China Tangos With Delusional Autocrats And Investors Reap The Short-Term And Short-Sighted Benefits: How Money Impacted GeoPolitics This Week:

Liquidity often dominates markets but sometimes it rescues leftist politicians too, and on this score the Left can rejoice in China’s accession to the global diplomatic, security and financial stage. China’s PBOC is doing the opposite of the US Federal Reserve, expanding liquidity not just at home but abroad, as seen in the latest foreign exchange support for beleaguered Argentina. What the Communists gain in stature they lose in financial viability, as Argentina is one of many nations that routinely fail because their economic fundamentals are unpalatable to their leaders. Economics wins every time in Argentina, and China’s global liquidity boost will waste resources in prolonging the inevitable downturn. But for now investors across the globe are rejoicing at the liquidity boost, and the volatility risk premium now points to a higher market over the next few days, though my technical reading of key stocks in the S&P 500 is bearish. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there were also several negative factors across global asset classes. Oil is pointing to declining global GDP expectations. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to rise modestly toward 4200 over the next few days.

While investors fret about the Fed continuing to shrink its balance sheet despite extending loans to the likes of First Republic they blindly exploit Chinese liquidity targeted to bailing out bad property investments and autocratic leaders. The IMF and its liberal western tradition is increasingly challenged by China and its debt rescue plans that emphasize not just economic stability but also returns for Chinese banks and exporters, and as important to the ruling Communist Party, strong lasting political allegiances that counter the US.

Bloomberg notes “Argentina’s central bank dramatically raised its benchmark interest rate by 1,000 basis points on Thursday as a renewed peso selloff in parallel markets piles more pressure on the country’s economic crisis, according to two people with direct knowledge of the decision. The central bank, which typically decides on its rate levels on Thursdays and doesn’t have a precise time to release a statement, isn’t independent and is headed by a Fernandez ally. Lifting rates comes on top of other recent emergency measures, such as the central bank tapping a swap line from China to finance imports or intervening in financial markets even as the International Monetary Fund warns against such a strategy.”

The Chinese Communists are pumping liquidity into Argentina but more broadly into the world economy to foster their reopening and to battle growing domestic pessimism that’s evidenced in the recent selloff in Chinese equities. The property crisis and vulnerability of provincial finances combined with Xi Jinping’s increasingly harsh treatment of the private sector is making China unattractive not just for American and European capitalists worried about getting arrested once on the mainland, but Chinese consumers and investors. To keep confidence from spiraling down Xi needs to prop up his stock market and show increasing stature on the world stage, which he believes can be achieved by bailing out Argentina and other dysfunctional nations like Pakistan, Sri Lanka and Zambia.

“Beijing is ultimately trying to rescue its own banks. That’s why it has gotten into the risky business of international bailout lending,” said study co-author Carmen Reinhart in the AidData post, referring to a study by the World Bank, Harvard Kennedy School, Kiel Institute for the World Economy and the US-based research lab AidData. Of the $240 billion in total bailout loans, $170 billion came from the PBOC’s swap line network – meaning agreements between central banks to exchange currencies.”

Conflating monetary policy (i.e., swap lines) with foreign policy is obtuse and can only make China weaker, as delusional leaders like Christina Fernandez believe their repeated failure now has a chance at success with Chinese backing. The near term result is the perverse marriage of pointless bailouts of Argentina et al with surging western stock markets, both of which will find gravity as economic reality reveals itself.

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.