Market Slice: Summertime Blues?


Note to Market Slice Readers:

Traditionally late August is a slow time for markets, as institutional traders take their bonus-fueled vacations and the retail crowd (that’s you and me) enjoy the late summer days (and oh those summer nights… RIP Olivia Newton John!) This year, though, the market has put on a nice summer rally. While it’s not clear whether this uptrend is going to continue through to Labor Day, this month has seen more activity than the typical August… not that anything is really “typical” anymore!

Next week we will wrap up the market’s exuberant bounce from the spring lows, and reassess our opinion that we are still in a bear market. For this week’s issue, though, we want to look at three concerning long-term trends. These issues are likely to impact trading prospects through the rest of 2022, and are an important part of the macro investing environment.


The Weaponization of Everything

Image courtesy of Wired magazine

When the Biden administration seized the financial assets of the Taliban after the disastrous evacuation of Afghanistan, few noticed the extension of weaponization of the dollar from its use against Iran and Iraq under previous administrations. While appropriating the dollar-denominated resources of an enemy may have raised a few eyebrows, no one thought too much about it. This changed, however, with the seizure of Russian assets after the invasion of Ukraine.

For starters, Russia is a much larger country. Afghan assets taken totaled around $9.5 billion; The U.S. seized over $300 billion from the Russian Central Bank. Even more astonishing, another $30 billion was seized from private Russian citizens, the so-called “oligarchs.” (Russian billionaires are called “oligarchs.” American billionaires are called “billionaires.”) What makes this even more remarkable is that Russia was not engaged in any form of overt hostilities against the United States at the time. In other words, massive financial assets were taken – through U.S. control of global financial systems – from a government and, more ominously, private citizens, simply because we didn’t like something they did (assuming the oligarchs can be held responsible for Putin’s actions.)

There might be a tendency to say, “oh well, it’s the Russians, f- them.” The only problem with that is, this will not stop with the Russians. What we are seeing is the weaponization of the global financial system. The same thing played out on a smaller scare with the Canadian truckers protest, where donation funds and the bank accounts of protest leaders were frozen by the government. Prime Minister Trudeau quickly reversed course, but the message was delivered.

As we move closer to the imposition of a Central Bank Digital Currency, the danger of having the government’s finger on the financial resources of everyday Americans is daunting. It’s hard not to see a connection between the use of financial systems to punish misbehavior internationally and the retaliation against protesters at home.

Two weeks ago, we mentioned a provision in the misnamed Inflation Reduction Act that allocates $80 billion to the Internal Revenue Service. It is now being suggested this will mean 87,000 more employees at the IRS… many of whom will no doubt be tasked with collecting money owed by recalcitrant taxpayers. Of course, we have no reason to expect this expanded tax army would ever be used selectively against opponents of the government… do we?

Because the final weaponization we need to talk about is the use of the Federal Bureau of Investigation to raid the home of former President Donald Trump and seize allegedly classified documents, possession of which is allegedly a crime, or alleged to be proof of a crime, or something. We really don’t know, because the Justice Department is opposing the unsealing of the warrant that authorized the search.

Whatever you think about Mr. Trump, the use of Federal law enforcement in what appears to be a politically motivated case (at least until evidence of a major crime is presented) can only be considered chilling to freedom and democracy. As Michael Every of Rabobank put it,

“the smell of banana (skins) is strong in this republic from many sources.”

Or as Frank Miele put it on RealClear Politics:

“Nothing symbolizes the decline of the American republic better than the weaponization of justice that we saw last week when the FBI raided the home of former President Trump.”

Now, back to the IRS, where Florida governor Ron DeSantis connected the dots nicely:

“The raid of MAL is another escalation in the weaponization of federal agencies against the Regime’s political opponents, while people like Hunter Biden get treated with kid gloves,” said DeSantis. “Now the Regime is getting another 87k IRS agents to wield against its adversaries? Banana Republic.”

Coming Soon to a Continent Near You — Europe’s Dark Winter


Returning to Michael Every’s comments for a moment, he also noted that the Rhine River in Germany is at historic lows. He relates this anecdote:

Germany’s falling water levels are not just stopping normal Rhine trade flows, disrupting supply chains, but are exposing “Hungersteine,” or ‘hunger stones’. These messages carved into the rock hundreds of years ago warn, “Wenn du mich seehst, dann weine” – “If you see me, weep.”

There is likely to be plenty of weeping in Germany, and throughout Europe, before the end of the year. Already soaring electricity prices are creating discomfort as the continent experiences a record heat wave, and with the Ukraine war dragging on and Russian sanctions still in place, the prospects for a very cold winter, piled on top of food shortages and supply chain disruptions PLUS an intractable debt crisis spells bad news for the Continent. American investors sometimes forget how important European markets are for U.S. companies. Financial institutions in particular are deeply entwined with the banks “over there.”

There’s an old saying that when America sneezes, the world catches cold. But this year, it could be the case that Europe’s cold, hungry winter and fragile economic health could make our domestic economy sick. And if things go south in a big way in Europe, we may get a reversal of the WWII song… because if the European economy crashes, it will be very bad for Americans.


Poking the Tiger

When Congressperson Nancy Pelosi traveled to Taiwan early this month, it evoked a predictable response from the Chinese government. Sensitivity over Taiwan is a major hot button for the Communist Party leadership, so the trip can only be seen as a deliberate provocation. The real question is why?

Behind the façade of Pelosi’s grandstanding, and the follow-up visit by a Congressional delegation two weeks later, is a hodgepodge of domestic and geopolitical motivations, ranging from the desire to deflect attention from inflation and problems in the U.S. economy, to an attempt to alter the balance of power in the South China Sea. Many commentators see the China issue as a simple question of how to combat a totalitarian – some would say outright evil — regime. Yet many of the more odious aspects of the Chinese system, from draconian COVID measures to the Orwellian social credit system, have been enthusiastically embraced by the West.

At the same time, the biggest U.S. investment firms have poured untold billions into the Chinese economy… and stand to absorb massive losses if relations between the two countries worsen to the point of war, or even retaliatory economic measures. So even as the U.S. government is poking the Chinese tiger, the administrative state and corporate power structures are moving closer and closer to full integration with the Chinese Communist regime.

It would take a whole issue of Market Slice and then some to untangle the knots contained in the China narrative. For now, we’ll close with this observation from veteran journalist Matt Taibbi, who has become one of the leading independent critics of the corporate media narratives that drive perception in contemporary politics.

This quote is in reference to the Mar-a-Lago events, but the lead sentence speaks to the China drama, as well:

We’ve reached the stage of American history where everything we see on the news must first be understood as political theater. In other words, the messaging layer of news now almost always dominates the factual narrative, with the latter often reported so unreliably as to be meaningless anyway. Yesterday’s sensational tale of the FBI raiding the Mar-a-Lago home of former president Donald Trump is no different.

As of now, it’s impossible to say if Trump’s alleged offense was great, small, or in between. But this for sure is a huge story, and its hugeness extends in multiple directions, including the extraordinary political risk inherent in the decision to execute the raid.

What we are seeing with Pelosi’s trip to China, as with Biden’s posturing around Ukraine, the January 6th hearings, and every other story in the news is political theater where messaging replaces facts as the primary purpose of the communication, and truth plays at best a minor role.

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