Geopolitical Developments: China’s Achilles Heel Is Feeling The Pain

The course of equity markets depends in large part on whether confidence in China surges back and cures the supply chain problems that are halfway responsible for inflation and rising interest rates. Unfortunately I see that confidence eroding rather than rising, largely because of the selfish policies of Xi Jinping and the broader Communist Party. For the CCP to do what is right by the people they would have to focus profoundly and that isn’t possible because of the volume of domestic and foreign problems they face. Consequently I see a bearish near-term for global risk assets. The volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is near-term bullish and intermediate-term bearish. There are several negative factors across global asset classes. Oil is pointing to stagflationary conditions. The action in currencies signifies $US strength. The US yield curve is bear flattening. Expect the S&P 500 to rise today but fall over the next few days.

The most recent headache and one that could become catastrophic for China is COVID in North Korea. Obviously the DPRK is unprepared to handle this, and should Kim Jong Un lose control of his health care system we can expect a migration out of the nation into China. That would be disastrous as China has no effective defense against COVID.

Thus the CCP is in a race against COVID, hoping their home-grown mRNA solution can get off the ground and into arms before domestic or DPRK-based COVID becomes endemic. I see this race itself as debilitating and eroding confidence. The key issue is China can’t manage its lockdowns well, and so any return to the lockdowns would be economically disastrous.

CNBC notes “Local authorities in China have allowed manufacturers to operate in Covid-restricted areas if the factories keep workers on-site. However, businesses have said travel restrictions have kept trucks from transporting parts between factories and customers.. Overall production of hardware could gradually resume to normal levels in June/July, with a brighter outlook for Apple’s supply chain than Android, while semiconductor would see more demand problems than supply,” Credit Suisse research analyst Edmond Huang and a team said in a report Monday.”

There are already signs the great Chinese reopening isn’t going to happen as restrictions return to Shanghai. The Chinese equity market hasn’t cracked but when it does it will help herald the bottom for the US markets, as that will mark the moment of mass and maximum pessimism. I see that at around S&P 3700, which is close by, assuming geopolitical events don’t conspire to shock the world yet again.

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.