Geopolitical Developments: Biden Must Act For Ukraine And The World But His Decision Depends On Xi Jinping

World leaders look shaky this week as inaction, bad actions and uncertain elections cast a pall on the world economy and world order. Equity markets have reflected this uncertainty of late, but today will be crucial as investors reveal whether they are optimistic enough to buy more stocks into the weekend or too uncertain to hold yesterday’s positions. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), 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 bull steepening. But there was also one negative factor across global asset classes. The action in currencies signifies $US strength. Expect the S&P 500 to be range-bound over the next few days as we hope for and await policy clarity from Biden and Xi Jinping.

China’s holds the trump card for Ukraine, its willingness to help Russia the source of Putin’s confidence in waging a long war where Ukraine is likely attrited down to defeat. So far China has restricted its firms from giving much support to Russia, so Putin’s inner circle must be concerned that unless China does more Ukraine will be their Afghanistan. This is because if China doesn’t open the economic safety valve then the only trajectory for Putin would be to Stalinize the country. This would be self-defeating, since the Russian people won’t embrace USSR policies not only because most Russians remember those bad years but all Russians have witnessed the prosperity China achieved by adopting market-based capitalism. Stalinism is a route to corruption, and the fundamental weakness in modern Russia is already corruption, so the inner circle knows that increasing the scope for it would likely foment unrest and heighten the odds of regime change as body bags return.

Corruption is also the key reason Russia is faring so badly in Ukraine and accumulating fatalities that already mirror its 10-year war in Afghanistan. DefenseOne notes “…while the outward manifestation of many of the issues faced by the Russian military appear to be logistical in nature, the true heart of the issue may be corruption. There are reports that before the invasion Russian military officers sold off their fuel and food supplies, and that these corrupt practices may be responsible for the stalling of a Russian tank column outside Kyiv. In this regard, the PLA has much to fear. Corruption has plagued the PLA for decades, with some PLA officers bluntly stating in 2015 that it could undermine China’s ability to wage war. Reportedly, more than 13,000 PLA officers have been punished in some capacity for corruption since Xi Jinping took power, including more than a hundred generals. This was a particular problem in the logistics sector, where there are more opportunities for corruption and links to the civilian economy.”

So China may not be willing to sacrifice its exports to the West in order to help its younger northern brother, knowing that any help it gives will be diluted by corruption. Its easy to see that Xi Jingping must be worried that Ukraine is already an unhealthy distraction, as his zero-COVID policies are starting to fuel unrest and are baffling to the rest of the world. For Xi to reverse these policies may be a simple matter, but the dent in his prestige will probably be enough to keep him from taking any major risks to help Russia. Biden undoubtedly sees this calculus and is betting that a long war in Ukraine erodes Putin’s support faster than its decimates Ukraine’s resistance. I expect that Biden will start liberalizing the sale of MiGs and other needed equipment to Ukraine unless the Russian army can achieve some major victories in short order. That may help turn the tide against Putin and restore the post-USSR global order that humanity needs.

Equity markets may be betting similarly, digesting bad news from Ukraine and across the world yet rallying from the late February lows at the start of the war to within 5% of all-time highs. But volumes have been low and I believe that unless Biden acts quickly to send needed equipment the markets will start to discount the worst-case scenario, where Putin remains popular and the Russian military learns from its mistakes and starts to erode the Ukrainian resistance. The fate of the world order lies with Biden and I see equity markets reflecting this reality soon, with lower lows proceeding through the month.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.