Putin Can Thank The Federal Reserve For Helping Keep Ukraine’s Dynamic Army At Bay, But More Pain Is Down The Road — How Money Impacted GeoPolitics This Week

It’s not just bullish investors that are thrilled with the excess liquidity sloshing around the globe but secretly and perhaps unconsciously the Russian leadership as well. Yesterday’s data release showed the Fed kept the balance sheet constant and effectively let the Biden Treasury soak up funds to replenish its coffers without draining anything from the money supply. That combined with liquidity emanating from China and across global banks means not only a rising equity market but resilience for the Russian state, with all the negative consequences this context presages. But for now investors couldn’t care less about Ukraine or the logic of too much money chasing too few goods, and instead are getting deeper into the equity melt-up. The volatility risk premium is pointing to a range-bound market over the next few days, but my technical reading of key stocks in the S&P 500 is short-term bullish and intermediate term bearish. Yesterday's cross-asset action brought several positive factors for US stocks. Copper's chart is signifying global growth. The action in the € & EM currencies indicates the $US is weak. 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. Expect the S&P 500 to rise modestly over the next few days before coming down hard by end of month.

Ukraine’s counter-offensive is going slowly as Russia’s preparation for this pre-announced offensive is yielding early dividends. Key to Russia maintaining discipline is the flow of artillery and weapons, which depends considerably on money and general confidence, which boils down to the economy. And nothing affects the Russian economy like fossil fuel prices.

Biden is doing what little he can to bring down oil and natural gas prices to hurt Russia, but his efforts are hampered by the surge in liquidity this year, which has kept demand from falling off a cliff and kept oil prices at $70 on average, which is critical for Russia since it’s fiscal breakeven is probably north of $100. As it is Russia may be getting only around $50 per barrel, so a further dip in oil prices would drive the Russian economy much lower and tilt the war in Ukraine’s favor. But the global liquidity dynamic so far is helping Russia instead of hindering it.

Liquidity abounds as the Fed has allowed excess reserves of American banks to grow after the March mini-banking crisis, while China continues to inject funds and cut interest rates and cross-border lending picks up. Private sector reports of disinflation happening faster than government statistics are reconciling investors to all this liquidity, dismissing the prospect of persistent inflation and instead believing that the global economy is normalizing and about to undergo a technological revolution such that excess liquidity should go into valuations of tech companies. But with the Fed determined to someday shrink its balance sheet the risk is that liquidity dries up at the same time that low global growth gives little reason for continued lending. BNP Paribas expects a 10% contraction in liquidity as the year unfolds, which will devastate both equity prices and likely the price of oil, slashing Putin’s wartime economy and giving a fillip to Ukraine.

The potential for a reset of the global economy and geopolitics is further down the road if the Fed just sticks to its plans. In the past few weeks the Fed has eased up but I expect this to change in short order, giving dose of painful medicine that will douse the bulls, setting investors up for a real buying opportunity on a retest of the October lows.

My current positions include 3M (MMM), Pfizer (PFE), and a large position in SPXU, which nets out to an extremely short position in equities.