Both Ends Of The Pacific Reveal The Era Of Big Government Is Back, With Equity Investors Paying The Price: The Geopolitical — Stock Market Connection

Bad news keeps rolling off the bulls like teflon, as news of an increase in COVID deaths in China meets with indifference both in Shanghai and New York. Markets are rallying on the back of a resilient global consumer with American retailers shining for a brief moment, despite portentous signals of rising statism and capricious policymaking. 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's action across fixed income, currency and commodity markets signified no meaningful changes to the global macro environment. Expect the S&P 500 to be range-bound over the next few days before making a final run to the 4120 level as the bear market rally enters its final stage.

Optimism regarding a short and shallow recession and resilient sales and margins ties inexorably to the notion that China will continue powering the global economy with a benign $US keeping prices low. But should China falter and the Yuan fall then the $US would likely rise against the €, ¥ and most EM currencies as well. That itself would crimp margins for US MNCs and leave only the American consumer to keep the global economy and the current equity rally going.

There is no plausible way China can escape the COVID conundrum without either giving up its vaunted place in the morbidity league tables (e.g., < 1.5 COVID deaths per 100,000) or caving in and importing huge volumes of western mRNA vaccines. Both of these escape routes are complicated by skepticism among the elderly to take any vaccine at all. The most like scenario is China continues its moronic zero-COVID policy until a large manufacturing and distribution infrastructure is built for a homemade mRNA vaccine. That can’t happen quickly enough to maintain global GDP at current levels.

But optimists also point to underlying Chinese pent up demand and excess savings as driving Chinese growth and helping nations dependent on exports to China (e.g., much of Western Europe and EM nations). The problem with this notion is the US is the biggest importer of Chinese goods by a wide margin and is now entering trade war 2.0. Foreign Policy notes “A congressionally mandated commission is calling on the Biden administration to assess whether China is engaging in predatory trade practices, a ruling that could eventually lead to the United States suspending permanent normal trade relations with China. By rolling back so-called permanent normal trade relations approved by Congress in 2000 amid China’s push to join the World Trade Organization (WTO), the United States could set the stage to further raise tariffs on Chinese imports. (The Trump administration put in place 25 percent tariffs on a range of Chinese products in 2019.) The commission, which is nonpartisan, is essentially recommending more of the Trump-era economic confrontation with China…”

Developments in China and the US both point to growing statism and disillusionment with global capitalism. This is one reason supply chain issues will persist through 2023 and keep inflation higher for longer, evoking high interest rates from the Fed. And higher rates are devastating to a large segment of the American consumer base. Only a turn away from statism, a reduction in the American budget deficit or a reconfiguring of trade routes can keep globalization on track and make the road back to the January 4 highs smooth and orderly. The stuttering nature of the current bear market rally and its high levels of volatility are likely a preview of a difficult road ahead even after the S&P makes its final lows sometime in 2023.

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.