The Great Geopolitical Threat

THE GREAT GEOPOLITICAL THREAT TO THE U.S. isn’t Russia, despite its hacking. The great threat isn’t China, despite its harsh crackdown on dissidents and its erratic treatment of Chinese companies. The great threat is Iran.

TIMED TO COINCIDE WITH THE INAUGURATION of a new extremist president, Ibrahim Raisi, Iran and its proxies have ramped up tensions in the region. Hezbollah has fired rockets into Israel and Iran almost certainly was behind the recent attack on an Israeli-owned tanker in the Persian Gulf. A retaliation from Israel’s new leadership is virtually certain in coming days.

RAISI IS WIDELY VIEWED AS COMPLICIT in the mass executions of dissidents in Iran in the 1980s. He received tepid support this spring from voters, who are restive over an economic crisis, water shortages, and a tidal wave of Covid cases. Perhaps in an effort to divert attention from these problems, Iran may be even more aggressive in the region.

BOTTOM LINE: There are two major implications — chances of a U.S.-Iran nuclear deal have slipped significantly; and more clashes between Israel and Iran appear likely in the Persian Gulf.

THIS ESCALATION OF TENSIONS COMES as the U.S. abandons allies in Afghanistan, where atrocities are likely to increase as the Taliban takes control of virtually all of the country by September. Donald Trump wanted the U.S. out of Mideast conflicts, and it appears that Joe Biden does as well. The fanatics are ascendant; the U.S. seems disinterested.

GIVE CHUCK SCHUMER CREDIT, he’s been a pit bull, pushing an infrastructure bill toward Senate passage, perhaps tonight or tomorrow. Even Mitch McConnell declared this weekend that “there’s an excellent chance it will be a bipartisan success story for the country.” But here comes the hard part.

ONCE SCHUMER WINS PASSAGE of the $1 trillion infrastructure bill, he will move to the $3.5 trillion package of social spending, which needs to advance via the budget reconciliation process, which requires only 50 votes to pass, not the 60 votes to break a filibuster.

SCHUMER PROBABLY HAS THE SENATE VOTES to advance reconciliation, but House progressives will battle with moderate Democrats — and 100% of Republicans — who want to pare back the huge price tag this fall. Our bottom line hasn’t changed: the first bill has a very good chance of passing; the second one faces obstacles — and a likely haircut. The key player will be Nancy Pelosi; could she kill the entire process if the second package is pared back?

THE UNEMPLOYMENT REPORT: Everyone has a thought on last Friday’s job report; our take-away is that by Christmas there will be a debate over what constitutes full employment. An acute worker shortage will persist, prompting employers to offer bonuses and higher hourly wages — and those costs will be largely passed along to customers.

WITH POLITICAL PRESSURE heating up over inflation, it’s increasingly likely that Jerome Powell will have to begin tapering Fed asset purchases by this winter. Commodity prices (lumber, copper, gasoline, etc.) aren’t the issue; wage inflation is the real threat, and Powell faces a difficult choice — should he risk weakening the recovery while the Delta variant is still raging?

WE THINK HE WILL TELEGRAPH TO MARKETS that the tapering will be very gradual and that a rate hike isn’t remotely imminent. What he needs to see is some moderation of inflation data, which could come as early as this week, with CPI (Wednesday) and PPI (Thursday) rising by about 0.5%, which would be half of last month’s steamy figures.

Related: Gary Gensler vs. Cryptocurrencies

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