WASHINGTON IS GRIPPED by five enormous issues this spring, with implications that will reverberate for years to come. The issues:
1. Debt ceiling: Beyond question, the most consequential issue in Washington is the looming debt ceiling crisis, which — until recently — the markets have ignored. Fresh data on government receipts have pushed up the default timetable, probably to some time in June — with no compromise in sight.
There’s agreement in both parties that some spending reduction is do-able, but that’s not the crucial issue — what matters most is that there’s no agreement on raising the $31.4 trillion debt ceiling; many hard-line House conservatives say they will vote against raising the ceiling, period. Others will insist on real spending cuts, not simply a reduction in the rate of growth. Chances of a deal are 60-40, an uncomfortably close call.
2. The Fed pause: The economy is still in decent shape (see: the Atlanta Fed GDP forecast) but signs of weakness are emerging everywhere, as commercial real estate faces a downward spiral that could affect over-leveraged banks. A Fed pause in interest rate hikes is coming, most likely after a 25 basis point rate hike next week.
What mystifies us is the view by many in the markets that the Fed will be cutting rates by fall. That still seems highly unlikely; most Fed officials reject that scenario. Maybe rate reductions are coming by winter, but let’s not forget — the Fed hasn’t stopped the rate hikes yet.
3. Biden vs. Trump: Most Americans don’t want a re-match but what are the options? A third party? Possibly. A popular Democrat taking on Biden? Unlikely. A challenge to Donald Trump and Ron DeSantis? We take note of renewed signs of life in the Glenn Youngkin camp; the Virginia governor will be in Taiwan this week, as contributions continue to pour in from major GOP donors, who aren’t happy with either Trump or DeSantis.
4. The Ukrainian Counter-offensive: It’s about to begin, as Ukrainian troops established positions this past weekend on the eastern side of the Dnieper River. Back in Moscow, a drive is underway to get 400,000 new military recruits, which is an absurd goal, as more men flee to Istanbul, Dubai, Helsinki, etc. Troop morale is still a huge Ukrainian advantage, but if the counter-offensive stalls, could western resolve waver later this year?
5. The Threat from Iran: We think this is the geopolitical wild card, as the Ayatollahs kill their own people and near completion of a crude nuclear bomb. The global axis of evil is not simply comprised of Russia and China — there are others, such as North Korea and Iran; the latter already is in a de facto war with Israel.
BOTTOM LINE: For the markets, the threat of a budget train wreck will increase daily. Biden and the Democrats are content to wait and blame the Republicans for manufacturing a default crisis — a strategy that has worked in the past, but this time may be different, as the dysfunctional Congress takes this issue to the edge of a very steep cliff.
Related: Damaging New Friction Between the U.S. And Key Allies
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