The fiscal situation in the US is getting worse and the moves by the Federal Reserve to restrain inflation pressures and cool the pace of economic growth, funded by record budget deficits, is a losing battle so far. Lifting the price of money and removing liquidity (QT) has not yet worked. The Federal spending largesse from both the previous Trump administration and now the Biden administration has lifted total debt to record levels of US$32.7T. With the need for nearly US$2T of new money this year and debt renewals, the US Treasury will be issuing around US$1T of new debt this quarter. With historic foreign US debt buyers like China and Japan not bidding, the price of debt continues to rise and the cost of interest for the US Treasury this year will reach US$1T. With tax revenues forecast at only US$4.7T, debt servicing costs are 21% of the funds coming in. This is the highest percentage ever and the cost of borrowing is still rising. Just the 30-day T-bill rate has risen from 4.52% in March to 5.57% currently and the Treasury borrows a lot of its funding in the short term duration market. 

Some of the positive and negative issues facing the US and other major economies are:

For the US: 

• The US fiscal problem this year is the spend on the war in Ukraine and major entitlement spending. The US deficit is projected by the CBO at US$1.7T+. Revenues (corporate and individual taxes) are down US$400B from prior estimates. Social Security spend is up 11% to US$111B as more retirees get checks and the inflation adjustments add to per person costs. Medicare is forecast to rise 18% to US$104B.  
• The US banking system is still fragile as regulatory capital increases (effective October 1st) mean less ability for banks to lend and those banks with large real estate portfolios (commercial real estate the big headache) are facing large write-downs. Moody’s yesterday downgraded 10 small and midsize lenders. The largest entities in the list include US Bancorp, Bank of NY Mellon and State Street Corp. More downgrades are expected and the pressure on deposits of regional banks continues. 
• The pressure of wage demands and spreading union strikes by members wanting to get real wage increases after many years of real wage declines is of concern. The UPS and airline deals were way above what the Fed wants to see. The July employment report showed job growth of 187K jobs, slightly below the forecast of 200K jobs. In the report the problem was that average hourly earnings grew by 4.4% and the unemployment rate fell to 3.5% from 3.6% in June. The Fed needs hourly earnings to grow at a slower rate and the unemployment rate to rise if they are going to halt rate increases. Tomorrow we get CPI data and on Friday PPI data. The July increase in energy and food prices may end up higher than estimates. The effective Fed Funds rate is now as high as it was pre ‘08 and the financial crisis that ensued. 

For the rest of the major economies in the world:

• China is facing a difficult economic period with exports falling 14.5% and imports down 12.4% in July. They are the second largest consumer of oil and the largest importer but have reduced imports with the US$18/b rise (from the June low of US$66.80/b). 
• In the UK, June consumer inflation was up 7.9% from the year before. The Bank of England raised its key rate for the 14th time in a row. Their rate is now 5.25% up 25 BP. 

The war in Ukraine is seeing more escalations as one side hits the other. This is now spreading to daily drone attacks on Moscow by Ukraine and the Black Sea Ukrainian grain ports being blockaded and attacked by Russia. A lot of the grain infrastructure at the export Ukrainian ports has been severely damaged. 

Some recent events: 

• A Ukrainian drone hit the engine room of a Russian flagged Sig oil tanker in the Kerch strait (connecting the Black Sea and the Sea of Azov and a shipping point for Russian crude and products to buyers). US intelligence helped with location data according to reports. The US and NATO support looks more and more that the war is expanding and Russia may escalate in retaliation. The focus of targeting the export income of each country is of concern to countries buying the grain and energy each produces.
• Ukrainian drones and cruise missiles hit locations in Moscow including three that hit an elite office building and residential skyscraper that many of Russia’s oligarchs use. Nearby office buildings of the government ministries were also hit. Targeting support from the US helped their drones and cruise missiles. Another example happened on August 4th. Ukrainian drones attacked the Russian naval base at Novorossiysk directed by nearby US recon aircraft in international space. 
• The land war is not progressing as the optimists had forecasted and the narrative of progress that Ukraine needs to continue to get military support from NATO is not there. Pressure for a negotiated settlement is rising. Russian defensive lines have held and Russian troops are holding their lines. This war of attrition will soon face wet conditions starting in October so Ukraine needs to see progress before the weather ends this campaign season. 
• Russia has warned that these attacks will be responded to with severe consequences for Ukraine. Some  of the reports indicate Russia is considering:

1. 1. Putin has authorized the cutting of undersea communication cables of the countries ‘enemies’. 
   2. The Wagner group has been repositioned in Belarus and with some of that country’s troops training to fight with Wagner forces, speculation is rising that a combined force of 50,000 troops could be ordered to attack Ukraine from the north. This would require Ukraine to move their best troops from the eastern and southern offensives to the north to halt this attack.     
   3. Russia is on the offensive now in the northeast but this has not been confirmed. 
   4. An attempt to assassinate President Zelensky was foiled by Ukrainian intelligence. Russia has spies near the fighting lines and would like to bomb locations that he is visiting to decapitate the leadership of the country. 

Market Movement:  We are watching the 33,600 level for the Dow (today at 35,159), which if breached would complete a topping formation for the Dow. A close below 32,600 would set up the waterfall decline phase to below 30,000. Stay patient with cash reserves and be ready to BUY at the next low risk entry point. Don’t get trapped by this current euphoria. 

Get ready to be buyers once this expected correction has lowered stock prices and fear has returned to the markets. The S&P Energy Bullish Percent Index is at an extreme high reading of 91% bullish, pushing near record highs. For traders this means they may want to take profits. Our view is to wait for the next low risk BUY window as we see much higher prices in the years ahead and want to build positions for the commodity super cycle that we see lasting into the end of the decade. As the general stock market declines we expect energy prices to back off and the Energy Bullish Percent Index retreat back to below 10% and ring the bell for the next BUY window. The last BUY signal was in March and we added 14 new ideas to our Action BUY List.

Once the general stock market is oversold again and energy stocks retreat we expect to add additional energy investment ideas. Many energy stocks are down over 50% from their 2022 highs, and many trade again below Proved Developed Producing (PDP) Reserve valuations levels. If you want to see what our subscribers are looking at, sign up now for access to the Schachter Energy Research reports.