Geopolitical Developments: Xi Jinping Is As Responsible For Inflation As The Pent-Up American Consumer, A Sad Fact For A Global System Desperate For Benevolent Leadership

Americans are sick of inflation but also buoyed to spend until they drop, the result of which is prolonged inflation and consequently rising interest rates foisted upon the world by bond vigilantes and the Fed. In a world still attempting a return to normalcy this dynamic is toxic, particularly to debt-laden nations like Turkey, Pakistan and Argentina. But for now the markets are indifferent to the plight of small EM nations and more concerned with the impending CPI reading on Friday, and whether it will push the Fed to even greater hawkishness. The volatility risk premium points to a market fall over the next few days but my technical reading of key stocks in the S&P 500 is short-term bullish. There are several negative factors across global asset classes. Oil is pointing to stagflationary conditions. The US yield curve is rising and in the current context that is bearish. Inflation expectations are rising 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 in mid-June.

The American people are the consumer of last resort and most EM nations need a robust American economy to power their own growth and maintain political stability. But with the Fed hell-bent on demand destruction these debt-laden nations are now anxiously watching China as a barometer of American trade. The Chinese Communist Party hasn’t helped matters with its moronic COVID strategy, and should the Chinese worker and consumer lose confidence that would doom the Chinese export machine and redound badly to EM nations as well as European exporters like Germany and Italy. Unfortunately I see Chinese confidence declining as Xi Jinping has much to answer for and unlikely to do it properly, owing to an ever growing list of distractions. Chief among them is how to prop up Russia while exploiting its fossil fuel reserves, but added to that is growing rejection of Chinese foreign policy by EM nations around the world.

The US has long pushed the debt trap hypothesis that claims China is a mercantile nation with a malevolent policy of foisting excess production on needful EM nations in exchange for debt and collateral that bolster the CCP’s military power. Pakistan has turned into a violent place for Chinese firms as has Myanmar, and now there are signs Nepal could join that list.

DW notes “Nepal's ruling party has become increasingly wary of China's expansive Belt and Road Initiative amid Sri Lanka's financial collapse, fresh loans from the US and a shift towards India...It has been five years since Nepal closed an agreement with China on expanding its global infrastructure project, the Belt and Road Initiative (BRI), into the Himalayan country. However, despite the milestone, no BRI project can be seen on the horizon. Nepal and China signed a Memorandum of Understanding (MoU) on the BRI in May 2017 under the leadership of then-Prime Minister Pushpa Kamal Dahal. He was widely considered to be a "pro-Chinese" Maoist leader who had joined mainstream politics following a truce after a decade-long armed rebellion.”

XI Jinping’s heavy handedness regarding COVID appalls not just Chinese workers but anyone who hasn’t forgotten that COVID originated from China. As Xi attempts to secure a third term as CCP chief he can’t afford to let take his eye off foreign policy, and that must necessarily come at the expense of assuaging the Chinese worker that his COVID strategy will have a happy ending in the near future. I see him failing this balancing act and consequently a drop in confidence worldwide, with clear implications for global equities. The actions of small forgotten nations like Nepal add up to a mosaic of bad news that will push the S&P to the 3700 level this month, at which point a bottom is possible.

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.