Geopolitical Developments: The World’s Least Stable Nuclear Power Could Be Headed For Democracy
Western liberalism animates the desires of Ukrainian patriots even as it comes under assault in places as diverse as Hungary, Mexico and the American South. But investors retain their confidence in the Western political model, as the current bear market proceeds in good order and bottom fishers come out each week. 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 action in major currencies indicates the $US is weak. Expect the S&P 500 to be range-bound over the next few days before taking a final leg lower going into June.
Geopolitical tensions remain high in Eurasia but Pakistan presents a potential bright spot as Imran Khan launches a serious bid to destroy the status quo. Were he to succeed the cause of democracy would benefit at the expense of autocrats all over Asia, redounding to the benefit of global investors as well, who have recently re-learned perils of investing in nations run by arbitrary governments.
Imran Khan’s re-ascendancy would open a door to peace and reconciliation between the only two antagonistic nuclear powers sharing a border — India and Pakistan. While he is no moral leader or thinker he does represent a mix of Asian and Western values which nearly all people can relate, especially cricket-worshipping Indians. The Pakistani military would be chastened and this would free Khan and Narendra Modi to pursue free trade as the one logical long-term solution to the unrest in Kashmir. The prospect of this scenario would be enough to buoy Asian equity markets.
More broadly his rise would express the democratic will of the Pakistani people and quash the belief that stability outweighs freedom and the potential for growth in the minds of the middle class. This would shock the confidence of the Asian military autocrats who have resurrected the malignant idea of military rule in nations as diverse as Egypt and Thailand. And it would send a message to China, Iran, Syria, Jordan, Myanmar and Cambodia that stability is secondary to progress and genuine elections.
Brookings notes “Khan has used his ejection to galvanize his supporters. Day after day, in huge rallies across the country, he calls the new government an “imported government” and the new prime minister a “crime minister.” Khan has used his rallies and interviews to command media attention, and argues that his government’s fall returned to power the corrupt politicians that are responsible for Pakistan’s problems. His supporters, many of them middle class, young, and urban, and furious at what they see as Khan’s unceremonious, orchestrated ousting, repeat his words on social media. With this narrative of grievance, Khan aims to undermine the new government’s legitimacy; his party resigned from parliament and he is calling for fresh elections. He now plans to lead a “freedom march” to Islamabad, likely later this month, to further pressure the government for elections.”
The military selected Khan and then catalyzed his ouster, destroying the latest attempt at Pakistani democracy. There are no positives from the military’s power since its command and control nature makes it unfit for governing on either cultural or economic grounds. Given the risks of climate change there is a desperate need for sustainable economic growth based on a robust commitment to competition, individualism and a limited but highly focused democratic state, qualities antithetical to the military. Khan’s rise would solidify confidence in the West and add to the troubles of Eurasian autocrats who are reeling from poor policies, colossal misjudgments and false antagonisms.
It will likely be a long slog for Khan to win, similar to the war in Ukraine and the war on COVID in China. All of these developments are painful now but point to rising confidence in Western liberalism, which is the foundation for bullishness in global equities. The human pain across most of the world doesn’t corresponding to the current bear market, but it does animate the pessimism. Fortunately valuations have declined while the US and European economies have kept afloat, suggesting a further leg down in equities is all that is needed to call a bottom.
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.