Geopolitical Developments: It’s Now Up To Russians To Lose Their Nation’s War Against Liberalism And Give The Global Economy New Life

Lost in the variety of dispiriting news for liberals this week is the continued advance of Russia against Ukraine. The main channel by which this affects most people is via commodity inflation, and since that’s declined the world has sadly grown tired of the war. That superficial reaction finds perfect analogue in the bear market rally currently underway. 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. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there was also one negative factor across global asset classes. Oil is pointing to stagflationary conditions. Expect the S&P 500 to be range-bound over the next few days.

The key determinant of the world’s geopolitical trajectory is now the war in Ukraine, as it demarcates western liberal values from eastern conservatism. The resolution of the war will determine whether Kim Jong Un gains or loses ground while his people slowly weaken, whether Xi Jinping consolidates power or loses it to the Politburo or another leader, and whether America rejects the right wing in favor of centrism in 2024. These outcomes in turn will yield the continuation of globalization or its inexorable pullback. Anything other than a humiliation of Putin will retract globalization and in turn the level of profits and margins that underlie the global financial markets.

Global trade can’t progress if Putin is allowed to save face, since that would send a clear message to right wing autocrats across the world that liberalism is waning. Globalization depends on free trade and that depends on rule of law, which is clearest when a nation is transparently democratic. Already the war has laid bear the fecklessness of Asian democracies like India, Indonesia, Malaysia, and Japan. The first three give succor if not outright support to Putin despite their vaunted status as democracies, while Japan has failed to exploit the war and turn around its conservative culture and politics. The only Asian democracies with a coherent response and path forward are Singapore, South Korea and Taiwan, but their democratic traditions are too short and shallow to withstand a larger Asian trend toward autocracy.

Given the incoherent policy of Biden and NATO toward arming Ukraine, the fate of globalization depends on Russians turning against Putin either implicitly or explicitly. There is some good news on this front, as most people around the world see no merit in Putin and the effect of sanctions will presumably lead more Russians to feel the same. Newsweek notes “Russian President Vladimir Putin's approval ratings have hit a two-decade low amid his invasion of neighboring Ukraine, a Pew Research Center study of 18 nations found. The poll, published on Wednesday, surveyed more than 23,000 adults across 18 countries between mid-February and mid-May, and found that the Russian president has become the most unpopular leader in the world…A median of 90 percent of respondents who participated in the survey said they don't have confidence in Putin "to do the right thing" in world affairs, while nearly eight out of 10 (78 percent) said they have no confidence at all in the Russian leader…The Russian leader did still suffer a decline in popularity this year compared to 2021 among those who support right-wing populist parties in their country, Pew said. Malaysia was the only country where a majority of participants expressed confidence in Putin.”

Unfortunately the last statement makes clear that Asians are vulnerable to seeing the world transactionally and accepting that might makes right. There is no scope for continuing globalization under that belief system. A retrenchment of global trade would hasten both automation and rising government regulations, and both lead to greater polarization and eventually inequality. The fate of the global economy now rests with the willingness of Russians to cease being gullible and pull their support for Putin and the cause of statism around the world.

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