MARKET PERSPECTIVE

By J Mulraj

April 21-28, 2023

To swallow or to protect?

Being a leader of a world power imposes onerous responsibilities on him. After WW II, USA became the dominant economic power, and its currency, pegged to gold, became universally  accepted by others. The US did a deal with other nations, under which it guaranteed freedom of navigation in international waters to countries, in return for support against Russia. Prior to this, only large countries could trade on the oceans, as they possessed,  and could afford, military escorts to protect ships against piracy. Once USA guaranteed the safety, smaller countries could trade globally, including in items of low value. This created a wave of globalization, prior to the one led by computation/communication technology, and excellently described by Thomas Friedman in his  book ‘The World is Flat’.

But to ensure freedom of navigation, USA had to have military bases around the world, and now has around 1000 of them. The global leader has the ability, and the responsibility, to use this military might to ensure freedom of navigation, combined with the ability, and the responsibility, to use its financial muscle, through the use of sanctions, against those crossing its red lines.

It is this that has, perhaps, led to a situation where it seems that US President Biden has, as depicted in the illustration, bitten off more than he can chew.

In order to protect freedom of navigation and encourage global trade, Biden has had to counter a belligerent China which claimed, defying an international judgement, its right over the whole of the South China Sea. It did this because it wants to solely exploit vast oil/gas resources on its seabed. USA now visualizes a face-off against China, over Taiwan, which China lays claim on, and vows to take control of, using force, if necessary.

So, externally, Biden is dealing with

> a Russian incursion into Ukraine

> a disgruntled France suggesting that EU pursue its own foreign policy, and not toe the American line

> a belligerent China threatening to take over Taiwan

> an annoying North Korea displaying its nuclear might over South Korea, which Biden has promised to protect

> an irate Iran heading towards obtaining a nuclear bomb, and having a delivery capacity for its use

> a miffed Saudi Arabia, once an ally of USA, now cozying up to China, which succeeded in bringing Saudi and Iran together, against mighty odds, and others, including an African continent being wooed by China and feeling jilted by America.

That’s a heck of a lot to chew on.

But there’s more!

Domestically, Biden is dealing with multiple issues. These include a debt ceiling imposed by US Congress, which is soon to be hit, one that requires approval of a Republican dominated Congress to be raised. Treasury Secretary warned that a failure to raise it would not only trigger a debt default, hence a lower credit rating, it would also risk mass unemployment.

The House of Representatives has just passed a bill to raise the $ 31.4 trillion ceiling by another $ 1.5 trillion, as a stop gap measure, pending long sought after negotiation between Republicans and the White House, to chart a course to cut expenditure, in order to avoid a future raising of the debt ceiling.

Whether out of obduracy or hubris, Biden has, foolishly, refused to discuss this, with Republican House Speaker Kevin McCarthy. The bill passed by the House is likely to be opposed by the Senate, which is controlled by Democrats; but should it pass, would face a Presidential veto. This forebodes ill for America’s economic future, and for stock market bulls.

Then there is the ongoing crisis in US banks. First Republic Bank is the latest. The global banking industry has an inbuilt weakness. Its liabilities, viz. deposits, are short term, payable on demand. Its assets are T Bills and loans, which are long term. This asset-liability mismatch will pose a problem whenever perception of weakness leads to a run by customers seeking withdrawal of deposits.

The political fallout of the Hunter Biden laptop, which apparently contains evidence of payments to him and family members by a Ukranian firm, is a Damocles’ sword, hovering over Joe Biden. Worst still, former CIA head Mike Morell has stated that Anthony Blinken, then a campaign official, now Secretary of State, had approached Morell for help to get other FBI agents to label the laptop story as Russian disinformation. This effectively underplayed the story and could have influenced the election.

The US banking industry has become wary of providing liquidity. One sector so deprived is auto dealerships were banks such as Wells Fargo and Capital One have stanched dealer financing.

The auto industry contributes 3-3.5% to US GDP, and lots of primary and secondary jobs.

Biden also has had to deal with the strong environmental lobby, under pressure from whom, he had stopped, immediately on assuming office, grant of further land leases for the shale industry. Because of the loss of production of oil from the industry, US has again become dependent on other countries for its energy needs. Biden labelling MBS, the crown prince of Saudi Arabia, as a pariah, didn’t help him in pleading with MBS for increasing production. Oil prices remain high.

Given the seemingly impossible problems, both external and domestic, he has to handle, it is a wonder that Biden has announced his intention to run for President again, in 2024.

Last week the BSE sensex rose 1457 points to end at 61112.

What now? Russia is preparing for a decisive assault against Ukraine, once the soft soil, wet from rains, hardens enough to allow tanks to roll over. Perhaps forseeing the consequences, and under pressure from its patron, USA, President Zelensky of Ukraine called President Xi of China, acting as peacemaker, and had a long conversation. Xi’s plan calls for Russia to retain conquered territory, and a ceasefire to prevent further annihilation of Ukranians. A negotiated end to the conflict would cheer stock markets, and provide an exit opportunity.

For there are far too many things on Biden’s plate for him to be able to handle.

Picture Source: https://openart.ai/discovery/sd-1007085026069991554

Comments may be posted to Jmulraj@gmail.com