The Geopolitical — Financial Markets Connection: How Biden Can Tamp Down Oil Prices And Put A Floor On Equities By Undoing Trumpism In The Middle East

Getting Europe through a heatless winter with confidence in its social democratic values is a critical job for Joe Biden, not only because of the stakes in Ukraine but also the impending move to the fascist right in Italy. By the same token, the sensitivity of equities to moderate energy prices is evident from this summer’s bear market rally, and in the runup to the first Tuesday in November it’s critical for Biden to do what he can to put a floor on equities. Key to success on both fronts is Biden shedding his gross hypocrisy on energy and replacing it with principled politics in the Middle East. If Biden can finesse this pivot the S&P 500 could bottom on a retest of its June lows, which is only a few turbulent down days away. But signs of Biden’s finesse and shrewdness are hard to sight, and for now 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 bearish. 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 were also several negative factors across global asset classes. Copper is pointing to declining global GDP expectations. The action in currencies signifies $US strength. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to fall over the next few days.

Biden’s warning regarding Trump rings hollow due to his own inconsistency and belief in political compromise in an era of stark division and increasing social anomie. Biden’s hypocrisy in disparaging energy companies while beseeching them to sell more product is only topped by Energy Secretary’s Granholm’s wish to divert Europe-bound exports back to America while the West tries desperately to stop Putin. To defeat the MAGA GOP requires both principle and shrewdness, and the Democrats have little of the former and only moderate amounts of the latter.

It’s clear the midterms will depend both on inflation as well as concerns regarding the 2024 Presidential race. And while Democrats can persuade themselves Biden’s mideast trip successfully brought down gasoline prices, the cost of his supplication to Saudi Arabia was enshrining Trumpism and inconsistency in his politics. Why support Saudi when clearly the rulers’ self-interest precludes supporting American values and simultaneously opposing Iran no matter who is in power? Now that Biden is pushing to get a new JCPOA done with Iran’s right wing any efforts to get Saudi to pump more oil will fall flat, particularly as Saudi is nearing full capacity.

His Saudi mistake notwithstanding, redoing the JCPOA is a laudable goal if one accepts the view that Iran can be a force of liberalism in the conservative Asian continent. Iran not only trumpets a belief in social justice but also has a modest but courageous history of democratically electing moderates. The first point sticks to American conservatives while the second has been self-sabotaged by Iran’s rightwing. Given past American mistakes across the Middle East it’s pointless to antagonize Iran and sabotage the will of the masses for moderate leadership.

America’s policies toward Saudi and Iran directly impacts the nation that stands between those two Islamic poles, namely Iraq. Where American conservatives blundered most was in trying to westernize Iraq, which has no history of democracy or even effective autocratic government, its glory years set back in the medieval period. Now that Iraq is boiling over with rage and political absurdity it’s critical Biden get his Mideast policy correct, not just for obvious humanitarian reasons but to anchor his energy policies to principles rather than expediency. The West does not need low or even moderate fossil fuel prices, what it needs is reliability in supply. The best way to get reliability is through unfettered competition, and here Biden can succeed if he puts America’s prestige behind the JCPOA and support for Iraq’s current centrist Prime Minister Mustafa Kadhimi. Should Biden make this effort it would stabilize Iraq and consequently help drive oil prices lower, while giving a fillip to Iranian moderates that would eventually make the Mideast safer and more reliable in its energy exports. A strong effort by Biden would help get Europe over its dread of a heatless winter and stamp liberalism more solidly in the most volatile region on Earth. That would be one more reason to believe that global equities will eventually scale a wall of worry back to old highs sometime in 2023 or 2024.

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