Navarro on the Economy and Markets, Week Ending 5.26.23

Cash Remains King, House Republicans Selling Out?

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Hi.  Peter Navarro here, and it was another Waiting for Godot sideways market week as the Profligate Spending Biden White House and the Republican-controlled House of Representatives failed to reach an agreement on raising the debt ceiling.  The broad S&P 500 market index  continues to trade in a range from 4,000 to 4,200. 

  As for the prospect of a deal, to his credit, as I write this on Friday, it looks more and more like House Speaker Kevin McCarthy is going to cave and agree to a deal that is a pale shadow of what is needed.  For example, the Democrats originally got an $80 billion increase to double the size of the IRS – yes, they are coming after you -- and McCarthy is only bargaining for a $10 billion clawback when the whole damn number should be repealed.

House Speaker Kevin McCarthy must hold firm: Unless the White House agrees to significant rollbacks in spending and relief for oil drillers, there must be no increase in the debt ceiling.

As we wait for a deal, the Democrats and the corporate media continue to shrilly warn of economic catastrophe.  McCarthy and the Republicans must fight back with this message:

The REAL catastrophe is a continued and prolonged 1970s style stagflation –simultaneous slow growth or recession and inflation -- if House Republicans don’t get most of their way in any deal.

Government spending cuts are necessary to reduce demand-pull inflation.  A more favorable climate for oil and natural gas development is necessary to at least partially resuscitate a US energy dominance under the Trump years that kept oil and gasoline prices low and thereby kept cost-push pressures at bay.

As I have previously discussed, the Federal Reserve does not have the appropriate tools to solve the stagflation crisis.  The Fed can solve either recession by cutting interest rates or inflation by raising them but it can’t solve both recession AND inflation at the same time, that is, stagflation.

Now here is the most important thing I can tell you given what look to be the imminence of a sell-out deal.  Whatever deal is reached, the American economy and financial markets are hardly out of the woods.  The next shoe to drop will be pent-up government borrowing.

The US government hit the debt limit at the end of January.  To keep paying its bill, the Biden regime has been mostly using accounting sleight of hand.  However, once the debt ceiling is increased, the Treasury will have to borrow more than twice as much as it would otherwise have borrowed in the three months before the end of the fiscal year

The sums are staggering – somewhere on the order of about $300 billion a month, which is even more that we were borrowing at the height of the pandemic.  Add to this another roughly $100 billion as part of the Fed’s “quantitative tightening” to clean up its balance sheet and that’s real money.

This pent-up borrowing will push up interest rates significantly.  The knock-on effects will include a contractionary economic shock as credit is tightened and becomes more expensive to businesses and consumers along with a short-run asset reallocation of funds from stocks to bonds to chase the higher rates.  That looks like a bearish pulse likely to last for some months.

To finish up, here’s just a few stories that caught my eye: First, there is a blood feud brewing between the Chinese Communist Party-controlled and socialist president of Brazil, Lula da Silva, and the head of the Brazilian equivalent of America’s Federal Reserve, Roberto Campos Neto.

Neto is playing the role of contractionary monetary policy hawk as Lula tries to deliver on his fiscal dove promise to provide “steak and beer” for the Brazilian masses through the usual kind of expansionary fiscal irresponsibility prevalent in Latin America from the days of Argentina’s Peron and Venezuela’s Cesar Chavez to, gulp, today’s Washington Swamp.  It’s a study in futility but a microcosm of many other governments worldwide dealing with conflict between the politicians seeking prosperity and the central bankers imposing austerity. 

The clear winner in this Brazilian case will be Communist China. Lula’s Brazil will need to borrow even more from this debt trap financing Communist beast

As a second story, I love to watch bond traders playing in the Fed Funds futures markets to handicap prospects for interest rate policy.  What traders are telling us is that the Fed is not yet likely to be on pause; they are pricing in 25 more basis points at least over the next two policy meeting with a 50% chance the hike comes in June.  Translation: Inflation remains a bear in the market’s eyes and that’s a bear for stock prices.

Finally, artificial intelligence is enjoying the kind of secular boom not seen since the early days of the dot-com bonanza.  As a poster child, Nvidia (NVDA) is Planet Earth’s most valuable chipmaker and key source of AI chips.  It beat quarterly earnings estimates by almost $4 billion, coming in at $11 billion.  If you bought in on November 15, 2022, when my favorite technical trading site Market Edge issued a buy, you’d be up almost 90%

The Edge – more about it in a future column – ain’t infallible.  I grabbed a small slice of C3.ai Inc (AI)  months ago which had a price of $27 at the upgrade but it’s had a rocky road since, dipping as low as $17 before getting back to $27. 

I’ll talk about what the AI boom might mean for everything from jobs and colleges to state-of-the-art war in a future podcast and substack, but there will be no putting this AI genie back in the bottle.  Here, in the US, the Chinese Communist Party puppet Elon Musk – who has most of his Tesla production now in Shanghai -- along with the Democrat’s woke social media oligarchs at Facebook (Zucker), Google (Pichai), and Microsoft are going big and that likely won’t be good for either for humankind or American politics.

Peter Navarro.  Out.