Abstract Socio-Cultural Changes Are Impacting Real World Margins And Foreign Relations With Bearish Implications For Financial Assets: The Geopolitical — Stock Market Connection
Political posturing from every corner of the globe is exerting a bearish force on risk assets that mirrors the negative corporate guidance coming from most sectors of the global economy outside of luxury goods and Chinese metals imports. Yet the bulls are firmly in charge, barely budging despite a corporate disaster in the form of Intel’s earnings report and guidance. The volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is neutral. There is one negative factor across global asset classes. 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.
Bearish pessimism regarding earnings, valuations and the political climate under a statist President and an increasingly unhinged right-wing opposition has so far failed to match up with bullish optimism that 2024 will be the start of a new goldilocks age of low inflation driven by the same price-elastic consumer who enjoyed the pre-pandemic years. According to this bullish scenario with low inflation comes low interest rates and with that high valuations and presumably robust earnings growth.
The reason the bears will win out in the end is that high valuations are not in the cards, due to the impact on profit margins from cultural changes that will take time to reverse and the political environment which has only one trajectory, namely deeper polarization and a rising level of government intervention in the private sector. Joe Biden has projected this trend innumerable times and this week it’s grating on our erstwhile allies as they complain about the inflation reduction act and the continuation of Trumpist Americanism above global concerns.
Carnegie Endowment notes “Earlier this month, the Economist published a widely commented-upon article that warned about what it saw as a worrying change in American trade policy. For decades, according to the authors of the article, U.S. trade policy worked to “to tear down the subsidies hurting American exporters and gumming up global trade.” But now, “rather than trying to get other countries to cut subsidies, the Biden administration’s unabashed focus is on building a subsidy architecture of its own, complete with the kinds of local-content rules that American officials once railed against.””
These interventions into the part of the America that’s undoubtedly productive — namely private sector capitalism — have both negative global implications and domestic cultural consequences. The last period of such profound interventions was during the 1960s, which led to the cultural anomie, polarization and the scourge of 1970s malaise which the Fed is girded to avoid at all costs. The primary cultural change is the sense of entitlement among workers for redistribution in both monetary and cultural terms. This is captured perfectly in a Baltimore Sun article which notes “Burnout contributes to quiet quitting, and we see a clear increase in burnout during the drive to return employees to the office. In a late 2022 Gallup survey, 71% of respondents said that compared to in-office work, hybrid work improves work-life balance and 58% reported less burnout…While a mandated return to office will inevitably lead to some quiet quitting and loss in productivity, smart leaders can ameliorate this problem using best practices. Focusing on helping employees socialize, collaborate, and get great professional development and mentoring, and thus showing them the value of the office, will reduce quiet quitting and boost performance.”
These suggestions for improving working life are preposterous in light of the options that firms have toward choosing workers, choosing automation, choosing Artificial Intelligence and — assuming Washington gridlock now prevents substantially more de-globalization — choosing which nation-states to produce goods and services. The issues affecting the mass of American workers can only be resolved through a cultural change toward high individualism, not vapid collective redistribution. These abstract sociopolitical issues redound to higher input costs for firms, and a near-term drop in the valuations once negative corporate guidance next week exhausts remaining bullish optimism.
Yesterday I initiated a short-term swing trade in the levered ETF UPRO as I believed the markets would rally after touching support in the morning. I exited that position during the day, and consequently my current positions remain the same as yesterday morning, namely a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE) and Starbucks (SBUX).