Who needs politics: the Fed September surprise

GEOPOLITICS

USA

Another assassination attempt on Trump as he was leaving a golf club in West Palm Beach.

The Pentagon is currently running out of weapons to send to Ukraine, and for several months now, the U.S. has been sending less military aid to Ukraine because of depleting stockpiles. This is obviously a major issue for the US itself at a time when any of the hot spots around the world could evolve to a wider conflict.

And it will take tears to rebuild the industry and ramp up production ...

Eastern Europe

Despite Russia’s warning about long range missiles usage, NATO considers justified from a military perspective to allow Kiev to strike Russia with long-range Western weapons such as Storm Shadow missiles. In this context, Russia has reiterated the threat of using tactical nuclear weapons.

At the same time, Putin ordered the expansion of armed forces, preparing for an extended conflict.

On the Ukrainian side, the army is getting short of fighters, and Netherlands has vowed to force Ukrainian men of military age who fled to the Netherlands to return to Ukraine (~19,000 men).

Middle East?

There is little doubts the Mossad was behind a massive operation to strike members of the Hezbollah in Lebanon with booby trapped communication devices the organization had ordered a few months ago.?

Hezbollah members are clandestine and this allowed to identify many of them by identifying the wounded brought to hospitals.

This operation also very likely totally disorganized the Hezbollah, in a likely anticipation of an Israeli incursion into Lebanon to directly fight the organization.?

In this context, the Israeli army deployed material to the Golan Heights, moving battle tanks and armored vehicles closer to the border with Lebanon.

The pentagon is worried Israel is close to launching a ground war in Lebanon, and many countries have asked their citizens to leave Lebanon immediately, especially in the context of depleted stockpiles as mentioned above. Nonetheless, the Pentagon is sending the USS Truman carrier strike group to the eastern Mediterranean.

ECONOMY

The Fed pivot: the Federal Reserve has cut interest rates by a surprising 50 basis points in their first rate cut since March 2020.

Moreover, the Fed sees 2 more 25 basis point rate cuts in 2024, 100 bps in 2025 and 50 bps in 2026. Nothing less.

As Jay Powell mentioned in his statement, the Fed believes that the economy is "strong overall" (why the 50 bps then?),and notes that inflation has eased but "remains above 2% target” (rather a floor than a target imho),?

Overall, the Fed’s decision before a major election appears highly political.

Numbers (official numbers btw) seem to suggest differently than a string economy though, with a record national debt ($35 Trillion), a record household debt ($17 Trillion), a record credit card debt ($1 Trillion), and credit card delinquencies at the highest in 12 years. A large majority of Americans are living paycheck to paycheck (66.7%), with a low savings rate (3.4% in 24' vs. 26% in 21'). In other words, the US and its citizens are broke and are living on credit.

The Federal government accumulated such a high level of debt that it first needs lower interest rates.

The Federal government is spending like there is no tomorrow (highest after the period 2020-2021), and spending has now exceeded revenues for 14 years straight.

Businesses also needed a rate cut, as bankruptcy filings in the US have reached the second-highest week in 2024. Chapter 11 bankruptcies were only higher in the first week of April which was the most in 15 years. Besides higher interest rates, rising prices, and declining consumer spending are behind the surge in bankruptcies.

MARKETS – No Investment Advice –

On the Fed announcement the S&P500 hit new all time highs, and surged the next day.

This was accompanied by a shift from risk off to risk on sectors in Equities.

The US 10-year yield rose though, as well as Gold, Bitcoin and most commodities, in a transfer to harder assets, and a potential Fed mistake that could trigger a new wave of inflation.

The US Treasuries, traditionally considered safe assets, don’t look as safe recently because of the actions of the Fed whose only objective seems to be pushing markets higher, at any cost.

For more detailed market review, I encourage jour to watch the Croissant Files Live, here, starting directly at the "Markets" segment.

Happy week of investments, and see you next week !