Xi Jinping’s China Is Stuck In The COVID Abyss And Keeping The Equity Bear Market Alive: The Geopolitical — Stock Market Connection
Mass incarceration of ordinary Chinese in their homes for months hit a tipping point and evoked strong protests over the weekend, sending equities lower yesterday. That’s fueling a new argument by the bulls that Xi Jinping is finally waking up to the need to open up, with beneficent consequences for disinflation and global supply chains. But such callow analysis is bound to evaporate and investors weigh the actual healthcare situation in China. The volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is bearish. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days before coming down hard as December begins.
Geopolitical concerns have been a key reason for the 2022 bear market, affecting the supply side of the global economy and accounting for roughy half of the inflation that has elicited high interest rates and consequent bear markets in equities and bonds. Now that the Fed is busy addressing the demand side of the problem the bulls argue that geopolitics is turning as well to allow supply chains to reorient and drive deep disinflation. That implies a Fed pivot in the near future, and consequently a return of the bull market in short order.
The bulls are half right, in that some of the biggest geopolitical problems will likely ease in 2023, but the pace will be gradual and encumbered by the new overarching concern of rising statism in the US and Europe. The result will be a bull run back to the old highs at S&P 4800 but with dreadful volatility and choppiness that belies the large vulnerabilities that remain.
Chief among the concerns is China’s moronic Zero-COVID policy for which Xi Jinping has no productive way out. Vaccine uptake is not only too low but months in the past, leaving a population highly vulnerable to omicron and thus bound to crush the healthcare system if Xi meaningfully opens up. The only feasible solution is to import the bulk of available mRNA vaccines from the West and use the state’s Orwellian power to force jobs in arms. I predict Xi will fall short of that solution and instead open up so gradually as to have no positive impact on supply chain issues. Rather it will be nearshoring and new manufacturing hubs like Vietnam and India that gradually take up the slack from China.
The gradual pace of supply reorientation is a key reason I expect the road back to old highs to be rocky. As the market arrives at this conclusion the drop in optimism will manifest in a retest of the October lows.
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.