Is Geopolitics Dictating the Markets?

Hope you had a great weekend. The NASDAQ swung lower on Friday, as did the all of the major averages.  Investors and brokerage firms all over the world over were shocked to see over the past several days as the colorful lines on their screens did the unthinkable: they sloped downward and to the right while the VIX did something it completely unexpected: it went up.

The cause for the sudden reversal of fortunes was undoubtedly the escalating rhetoric between Donald Trump and Kim Jong-Un.   In other words, geopolitics came calling.

Global central banks have printed more money than most people are capable of financial assets have been inoculated.

The transmission mechanism for these funds to financial markets is remarkably straight-forward: policymakers engineer a shortage of purchasable securities and that begins by driving yields on the safest of assets to punitive levels. So this works on both the supply and the demand side. You simply reduce supply by buying up assets, and this results in engineering a demand for yield. In more extreme cases, the net supply of securities becomes negative.

So the great question is (or at least for investors) is whether that powerful technical can withstand extreme political shifts. So far, political tsunamis  “the likes of which the world has never seen” (to use a Trump Euphemism) have been overwhelmed by central bank liquidity.

This week, we might have seen the first sign that central banks have reached a limit in terms of their ability to offset geopolitical/policy uncertainty.

Here is what the chart for the Nasdaq and Dow look like.

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