American Labor Walkout: Republicans Strike Over Debt

An epidemic of worker strikes is striking America. So far this year 453,000 have refused to work, including automotive, healthcare, Hollywood actors and writers, and hotel workers. The reasons are obvious. High inflation and falling real income. The Government vastly overstimulated the economy and created a 40-year high for inflation. This in turn resulted in a net deflation of real disposable income.

The record worker shortage resulting from over Government induced over consumption means labor has the hot hand as they can’t be replaced. Demanding historic pay hikes and benefits was the logical outcome. While labor unions have been shrinking for 60 years, key unions among automakers, healthcare and entertainment are flexing their power and seeking unusually aggressive guarantees. More strikes should be expected until inflation and the economy slow significantly from here. A handful of 8 House Republicans, wielding exceptional power, are also on strike over the rapid growth of debt at a time when workers don’t need more handouts. As with the other labor strikes, the Republican Freedom Caucus in a thinly controlled GOP House, insist on more power and transparency over the Federal budget. The GOP disarray appears likely to trigger a temporary Government shutdown. in November. Combined with labor strikes, this may create some negative stock market uncertainty before year end.

Historically, deficits grow during bad economic times as the Government borrows from itself (printing money) to artificially boost consumer spending and risk taking as a counterbalance to rising unemployment and reduced income. In an expanding economy tax revenues grow, and Government assistance and deficits shrink. This cycle began in 2020 with the extraordinary Government stimulus under the guise of Covid that prevented any recession from manifesting. The additional liquidity was trillions above what was needed to boost the economy during Covid and resulted in record annual deficits of $3 trillion in 2020 and 2021. Since the pandemic ended, this Administration has continued to spend as if we are still in a deep recession, creating an annual deficit that may reach $2 to 2.5 trillion in 2023.

The US national debt ($33.4 trillion) has been growing nominally and as a share of GDP (120% today) for decades with deficits always accelerating during weaker economic periods such as 2008 and 2020. However, the consumption boom fostered by free money Government legislation (chart below) reveals how extraordinarily the consumption inflated from 2020 to 2022. Personal consumption inflation has slowed in 2023 to 4% but remains double the target rate. Inflation has accelerated US debts and deficits and will unfortunately become stickier now that interest payments on the national debt have soared from just over $500 billion to $900 billion a year between 2020 and 2023.

If the inflationary spikes and excessive Government spending were unique to the US, then we would see a falling Dollar. Since all first world economies followed our irresponsible lead since 2020, the US Dollar remained strong relative to other currencies while inflation and higher interest rates in all countries rose in lock step. The longer it takes for Central Banks to raise rates and shrink bank balance sheets in order to normalize core inflation at 2%, the longer interest rates will remain elevated and require a continued explosion of interest payments usurping the Federal budgets around the globe.

The dissertation above explains why interest rate sensitive investments such as bonds and utilities have been terrible investments over the past year and are experiencing their deepest drawdown in over 40 years. Normally stocks and bonds spend long periods moving in tandem, but the general stock market, like the economy, has been quite resilient in its growth and earnings power, despite the rapid rate rise. By early 2024 bond yields should peak and begin working lower with a softer economy as the year progresses, providing attractive returns by 2025. Large cap technology companies, energy and select healthcare have continued to thrive in this higher cost of capital environment. For the overall markets, our forecast in July expected an equity market decline starting by early August with a series of lows bottoming in October. After an 8 to 10% correction from the highs in the major indices ending this past week, some buying is warranted for what is expected to be a healthy corporate earnings quarter. Oversold sentiment has also returned as Money managers were 102% exposed to equities in late July and have now flipped to just 36% long stocks. While Manager sentiment can fall further in a deep Bear market panic, the current exposure is favorable for an October low. This month can be volatile, but as long as the SP 500 Index 4200 area holds, we expect a modestly positive equity trend into early November and throughout a choppy Q4 that has to navigate labor strikes and a possible Government shutdown.

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