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American Civil Conflict & Fed Failure - Stoic Markets

Another Fed Failure Is Brewing & US Political Dismay Coming

This last week has been rather tame, but has been mostly focused around the big issue for the previous 18 months, the Federal Reserve, interest rates, Quantitative Easing and the subsequent Tightening, and of course inflation, at least when it comes to the economy that it.

In particular, investors have been trying to determine whether or not the Fed is set to halt their interest rates hikes even further, or if they will perservere the current market sentiment and actually fight inflation until the job is done.

The other bit of news dominating our headlines is that of President Trump and his indictment. While we will try not to delve into the politics of this news, the market implications have the potential to be massive, and simply can not be ignored.

To Halt Or Not To Halt

Accord to most economists, the Federal Reserve is set to pause its 15-month interest rate hiking campaign, despite Core inflation remaming stubbornly high, and not falling as we’d like to see it.

This pause is expected to come during the FOMC’s meeting on Wednesday, as it maintains its benchmark lending rate within the 5%-5.25% range, marking a break after 10 consecutive rate increases since March of the previous year.

In the Fed's Summary of Economic Projections, the policy benchmark rate is anticipated to stand at 5.1% at the end of 2023, with the markets predicting a potential quarter-point hike in July.

The market then anticipates a permament freeze in interest rate hikes, followed by a cut of 25 Basis Points by December.

Last month Jerome Powell, suggested that a hiatus in rate hikes is needed to assess the impact of previous policy actions and recent banking failures on credit conditions and the economy, in what seemed like a hint that the much anticipated Fed Pivot is actually coming.

But this is not a popular decision to have been made. Disagreements among FOMC members are increasing, with some members wising to wait and observe the impact of previous rate hikes on the economy, while more hawkish members believe rates are not yet restrictive enough, and they have evidence on their side.

The silver lining here, is that when Fed officials start their deliberations on Tuesday, they will have new consumer price index data to work from. The core CPI is expected to rise by 0.4% from the previous month, marking the sixth straight month of such increases, and this is not good news on the inflation front.

The core CPI is expected to rise 5.2% on a year-over-year basis, the slowest pace since November 2021, but still well over appropriate levels, and not nearly a fast enough drop to warrant a pause in hikes.

The overall CPI is projected to recede to 4.1% which is on the surface good news, but even that is still too high for safe inflation levels, and that “low” figure is distorted by drops in the prices of volatile goods like Oil and used cars.

In short, I beleive we are about to witness whether or not the Fed and Jerome Powell have the guts required to run the monetary policy of the largest economy on earth.

What is needed at this time, is a strong and robust fight against inflation that is not scared of upsetting some weak-kneed politicians.

But history does not speak kindly of the Fed or Jerome Powell, he has failed countless times as Chairman over the last few years, and I cynically believe he is about to fail us again.

Should that be the case, we are deadset on course fo stagflation, for a decade of tough economic conditions, and inflation eating up whatever cash we manage to save.

The begining of the end of US politics

News of Trump’s indictment hasn’t surprised anyone who has paid attention over recent months, but it has worried many.

It represents a contintued attack against the American President from the Federal Government and Democratic politicians which is no new thing.

But it sets a precedent for ex-Presidents suffering from witch hunts when they finally leave office.

Now to be clear, I firmly believe that politicians ought to be prosecuted for any crimes they may have committed while in office, but this must be done with true impartiallity, and that is wholeheartedly not the case.

Speaker of the House Nancy Pelosi has statistical evidence against her almost guaranteeing that she has profited to the tune of hundreds of millions of dollars using insider information, but no prosecution has ever arrived.

Joe Biden has recently been exposed as having accepted a $5 million bribe from a Ukrainian gas company, and the mainstream media has been refusing to report on it. He will no doubt suffer no such prosecution for his crimes.

The list goes on and on, Hilary Clinton and her emails, the entire Iraq War being based on lies and fraud, and yet 99% of these politicians face no such repurcussion.

What we need to be wary of, is how this will affect American politics going forward, because it won’t be a change for the better.

I’m sure you’re not in need of a history lesson, but Julius Caesar invaded Rome and started “Caesar’s Civil War” because he was threatened with prosecution back at Rome and ordered to give up his legions.

Witch hunts targeting politicians once they leave office lead to politicians that will do anything to avoid leaving prison.

Pricing this into our investments, and even the market as a whole is an incredibly difficult thing to do. An American civil war, or even slide into authoritarianism would without a doubt be a “Black Swan Even” something that can’t be properly pricing into the markets, because of its lack of precedent and impossibilities with working out probabilities.

Needless to say though, this would shake every single market in the world, and seeing as the vast majority of investors simply dollar cost average into the S&P 500 these days, they would be particularly exposed to any turmoil.

Many will say thinking about civil conflict at this point is needlessly cynical, but for markets to be impacted we need only another Jan 6th, another set of riots or protests, or even just one ex-President trying to overstay their welcome.

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