The Equity Bulls Hope What Happens In Pakistan Stays In Pakistan: The Geopolitical — Stock Market Connection

Short sellers have a tough time in 2023 but can take heart in one massive victory on the Indian subcontinent that exposes not just fraud on the part of a sprawling Indian firm but a broader culture of low morality and bogus nationalism. While Hindenburg’s assault on the vaunted Adani Group may not redound to western markets the way India responds to this report will affect not only India’s current business confidence levels but also the dynamics in neighboring Pakistan. And we know what ignoring Pakistan can mean to America from the events in Afghanistan, 9/11 and every subsequent terrorist attack. But for now the markets are focused on a monster week of US and European events and consequently 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. 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. Oil is pointing to declining global GDP expectations. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to be range-bound over the next few days.

Pakistan’s currency is on the verge of collapse and its political situation dire, and as a nuclear power with longstanding hatred of similarly nuke-ready India the resolution to its troubles is of grave consequence for humanity and equivalently for financial markets. Yet the markets continue to trade higher with little mention of Pakistan and this is due to one simple fact: Pakistan’s economic and political implosion sounds like a broken record where the only people to suffer are the Pakistanis.

Dawn notes “Foreign exchange reserves of the State Bank of Pakistan (SBP) plunged to $3.678 billion on January 20 from $4.601bn due to external debt repayments. At this level, the reserves provide imports cover of three weeks against a standard minimum of three months…external debt payments due before the close of this fiscal year on June 30, 2023, are huge at about $8bn. This means the bulk of forex funds expected to come in (after the resumption of the IMF lending programme) will be consumed by external debt servicing.”

While the current situation sounds much like previous episodes where the IMF rescued the nation, this time there is a profound ecological cause of Pakistan’s decline, in the form of lethal floods. That only amplifies the bottomless hatred and resentment found in islamic Third World nations toward the industrialized world, which bears the balance of responsibility for greenhouse emissions. That resentment prevents Pakistani politicians from taking dramatic steps to reform the nation, and consequently emboldens the military to regard itself as the only legitimate interest group and to hold outsized economic and political power. Nothing can change this dynamic except envy of its arch-rival India’s resurgence, given the West’s current leaders.

And that makes the Adani affair so profound to geopolitical dynamics. There is simply no way India’s fraud-ridden democracy can ever set an example for other Third World nations until standards of behavior are raised. Example A is India’s leader Narendra Modi, who behaves impunibly towards his political rivals on moral issues like treatment of Indian muslims and corruption and still maintains unshakeable popularity. Given India’s confidence levels it’s conceivable the Adani affair will pass with little reform or behavioral change, despite that fact that the Hindenburg report is well-regarded among financial professionals. An article by Fortune quotes two Indian analysts as implicitly confirming that corporate governance in India is weak while none of the pro-India investors gave statements defending Adani. Even more damning is a Reuters article that notes “India's capital markets regulator, the Securities and Exchange Board of India, has investigated some of these issues over the past year following local media reports.”

The fraud that flows through subcontinental Asia must be attacked now or it can only boil up into autocratic government that takes its cue from Russia and/or China. Democracy is practically nonexistent in Pakistan is has always been fraud-ridden in India, so a shift toward outright autocracy is both feasible and increasingly likely unless the West exerts its moral power. The current dynamics suggest Pakistan won’t reform under its current leaders and might now even if Imran Khan regains power, nor will India reform as long as Modi is in power. This can only work to further de-globlization as neither US firms nor investors want to put their trust in fraud-friendly nations. Should near-shoring gain more ground in the US and Europe the effect on profit margins and investor confidence will be profoundly negative, putting in peril the prospect of reaching the old January 2022 highs anytime soon.

Yesterday I exited my short-term swing trade in the inverse levered ETF SPXU early in the morning and later entered a large bullish position via the levered ETF UPRO, which I exited in the afternoon. Consequently my current positions include a very large cash position, Goldman Sachs (GS), 3M (MMM) and Pfizer (PFE).