SOME SOBERING THOUGHTS

JP Morgan’s Jamie Dimon reiterated comments that today’s geopolitical environment is the most difficult and dangerous in at least two generations.
I vaguely recall the “duck and cover” drills in the 1960’s, drills promoted by the government to protect children in schools if a nuclear attack occurred. To remind all, students were instructed to duck underneath their desks and put a book on their heads.
Today history regards this drill as entirely useless. Perhaps the mask mandate and social distancing of four years ago will suffer the same fate. Both examples were government’s actions to appease a scared society for perhaps nefarious purposes and were symbols of that era.
Speaking of which, how will history gauge the EV mandate and the 100% tariff on Chinese produced EVs? Government sponsored capitalism does not work. Consumers are buying EVs at a reduced rate from recent years. Last week the government stated the average age of a car on the road is a record 12.7 years, partially the result of surging costs.
Even with government subsidies, the general public cannot afford an EV.
The WSJ reports there are over 25 million unsold Chinese produced EVs. The Administration is fearful the Chinese will dump these cars on the US, a fear that has considerable validity.
The Administration has boasted about its intervention forcing Ford et.al to accept huge wage gains as the UAW was fearful that EV production may reduce head counts. This intervention assured that cost push or wage inflation would become imbedded perhaps emerging as a template for almost every other labor disruption.
Little comment is required about the cost push inflationary impact of the increase in minimum wage.
As noted several weeks ago, China sold a record amount of US Treasuries during the first quarter. The Asian behemoth is aggressively pursuing its sub-Saharan “Belts and Roads Initiative” that commenced about 10 years ago which is essentially the economic and environmental exploitation of sub-Saharan countries’ natural resources to meet the West’s demand for rare earth minerals to be used in the “Green Revolution.” There are recent reports, however, these efforts are not producing results hoped for by China.
The market is still expecting the US Federal Reserve to lower interest rates this year. Yesterday Minneapolis Fed Bank President Neel Kashkari reiterated comments that he [nor the FOMC] would not rule out the possibility of further rate hikes, primarily the result of embedded wage inflation that could potentially cause an inflationary spiral.
As noted above, after twenty years as one of the largest purchasers of US Treasuries, a home for their excess funds, China stopped aggressively buying Treasuries around 2013, commenced their Belt and Roads Initiative and became aggressive sellers last quarter.
Over the weekend, the WSJ reported the Administration is “very close to agreement” to utilize frozen Russian assets in US dollars to fund the war in Ukraine.
This potential policy is violating 88 years of trust and precedence, commencing around 1944 with the Brenton Woods Agreement which was the international accord that declared the US dollar will be the only reserve currency.
JP Morgan’s Dimon has consistently voiced his concerns about the surging deficit. A major question at hand what will be the impact of using frozen Russian dollar assets to fund the war in Ukraine and the absence [and perhaps aggressive selling] of Treasury purchases by China to be used in an economic policy that could be detrimental to the US?
Wage inflation can morph into double digit inflation.
There was only one time in history when an industrialized country experimented with quantitative easing. The Weimar Republic experienced a catastrophic death that ushered in the next era that ended in a World War, the event where the US became the only financial global power.
Perhaps Dimon’s fears should not be discounted.
Commenting on yesterday’s market action, Treasuries sold off on a weaker than expected bond 2- and 5-year Treasury note auction. Equities were bifurcated with the Dow off about 0.55% while the NASDAQ posted a 0.40% gain.
Lat night the foreign markets were down. London was down 0.22%, Paris down 1.01% and Frankfurt down 0.63%. China was up 0.05%, Japan down 0.77% and Hang Seng down 1.83%.
Futures are down about 0.5% on inflation concerns and a weak Treasury auction. The 10-year is off 5/32 to yield 4.57%.