How Biden Sabotages His Liberal Foreign Policies With Leftist Economics: The Geopolitical — Stock Market Connection

This morning’s employment report shows the continued effects of the Biden stimulus payments that allowed workers to opt out of the labor market in order to stay home and spend, baby spend. What is less reported is the profound geopolitical consequences of this leftist cultural change. The markets have yet to recognize how these consequences will keep inflation higher and constrain profit margins, but today’s selloff will hopefully make the issues clearer. 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 cross-asset action brought several positive factors for US stocks. The action in major currencies indicates the $US is weak. The US yield curve is falling and in the current context that is bullish. 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 crashing back to earth as December rounds out.

Biden’s COVID stimulus not only stoked inflation and broke the work ethic that underlies the labor market but also amped up the budget deficit. It turns out this has had profound geopolitical consequences. The stimulus kept consumption up and that fueled continued large trade deficits with autocratic export economies like Russia and China. And since those two nations are increasingly recognized as enemies they’ve taken those export earnings and used them to help their allies. By contrast our allies like Germany and Italy have seen their trade surplus cut due to China’s moronic zero-COVID policy and the runup in energy prices. So the West is financially weaker and now enduring high interest rates as wages rise in order to keep up with inflation, fueling a classic wage-price spiral.

The Council On Foreign Relations notes “Russia’s surplus is set to top $250 billion. Saudi Arabia’s surplus should top $200 billion. The other monarchies in the Gulf should have a surplus comparable to that of the Saudis—if anything, it will be a bit bigger. And China’s reported current account surplus should top $400 billion this year, and its true surplus could be bigger.”

Before the trade wars and the War in Ukraine these surpluses were largely invested in liquid safe assets like the US treasury bonds that underwrite our budget deficits and by implication, our trade deficits. But now the geopolitical order has changed and those surpluses are being divvied up to help other autocratic nations and form a bulwark against western liberal democracy. COFR further notes:

“And the reality of a world where the big surpluses are in countries that don’t really want to be holding all that many dollars openly has opened up new opportunities for smaller financially troubled states to seek rescue financing from less traditional sources. Russia (through its state banks) has helped fund Turkey’s external deficit; the Saudis and the other Gulf monarchies are providing far more (net) financing to Egypt than the IMF; and Pakistan and the IMF are counting on China and Saudi Arabia not to pull funds out of the State Bank of Pakistan.”

The end result is too much division in Europe and NATO, giving Russia hope that it can win the war in Ukraine, and the continued buildup of terror and autocracy in Central Asia and the Middle East, as manifested now in Taliban-ruled Afghanistan. And that means continued defense spending that makes it harder to cut the budget deficits that give rise to demand-push inflation in the first place. Only a cultural shift in America toward liberal individualism and a concomitant decrease in dependence on the state and democracy can change the political dynamic that keeps the tragic geopolitical dynamic ongoing. Absent that the odds favor a continued bear market through early 2023 and a rocky road back to old highs sometime in the next few years.

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.