Geopolitical Developments: Unpredictability Now Extends To Biden And That Will Pull Markets Lower While The Whole World Suffers

The window to pull Putin back from Ukraine and other nations remains open but not until he has made his way into Kyiv and shown how unprepared NATO is to containing him. Putin’s unpredictability remains but now it’s clear he will push NATO to the brink without a care for his own economic and strategic considerations, and that puts the ball in Biden’s court. Unfortunately that means pressure on markets until Biden shows his mettle. 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 neutral. Yesterday's cross-asset action brought one positive factor for US stocks. The US yield curve is falling and in the current context that is bullish. But there were also several negative factors across global asset classes. Gold is trading as a risk-off asset. Oil is pointing to stagflationary conditions. The action in currencies signifies $US strength. Inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to be range-bound over the next few days.

Russia’s present offensive into Kyiv is likely the first of several trials for the West as Putin alternates between aggression and negotiation, causing a huge distraction for Biden and the EU. Geopolitical issues around the world will necessarily slip through the cracks into consequential neglect, which hurts investor confidence on top of the urgent moral issues that will go unresolved. Putin is increasingly being spoken of as an irrational dictator of the 1930s variety and the unpredictability of his actions married to Western fears of how far he might foolishly go will drag down confidence from its current high levels through the remainder of winter.

The global economy is on a moderate footing so a drop in confidence will pull equity valuations through the winter, which has only a few more weeks to go. I expect the S&P 500 to find a bottom at 3700 in short order. Key will be Biden’s performance and the reaction from Asia, where Putin needs tacit support given the broad disgust he has engendered in the West. Should Biden falter or lose his grip on the Western alliance, or should Asia peel off and tacitly support a new world order, confidence will plummet even further and a long bear market will ensue.

Biden gave a middling speech but followed with a poor performance during press questions, admitting the EU isn’t allied with the US on SWIFT and providing no guidance on how this would play out, failing to coherently explain the power of the agreed sanctions, and failing to adduce the reasons for India to join the Western stance. The latter is critical as India is a US defense partner but also a key market for Russian exports and a potential leader of South and Southeast Asia. At a time when Pakistani leader Imran Khan has the misfortune to be visiting Putin there is a window for Indian leader Modi to exercise influence in moving Putin back while scoring points against Pakistan. Biden failed to put this into perspective but instead claimed his sanctions were stronger than any action on SWIFT, despite the overwhelming media coverage of how SWIFT sanctions could decimate the Russian economy.

The window to move Asia to restrain Putin is still open as China is clearly nonplussed and Vietnam is allowing anti-Putin voices to rise up. Chinese tabloid The Global Times ran an editorial which conspicuously failed to justify Putin’s action, rather it simply explained it and called on diplomacy to restore peace. China wants a predictable and pliant Russia to act as its lieutenant in breaking down liberal democracy in the West, not an unpredictable risk-taking bully. Should the West continue making Putin look like a grandiose aggressor China will be forced to restrain Putin in order to keep him from any further intervention in its near abroad, particularly Central Asia. And Vietnam’s position is bound to influence Putin since the country is closely integrated with Russia on many fronts. Radio Free Asia notes “As Russia launches a major military invasion on Ukraine, Moscow’s closest partner in Southeast Asia - Hanoi - has remained passive, giving no substantive comment besides a formulaic call for restraint.,,Vietnamese media, on the other hand, are covering the conflict in great detail, surprisingly without much of their usual pro-Russia bias.”

Russia has no clear supporters for its actions and that means Putin will use aggressive actions to call for one concession after another, giving little way until either the West concedes the Baltics or the West puts the screws on once winter ends. I predict the latter but until then the markets will be under pressure and investors will increasingly move to cash.

My current positions include a sizable cash position, as well as Amgen (AMGN), Goldman Sachs (GS), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.