Geopolitical Developments: Confidence In Liberalism Is Key to Turning The Global Economy Around

Inflation, war, the pandemic and autocracy are the modern horsemen of the apocalypse for western liberalism, their influence felt not just politically but in the malaise that has characterized the 2022 bear market in equities. Should these forces continue to ride roughshod over liberal values confidence in global markets and the valuation of capital assets would soon keel over as well. For now investors are hoping that at least inflation and COVID lockdowns attenuate, and consequently a bottom in equities around 3500 if no materially bad news emerge. 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. The US yield curve is rising and in the current context that is bullish. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there were also several negative factors across global asset classes. Copper is pointing to declining global GDP expectations. The action in currencies signifies $US strength. Expect the S&P 500 to be range-bound over the next few days before dropping precipitously into the second half of July.

Western liberalism has little hope of winning hearts and minds as long as autocrats like Narendra Modi and Viktor Orban win re-election. Support for western liberalism has waned since Xi Jinping took over the Chinese Communist Party but nationalism and statism get their biggest boost from those right wing populists who legitimately beat liberals in historically liberal nations, While Hungary and the Slavic nations resonate little with other cultures and regions of the world India is a different matter. Through its religious traditions of Buddism, Hinduism and yoga, India possesses the respect and warmth of nations across Eurasia and the eastern seas to Indonesia and beyond. With its population likely to exceed China next year India is critical to countering China in western and eastern asia and fostering secular democracy & ethnic diversity across the world. But the forecast is ominous not only because Modi is a bigot but because Indians have embraced him and his myopic foreign policies,

Modi has demonstrated pure realpolitik instincts that promote no long-term moral vision other than “India first.” His support for the despicable Myanmar junta coalesces with his economic support of Putin into an Indian iteration of Trumpism that can only alienate Indians from liberals across the world. To top off such illiberal instincts Modi is now courting the Taliban. After failing to foresee the Taliban takeover of Afghanistan under Trump and Biden now Modi is absurdly trying to build bridges there, believing that such a play will weaken Pakistan and gain India economic benefits. Foreign Affairs notes “In return for India’s tacit recognition, the Taliban are reportedly ready to act on intelligence against some of the major jihadi groups—including Lashkar-e-Taiba, Jaish-e-Mohammed, and al Qaeda in the Indian Subcontinent (AQIS)—that have traditionally found a haven in Afghanistan.”

This gambit has low odds and will take years to bear any fruit if one assumes the Taliban hold onto power for that long, while the immediate consequence is to paint Indians as footling versions of American Proud Boys and Russian paramilitarists. As Putin straddles the extreme right and his Communist friends in China, the ideological divide in Eurasia boils down not to right and left but to statist and anti-statist. With its unparalleled linguistic diversity and commitment to secularism India is in danger of falling into statist trap that puts it at odds with the West. This can only confuse the world as Indians are a remarkable presence in the US and widely known for promoting the morality and everyday ethic of peaceful cohabitation.

The confusion the world increasingly feels towards India may be reversed as Indians themselves become confused. Despite Modi’s power over the mainstream Indian press there are signs the press is breaking away due to the vapidity of Modi’s foreign policies. A recent article in the Times of India moaning about costs of Ukraine war to poor nations like India is the first tentative step in liberating the nation from demagoguery. Should India break from Modi and his nationalist bigotry western liberalism will get a shot in the arm that redounds to investor confidence that democracy and the rule of law are retaking the lead from the rule of man.

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