Political/Economic Outlook July 4th Edition

Inflation

The Fed and Biden’s White House finally have something that they can agree and coordinate on – inflation. This is the dirtiest word in the beltway, as it is the #1 killer of political careers.  People may be swayed by complex social media campaigns, but nothing hits harder than going to the gas pump or supermarket and paying 10-20% more than you did 2 years ago.

The Fed finally had to step in and attack commodities, along with the Chinese to help stop the runaway prices. It was a job well done and I have had to tip my hat to them on that. However, it is likely to be short lived, as a new round of global lockdowns seems imminent and supply chain disruption will again begin to stress prices higher up and down the supply chain. It does not take every country or every state in the US to lockdown to disrupt the economy. Even if only a few northern US states lockdown, the supply chains become problematic, as factories in Ohio cannot operate with their peers in Michigan. Without a doubt, the Hill is drafting a plan for lockdowns, whether or not it materializes is another matter, but it would certainly trigger inflation to surge again.

Market correction

We are near my first target in the market of 4400 on the S&P futures. Over this level the likelihood of a correction grows. In all reality, the market is way overbought and comments of “bubbles” in fintwit is very high. The Fed has used market makers to pumpthe market to get to a level where a market correction of 15% doesn’t break the 4000 level(they may dip just below to scare longs out). Perception is reality, and the easiest way to achieve this is NASDAQ. Numerous times in the past two weeks, I have called for long position at 4160 and last week noted $TQQQ was best way to monetize this plan on staying a step ahead of the Fed. This will continue for at least 2 weeks and we could see 4600 by the end of July, when Congress begins to take up debt ceiling issue.

There are two scenarios for a correction to be engineered, new partial lockdowns in states/countries or simply the Fed pulling back from market support (in other words, no more pump). The DXY range of 89-93 as I have stated remains intact until a correction begins which could see it touch 95 or slightly above.

Biden-Harris troubles

Increasing rumours of leaks in the Harris administration have the media spun up on the “toxic”  and “dysfunctional” nature of her office. I completely dismiss this, as recently Tina Flournoy has entered the fray. She is a well known Clintonite and a seasoned professional, but this move has all the signs of some growing discord between the twooffices, with the Biden administration viewing Kamala as a problem. Biden has been rumoured to be only working 3-4 hours a day, with visible bouts of anger throughout. I don’t like to peddle conspiracy theories. However, the internal fight between the two offices signals that one is trying to prevent the other from attaining more power.  A situation where Biden would have to step down would immediately send the markets down 20-25%, as we would be in uncharted political waters with a very progressive VP stepping in.

Midterm calculations

There is little doubt that a GOP controlled state will redistrict lines to benefit its House calculus. The Republicans will most certainly win back the House majority, since the Census afforded them a handful more seats.  This will be a significant challenge to Biden’s progressive agenda going forward and I expect more progressive Executive Orders to come out in 2023 and 2024 leading up to the 2024 election. However,significantly, tax laws are not likely to be taken up in any significant manner, since no congressional member wants to return to the campaign trail having raised taxes.

As for the Senate majority fight, the reality is that both the GOP and the Dems need to protect 4 seats each. Warnock of Georgia is in the weakest position and likely loses his seat whereas the GOP need to worry about Burr’s seat in North Carolina flipping. Many pundits are making noise about Toomey’s seat since he is retiring and ignoring Kelly’s Arizona challenges, but with the GOP winning the SCOTUS ruling on ballot harvesting, it is highly unlikely the Dems will have the turnout necessary to hold the Senate majority either.