The Bulls Roam Free While Putin Remains Shackled — How Money Impacted GeoPolitics This Week

Putin may be trying to dethrone America and Western liberalism but this week’s geopolitical events show he’s not only fearful of travelling abroad but as dependent as ever on the dictates of the West. And as US equities roll merrily along it must be galling for him to see Americans growing wealthier while allocating a portion of their resources to arming Ukraine to kill Russians. While this poetic justice invigorates the bulls the fact of earnings reports this week reveals that anything at all will invigorate the bulls. The macroeconomic picture grows cloudier and that will fell both the bulls and Putin’s vaunted Russian economy, a coincidence that becomes clearer when one examines the dollar. For now the bulls are simply looking forward to a hot weekend and consequently dollar dynamics aren’t capping euphoria. 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), but my technical reading of key stocks in the S&P 500 is neutral. There are several negative factors across global asset classes. The action in currencies signifies $US strength. The US yield curve is rising and in the current context that is bearish. Inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days toward 4600 before correcting hard.

Putin wants the BRICS to replace the West but he won’t be there this time around to tout its progress. Even worse is that the BRICS are comically unable to forge a geopolitical force since they don’t agree on a historical narrative, lack cultural similarities and often have diametrically opposite economic goals and needs. What unites them is the expediency of anti-Americanism, as they see America’s liberalism as threatening to their autocratic tendencies. So Putin’s humiliating imprisonment in Russia gives them all the more reason to vent at America’s economic hegemony and particularly as the role of the dollar at the all-important reserve currency. Such is the bizarro world that the bulls’ case dovetails with the anti-American sentiments of the BRICS nations and their desire to dethrone the dollar.

The bulls claim a virtuous cycle is in the works where dollar decline provides a tailwind to US multinationals and profoundly aides the global economy since so much of global trade requires the dollar as an intermediating currency. A weaker dollar would facilitate trade at better prices for non-US entities but also hasten the case for alternative reserve currencies, which would relieve the world of the occasional disaster of dollar shortages, where global supply chains seize up because the global financial system is coveting dollars and will only lend them out at high rates. Unfortunately the overvaluation of US equities is occuring at the same time there are shortages of high quality collateral, most of which is in dollars.

Securities Finance Times notes “Market dynamics force firms to seek out new sources of collateral…the demand for high-quality collateral has intensified for financial institutions. This follows the introduction of Phase 6 of the BCBS-IOSCO’s Uncleared Margin Rules (UMR) in September 2022. Phase 6 of the UMR subjects a wider scope of bilateral counterparties trading uncleared over-the-counter (OTC) derivatives to additional margining requirements — forcing them to source and post further collateral.”

The Fed’s policy of reducing the balance sheet only makes this collateral richer and raises the risk of dollar shortages. Last week the Fed reduced the balance sheet by a modest $23bn but excess reserves increased by $58bn as the Fed did $90bn less in RRPs while the TGA increased by a modest $20bn. Excess reserve balances are at their highest in a month. So the trend is clearly in place to keep the dollar at current levels, but liquidity continues to be strong as power equities higher. This is potential double-hurt on the BRICS, as future dollar strength limits their economic growth while a correction to US equities will bring down global equities and confidence with it. A foretaste of this is whats happening in China, where lack of confidence feeds on itself and puts the autocrats in a bind, ever dependent on America. And what’s happening in China will soon afflict the bulls too, another case of poetic justice.

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