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UPDATE FOR A MONDAY

By: Tony Minopoli

We continue to watch the growing tension in the Middle East and I’m sure all of you are well aware that a drone attack in Jordan left three U.S. service members dead and about forty other soldiers injured. There are a variety of mixed reports indicating there may have been some confusion and the drone that killed our service members was thought to be a friendly drone. The U.S. issued the standard rebuke and we will retaliate at a time and in a manner of our choosing. The U.S. military has continued to say that it is their operating theory that Iran does not want a war with the U.S. However, the Pentagon has correctly indicated that the killings were due to Iranian-backed groups. At the same time, there are progressing talks on an Israel-Hamas hostage deal. Any quelling of the fighting in Gaza will go a long way to turning down the heat in the entire region. All of that said, the West needs to be vigilant to be sure that Iran does not become an even larger nuclear threat and work to destabilize the area. Whether Iran directly killed our soldiers is not the question. The primary issue is that their proxies are waging war in the region, and we need to keep this from escalating further.

Switching gears, we continue to try and decipher the way forward for the U.S. economy and the market. The escalating tensions in the Middle East have witnessed oil move above $77 per barrel, although oil traded down $1.04 today[1]. As the economy remains hot, the probability of Fed activity is declining. I have read quite a few strategy comments in the last few days, but think the following themes are starting to crystalize. First, the continued threat to shipping in the Middle East could be disruptive to the global supply chain and this can be inflationary. Second, it is well documented that the COVID-19 stimulus that was largely in savings accounts has been spent. On the one hand, this takes some pressure out of the inflation balloon, but at the same time, the consumer has less money to spend and this could cause an economic slowdown. Finally, it seems that pundits are coming around to our thinking that the road to 2% inflation may not be smooth or without incident.

It will never be my intention to even intimate that we are smarter than the consensus. Rather, we are taking a less optimistic view that the economy would have a slight slowdown and then be back to economic growth. The excess pressure built into the economy due to stimulus and quantitative easing all need to be worked out. I have quipped in the office that this is going to be more difficult than the typical sitcom, where a problem is introduced and within thirty minutes, including a few commercial breaks, there is a solid resolution. If only life were that simple!

We will keep at it and be back with more.

[1] Source: Bloomberg

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