When Bulls Turn Bullish On Politics We Know The End Is Near: The Geopolitical — Stock Market Connection

The callow claims of the equity bulls that the world is returning to the good old days before pandemic look less farcical when taking a hard look at geopolitics. While problems around the world are horrific and are arguably worsening, the major risks to America are clearly mitigated by several factors which can make it seem like nothing has really changed. This too is callow reasoning when considering the inconvenient problem of climate change, but for now equities are treading water at the top of the recent range, with the bulls nominally in control. 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 neutral. There are several negative factors across global asset classes. Copper is pointing to declining global GDP expectations. 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 consolidate over the next few days before making a last stand in a foolish melt-up to 4300.

The bullish case rests on the age-old trope that equities climb a wall of worry, and the mosaic of dread-inducing geopolitical risks simply represent a portion of this wall. These risks clearly can’t be dominating else investors would seek short-duration assets or no-duration assets as a matter of prudence. So the present-day bulls effectively believe the following:

• That America’s key antagonists are large Eurasian autocracies but their vaunted military capabilities are in fact a modest threat to the global order. This is evidenced by the paper tiger that Russia has revealed itself to be in waging war on Ukraine, but also in the equally horrific performance of Chinese ally Myanmar in waging war on its own citizens. The prospect for China successfully invading Taiwan is negligible especially when considering that the last time the PLA attempted anything significant was the disastrous 1979 war with Vietnam, which helped precipitate Deng Xiaoping’s reforms.

• That both Europe and EM nations are reforming their economies such that the inefficiencies wrought by deglobalization and record-high global indebtedness will be profoundly mitigated. Macron’s liberal reforms in France and Europe’s moves to diversify energy sources couple with ongoing Abenomics in Japan and reforms in major EM nations like India and Indonesia to make this case for a robust global economy.

• That the greatest tail risk of all, Kim Jong Un’s constant threat of nuclear attack on Japan, South Korea and even America, has been hollowed out because Russia and China have refused to support him (per recent claims in the South China Morning Post).

The problem is that cultural changes are causing huge deglobalization, persistent inflation, growing indebtedness and worsening politics, and economic reforms are powerless to change this. These cultural changes reduce the work ethic and simultaneously drive people to polar extremes, worsening both politics and corporate efficiency. The fundamental driver of these cultural changes is the depressing ecological trend that is not only wrecking increasing parts of the world but being answered by policies that are comically nugatory. The visceral symptoms of ecological decline are migration and variable precipitation, resulting in ever-growing statism and abridgement of individual rights, and consequently a growing malaise that is driving populism. And it’s populism that is the bane of the global order.

Biden represents a stolid uncharismatic acceptance of populism which eschews persuading people to maintain great liberal principles, since this requires eloquence and substantive ideas. His approach is to tacitly accept lowest common denominator feelings which drive xenophobia and cultural sectarianism but to use the state to rectify this by resetting priorities and redistributing resources. Instead of focusing on eloquence, which Obama tried and failed to get anywhere with, Biden uses the tried and true method of statism, which is effectively the Catholic idea of distributism via democratic process rather than quick and nasty expropriation of property and wealth.

That Biden polls badly and inflation persists is proof that he is not only too old to dynamize the public sector and change the tenor of the cultural zeitgeist but that he is also incoherent. As America turns away from the liberal principles that created the global order of the postwar era so too the risks against equities grows to alarming levels. Expect the bulls to give up the ghost soon as recent earnings reports substantiate the negative effects of over-leverage and inefficiency and point to declining valuations.

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