Preparation for the New Cold War Era - A Reinterpretation of Austerity
- Minwu Kim
- 2022년 3월 29일
- 3분 분량
A. Overview of Market Dynamics:
In a retrospective analysis of the geopolitical tensions arising from the Russia-Ukraine crisis, I posited a nuanced perspective on market trajectories:
- In the immediate aftermath of the conflict's resolution, a transient market rebound is anticipated.
- Over the mid-term, market sentiment is expected to remain subdued, contingent upon a shift from the Federal Reserve's current restrictive monetary stance.
- The long-term outlook suggests a market resurgence upon the Federal Reserve's transition to a more accommodative monetary policy.
Two weeks subsequent to this assessment, the validity of this scenario persists. Presently, there are minimal indications of a conclusive end to the conflict; however, the US market has exhibited a notable ascent of 10% subsequent to the Federal Open Market Committee (FOMC) meeting in mid-March. This uptrend signifies a partial mitigation of the adverse market impacts attributed to the conflict.
This juncture poses a critical question: Is this upswing a precursor to a sustained bull market, or merely a fleeting recovery? My analysis leans towards the latter interpretation.
Market participants in the recent fortnight can be broadly classified into five distinct categories:
1. Proponents of the Federal Reserve's eventual policy relaxation in response to economic deceleration.
2. Advocates for the transient nature of inflation, contingent on the resolution of oil price fluctuations and supply chain disruptions.
3. The "There Is No Alternative" (TINA) cohort, endorsing equities as the paramount investment avenue in a low-interest rate environment.
4. Individuals oblivious to the paradigm shift in market dynamics, reminiscing the bullish market of 2020-2021.
5. Institutional investors engaging in quarterly portfolio rebalancing, driven by predetermined asset allocation mandates. For instance, a fund adhering to a 60/40 stock-to-bond ratio, encountering a deviation to a 55/45 ratio by mid-March due to a market downturn, would necessitate stock purchases to reestablish the 60/40 equilibrium around April 1st.
The investment rationale of the latter two groups warrants minimal discussion. For the former three categories, the timing post-FOMC may have been opportune for acquisition, yet a comprehensive market recovery appears to be a protracted process.
In analyzing the current market rebound, it is imperative to recognize that the market is transitioning from "anticipation of austerity to confidence," without the commencement of actual liquidity contraction. An abundance of unallocated capital remains circumspect in its search for investment havens.
Consequently, I maintain a cautious stance regarding the market's capacity to renew its peak until the culmination of the Federal Reserve's restrictive policy phase.
B. Resurgence of Cold War Dynamics: An Additional Vector for Austerity
In prior analyses, I identified two primary catalysts behind the Federal Reserve's austerity measures:
- Inflation mitigation
- Strategic positioning vis-à-vis China
This discourse introduces a third dimension: preparation for an emergent cold war era.
Recent proposals from the Biden administration advocate for a 10% enhancement of the defense budget, an augmentation from the initial 5% proposition in December. An insightful article from Forbes provides a historical parallel:
The Ukraine crisis transcends a mere regional conflict, serving as a clarion call for a generation accustomed to peace. The aggression by the world's second military power on Europe's frontier marks a pivotal juncture in the hegemonic rivalry between the U.S., China, and Russia, potentially precipitating escalated defense spending globally. The proposed 10% increase in U.S. defense expenditure may herald this trend, with probable implications for inflation due to augmented governmental expenditure.
This scenario posits an additional variable for Federal Reserve Chairman Powell's consideration, reminiscent of Volcker's strategy to facilitate Reagan's military ambitions through high-interest rates. This historical context may shed light on the Fed's abrupt policy pivot in December, amidst emerging military tensions and the prelude to the Ukraine crisis, indicating a strategic anticipation of protracted inflationary pressures.
C. Future Outlook
As April approaches, the forthcoming earnings season emerges as a pivotal determinant of market direction. Subsequent to this period, market volatility is anticipated to escalate, driven by shifting focus towards the FOMC meetings in May and June.
Let us remain vigilant and observe the unfolding market dynamics.
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