The Geopolitical — Financial Market Junction: The Ukraine War, Biden‘s Incoherence, And Equities

There are many reasons to doubt the bear market ended in June, and while Jerome Powell gets most of the blame this is simply because his actions form the simplest cause-and-effect that investors can gauge and plan around. In reality the bear market reflects a lack of confidence, not a mathematical reaction function to rising interest rates. Investors knew back in 2021 that the Fed was going to raise rates sooner or later, but what shook confidence was the foolishness of helping inflation along with unnecessary stimulus payments, followed by the disastrous Russian invasion of Ukraine. And instead of a short sharp drop, the bear market has persisted through the spring and summer as policy foolishness continues. While many investors have posited that we have made the lows of the year already, the tone in the markets this week is very negative and the volatility risk premium points to a market fall over the next few days, while my technical reading of key stocks in the S&P 500 is neutral to bearish. A further selloff is just around the corner, and there are several negative factors across global asset classes to spur this along: Oil is pointing to stagflationary conditions; the US yield curve is rising and in the current context that is bearish, and 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 careening as we approach the Labor Day Weekend.

Joe Biden’s knowledge and experience doubtless make him feel his policies and actions are coherent and address the world as he finds it. But the outcomes have been poor and few people outside his supporters can explain how his ecological, economic, cultural and geopolitical policies square up. The most sensible explanation is that Biden believes in compromise more than tangible goals, and this attitude is ill-suited to a a nation riven with division and a world vacillating between reverence for western liberal democracy and its near converse, Eurasian autocracy.

Case in point is his fervour in arming the heroic Ukrainian people while doing less than they ask and stopping short of cutting the US entirely off of Russian exports. Biden would likely counter that his support for Ukraine has made all the difference and that his compromised positions will lead to closer integration with Europe and isolation of Russia. To this end, the National Interest notes “In recent months, senior U.S. defense officials at the Pentagon have pointed to Ukrainian fighters’ sheer intensity and morale, the impact of “risk-adverse” Russian military leaders, and the effectiveness of Ukrainian air defenses as explanations. All of these factors, however, do not fully account for why Russia is still unable to achieve air supremacy six months into the war, despite having hundreds more fighter jets than Ukraine. But this circumstance may now be inspiring Ukraine and the West to think that achieving “air superiority” over the Russian Air Forces is not out of the question…An increased ability to track and destroy Russian air defenses suggests that Ukraine and its Western allies are not “ruling out” the prospect of achieving air superiority over Russia, despite their overwhelming numerical deficit.”

Beating Russia is one of two huge goals that Biden should be praised for adopting. But the other goal is to ween the West from any dependence on Russia, and here the incoherence reaches unpalatable heights. Biden’s Energy Secretary Granholme recently advised American energy refiners about limiting exports to Europe in favor of energy-dependent American consumers. Rigzone notes “The Biden administration is effectively asking refiners to prioritize American consumers over maximizing profits by supplying fuel-starved Europe, which is facing an unprecedented energy crunch after the invasion of Ukraine triggered US sanctions on Russian oil supply. While US retail gasoline prices have eased after hitting a record nationwide average above $5 a gallon in June, the White House remains under pressure to tackle inflation ahead of the midterm elections.”

The sacrifices made by Europeans to push back Russia has no corollary in the US, as exemplified by the above. This is no way to unify or even treat your allies. This contradiction supplements the atrocious contradiction of pressuring fossil fuel companies over ecological goals while simultaneously pressuring them to increase output and channel it as Biden deems most expedient politically. The sum of this incoherence is declining esteem for America across every region of the world, which plays into the hands of the Eurasian autocrats who are together directly and indirectly torturing the Ukrainian population.

Loss of esteem can only detract from confidence in American assets. The 2022 bear market has many causes that sum up to an unscalable wall of worry, and only lower valuations can make that wall seem inviting again. Biden’s persistent stream of incoherent policies is just another reason I see the bear market continuing until valuations cross under their historical average, which lie considerably below the June lows.

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