Flashpoints

Flashpoints

Global equities touched record highs Friday and looked poised to notch the best streak of weekly gains since November (figure below), amid optimism around the world’s two largest economies.

Scorching data out of the US on Thursday and signs that the Chinese consumer is a semblance of healthy bode well. Or so goes the narrative.

That’s not to say there aren’t concerns. There are. In fact, there are three key geopolitical flashpoints that should be on everyone’s radar. Russia-Ukraine is obviously one. The Biden administration hit Moscow with sanctions Thursday, but they were seen as punishment for past misdeeds — “revenge for Billy Batts, and a lot of other things,” so to speak. The measures were telegraphed to the Kremlin, and weren’t generally viewed as representing any kind of worst-case scenario for Russia. The idea, apparently, was to exact a measure of revenge for hacking, meddling and poisoning, without aggravating Putin enough to prompt another escalation in Ukraine.

Dmitry Peskov on Friday told reporters that Russia is “ready to develop our dialogue as much as our counterparts are ready for it.” “It’s probably very positive that the viewpoints of the two heads of state coincide here,” Peskov remarked, noting that currently, “they do not coincide in their understanding of building relations on a mutually beneficial basis and taking into account each other’s interests.” The jokes just write themselves.

On top of that, there’s Taiwan, reduced to a pawn in the Sino-US struggle for global hegemony. And then Iran, which overnight enriched uranium to 60%, less than a week after an Israeli attempt to sabotage Natanz and amid tenuous talks in Vienna aimed at salvaging whatever can be salvaged of the nuclear pact.

“The escalating shadow war in the region represents the biggest threat to the Iranian nuclear talks in our view. We judge that a major, kinetic Iranian response to the Natanz facility incident will place the talks in far more jeopardy and cause regional tensions to rise appreciably,” RBC’s Michael Tran said.

RBC

Tran suggested that Iran’s reaction function could be more restrained now than it was in 2019 (Keyser Soze is dead after all), but he cautioned that  “hardliners are unlikely to want to see the political fortunes of moderates bolstered by a revised nuclear agreement [so] a return to the 2019 playbook” isn’t out of the question, even as the bank thinks “the chances of a diplomatic breakthrough resulting in sanctions relief in H2 2021 remain fairly high.”

Of course, geopolitical flashpoints are nothing new, but occasionally it’s worth reminding yourself that the world is a dangerous place. And, contrary to what the nice man with the red hat who you met while golfing in Florida told you, it wasn’t any safer when the occupant of the Oval Office was erratic and prone to fits of infantile rage.

Ironically, the most brazen of Trump’s decisions while in office (assassinating Qassem Soleimani) turned out to be a stroke of strategic genius, but everyone lucks up occasionally. It’s doubtful that Trump conducted a serious cost-benefit analysis and determined that Iran wouldn’t risk all-out war in retaliation. In fact, all indications were that he was encouraged by people who had conducted such analysis not to pull the trigger. He did it anyway. And it worked out from a kind of “shock and awe” perspective. But even as it arguably made the world a safer place in the very near-term, it made things more dangerous than ever over the longer-term, which is a concern for the rest of us, if not for Trump.

Anyway, if a pandemic that killed 3 million people globally isn’t capable of derailing stocks for more than a few weeks, I suppose we’d all be foolish to fret about such “trivial” matters as a new Russian incursion in Ukraine, China subjecting Taiwan to the Hong Kong treatment or Iran pretending like they’re going to build a bomb.

So, onward and upward it is, as we build on the third largest YoY rally in US equities in a century (figure below from BofA’s Michael Hartnett).


 

7 thoughts on “Flashpoints

  1. Guess its obvious from the Hartnett chart but big launches higher occur after bear market lows, typically not particularly unnerving for the bulls, yet this 15% gap to the 200dma and Peak PMI and extreme valuations (if anyone cares about that) are somewhat worrying for the near term outlook as we approach the old saw of Sell in May which is obviously why some chap invested $40 million into the July 25-40 Vix call spread

    1. Meant as a joke, I know, and I chuckled. But, really, how long can humanity continue down the road of mutually assured destruction? One mistake, one miscaluculation… and that’s all she wrote. Hegemony, global or othwerise, is an ugly word. Swords into ploughshares. For our kids’ and grandkids’ sake.

      1. Humankind has yet to be able to find the alchemy that turns swords into ploughshares. Is there a second Einstein waiting in the wings that will show us the way? Or does every species contain it’s own demise baked into a cosmic design we are incapable of understanding.

  2. One myth that has lasted throughout history is that all humanity is essentially good and people will eventually stop killing one another so they can take something that belongs to someone else. They (we) never have lived up to this myth and they never will. Any conclusion to the contrary is a delusion. I spent one of the most enlightening three hours of my life in a seminar with veteran full professor of psychology from Ohio State who spent most of his illustrious career conducting repeated experiments that proved that not only humans but essentially all animals will regularly act against their best interests and the interests of their neighbors to indulge in acts which provide only short-term personal rewards — in other words we are now and always have been eternally selfish. There may be some small communities of strongly religious individuals who eschew such behavior but any reasonable look at our collective history will show endless wars funded and fought by followers and zealots of all the world’s largest religions, and most of its smaller ones. The reason for our behavior is inherent in our genes, and those of all animals, ie., the gene, or genes, which drive us to actions that are intended to raise our chances of survival. Those who don’t have these genes usually fail to survive and don’t pass on their “bad” genes. Ensuring survival is a personal act which often involves co-opting all available resources by whatever means necessary, sometimes even sharing when it is the best option. However, doing anything to survive is, by definition, selfish. Richard Dawson, an eminent scientist and author even wrote a book about this topic, entitled “The Selfish Gene.”

    1. Which brings us to the nature-versus-nurture debate. Yes, our genes are selfish, but our brains are big and receptive to new ideas and modes of thinking. We just need new and better frameworks. Clearly, institutionalized religion has failed to persuade us to leave behind our selfish genetic baggage. One could argue that the green movement is a more sophisticated attempt to get humans to think altruistically about the greater good, but the forces opposed to it are entrenched and powerful. Could intelligent machines teach (coerce?) us to be better than our nature allows us to be? Perhaps, but I’m pretty sure I won’t be around long enough to find out. It’s a dilemma.

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