Russian Regression Is Fine For Western Politicians But Bad News For Financial Markets: The Geopolitical — Stock Market Connection

Rising oil prices and falling bond prices spell trouble for the global economy and bullish investors who have made an art of ignoring inconvenient news. Restrictive interest rate policy is slowly becoming the market’s precept yet the bulls retain faith that the mid-2020s will resume where 2019 left off. For now the bulls retain high enough cash balances to make another stab at 4200, and 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 stagflationary conditions. 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 as volatility returns to 2022 levels.

Oil and gasoline prices depend more on Eurasian autocrats than American oil firms and Joe Biden has no tools left to change this status quo. The risk is for permanently higher oil prices as these autocrats have solidified power and citizens are too exhausted to demand a return to the liberal order. Putin’s strategy has evolved from winning the war to ridding Russia of its liberal citizenry no matter the long-term risks to Russia’s economy. Youth emigration and recent changes to the mobilization effort mean modernization is now out of the question, leaving Russia a commodity producer and criminal state that will endure sanctions for years to come.

Carnegie Endowment notes “Putin ordered the government to draw up a package of measures by 2023 that will increase birth rates and life expectancy in Russia. He also expressed bewilderment at the falling birth rates in a number of regions. Yet just a few days later, Defense Minister Sergei Shoigu proposed changing the age at which Russian men are conscripted for mandatory military service from eighteen to twenty-one and increasing the upper age limit for conscription from twenty-seven to thirty. That would mean young men being called up after earning their college degrees, and trained specialists being pulled out of the job market to have their skills voided by military service. If men go to war or emigrate en masse instead of fathering children, where will the children come from? The effect on the labor market will also be severe: conscription at such a productive age leeches the labor force out of an economy that is already expected to lose 3–4 million people aged twenty to forty by 2030 (compared to 2020) for objective demographic reasons.”

Demography is destiny and without regime change Russia is bound to regress into anti-modern virulent force against the West, similar to the 1970s. This doesn’t bother policymakers too much since skilled Russian immigrants can help the West both economically and politically, leaving Putin looking more like Brezhnev than Stalin. Carnegie further notes “The average number of years of education of the employed population in Russia is stagnating at best, and falling in some aspects. This also reflects the fact that young people want to quickly enter the labor market and start making money. The value of a good education is declining…even the nearsighted state has noticed that the number of high school students planning to take the Unified State Exam in physics and information sciences has fallen. “

The impact on equity markets has yet to be entertained by bullish investors who trumpet the return of pre-2020 global dynamics. Russia’s decline means more volatility for commodity prices, which support a new and dreary narrative of shorter business cycles driven by persistent inflation and high interest rates. The Fed has intimated such a scenario by cautioning the possibility of inflation spikes within the disinflation trend, necessitating higher for longer rates. Commodity price volatility impacts both inflation but also profit margins, exerting negative pressure on equity valuations. Given existing high valuations the likelihood of continuous war in Ukraine the road back to S&P 4800 will be rocky and long, yet another reason for this bear market rally to draw to a close.

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.