players have localized their strategies to improve China’s image in Turkey in recent years. Indeed, Turkey’s unfavorable public opinion has been a constant headache for China, whose propaganda outlets in the country produce little Turkish language content that actually resonates with domestic audiences. Turkey also has few explicitly pro-China voices and no sizable overseas Chinese community, which has made positive public relations into an uphill battle for Beijing. But having acknowledged these weaknesses in recent years, the Chinese regime has opted for strategies that aim at building a new synergy with local actors in the Turkish mediasphere…On the other end of Turkey’s polarized ideological spectrum, China has also appealed to left-wing opposition groups through its narratives, which emphasize the country’s anti-imperialist credentials. Such messaging strategies may already have produced some results in Turkey, as the most recent opinion polls reflect a gradual increase in the number of Turkish citizens who perceive China as a potential partner.”

There is nothing Americans can do to stop CCP influence unfortunately, since America is so divided the Chinese can plausibly make allies and change the political dynamic. The key is Xi Jinping’s shrewdness and priorities. Should the Chinese stock market fall precipitously over the next few months then Xi will have bigger domestic problems that preclude him from conducting sophisticated foreign policy. The Shanghai Composite has led the US markets and is likely to fall hard, which would mean short-term pain for American investors but significant longer term gains as Xi Jinping flails at reviving the Chinese dream.

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.