Progressives Make Queer Bedfellows With The Reactionary Right: The Geopolitical — Stock Market Connection
This morning’s self-contradictory employment report from the Labor Department perfectly mirrors the geopolitical environment of cross currents and wheels within wheels that frustrate nearly everyone. While the payrolls report showed strength the household survey showed weakness, leaving the bond vigilantes uncertain and the underlying bullish trend in equities intact. I expect this trend to continue to through the midterms, as 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 remains long-term bearish. Yesterday's cross-asset action brought several positive factors for US stocks. Copper's chart is signifying global growth. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there were also several negative factors across global asset classes. Oil is pointing to stagflationary conditions. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to rise modestly over the next few days.
Central to the inflation and interest rate story is the war in Ukraine. The suffering across that nation finds a dreary analogue in the seemingly purposeless volatility of financial markets, where monstrous bear market rallies give way to lower lows only to resurface again due to seasonal issues. The strains in supply chains and commodities markets account for some of this volatility but the balance is attributable to the persistent debate about how far the Fed will go to increase unemployment in order to tamp down inflation, driven in part by ambiguous public statements by different Fed officials.
Should Russia blink the easing of commodity pressures would buoy the Fed to pivot sooner or even pause, depending on how fast gasoline prices fell. But Putin’s commitment to destroying Ukraine depends in large part on American and European commitment to maintaining sanctions and limiting Russian fossil fuel revenues. Not only can Putin count on a gallimaufry of supporters among the European Left and Right, but even in America he has leftist supporters who coexist grotesquely with Trump. Biden will have plenty of trouble with the Democratic party should the midterms tilt to the GOP, and one casualty may be his strong stance on the war.
The New Yorker notes “Last week, the Congressional Progressive Caucus, which is led by Pramila Jayapal, of Washington, released a letter urging President Biden to “engage in direct talks with Russia” to help bring an end to the war in Ukraine. Although the letter placed the blame for the war on Vladimir Putin’s regime and applauded American support for the war effort, other Democrats in Congress and commentators accused the signers of naïveté and even “appeasement.” The controversy raised several questions, including whether progressives would continue to support the Biden Administration’s Ukraine policy, especially under a potentially Republican-controlled House, in 2023, when funding may be a thornier issue; and whether Biden’s broader foreign policy would meet with disapproval on the left…”
The article goes on to quote a former advisor to Bernie Sanders who notes the following of progressives: “One of the most important understandings that they’ve brought is that the line between domestic and foreign policy is a false one—that our militarism abroad reinforces the inequality we see at home.”
This is sophistry, since defense spending creates not just purposeful work for military personnel but manufacturing and high tech jobs for the nearly 1 million-strong civilian workforce dedicated to national defense. Middle class and lower class men and women get premium compensation for productive work and this spending clearly underpins national confidence among consumers, businesses and investors. The working people who make up our military wouldn’t necessarily find comparable work or compensation in the private or nondefense public sectors, and given the long trend of inequality, cutting defense spending and extricating them from premium employment in national defense would only increase inequality. Brookings notes the following:
“Bernanke acknowledged the benefits of these developments, stating that “by far the most important [impact of defense on economic growth] in the United States has been the linkage between defense military appropriations and broader technological trends,” but added the caveat that “if the same money had been spent on basic science [research] that would have probably been an even better strategy…Unfortunately, Bernanke said, the research suggests that a soldier re-entering the private sector will typically have a lower initial wage than a similar person who never served in the military. Nonetheless, while in uniform, U.S. military personnel today are reasonably well compensated, O’Hanlon argued, with the latest DOD study on the issue suggesting that overall compensation (not including pensions) for enlisted military personnel of given age, experience and skill levels exceeded that for about 85 percent of comparable cohorts in the broader civilian economy.”
Defense spending is one of the few domains that all agree belong to the State. It’s thus predictable that Leftists who conflate democracy with statism should want to reallocate resources from Defense toward any and every other potential organ of state power. The trend toward statism among both Democrats and the GOP since the Clinton years signals more conflict with Eurasian autocrats in the future. Unless voters rebel against both sides (as they implicitly did in Brazil last week) the growing likelihood of such conflict will make for unnecessarily volatile financial markets similar to 2022.
My current positions include a small cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the ETFs UPRO and SPXU, all of which nets out to a small long position in equities, which I expect to exit in the coming days.