Heat Check

Market participants — those not on vacation, anyway — have busied themselves recently obsessing over the veracity of sundry “peak inflation” narratives and the implications for the September FOMC meeting.

We should perhaps take a step back to remind ourselves that the difference between a 50bps rate hike or a 75bps move next month from a panel of technocrats in Washington isn’t an existential issue. Indeed, for all the hand-wringing and breathless coverage, there’s a very real sense in which the size of the Fed’s next rate hike only matters to STIR traders. For a handful of market participants, getting that call right means the difference of millions of dollars. For everyone else, it may as well be a distinction without a difference.

With that in mind, it’s worth refreshing the geopolitical discussion. That is: A discussion that actually matters, or at least has the potential to matter, to everyone. I’ve learned over the years that readers are best served by calibrated coverage of political flashpoints, where “calibrated” means dialing coverage up and down in direct proportion to the perceived market relevance. To be sure, it’s always possible to posit a market link to political stories of any consequence, but belabored efforts in that regard aren’t especially helpful and can be dilutive if handled improperly.

Simmering tensions between the world’s two superpowers will ensure geopolitics remains topical for market participants. Several years into the multi-sided standoff between the US and China, we can confidently say the world has a new cold war, although some aren’t fond of that characterization. Less than two weeks after Nancy Pelosi drew the ire of Beijing with a highly publicized stopover in Taiwan, Senator Ed Markey led a congressional delegation to the island, where US lawmakers will spend two days with senior officials discussing “regional security, trade and investment, global supply chains, climate change and other significant issues of mutual interest,” according to a Sunday statement.

One “significant issue of mutual interest” is Xi Jinping and what everyone hopes isn’t a plan to seize the island anytime soon. Beijing’s response to Pelosi’s visit was predictable: Drills, missiles and bombast. What’s interesting is the extent to which the US appears especially keen on frequent shows of support for Taiwan. You don’t have to be any kind of expert to suggest those displays convey an elevated level of concern over Xi’s intentions, although I’d reiterate that a worst-case scenario is highly improbable.

Hong Kong-style appropriation won’t work with Taiwan for a laundry list of reasons, and in addition to being wildly reckless, a military “solution” would completely undermine Xi’s pretensions to fostering a live-and-let-live world where an unofficial doctrine of “mutual respect” is the ordering principle. Nobody (outside of the Kremlin anyway) would buy the excuse that mutual respect doesn’t apply to Taiwan because it’s China’s anyway, and that Xi was forced to commandeer it because too many foreign dignitaries had dinner on the island. On Sunday, Taiwan said eleven Chinese military aircraft crossed the Strait’s median line.

As for that “other” geopolitical flashpoint, there’s a risk the world leaves Ukraine for dead. Figuratively and literally. The problem isn’t Western governments’ commitment to supporting Kyiv. Rather, the issue is that voters, and particularly American voters, aren’t exactly renowned for familiarity with geopolitics. The American electorate has to be galvanized by something tangible, like an attack on the homeland, real or imagined. The Ukraine conflict is still very real for many Europeans, but in America, the war was only as real as gas prices were high.

Notwithstanding a juvenile political marketing campaign wherein everyday citizens were enlisted in the propaganda wars via small stickers of Joe Biden with the caption “I did this!” designed specially for placement on gas pumps, most Americans understood that the abrupt surge in gas prices was at least related to Ukraine, irrespective of whose fault the conflict was in their minds. Prices at US gas pumps just fell every, single day for nine consecutive weeks.

If gas prices stay tolerably “low” and there are no other tangible consequences for average Americans (where that means something that directly affects them on a daily basis), they’ll lose interest in Ukraine. With the midterms approaching, the culture wars raging and Donald Trump’s feud with the FBI now dominating the nightly news, it seems unlikely that Ukraine will be a fixture of the national debate, ironic considering Trump’s first impeachment was due entirely to his administration’s efforts to conscript Volodymyr Zelenskyy in America’s domestic political wars with a weapons-for-Biden-dirt scheme.

Grain from Ukraine is slowly making its way to global markets, but there’s nothing “normal” about the shipments. And now, artillery fire near the Russia-controlled Zaporizhzhia Nuclear Power Plant is raising concerns of an accident and prompting civilians to flee a nearby town. Apparently, Russia is firing on Ukrainian positions from the plant, knowing Ukraine can’t return fire without risking a catastrophe.

Again: The highly unfortunate reality is that the average American voter isn’t likely to care, and it’s not a stretch (at all) to suggest that a sizable portion of the electorate has now mentally consigned Ukraine to a fate of perpetual war. Just another place no one can identify on an unmarked map doomed to bloody conflict. (“As long as college football starts on schedule…”)

I doubt seriously there’s much public support for US funding. Rather, voters simply aren’t able to draw any sort of connection between their own finances and federal aid to Ukraine. The Trump wing of the GOP is ascendant and, generally speaking, isolationist. I’d venture it’s just a matter of time before someone from that contingent attempts to rally the “base” against additional funding, if they haven’t already. This isn’t John McCain’s GOP. Just ask Liz Cheney, who was on her way to a landslide loss in Wyoming’s Republican primary.

Apathy won’t set in as quickly among Europeans given both geographical proximity to the war and its impact on gas prices — the other kind of gas. There was some good news on that front over the weekend. Germany said its storage facilities are 75% full, suggesting the country’s efforts to bolster supplies amid Kremlin curbs are two weeks ahead of schedule.

The real irony in all of this from an American perspective is that the US is increasingly described as a country experiencing a “cold civil war.” If, heaven forbid, it thaws, one can only hope the world doesn’t forget the millions of Americans caught in the middle the same way this generation of Americans tends to forget the millions of people around the globe dodging bullets.

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17 thoughts on “Heat Check

  1. Won’t the market rip higher if Iran returns to the nuclear deal as Mr. Market fully embraces the narrative that peak energy (oil also drives coal and gas due to substitution) implies peak inflation implies peak rates?

    The Fed will continue to raise at the short end and QT will progressively drain liquidity, but Mr. Market will be kitted up to climb the Wall of Worry. It’s a venal sin to lose money in a bear market; it’s a mortal sin (to one’s career and reputation) to fail to participate in the recovery rally. The rally will be fueled by underweight managers progressively capitulating to the emerging consensus that they have missed the bottom.

    1. Salman Rushdie’s stabbing must be sufficiently forgotten first, otherwise a deal would look even worse than it already is, cosmetically.

  2. The public may tire of Ukraine but the dod, state dept and nato won’t. We have a proxy war on the cheap damaging Russian offensive capability. Biden will fund the Ukrainians as long as they can hold off Russia. Bad for Ukraine, as we won’t help more than that.

    1. If Biden can’t turn things around, Democrats will lose Congress and then, in 2024, the White House. Assuming Trump (or a chosen successor) ends up in the Oval Office, the US may well abandon NATO, as Trump threatened to do on several occasions. Contrary to one reader’s assessment (from a comment a few days ago), recent events (i.e., revelations) further support the contention that the US was perilously close to a scenario in which all organs of the state were completely subservient to the executive during the last administration. If America goes the way of soft autocracy a couple of years from now, it won’t matter what the DoD thinks, and that assumes the Pentagon would think any different from the executive, a questionable proposition given that autocracies are only durable to the extent the autocrat has something akin to total military buy-in. This is why it’s so critical that Democrats abandon the nice guy/ nice gal, play-by-the-rules, win-with-rationality, approach before it’s too late. Of course, they’re unlikely to do that. Both parties live in a fantasy world. The GOP lives in an alternate reality where there’s no such thing as facts, and autocratic rule is seen as a desirable state of affairs. Democrats still believe “this is not who we are” (so to speak) despite watching two consecutive national elections during which half the electorate proved, beyond a shadow of a doubt, that yes, this is in fact who we are. Also, as another reader pointed out previously, it’s very likely that Trump would’ve won (fair and square) in 2020 were it not for the pandemic and summer street battles (bleach injections and burning cars were seemingly a bridge too far for some swing voters).

      All of that to say that allusions to the DoD and State are about as useful these days as references to SCOTUS — so, not very useful. All of these institutions are subject to being commandeered, and the unfortunate irony is that the American electorate is so deluded that half of the populace believes the people doing the commandeering are the ones trying to save them. There is, in fact, a conspiracy afoot. The people doing the conspiring are, in an irony of ironies, the conspiracy theorists.

      The rest of us are apparently hostage to these folks because our commitment to due process (and so forth) means effectively suspending disbelief under the banner of presumed innocence. I’d suggest those two things aren’t the same thing. When we witness crimes (and particularly instances of espionage and “light treason,” as it were) with our own eyes, the presumption of innocence is a farce. It might be tenable to follow protocol in a situation where time isn’t of the essence. So, for example, if I see you steal my TV and I film you doing it from my driveway, I suppose you’ll still be entitled to a trial, and that’s fine because i) you’ll surely be convicted on the evidence, and ii) there’s no chance that your act is going to trigger an existential threat to national security.

      In the current circumstances, Democrats are countenancing a simmering threat to the republic in the service of ensuring due process for people who are unfortunately bent on replacing a nominal democracy (where “nominal” is a reference to all the many ways in which the system is broken) with a soft autocracy. The longer Democrats countenance that while in power, the more perilous the situation becomes.

      I worry (for the rest of you, because it isn’t likely to affect me), that come January 2025, the part of the electorate who doesn’t care about NATO or alliances in general (on the foreign policy front) or the rule of law (on the domestic front), will be the only part of the electorate which matters, because their votes will be the only ones counted in all subsequent elections. Democrats have an opportunity, right now, to prevent that outcome and thereby ensure that the entire world doesn’t look totally different 10 years from now than it does today. It looks, though, like they’re going to squander that opportunity.

      I don’t think I have many longtime readers who favor a shift to soft autocracy, but I do have a sizable Republican readership, and to the extent those folks are inclined to support anyone who runs on the GOP ticket in a protest vote against Democrats, I’d strongly encourage you to consider the possibility that autocracy won’t be what you expect. Perhaps the more effective way to put it is this: If you’re inclined to support the former president for another term, at least consider the possibility that should he win in 2024, and then, subsequently, some new Republican comes along offering a vision for the party and the country that seems preferable to you, that person will not be allowed to run, either because terms limits may be suspended by then or because the party decides that the president gets to choose who will succeed him and as such, no primaries will be “necessary,” where “necessary” means allowed.

      I’m not sure what the solution is, but what I do know is that the world (and thereby markets) would be a very volatile place in the event the US morphs into an autocracy. I remember (distinctly) being derided for suggesting in September and October of 2020 that Michael Cohen may have been onto something when he insisted, under oath, that in his opinion, there wouldn’t be a peaceful transfer of power in 2020 should Trump lose. I think we are all (Democrats, Independents and Republicans) deliberately underestimating the potential for a very bad outcome a few years from now because we worry about what might happen today if we prosecute high profile individuals the same way we’re prosecuting the nobodies who acted based on their implicit exhortations.

      1. This is a great and thought provoking addition to your original post.
        I am struggling to understand why this will not affect you.

      2. If you prosecute the high profile individuals you are susceptible to being blamed in the present. If you don’t, you increase the odds of catastrophe in the near future, but you won’t suffer now. History is mostly in he story of people choosing the latter.

      3. Amen, brother…
        …and this is where Manchin and Sinema’s failure to stand up for US voting rights may be the knockout blow to American democracy…my fledgling at best hopes for the future involve the necessary rallying for the planet as it can’t take care of us if we don’t take care of it…but unfortunately if governing power is lost we may see a day where environmental science (with all else) becomes subservient to the priorities of the State…who is George Orwell…?

  3. As you note, many/most Americans care little about Ukraine, outside of the impact on energy & food prices.Taiwan is a different story. We NEED those chips that go into our iPhones & iWatches! They are worth going to war for.

    During the 50s and 60s CKS. the charming Madam Chiang and Life magazine bamboozled Americans into supporting Formosa as a buttress against the Red Menace. Their “Fortress Taiwan” strategy has been a brilliant extension of that strategy. We’ve been played!

  4. I simply cannot imagine any American who did NOT vote for Trump in 2020 deciding to vote FOR him in 2024. His brand is utterly toxic as far as the majority of Americans are concerned and his support in any future run (if he’s not in jail by then) won’t go much beyond 35% of the electorate.

  5. Republicans are willing to cut the baby in half to get what they want, Dems are not. Unfortunately the American people may not be as wise as king Solomon.

  6. Mr. H, please save me a seat at the tiki bar. If Trump wins in 2024 I think the exodus would rival what happened in Russia this year. Well, at least a solid 2nd position on the list of countries experiencing brain drain.

  7. H-Man, the world and our country is one giant cluster with no light at the end of the tunnel. It would seem that no matter where we step, more eggshells are being crushed. We need leadership to move us out of this morass but alas, at last count, we having nothing but sycophants who do nothing but polarize the situation. So, where is a messiah when you need one?

  8. I am trying, with great difficulty, to reconcile the prevailing state of fragility and liquidity in the markets, with the market’s seeming disinterest in responding to very large macro and geopolitical developments and impacts of late. There seemed to be a time when international hostilities, civil unrest, climate catastrophies, international price fixing, pandemics, trade disruptions and political scandals had more than a daily news cycle’s effect on the markets. Instead, it seems that despite the impaired state of the markets, they largely continue to chug along on trend, increasingly determined merely by inflows/outflows and nonhumans, and increasingly impervious to all the human pressure and shenanigans afoot.

    There used to be good and bad. Now on top of that, there is “good for the market” and “bad for the market,” and as the correlation has clouded and splintered, it’s almost as if the market has become it’s own (largely central bank-driven) thing, less and less dependent on anything non-specific to the market going on around it.

    I may not get there with you, but I can almost foresee the end of mankind coinciding with the mother of all bull markets.

    “World Population Hits Record Low as Market Charges to New All Time Highs on Hopes for Fed Pivot.”

    1. “Instead, it seems that despite the impaired state of the markets, they largely continue to chug along on trend, increasingly determined merely by inflows/outflows and nonhumans, and increasingly impervious to all the human pressure and shenanigans afoot.”

      Yep. It’s also why earnings and valuations don’t matter much. But for many of us, it’s our job to pretend that they do.

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