How Money Impacted GeoPolitics This Week: The World Might Be Getting Smaller But Nations Are Increasingly Pulling Away From American Economic Hegemony

Emmanuel Macron isn’t the only one distancing his nation from the US, as American monetary, trade and security policies increasingly seem inconsistent and untenable to many supposed allies and friends. American retrenchment goes against the grain of American exceptionalism but many countries are assuming such a future and hoping Eurasian autocracies can fill in any gaps. These issues impact firms like Apple and Tesla who have deep sales and production relationships in Eurasia, but for now seem like background noise to investors more concerned with daily earnings reports that validate optimistic forecasts for 2024 and beyond. Consequently 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. Yesterday's cross-asset action brought several positive factors for US stocks. 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. Oil is pointing to declining global GDP expectations. Expect the S&P 500 to rise modestly toward 4200 over the next few days.

Monetary retrenchment is baked in as the Fed hawks dominate economic policy, famously echoing Volcker’s maxim that the Fed solve American problems and let other nations solve theirs. But global monetary aggregates are falling as a result and paint a scary picture of declining liquidity. Excess reserves declined markedly last week in the US banking system due to tax filings that shifted money to the Treasury’s account at the Fed, though the Fed balance sheet declined only modestly by $21b. But this comes amid growing pessimism about global growth and quiet indignation at America putting its own interests first. Rifts across the democratic world have been papered over but the real world effects are countries increasingly going it alone or ignoring America’s entreaties. Pakistan’s decision to buy Russian oil is just the latest example of an erstwhile partner contravening US efforts. And this is mirrored by the widespread feeling that global growth suffers while Americans continue to spend and rack up debt with the impunity that comes with having a reserve currency and polarized politics.

The Fed is doing its part by cutting down liquidity and keeping interest rates high, though they paused the former in order to help small and regional banks weather the effects of poor asset-liability management. Simmering anger against the Fed for being so hawkish may soon boil over as other central banks are forced by their circumstances to tighten up as well. The PBOC is still providing liquidity but tapering, in line with some strategists who see the surge in Central Bank liquidity that began late last Fall reversing course this Spring. One strategist at CitiBank sees a $600b draining of liquidity and attendant correction in risk assets. That and receding forecasts for earnings in 2024 will send equities back to their October lows this Spring.

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.