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.