Leftist Cherry-Picking Threatens Investment Performance And That Could Doom The Democrats And Possibly Ukraine As Well: The Geopolitical — Stock Market Connection

As culture wars bleed into the classroom and now into terrorism charges and countercharges the S&P 500 continues to consolidate as if interest rates were the only concern for investors. But the confidence of the nation is really what the S&P measures, since valuation multiples (e.g. the PE) are usually the real driver of uptrends and downtrends. And that confidence is slowly being rent by culture wars that broaden out with no relief in sight. For now the markets are consolidating in hopes Jay Powell will not get overly hawkish, 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 bullish. Yesterday's cross-asset action brought one positive factor for US stocks. The action in the € & EM currencies indicates the $US is weak. But there was also one negative factor across global asset classes. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to try retesting the 4200 level over the next few days before beginning a long slog back to the October lows and beyond.

A new tack by the GOP in the culture wars is attacking ESG investing and corporate compliance. This is smart politics as the ESG wars can only hurt the Democrats as they find Middle America and Southern states harder to pick off now that centrists like Virginia Republican Youngkin have figured out how to win a blue state using cultural issues. Even more daunting for Democrats is facing the more experienced Trump-lite Republicans like DeSantis and Haley; failure to beat them in 2024 would have grave consequences for American foriegn policy, and that makes the ESG issue paramount not just for stock picking but the overall trend in the markets.

ESG was once hailed as an investment strategy that somehow worked to improve productivity and decisionmaking at the firm level. This vapid reasoning has been proven false as long-term data shows this was a temporary phenomena based on cherry picking. The Harvard Business Review noted in 2022 (before the huge runup in fossil fuel energy firms) that “Investing in sustainable funds that prioritize ESG goals is supposed to help improve the environmental and social sustainability of business practices. Unfortunately, close analysis suggests that it’s not only not making much difference to companies’ actual ESG performance, it may actually be directing capital into poor business performers.”

Even more problematic are the culture wars that are dooming ESG as a meaningful strategy to offer investors. PlanAdviser notes “Financial advisers are not optimistic about the future of including environmental, social and governance attributes to investing, in part due to growing political tension around the subject, according to a Cogent Syndicated report from Escalent. In 2022, 58% of advisers used ESG investments, down 10 percentage-points from 2020, according to the Livonia, Michigan-based firms survey of over 500 financial advisers in September. Meanwhile, only 15% of advisers who used ESG agree with its importance or expansion, and the majority of advisers don’t think ESG investing is a growing trend nor a significant factor in attracting new clients.”

ESG is key to the culture wars since it threatens to attenuate the productivity and probity of American companies. The recent hypocrisy of Democrats chiding fossil fuel companies for not producing enough while pushing ESG standards that would limit fossil fuel production isn’t lost on the average American. At heart is the inefficacy of ESG as a process that can bridge differences and promote productivity. ESG simply can’t bridge the problems of declining communication standards, inefficacy of social monitoring, and unwillingness of normal people to tax themselves with understading ideological and scientific complexity in order to compromise with cultural adversaries. Instead of legitimate changes in firms ESG simply makes work that serves no corporate purpose and eventually must be contradicted when strategic decisions change the thrust of the firm.

ESG can waste natural resources but can’t make progress unless employees are engaged in expressing their ethical preferences. In that theoretical case the ESG investor can rely on the firm’s organic energy to drive experiments in ethical decisionmaking and evaluate the costs, risks, benefits and rewards from the firm’s employee-led thrust. But declining communication standards make employee expression a highly taxing and risky proposition that can not only to alienate colleagues but imperil the employee’s career prospects.

Consequently the impact of ESG is to stoke the culture wars that led to Trump’s victory over the more experienced centrist offer of Hilary Clinton. Trump has amped up the culture wars to the point the GOP is now divided between pro-Russia and anti-Russia camps. This makes it imperative for Ukraine to win back territory in the Spring, else not only will America push for a peace deal that lets Russia legitimize its Crimean takeover but moves some European nations to break the Ukraine consensus and thus put the EU experiment in peril. The near-term solution is for the American Left to cease its vacuous belief in ESG and focus instead on improving standards of communication which can reset the foundation of American public discourse, democracy and unity.

More likely is that a bruising Presidential campaign that divides households is in store and that will put a damper on productivity and confidence. As long as the ESG community continues its vapid work we are facing not just lower lows this Spring but a rocky road back to the old highs of early 2022.

Yesterday I added significantly to my short-term bullish position in the levered ETF UPRO. Consequently my current positions include a moderately large cash position, 3M (MMM), Pfizer (PFE), the levered ETF UPRO and a much smaller position in the inverse levered ETF SPXU.