India Is A Colorful Font Of Optimism For Global Bulls Despite Decades Of Desultory Decline: The Geopolitical — Stock Market Connection

Green shoots of optimism are looking withered as interest rates ratchet higher, but not even open-mouth operations by the Fed will exhaust the bulls until they’ve mounted a retest of the 4200 level on the S&P. This morning’s selloff will likely end at support levels and lead to one last surge of irrational exuberance built on optimism about China’s reopening and confidence surging across Eurasia. Consequently the volatility risk premium points to a higher market over the next few days, while my technical reading of key stocks in the S&P 500 is neutral. There are several negative factors across global asset classes. Oil 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 be fall and rise again before hitting massive resistance at 4200, setting up for a later winter swoon down to lower lows.

The bulls feel India is one of the myriad green shoots that will power Asian growth and in turn American multinationals. The S&P 500 universe gets 40-50% of revenues from international sales so the bulls believe that the Fed alone can’t stop American firms from profiting by global trends. And even more fortuitous will be a more or less linear path of disinflation which fosters a Fed pivot by 2024, which the bulls argue is a sensible look-through. With those assumptions one can easily justify 18-20 multiples on earnings.

Unfortunately this convenient thinking rests on faith that India will grow in a way that benefits MNCs, such that firms like Apple can diversify away from global value chains dependent on America’s enemies like China and Russia. Instead the reality is that India is aligning with Russia, is deeply insecure about geopolitics due to sharing borders with nuclear-armed adversaries, and thus is highly unlikely to maintain robust growth rates or create an investment and consumption environment that meaningfully helps MNCs. Irrational exuberance about geopolitics mirrors that for long-term interest rates, and both will fell the bulls sooner rather than later.

India doesn’t want to be dependent on US economic policy and its cycles of ebullience and recession, or the prospect of a return to Trumpism, so India is forging deeper ties with the malevolent regime of Putin. The hoary notion of “non-alignment” has resurfaced as India has shifted from a left-wing society into a right-wing society, but the desultory results will be analogous. Russia doesn’t offer any long-term benefits to India, and Indian politicians and their supporters in the electorate aren’t bothered by that. Bloomberg (via oilprice.com) notes “The surge in India’s imports of crude oil from Russia has deepened its trade deficit with the latter and has rendered rupee trade pointless…According to these sources, despite much talk about switching some bilateral trade to rupees, no payments have been initiated so far because Russian banks do not want to accumulate rupees.”

While Biden’s policy of reshoring American manufacturing currently targets China it’s only a matter of time before Democrats and Trump-driving Republicans target India and other low-wage nations that don’t play fair or intelligently in markets or geopolitics. India is supporting Russia’s war on Ukraine, supporting the Myanmar junta and doing nothing to solve the problems in Pakistan except threaten to disrupt the foundational water treaty that ensures Pakistani stability. American backlash against India is only a few years away and Indian politicians are predictably myopic about this likelihood, choosing to trade hungrily with Russia at the cost of long-term growth.

Bloomberg further notes “Between April and November 2022 India’s imports of Russian goods and commodities exceeded exports to Russia 16 times, Bloomberg also noted. Last month, India was the biggest buyer of Russian crude, with 70 percent of Urals volumes loaded in January going to that country. China is the second-biggest buyer of the flagship Russian blend. Last year, Russia became India’s third-largest oil supplier, after Iraq and Saudi Arabia. In December last year, imports of Russian crude hit an all-time high of 1.25 million barrels daily out of the total 4.9 million bpd in crude imports.”

The bulls will soon realize the violent geopolitical order is being misplayed by Biden and the GOP into productivity-diminishing trade and reshoring policies, eviscerating the case for high single-digit profit growth building on a soft landing in 2023. Only a recession and a cleansing of efficiencies can power high profit growth, and the Fed is dead set on creating those conditions. The bulls will bear the cost of such policies as we retest the October 2022 lows this Spring.

My current positions include a significant cash position, 3M (MMM), Pfizer (PFE) and the inverse levered ETF SPXU, which nets out to a significant short position.