Divergences--Geopolitical and Economic

The real injustice, I said, beginning to get heated, is that an honest man must live a penurious life in our country.

The Sympathizer, Viet Thanh Nguyen, 2015

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Highlights of today’s post:

1.        Geopolitically, the gap between countries off track and those with some form of electoral course correct is widening.

2.        Financially, the easing cycle has begun … outside the US.

3.        US data looks wonky.

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THIS IS NOT INVESTMENT ADVICE. INVESTING IS RISKY AND OFTEN PAINFUL. DO YOUR OWN RESEARCH.

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Russia Versus India

This week, I found the gap between a chastised Modi and a self-confident Putin to be instructive.   In India, Modi’s Bharatiya Janata Party is set to lose its parliamentary majority. It’s a reminder electoral systems provide invaluable course correction. That’s true in every country, including the US.

In Russia, Putin led the St. Petersburg economic forum. Seats that were once filled with the apex of Western finance are now occupied by the Taliban. Russia has become a pariah state. In the Tweet below, Sasha Kmett wrote: The Columbian and Mexican cartels are in disbelief and ask, how come the Taliban are invited to the St. Petersburg Economic Forum and we aren’t?

In the US, Trumpism can also be thought of as an electoral course correction. His surprise 2016 upset led to a U-turn on China policy and, with the added stress of COVID-19, massive infrastructure investment. These were all concrete ways of Washington acknowledging they had received the memo. For Trump to be elected, the lumpenproletariat had to be pissed and required substantial policy change.

If Trump’s act is now stale, Putin’s is the rock-hard crust of ossified bread. The bright future he has been preaching for a quarter century has revealed itself to be a wasteland of murder. That’s true for Russia’s poor in particular, who are disproportionately getting killed on the front. Of the 360,000 troops sent into the war, 315,000 of them have either been killed or wounded, based on December 2023 data. If a clean election was possible in Russia, I suspect a Trump or Modi-like course correction would have happened long ago even for a land, like Russia, habituated to bad government.

Investment Outlook

This week the Bank of Canada and the European Central Bank cut interest rates. The money quote was from the head of the ECB. Paraphrasing, she said inflation had fallen from 10% 2 years ago, to 5% a year ago, to 2+% now and if it fell by half again, to 1%+, that would be a problem. I show the chart below. The logic of the Bank of Canada was similar.

That’s what inflation looks like in the US, too, except slightly less extreme.

Why did this happen? Because central banks all stepped on the brakes at once: stimulus (inflation) and response (tightening). Below I show one-year bond yields.