Eurasians Know East Is East But Investors Are Slowly Awakening To This Reality: The Geopolitical — Stock Market Connection

Tensions with China are ramping up over Russia and indirectly changing financial market sentiment. This morning the markets are keyed off inflation and interest rates but the increasing talk of deglobalization and deepening polarity between East and West is eroding long-term bullishness. Consequently there are indications of long-term investors moving deeper into cash so they can be paid to wait, while short-term traders focus equally on the bullish and bearish cases. 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. Yesterday's cross-asset action brought several positive factors for US stocks. The US yield curve is falling and in the current context that is bullish. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to be rebound over the next few days as the bulls make one last gasp before rationality sinks in and pulls the market closer to the October lows.

As Biden warns China that further decoupling will ensue should Chinese drones and other materiel flow to Russia, so too domestic trends bode ill for globalization. Biden is a statist at heart and a union supporter, so his natural forte is promoting reshoring as patriotic economics. American blue-collar workers and leftists of both the Trumpist and Democratic varieties love this, consequently Biden can triangulate the GOP by rolling back globalization. This is dreadful for American productivity growth, since labor dynamism and new technology are the fundamental fonts of productivity growth, not education. What education does is equip workers to meet basic requirements for their jobs, but growth in productivity comes from dynamism on the job. And that depends on self-motivation and competition, which globalization supports and deglobalization erodes.

Reshoring is stealth unionization as it unites American workers against competition, and the Chinese Communist Party is foolishly amplifying this by aligning itself with a chauvinistic and imperialistic Russia. But self-motivation is also declining, as workers try clawing back their work-life balance from the stress of the pandemic and the inflation that ensued. Fortune quotes an HR executive as saying “I don’t think quiet quitting is going away in 2023, especially if we’re in a recessionary environment that causes more layoffs,” says Lexi Clarke, Payscale’s vice president of people. “When workers are let go, it really increases that burnout potential and workload burdens on those folks who are still there. That can build resentment, especially within organizations where there may not be pay increases or promotions.”

And quiet quitting adds a new form of inequality to the American social fabric. Workers not only get a smaller share of income and little share of the wealth compared with generations past, but now the shrewd and fortunate among them can at least get by with a surfeit of leisure and personal time that other workers must forfeit lest they opt for quiet quitting. Fortune goes onto note “Even if a recession doesn’t happen, the U.S. is still experiencing a high rate of worker turnover that hasn’t stopped following the high water mark reached with the Great Resignation. At least 4 million Americans have quit their jobs every month since July 2021, according to the latest available data from the Bureau of Labor Statistics. But the constant churn of workers hasn't stopped the economic recovery, which indicates many companies are making do with fewer employees. That means workers who aren't changing jobs (or those who aren't shifting as frequently) are typically left trying to manage a growing workload, usually without the help they need. Over half of those who stayed at their jobs say they’ve taken on more responsibilities, according to a report released in October 2021. About 30% of workers left behind said they struggled to get all of the work done, while nearly as many—27%—reported they felt less loyalty to their employer amid the continuing tumult.”

This morning’s economic reports notes that wages are rising along with persistent inflation, indicating workers are clawing back real wages such that companies keep increasing prices to keep margins intact. Further deglobalization can only add to these nasty trends. The only way to check deglobalization is for NATO to take a stand on the War and arm Ukraine with air power that decimates Russia and brings the war to an end. That is off the table while Chinese support for Russia is now front and center and Biden/Trump statism is here to stay. A resumption of the bear market would be the natural response from investors who rationally weigh this geopolitical-financial connection.

My current positions include a large cash position, 3M (MMM), Pfizer (PFE) and a significant short-term bullish position in UPRO.