Playing A Game Of Chicken Is Ludicrous When People Can’t Afford To Buy Drumsticks — How Money Impacted GeoPolitics This Week

Debts are growing everywhere as Asian Central Banks push money into the global economy and empower governments and wealthy consumers to keep spending at inflated prices. Even the Fed stood pat last week as it failed to reduce its balance sheet, instead watching excess reserves in the banking system grow by $70 billion as the Biden government recycled tax receipts into spending. The Fed has sown doubt that it intends to curb inflation and monetary growth as its infusions into teetering regional banks brought a patina of stability to the banking system, resulting in decreasing volatility in equity and bond markets. But angst is growing and set to burst as the markets grind higher toward resistance. 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 short-term bullish and long-term bearish. Yesterday's cross-asset action brought one positive factor for US stocks. The US yield curve is falling and in the current context that is bullish. But there were also several negative factors across global asset classes. Copper is pointing to declining global GDP expectations. The action in currencies signifies $US strength. Expect the S&P 500 to rise to 4210 over the next few days and then retreat in a hurry.

Nation-states use the Hobbesian notion of the social contract to offer stability in exchange for a discipline and order among the populace. America’s profound stability and the pretense of discipline attract immigrants who come for both economic opportunity and to escape ravaging social and political conditions. But insecurity and inequality have made immigration and refugee migration a unity-busting issue with Biden breaking from most Democrats to continue Trumpism. This makes sense if one takes Biden as a Statist more than a shrewd politician, as it gives the government more power to mold the culture and economy of the nation. But discipline and order slip away as unity crumbles.

Biden is trying to forge unity with ever more statist stimulus, offering public-private partnerships for anything he can think of, at the cost of soaring debt-to-GDP ratios. But the Fed is trying to reversing its stimulus while allowing markets to discipline banks, all while promising price stability via high real interest rates. The results so far are nugatory: disinflation is too slow and regional banks are fraying as deposit betas rise and depositor angst grows. Even more pernicious is the pretense of stability has led Biden and the GOP to play games with the global economy, with party officials openly stating that only financial market instability can force both sides to compromise. That’s not happening yet, as markets are moving with low volatility that ignores the fraught gyrations among a few regional banks.

The stability in markets reflects this game of chicken between the two sides and the bulls argue that it takes into account decades of history. But that’s false: the recent turn in politics is worse than anything seen in modern memory, as Democrats load up on statism and deficits and consciously mimic China while the GOP loads up on Trumpism, where the standard-bearer recently claimed nonchalance in the face of a Treasury default. Equities haven’t batted an eye but key industrial metals are trading badly and portending worsening growth and consequently worsening soveriegn debt loads. No matter how the debt ceiling impasse progresses, the underlying issue will remain that both sides want to grow the state and the resulting overindebtedness is forging ever greater disunity.

As disinflation proceeds distressingly slowly the markets are being set up for a clash of forces that sends risk soaring and equities tumbling. Even if central banks continue pumping in money the drop in confidence is set as it depends on much more than monetary policy. Expect the S&P to turn tail soon after it hits resistance at 4210.

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