Pakistan’s Tragedy Helps The European Right Wing And That Hurts America, As The Bulls Will Soon Realize: The Geopolitical — Stock Market Connection

The bulls have been riding high on AI euphoria and hope for strong corporate earnings but also more reasonably on the value of the mighty dollar. Since October the dollar has fallen about 10 percent, but the bulls need even more to justify their belief in a robust global economy powering American MNC earnings. I see this as unlikely as geopolitical events point to greater reliance on the dollar, not less. The bulls aren’t listening, however, biding their time for earnings season to begin in earnest next month. 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 short-term and bearish intermediate-term. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to bottom out around support in the 4300 area over the next few days before resuming the melt-up.

The bulls depend more than they care to admit on a weakening dollar, since emerging market growth and competition is key to making the American economy productive. Without a weak dollar Biden’s nearshoring policies will just entrench inflation and that historically causes valuations to fall, not rise. The bulls need a weak dollar but the trends aren’t hopeful, as evidenced in the tragic sinking of a migrant ship off of Greece two weeks ago. Pakistanis made up a large part of this suffering community and this surge of migration is due in large part to the strength of the dollar. DW quotes both a Pakistani immigration lawyer and a human trafficker who separately noted the same thing, namely “The rapid depreciation of the already weak Pakistani rupee against foreign currencies over the past 18 months has probably been a huge factor," and ”that political and economic uncertainty has led to "desperation" among young Pakistanis.”

There is little hope of liberal reform in nations like Pakistan, which means a strong dollar is more likely to persist than not. But the tragedy in Pakistan redounds negatively to the West in more ways than moral. Greece’s actions towards migrants is increasingly transactional rather than moral, and likely to go the way of Italy and its neo-fascist government. The persistent threat of the far right in Europe is due to fundamentals of human nature that the Left wing is comically unfit to overcome. As long as regional conditions are unfavorable populations will favor autocratic and statist governments that naturally veer to the right (AMLO in Mexico being a potent example of a leftist who governs like a right-wing populist). The antidote is not smarter Leftist politicians but a liberal global order and this depends entirely on the US, which under Trump and Biden is regressing from liberalism instead of promoting it.

Biden believes the state can help people become more secure and dynamic and consequently more communitarian. This is nonsense since America is too diverse for communitarianism, as proven during national tragedies like the Great Depression, where FDR’s policies achieve little bang for the buck. Liberalism is key and this means freedom of capital, mobility and expression, the first two of which Biden is trying to constrain by deglobalizing. This can only lead to a more Right-wing Europe, which has previously launched the world into horrific war and holocaust.

The right wing in Europe is potent because it counts on the transactional nature of human conduct outweighing the moral. In their social behavior most people are balanced between transactional and affective, where the latter potentially creates positive social dynamics that build culture, ethics and cohesion, while the former militates against culture and promotes moral diversity and potentially persistent antagonism. People are transactional to a large degree because life’s persistent antagonisms (uncertainty, pain, fear and debilitation) affect one individually more than collectively. Key to mitigating life’s antagonisms is a favorable terms of trade, which is the amount and quality one can get in exchange for what one has to offer. The terms of trade are calculated by the price level and income flows in an open society, while in statist societies that limit trade, expression or mobility, the issue of deteriorating quality also comes in. The other ways of mitigating life’s antagonisms are robust self-confidence and confidence in one’s community, both of which are uncommon. Other than the young, few people achieve robust self-confidence since this depends on foresight or high levels of energy. Community confidence is also rare, as it depends on both persistent civic behavior that is pleasing to observe, and stable security. The former is uncommon in societies other than Lutheran and Confucian societies, and the latter is uncommon other than in economically productive and hierarchical societies. Southern Europe is Catholic, and its population notoriously apolaustic rather than industrious. A right wing Europe is more likely than not as migration surges, and this won’t help the Euro let alone other currencies rally against the dollar.

The bulls are loathe to admit that politics, culture and social conditions affect economics, but they do recognize the effect of geopolitics on the dollar. With so many trends favoring the dollar the bulls effectively need earnings to shine in order to give them time to hope the dollar falls. That makes this coming earnings season critical and why I see a collapse of equity confidence in the making by mid-July.

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