Geopolitical Developments: The Fed Plays Its Hand In The Culture War And Global Investors Pay The Price

The $US has taken a break from its inexorable rise but the bearish action in many EM currencies like the Turkish Lira and South Asian Rupees tells me the worst is far from over. Equities are rising this morning in hopes yesterday’s retest of recent lows marks the end of the correction, but if the $US resumes its uptrend global growth will decline and the correction will turn into a bear market rout. 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 several positive factors for US stocks. Copper's chart is signifying global growth. 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. These are just short-term counter-rallies and I expect the S&P 500 to be range-bound over the next few days before falling to new lows sometime next week.

The main economic factor driving the equity correction is Federal Reserve hawkishness on raising interest rates and aggressively reducing its balance sheet. The stated intention of the Fed to whip inflation now is dissimulative and artful, since the supply-side causes of inflation aren’t reduced by the Fed’s hawkishness but if anything worsened. We need firms in the supply chain to produce more not less, and raising the cost of capital or reducing reserves and liquidity does the opposite. Moreover the Fed’s stated hostility to excess demand and tightness in the labor market is questionable since the cultural causes of these twin conditions are the stresses of the pandemic and the redistributive stimulus provided by Biden. As last year’s stimulus payments get spent household savings will decline and consequently so will consumption and the antipathy toward working, unless the government does something new to give households a break. The three causes of inflation (cultural shift, foolish fiscal policies and the natural consequences of the pandemic) have little to do with the Fed and the best the Fed can do is implement an orderly set of Fed rate hikes and reserve depletion, not remonstrate with consumers and workers or terrify financial markets.

But consciously or unconsciously the Fed wants to discipline those those seeking to lower corporate profit margins. This is understandable, but the Fed is not the authority to do this. Rather it requires the literati and sensible leaders to speak coherently about the cultural and geopolitical divide afflicting the world, and how individualism can adapt to rectify this divide. Instead the literati are divided and divisive, promoting decadence of both right and leftwing varieties, and inadvertently causing the intractable hostility between the West and Eurasia.

American workers have nothing to gain by reducing profit margins, since the dynamic that results is labor becomes more expendable and inequality grows between shrewd knowledge workers and the rest. The cure to inequality and the stresses working people endure is higher productivity and the confidence this engenders, and this requires a new perspective on individualism and learning instead of the hoary nostrum that spending on education will bring equality. This nostrum has been false since the 1970s, and working people are so ravaged by its failure that they are choosing to work less in order to restore their health and well-being.

This dynamic won’t work either, because the decline in the work ethic leads to automation and more offshoring, while buttressing the geopolitical divide. Working people choosing to work less is explained by many factors but two of the common ones are rage and the desire to reject the work ethic norm, which Eurasians see as part and parcel of Western decadence. Despite the wealth and historical advantages American and European populations enjoy there is too much stress, pathology and crime for Eurasians to see the Western model as viable, let alone venerable. Instead they see the West as losing virility. Evidence that workers have quit for poorly conceived reasons comes from a recent article in Forbes:

“Online invoice platform Skynova recently surveyed 705 people who had quit a job to see what fueled resignations and the outcomes. Of those surveyed, the vast majority who quit left on the spot, either walking out following an argument with a superior or simply never returning to their position. Shockingly, 16% “ghosted” their employer completely. Like many decisions made in the heat of the moment, some people changed their minds. Of those who had “rage quit,” 41% tried to get their job back after cooling down, but the majority left never to return. That's a lot of lost talent, especially when we consider that 78% of those who quit and then tried to get their job back were successful. This suggests that the employees leaving are highly valued—not workers the organization wishes to lose.

The Fed is trying to help cure a cultural and geopolitical problem by “loosening up” the labor market and raising the cost of consumer borrowing. Since this is clearly anti-worker it necessarily tries immunizing itself from overwhelming leftist criticism by embracing leftist ideas like targeting income inequality & climate change. This is perverse since the Fed’s operations have no positive effect on either, since it deals with Wall Street institutions in fixed income markets. These institutions are widely regarded as facilitating inequality and climate change, so the Fed uses its bureaucratic power to force changes in these institutions. By trying to bureaucratize behavioral change the Fed not only encourages these firms to game the system with bogus forms of ESG or corporate policy reform, which Wall Street has generations of experience doing, but more insidiously creates a counter-reaction from employees of these Wall Street institutions. Forced to accept left wing goals under bureaucratic coercion by the Fed, these white collar workers turn to reactionary causes and media to rebalance themselves. The result is the extraordinary domination of Fox News and the vulnerability of liberal-leaning social media firms to exploitation by malevolent forces of the right. A key facilitator of the bewildering QAnon movement was a CitiGroup employee from New York.

Only cultural change can rectify these debilitating trends, and the Fed lacks both experience and pedigree to make itself a force for change. In the meantime we see the divide playing out in declining earnings estimates and a rising $US, causing high stress in both financial markets and the real economy. Expect lower lows next week as global investors grow tired along with their working brethren.

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