What global financial markets are telling Biden about geopolitics – Archyde

Stock and bond prices may appear random on any given day, but the state of the world has a deeper meaning when you know where to look. Beyond a company’s prospects or the durability of the current economic cycle, there are important messages about world order that US President Joe Biden’s advisers should keep in mind as they prepare to update the national security strategy and ritual elaboration of his state to initiate the union speech.

Of course, financial markets don’t really fully measure the global economy, let alone all of its social and political dynamics. They also distort actual developments due to what former Federal Reserve Chairman Alan Greenspan called “irrational exuberance,” whether it be the euphoria surrounding the first generation of dot-com companies at the turn of the millennium or the full-blown panic triggered by the sudden emergence of a new and contagious virus two years ago. Still, persistent patterns in the $230 trillion sloshing around the stock and bond markets provide a numerical measure of what’s right and wrong in the world, much like a thermometer gives a rough indication of a patient’s health.

While we all strive to describe this confusing period in something more descriptive than the “post-Cold War era,” financial flows offer some surprisingly clear geopolitical outlines that should shape the President’s agenda.

Stock and bond prices may appear random on any given day, but the state of the world has a deeper meaning when you know where to look. Beyond a company’s prospects or the durability of the current economic cycle, there are important messages about world order that US President Joe Biden’s advisers should keep in mind as they prepare to update the national security strategy and ritual elaboration of his state to initiate the union speech.

Of course, financial markets don’t really fully measure the global economy, let alone all of its social and political dynamics. They also distort actual developments due to what former Federal Reserve Chairman Alan Greenspan called “irrational exuberance,” whether it be the euphoria surrounding the first generation of dot-com companies at the turn of the millennium or the full-blown panic triggered by the sudden emergence of a new and contagious virus two years ago. Still, persistent patterns in the $230 trillion sloshing around the stock and bond markets provide a numerical measure of what’s right and wrong in the world, much like a thermometer gives a rough indication of a patient’s health.

While we all strive to describe this confusing period in something more descriptive than the “post-Cold War era,” financial flows offer some surprisingly clear geopolitical outlines that should shape the President’s agenda.

America still dominates. This is not entirely obvious given the headlines about democracy on the brink since the US Capitol uprising or the faltering US leadership after the Kabul airport debacle. Biden’s foreign policy priorities should highlight the fundamental truth that the world still has overwhelming faith in US institutions. For all the latter’s malfunctions, investors are still willing to pay 21 times next year’s earnings for companies in the S&P 500 Index, compared to 15 times for the Euro Stoxx and 18 times for the Japanese Nikkei. Low US Treasury interest rates reflect flows from around the world that see no better combination of high yield and low risk.

China continues to grow apart. The world’s second-largest economy still makes up only about 4 percent of the MSCI All Country World Index, in no small part because of Beijing’s persistent barriers to entry. Volatile stock returns have been a terrible indicator of China’s stunning economic performance, in part because of the tight mix of public companies, patchy corporate disclosures and rules restricting foreign investment. But the discrepancy in index weights actually reflects the larger truth that significant barriers to the country’s financial integration into global markets remain. Even if China continues to grow and become richer, it may depend more on its own resources and domestic market demand than on foreign investment and exports. Washington will continue to make its wish list for changes in a number of Beijing’s policies, but the shape of the markets reflects a sense that China will choose its own path.

Russia remains a regional power. Western warnings of the increasing threat of Russian troops massing on Ukraine’s border sparked a nearly 20 percent selloff in the Moscow Stock Exchange last fall. At the same time, the price of oil — a key Russian export — moved more on Omicron’s fears than the possibility that conflict could disrupt supplies. Since negotiations between the US and Russia ended in a stalemate last week, Russian company stock prices and the ruble have continued to fall, even as oil prices have risen sharply. The crisis could still escalate and have wider implications for energy prices, but markets are telling the Biden administration that Russia’s threat is serious but not global.

World leaders are still not serious about climate change. While various systems have been established to put a price on carbon, 80 percent of global emissions remain priceless. Economists at the International Monetary Fund suggest rich countries need to charge at least $75 per tonne to accelerate the transition to renewable energy, but the global average price of emissions is $4. The President may call climate change an “existential crisis,” but it will take more than high-flying rhetoric to convince markets that change is at hand. Changes are also unlikely to materialize until markets start pricing them in.

The recent rise in energy prices has been attributed to underinvestment in oil and gas exploration, partly due to environmental pressures to limit fossil fuel production, and the day may be approaching when concerns about long-term supply will push prices up to drive. However, the currently high crude oil prices are being driven much more by the rapid recovery in demand and tight supply management by OPEC. Even Europe’s sky-high natural gas prices are related to weather and storage constraints rather than the possibility of gas production running out anytime soon.

Technological change has only just begun. Fears of rising interest rates over the past few weeks have sparked a sell-off in cryptocurrencies and tech stocks, but investors are still willing to pay a premium for Microsoft, Apple and co. These particular companies may or may not deliver, and many of the other current market darlings won’t, but technology valuations reflect an overwhelming sense that more disruption is on the way. That means more than new apps that support working from home. Rather, it is the combination of low-cost sensors, cheap storage, ubiquitous cellular networks, and rapidly evolving artificial intelligence that will disrupt almost every business model.

Of course, it’s still a physical world where demand for commodities, industrial goods, and consumer goods will dominate, but the most successful companies in all of these sectors will make better use of technology. Data will be part of what historians use to describe the next decade, and markets are reminding the Biden administration that it needs a comprehensive plan that supports innovation, strengthens cybersecurity, ensures privacy and protects competition.

Of course, markets aren’t always right when it comes to geopolitical risks. While investors worry about recent tensions in the Strait of Hormuz or on the Korean Peninsula, the probability of a catastrophe is difficult to measure and even harder to correlate to financial returns.

But when there are enduring and obvious patterns, financial markets reflect fundamental geopolitical truths. The Biden administration’s international priorities shouldn’t end with a review of market messages, but there are worse places to start.

Reference-www.nach-welt.com

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