Russia And China Are Baiting Americans To Buy Now, Pay Later And Neither Party Wants To Change That: The Geopolitical — Stock Market Connection

The Parties may be polarized but their policies on international economic relations are indistinguishable and sound like sour grapes about the weather: everybody talks about it but nobody wants to do anything about it. Trump increased the trade deficits when he promised to cut them, while Biden has blown it out of the water, leaving the American voter a choice of bumptiousness or fecklessness. Both sides hear the same reasons for our dependence on Russian and Chinese exports but are too internally divided to figure out how to reverse it. Now Democrats are about to taste the consequences of their internal divisions while tax-loathing investors are cheering all the way to the bank as we rally into the midterms. 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 one positive factor for US stocks. The action in the € & EM currencies indicates the $US is weak. But there was also one negative factor across global asset classes. 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 before beginning a new leg lower by mid-month.

The battle between MAGA minority and the fissiparous anti-MAGA majority appears to be tilting to minority rule, due largely to Biden’s feckless stoking of inflation. Russia and China are ruthless villains in creating inflation but Biden exceeded his fair share of the blame by funding a redistributionist program entirely out of rising government debt. His stimulus paychecks not only put too much money in the chase for too few goods, but fueled the movement toward quiet quitting and decline of the work ethic. The results are clear in the poor productivity figures and concomitant inflation that viscerally impact consumers and businesses.

The result is a ballooning trade deficit that dwarfs the Trump and Obama deficits. These deficits help Russia and China since they run surpluses selling either commodities or finished goods that Americans buy. Consequently Biden can’t make his foreign policy sound coherent to his European allies, let alone the Eurasian enemies. But the underlying root cause of the trade deficit has nothing to do with politicians or surplus Eurasian nations, but with the unwillingness of a large cohort of Americans to save more than they earn. Our trade deficit is indefensible, since as a rich country we should be net savers. There are so many choices of consumption that most Americans can feasibly save and consume simultaneously. Only those in deeply depressed areas lack the choices that allow for saving. More importantly, our opportunistic capitalist system provides endless lessons in shrewdness, which ordinary Americans can learn and so use debt effectively. There is no good excuse not to learn shrewdness, as this doesn’t require formal education, only literacy and keen sensitivity. Finally and most obviously, our financial system has been successful for so long that people could use it if they applied themselves. People focus on the sordidness and fraud on Wall Street at the expense of doing what is in their own interests, namely to learn to use Wall Street.

Consequently America is now a triptych of those who save persistently and grow their wealth, those who remain in the static middle and lower classes and those who live even more precariously. This satisfies the fortunate first section since the trade deficit not only attracts capital flows to finance it but in combination with our military hegemony serves to make the $US the reserve currency, which reinforces the stability and power that make the US a hegemon in the first place.

But the global trading system would benefit from less reliance on the $US, and America would benefit from being a land of shrew people how value savings and enterprise more so than materialistic consumption or public sector programs. The fact that we have used our time as hegemon not to make this change makes the Eurasians despise us. They believe they possess a glorious history and a glorious moral system (e.g., Orthodox Christianity, or Confucianism, or something else) and that the US has little of either. So they are naturally chauvinistic and disdainful of foreign policies like Bush’s war in Iraq, Obama’s support for the toppling of autocrats while simultaneously backing off his threat to enter the Syrian civil war, and Trump’s MAGA movement, all of which conspire to make the US look like an aggressor with blind nationalism making do as an ersatz moral core. All this comes at a cost to the global economy, as the $US is simply too powerful for both the good of Americans and everyone else.

The FT notes “After decades of chronic current account deficits, the US has attracted vast amounts of foreign capital to finance them and has accumulated a deficit of external financial assets compared with liabilities of more than $18.5tn. Foreign institutional investors most likely hedge the currency risk on their dollar-denominated bonds. Also, supported by academic studies, investors have developed more conviction on the direction of interest rates and equity markets than on currencies. So they often prefer to bet on the former but hedge the latter. They usually hedge their exposures by selling the greenback and agreeing to buy their home currency at a future date. Over the past year, investors have suffered substantial losses as the price of bonds fell worldwide as interest rates have risen. And since the value of their dollar bond portfolios fell, foreign investors had to adjust their hedges down, buying back dollars and selling their home currencies.”

Most Americans lack the financial literacy to parse the above and figure out what to do with their vote or their pocketbook. Until Americans learn shrewdness and the elaborate architecture of Wall Street, this abstruse but nasty state of geopolitical affairs will persist. That can only make for volatile equity prices, which we are currently experiencing in bewildering fashion. Expect lower lows over the coming months but also a rocky road back to old highs unless Western nations make the long march back to liberalism and discard consumerism and leftist quackery.

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.