Once We Sang The Greeks Don’t Want No Freaks But Last Week Proved Differently — How Money Impacted GeoPolitics This Week

Austerity in Europe will get a new twist as the ECB just suggested big policy changes were afoot to reduce excess liquidity among banks. That’s the Fed’s stated goal as well with QT, but while the bulls have ignored this draining of funds the average European can’t ignore the political consequences of relentless austerity. Greece was not just the site of a migrant tragedy but also the rise of the far right and demise of the far left in the past week’s election. More of that to come now that austerity in the West is poised to accelerate. For now the bulls are in control and the volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), while my technical reading of key stocks in the S&P 500 is bullish short-term and extremely bearish intermeidate-term. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. 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. 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 4480 before the bulls exhaust themselves.

Austerity is proceeding modestly in the US and Europe but assuming the bullish case where regional banks don’t suffer more disintermediation and disinflation persists beyond this summer (where base effects in the calculation are fortuitous) then austerity will reach levels well beyond what was last seen in October. The decline in the Fed balance sheet combined with normalized Treasury balances held at the Fed will bring excess reserves down below levels last seen during the high volatility period of late 2022 to early 2023. A bullish economy and stock market would make the Fed comfortable with austerity, particularly given their sober politics and culture that contrasts sharply with euphoric investors.

Austerity is a nasty term in Europe since it rebukes decades of social democratic growth and turns away from solidarity and collectivism. The Fed may be leading the way but the ECB is thinking just as profoundly about reducing liquidity and enforcing austerity on the financial system after years of loose policy and bailouts. The political consequences are clear because they’ve manifested for years now. Nothing calls out the far right like anger at the government.

Greece saw an unseemly rise in far fight election victories this past week, and polls suggest the same will happen in Germany. Even liberal Finland saw a government minister hint at support for neo-nazis. The common thread among far rightists isn’t consensus on culture, history or policy, where the differences are comically large, but anti-migration. This was evident in the shift of Greece’s leftist Syriza party towards an anti-migration policy, which did them little good at the polls.

The protests rocking France at similarly driven by angry leftist culture warriors, and nothing can bring them out more than right wing rallies. The clear logic of liquidity draining is worsening politics and more economic disruption, which eviscerates the bullish case for a surge in productivity. Expect the current melt-up in equities to collapse soon as 2nd quarter earnings reports reveal just how marginal the economic outlook is.

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