Paraguayan Politics Is Not Just The Stuff Of Movie Parodies But The Nasty State of Western Politics In General And Taiwanese Sovereignty In Particular: The Geopolitical — Stock Market Connection

Prospects for an American default hinge on whether the GOP is correct in claiming that most Americans want spending cuts rather than big government initiatives like the CHIPS Act and social justice-related stimulus payments. If so Biden’s statist agenda is imperiled and his chances for re-election depend on a weak GOP candidate who won’t tax him with constant campaigning across the nation. And since Biden polls so poorly he’s likely to try keeping his Democratic electorate in line rather than embrace the plurality that wants spending cuts. So debt-ceiling posturing likely continues and may eventually fell the equity market by month’s end, but for now investors are ignoring the drama as 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. There is, however, 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 rise modestly over the next few days toward 4200 before turning around.

This ideological divide imperiling bondholders is analogous to the desultory politics afflicting Latin America. Statism and insecurity dominate most Hispanic nations, with poor results that were made visceral during the Pandemic. Hispanic conservatives tend to be more like Trump than not, and even some leftists like Mexico’s AMLO draw profound comparisons. Case in point is Paraguay, where ideological differences have an outsized influence that extends beyond its own landlocked borders to the central geopolitical issue of China’s belligerence toward Taiwan.

That Paraguay’s masses freely and fairly elected conservatives who’ve incurred the wrath of the American justice system and who find little fault with their nation’s deep inequality might seem illogical enough to leftists who see parallels with the GOP, were it not for the additional complication of Taiwan. Paraguay is one of only 13 nations incurring the wrath of China for recognizing Taiwan’s sovereignty, and it’s the conservatives who advocate this rather than the liberal-left. The logic of Paraguay applies to all of Latin America, where vaunted claims of mass solidarity fall flat and empower the atavistic right wing to constantly win elections despite their profound anti-democratic history.

Bloomberg notes “Paraguay can’t directly sell its soy and beef exports to China, as it’s one of Taiwan’s few remaining diplomatic allies. And corruption is a key election issue after the US government sanctioned two Colorado Party leaders, Vice President Hugo Velazquez and ex-President Horacio Cartes, for alleged graft and ties to terrorism.” And yet its the conservative Colorado Party that hold dear to Taiwan at the expense of padding their pockets from trading with China.

The reason the masses chose the conservative Colorado Party is that insecurity trumps hope when hopes are unanchored to economic reality, and insecurity tends to breeds unpredictability and thus move people to vote conservative. In Paraguay’s case insecurity afflicts both the privileged and underprivileged. The privileged feel insecure because Catholicism reigns as the national religion but has never forged a civic morality the way Protestantism has, and consequently their status can be deemed arbitrary should a civic morality that embraces economic reality take shape and serve as a foundation for new economic and cultural policies. The masses are insecure because they are divided into those who make use of education or shrewd techniques for advancement and those who don’t. The educated and shrewd are easily tempted to pursue individualistic self-expression and the diverse pleasures afforded by advancement, consequently they’re also prone to feeling indifferent toward their less shrewd compatriots. This lack of nobility and purpose constrains the upper strata of the underprivileged from unifying into a force that can lead their compatriots. The vast majority within the masses feel insecure because they can’t escape the indignity of failing to attain the intellectual skills of either education or shrewdness.

The paradoxical result is that Paraguayan conservatives feel a bond with the progressive Taiwanese while liberals and leftists want to abandon Taiwan for the illiberal and autocratic China. Paraguay’s conservatives trace their history to an anti-Communist military dictatorship that eventually embraced democracy, and so does Taiwan. Their coming of age occurred contemporaneously, they often feted each other during the good old days of the Cold War, and both now fear the leftist leanings of China under Xi Jinping. This historical bond is a substitute for a civic morality, and helps unify Paraguayan conservatives who otherwise have divergent economic and cultural interests. By contrast the liberals and leftists should have been able to forge a united front based simply on anti-Colorado enmity and desire to benefit from China trade, but as the loser in the election noted to NPR, divisions among the opposition "prevented us from reaching the goal of being able to bring about the change that the majority of Paraguayans are asking of us." The liberal-left is always divided, and can’t possibly by anything else without a clear civic morality to anchor them.

The path forward is to devise something the Enlightenment failed to do, namely a method of foresight applicable to all who are basically functional and basically literate. Instead liberals and leftists encumber the masses who can’t buy shrewdness and foresight with conforming their personalities to the constraints and rigors of an educational system. This doesn’t level society, but sustains inequality while diversifying it.

As long as inequality remains a potent issue the democracies of the West are prone to become statist and losing their differences with Eurasian autocrats. Biden is a clear example of this trend, and his policies can only turn corporate America into a team player with government, yielding poor results for productivity, efficiency and profits. This bad turn of events marries with the decline of the work ethic to limit economic growth and is a key reason I see little profit growth in 2024 and beyond, with correspondingly negative implications for equity prices.

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.