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HIGH ENERGY!

“High energy” are two words that many use to describe me. As I am fascinated by what I do for a living, I read voraciously to keep up with all of the ebbs and flows in the capital markets. I can hear the inaudible, and sometimes audible, groan of my staff after a weekend when I start with, “I did some reading.” More often than not, I will try to weave together disparate and often opposing views to try to test and retest our central themes on the economy.

This morning, I read in the Wall Street Journal (April 10th) that the Federal budget deficit has eclipsed $1.1 trillion and debt service is now higher than defense spending. This is not sustainable, and we have to get our spending under control, or we imperil future growth and our ability to maintain reasonable levels of inflation and interest rates. As I wrote in a previous post, the current budget has a built-in $2 trillion deficit. Moving back to pre-COVID-19 spending gets us to a place where we could achieve something that resembles a balanced budget.

This is juxtaposed with the inflation environment, as today, CPI came out with a reading of 3.5% percent[1]. In the 1970’s, then Fed Chair Arthur Burns pivoted too quickly and  Paul Volcker then needed to raise short rates to stratospheric levels in order to tame inflation. In a casual conversation over last weekend, a friend asked what I thought about inflation. I told him that I thought this last battle to cut inflation to 2% was going to be difficult. Further, my concern is that the Fed is so worried about the time to cut that they might actually be painted into a corner to increase rates lest inflation begin to climb to uncomfortable levels.

The geopolitical temperature around the world is getting hotter. We do not think that there will be a direct war between Iran and Israel but don’t discount a serious proxy war. The world is growing wary of extended conflicts and getting a cease-fire and agreement between Israel and the Palestinians will be important to calming the frayed global nerves. Ukraine continues to fight the Russians and they are receiving fresh resources. Putin will not back down so this war will continue. Finally, the Chinese have been getting quite provocative with the Philippines. The Philippines have been a durable ally of the U.S. and this provocation risks more direct U.S. involvement.

As our budget deficit causes us to spend more on debt service than defense, it begins to bring into focus if we can remain the protector of the free world. As we continue to fight our own open borders and culture wars, one does have to question if we are up for the task.

[1] Source: Bloomberg as of 3/15/2024

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