How Money Impacted GeoPolitics This Week: The US And China Battling For Hearts And Minds And Confidence

The unseemly spectacle of an unesteemed Congress assailing the CEO of a popular entertainment platform masks the serious issue of confidence in two antagonistic systems. The US has long been a font of confidence but that’s now in question as the equity market falters, while China has managed to reopen to the world in a seemingly smooth fashion and drawn capital flows to its markets. That disconnect in confidence will likely dissipate over the coming days, as 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 bullish. Yesterday's cross-asset action brought several positive factors for US stocks. Copper's chart is signifying global growth. 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. But there was also one negative factor across global asset classes. Gold is trading as a risk-off asset. Expect the S&P 500 to rise modestly over the next few days.

Global liquidity this week is pushing the US and China toward confrontation, centered on the most superficial of issues, the social media site TikTok. America needs a strong economy to keep its allies unified against China’s malevolent policies, especially since China is in a strong position to hurt US companies. But the drop in liquidity engineered by the Fed since 2022 in response to high inflation has wound up breaking several banks, causing ordinary Americans to suddenly start conversing about deposit guarantees. So the world watched the Fed reverse its course in reaction to Silicon Valley Bank and the ongoing depredations facing First Republic Bank, turning to liquidity injections and swelling its balance sheet. The result should push the equity markets higher but so far it’s been a painful ride as volatility has risen along with bond prices, leading to huge selloffs that keep the markets in a range instead of an uptrend.

Not so China. Recent liquidity injections by the PBOC combined with the easing of the COVID lockdowns have helped their equity markets climb back and are girding the Chinese Communist Party to take a hard line on TikTok. The CCP believes America not only has much to lose in an economic war but is in a weak spot at present. Consequently expect the TikTok saga to drone on while Biden hopes the Fed can steer the economy to steady growth and disinflation and thus keep the US economy relatively strong compared to China.

Yesterday I added a small position in the inverse levered ETF SPXU. Consequently my current positions include a smaller but still large cash position, 3M (MMM), Pfizer (PFE), and the levered ETF UPRO and inverse levered ETF SPXU.