Geopolitical Developments: Fatigue Sets In On Everyone But The Bears On Wall Street And In Moscow (Please Note A Disruption In Service From SquareSpace Delayed This Posting Until Friday Afternoon)
Despite a waterfall dip earlier in the week there are fewer and fewer voices of opportunism and patience among Wall Street Strategists. Instead of buying the dip the overwhelming consensus is for deeper dips and concern over signs of panic among traders across real and imaginary asset classes. This sense of deep anxiety mirrors the statements of European leaders and Biden officials concerning Russian resilience and the need for Ukraine to forfeit its sovereignty after losing so much already. Gloomy geopolitics and international economics tends to coincide with deep bear markets, and yesterday’s action suggests the end is not in sight. 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 bearish. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to be range-bound over the next few days before beginning a new leg lower.
War fatigue is clearly setting in both in Europe and the US, where the focus has now shifted to the decidedly less profound issue of gas prices and real wage growth. The European Council on Foreign Relations notes “...research shows that, while Europeans feel great solidarity with Ukraine and support sanctions against Russia, they are split about the long-term goals. They divide between a “Peace” camp (35 per cent of people) that wants the war to end as soon as possible, and a “Justice” camp that believes the more pressing goal is to punish Russia (25 per cent of people).
In all countries, apart from Poland, the “Peace” camp is larger than the “Justice” camp. European citizens worry about the cost of economic sanctions and the threat of nuclear escalation. Unless something dramatically changes, they will oppose a long and protracted war. Only in Poland, Germany, Sweden, and Finland is there substantial public support for boosting military spending.”
The consequence of this is less American faith in the liberal order and continued power of Trump and his anti-liberal following. Primaries this week showed Trump retains popular support among Republicans and even his detractors must admit Biden has continued several Trump policies with no tangible change in results. Now that Biden shoulders blame for excess stimulus payments in 2021 that yielded current inflation, there is little reason to back him against a resurgent Trump in 2024. I believe Biden is as likely to pull out as to run again, and that means extraordinary election uncertainty for the next 2+ years. To this new source we can add the hoary uncertainties accumulated since January, namely uncertainty over earnings estimates, the persistence of inflation, the true rate of unemployment, China’s actions against Taiwan, Russia’s actions against vulnerable Eastern European nations (e.g., Moldova) and most unnerving of all, the intentions and sanity of Kim Jong Un as he deals with COVID and other diseases plaguing his oppressed and starving people.
All this points to is a decline below my target of 3700, which was hit yesterday. I see the market overshooting to the downside and likely bottoming at 3310.
Yesterday I added to my position in the levered ETF UPRO, which I closed out by the end of the day. So my current positions remain a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), Titan Machinery (TITN) and the levered ETF UPRO.