How Money Impacted GeoPolitics This Week: Wealthy Investors Keep Europe’s Center-Left Governments On Course

Liquidity often drives market rallies and in some cases drives out rationality and common sense, but beleaguered politicians will take that when faced with the wrath of the masses. Both French and German governments need a strong equity market to tide them over in this inflationary environment, and so the forces are arrayed for higher markets where reason goes out the door and valuations reflect a perfect future. 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. Oil's chart is signifying global growth. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to rise over the next few days as it tries overcoming resistance at 4200.

Global liquidity this week is helping European leaders smooth over labor market concerns in the belief that robust equity markets point to economic resilience and higher living standards over the next few years. The STOXX 600 is less than 8% from from the record highs it hit during the pandemic, and due to low level of equity ownership this strong performance accrues to the wealthy and more conservative elements of European society. Consequently Macron’s strong liberal push for pension reform is likely to face unrelenting attack from the broad populace but find strong if temporary support among the upper classes. Similarly the German center-left government endured a rare mega-strike this week and focused instead on coordinating its climate change and infrastructure policy. For European social democrats dealing with high inflation, energy stress and labor market strife ranging from strikes to quiet quitting to its new cousin “rage-applying,” a strong equity market is one of the remaining lines of defense to ensure confidence in parliament. But this is likely to be short-lived as the positive liquidity events of the past few weeks will likely be reversed in the weeks and months to come.

The Fed managed to decrease dollar liquidity marginally in the week ending Wednesday, reflecting ongoing QT but mitigated by its new lending to regional banks as well as declining Treasury balances and uptake of reverse repos by the big mortgage securitizers. As loans to regional banks wind down (assuming no further banking crises) and the debt-limit debate reaches its normal conclusion, Fed-based liquidity can be expected to decline in line with QT. That’s problematic for European equities since the ECB is under even greater pressure to raise rates to quell inflation. And with Japan hinting it will abandon yield curve control that leaves only China as a major source of liquidity injections for the world. That spells trouble for world leaders who offer unpalatable medicine for their low productivity workforces, and could translate into gains for right wing elements that threaten the entire European federalist project. Both liquidity and geopolitical vectors point to short-term gains for global equities but long-term pain.

My current positions include a large cash position, 3M (MMM), Pfizer (PFE), and the levered ETF UPRO and inverse levered ETF SPXU.