The Geopolitics — Stock Market Connection: Chilean Workers Give Markets Reason To Cheer, Eventually

Confidence is reversing today as surprisingly negative economic data fells President Biden’s attempt to campaign on a reinvigorated economy. What Biden doesn’t recognize is what business leaders and global investors want is a return to stable fiscal and monetary action that allows markets to clear and return inflation and employment to normal levels. But Biden is set on reinvigorating statism in the land of liberty while Fed President Jerome Powell keeps the markets guessing about his team’s next move. Fittingly 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 was also one negative factor across global asset classes. 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 as we begin a descent to new lows this Autumn.

One key to maintaining confidence is limiting the government’s place in diverse nations (which are 90% of all nations), as this both limits geopolitical disasters like the War in Ukraine and promotes the private sector and its capital markets. Thankfully September has provided one piece of good news in form of the constitutional referendum in Chile. The antics of Chile’s leftist Constitutional Assembly members played a major part in amping up turnout for a NO vote that was so dominant it stunned leftist President Gabriel Boric. The impact on stock markets is twofold, as Chile’s pension system was what the Left wanted to attack the most, and the fact that workers joined with elites in interdicting this attack shows that capitalism redounds to everyone’s bottom line and isn’t what needs government intervention.

Chile stands out as once electing a far-left idealist (Salvador Allende) and then paying for this folly via a horrific America-promoted coup led by a vicious right-wing junta (Pinochet). In electing Boric last year Chile could have returned to its left-wing tendencies but firmly rejected this in the recent constitutional vote. The stock market connection lies in the Pinochet-devised pension system that gives the private sector a strong role in investing pensions, which Boric wanted to remove by taking out the “subsidiary” role of the public sector. Pensions act as the long-term funding source for Chile’s long-term funding needs (e.g., infrastructure) and are invested in equities particularly for younger workers. In numerous interviews Chilean voters stated they were unwilling to allow Leftists to play with their pensions, notwithstanding that Chile’s system has underperformed all expectations.

This is good news for stock markets but not so good for Chile, as the social cleavages remain and Boric has time to attack them with more leftist idealism. Fitch notes “The rejection of Chile’s (A-/Stable) proposed new constitution prolongs rather than resolves uncertainties stemming from constitutional reform… uncertainty will continue to weigh on investment in key sectors and hence on economic growth, while social spending is likely to rise irrespective of the referendum outcome….The rejected proposal had raised significant questions over the role of indigenous peoples in approving major projects in sectors such as mining, electricity and forestry; water rights under a new system of temporary and revocable permits; compensation for owners of expropriated assets; the role of the private sector in providing health insurance and pensions; and the composition and powers of the upper house of Congress. The fact that it will not be implemented could boost market sentiment and removes the most immediate issue that has affected corporate investment.”

So far so good but Chile is in for tough times as Fitch further notes that “Growth has slowed sharply and contracted by 0.8% qoq in 1Q22 and was static in 2Q22, partly due to political uncertainty as well as a negative fiscal impulse and monetary tightening.” The rebound in copper prices will help Chile a little, but only a resilient American economy, a victory by Ukraine or the swift jabbing of mRNA-filled needles into Chinese arms can stop the global economy from sliding into recession. And a global recession could be all the Chilean Left needs to attack capital markets again. If Biden and Powell can get out of the way I see confidence returning to the markets in a matter of weeks, and that could spell long-term progress for Chile along centrist rather than leftist lines.

My current positions include a fairly large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the inverse levered ETF SPXU, all of which nets to a meaningful short position in equities.