Bears in America, Tunnel Rats in Gaza, and the Speaker That Wasn’t

Hi. Peter Navarro here with this week’s economy and market rap for the week ending October 20, 2023.  Recall that after a bullish reversal two weeks ago of the S&P500, I warned off any short sale warriors and indicated instead that a cash position earning 5% in short term instruments may well be the optimal position.  Recall further that Hamas stuck a thousand missiles in that infant bull and now the risk is clearly once again to the bearish downside in U.S. markets – the S&P indeed had a bad week this week.

One obvious bearish force is the rise in oil prices which topped $90 at the end of this week.  That’s a clear stagflationary supply side shock to the US and global economy. 

Why stagflationary?  Oil price shocks not only spike inflation.  They slow economic growth – the stag part of the equation -- by effectively taxing consumers, who then spend less and reduce aggregate demand.  Such shocks also tax businesses, with higher costs leading to reduced output, reducing aggregate supply. 

The bad news here is that we may well see much higher oil prices if the war escalates more broadly across the region; and there is a very high likelihood of such a possibility.

Here, Israel is literally between an Arab hatred rock and global negative opinion if it does what many of its hardliners believe must be done – rid the Gaza strip of the Hamas militants that regularly engage in terrorist activities against Israel.  This would require what Israel has begun to do: send a massive ground troop contingent into Gaza to destroy Hamas’ extensive tunnel system and hunt down the perpetrators and literally fight gun- and missile-fire with fire.

As a side note, one of the big reasons the US lost the Vietnam War was the extensive tunnel system of the Viet Cong – read The Tunnels of Cui Chi or a Harry Bosch novel and you’ll understand the tunnel rat culture on both sides of the bayonet in that war and why the tunnels were a decisive factor.

In this case, Hamas has built some 300-miles of tunnels crisscrossing a strip that is only 25 miles long and three and a half to seven and a half miles wide.  Israelis call the tunnel system “the metro,” and if Israel is ever to be safe again, all of these tunnels must be completely destroyed.

Will that happen? Iran is already calling for an oil embargo on Israel while Saudi Arabia, in a victory for Hamas, has ceased any notion of normalizing relations.  Meanwhile, everyone and everything from Communist China’s dictator and Harvard protestors to American congresswomen like Rashida Taib and child climate change actress Greta Thunberg are pressuring Israel to agree to a cease fire and negotiate – the most fruitless of options if Mideast past is any kind of prologue.

Meanwhile, interest rates continue to climb, with the long end of the bond’s yield curve now flirting with 5% to match the short end as mortgage rates continue their inexorable climb.  This is putting further pressure on the home and auto markets while commercial real estate, already in a death spiral, is facing massive cost increases to roll over what is traditionally a lot of short-term debt in the industry.

There is also the messy issue of the House speaker debacle, which I will deal with in a separate missive.  Suffice it to say here that chaos benefits the Uniparty and Wall Street as it prevents House Republicans as a unit from tackling debt-reduction and the border head-on – oh and that pesky Ukraine aid America is now borrowing money from China to hand out while spiking our debt.

Of course, on the bullish side, we are getting blow-out growth numbers for last quarter well above 3% and a jobs market that remains on fire.  But this is, as we say in economics, an unsustainable equilibrium.  It’s only a matter of time before oil and food and housing price shocks and tightening credit catch up to us.

With that as the overview, let’s note some of the macrowaves that popped up this last week.

On the tech front, Apple’s new iPhone 15 is a total bust in Communist China as the government pushes consumers away from Apple and towards the ever-evil Huawei.   That rotten Apple will ripple across the tech industry and is a harbinger of things to come for other American brands in China as Xi Jinping goes full populist nationalist.

On the bond front, a joint venture tied to the bond king PIMCO surrendered a portfolio of 20 hotels with a $240 million mortgage – I’m waiting for other PIMCO shoes to drop and any big financial trouble in that house would be an earthquake for the financial sector.

On the earnings front, I had to laugh at the new most evil corporation in America this side of Pfizer.  I’m talking about Blackstone, the hedge fund octopus that is now penetrating virtually every corner of our lives and laughing all the way to the bank.  Because of higher interest rates and a concomitant pullback in dealmaking, its quarterly profit fell by 12%.  If that’s happening to this predator, you can bet your bippy the broader deal-making colonies on Wall Street are suffering too.

Meanwhile, Elon Musk has issued gloomy expectations forecasts for Tesla and put its newest factory in Mexico on a slow construction walk.  Expect more predatory pricing and Communist Chinese production from this cyborg that will kill the US auto industry and inundate America with subsidized Communist imports.

Finally, we’ve talked about so-called technical analysis before when it comes to speculating on the stock market.  The fundamentalists look at things like price-earnings ratio while the technicians use math to spot trends through tools like moving averages and resistance and support levels.

Here, we are seeing that the Shanghai Composite Index – similar to the S&P 500 in America – dipped below 3,000 in early trading on Friday before a bounce back.  Technicians believe if this support level is decisively breached, there will be a significant correction or crash.

Not coincidentally, here in the US, the S&P 500 is likely in danger of falling below its 200-day moving average – with the same bearish implications.

Last take: Anybody thinking like Nikki “Dead Candidate Walking” Haley of inviting a million Palestinian refugees into our ongoing border invasion should remember what Rashida Tlaib is doing to our American democracy with her godless globalist rants – her district is not unlike the Gaza Strip, except with all of the comforts of American life.  Just say no!

Ok, that’s it for this week.  Remember.  I’m not giving financial advice in these weekly raps, just trying to help build your financial market literacy.  My remarks on the market reflect how I would deploy assets.  For now, that would be in cash, with a small but growing position once again in SPXU, the leveraged short fund for the S&P 500.

Peter Navarro.  Out.