Bulls Bet Equities Can Soar On A Benign Future But North Korea’s Rockets Are The Real Thing And Anything But Salutary: The Geopolitical — Stock Market Connection

The S&P looks set to test the 4200 resistance level as investors blithely ignore a raft of geopolitical developments and focus instead on heroically fighting the Fed. But resistance will reveal the futility of this rally as investors lose their enthusiasm trying to substantiate why earnings will grow majestically in 2024 and beyond. Cultural, political and monetary trends are all lining up to make the next few years challenging for earnings, and as investors weigh the rewards of buying more equities the higher the S&P goes the bears will eventually retake control. For now the bulls can bask in collective myopia as the volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is bullish. Against jejune optimism there are several negative factors across global asset classes. The action in currencies signifies $US strength. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to rise modestly to test 4200 over the next few days.

Lost among the myriad Eurasian developments are the negative consequences of North Korea’s launch of a solid fuel ICBM late last week. Kim Jong Un’s relentless progress to more sophisticated WMDs has led Japan to try recapturing its military might, turning a pacifist nation back to its pre-war roots. And because of Japan’s ignoble foreign policy history this chain of developments threatens South Korea and China and thus worsens both regional security and the alliance of democracies trying to limit Eurasian autocracy.

DW notes “The advanced new solid-fuel intercontinental ballistic missile (ICBM) fired by North Korea last week has triggered expressions of concern in South Korea and across the region. Analysts have warned that Pyongyang now has the ability to fire missiles that can hit targets as far away as the United States, and with little or no warning.”

KJU can easily target Japan with this weapon and give those South Koreans and Chinese who value history a touch of schadenfreude as Japan did little to repay those countries for its aggressions and atrocities so much as it benefitted from the Korean and Vietnamese wars, via America’s need for war supplies and logistics. The Japanese sense this and take KJU so seriously that the latest launch created a national panic. Skynews notes “The launch triggered a scare in northern Japan where Hokkaido residents were told to take cover, though there turned out to be no danger.”

KJU’s repudiation of norms not only worsens Pacific security but also America’s national security and even more profoundly, allows Russia to foment mass warfare in concert with Iran and the tacit support of China. The threat of using WMDs is what prevents Biden and European allies from all-out arming Ukraine and rushing this war to a conclusion with a Spring offensive. Militarily Ukraine can potentially take back all its territory from the pre-2014 border but has no chance unless it’s better armed and supported by the West. The result is likely to be a protracted war where stalemate becomes an increasingly desired goal for exhausted democratic leaders.

Russia’s ability to hold onto territory would only cement its status as a player in both geopolitics but also world commodity flows. This has already led to stark divisions between the West and big fellow Asian democracies like India, Indonesia and Malaysia. And its led OPEC+ to cut oil supplies and threaten to reignite headline inflation via higher gas prices. Investors will find it hard to fight the Fed when disinflation proves tough to accelerate, and realize the nexus of geopolitics and finance dominates jejune arguments of economic recovery and renewal.

My current positions include a very large cash position, 3M (MMM), Pfizer (PFE), the levered ETF UPRO and inverse levered ETF SPXU, all of which net out to a modestly long position in large-cap equities.