Major Issue as Fall Begins? It All Starts With Ukraine
Author: Greg Valliere
September 6, 2022
UNLESS THERE’S A TRUCE IN THE WAR, inflation will persist, which means the Fed will have to have to stay hawkish, which means economies will soften, which means voters will punish incumbents. Here’s our handicapping of the key issue:
UKRAINE: The war is still gridlocked, despite a counter-offensive by Ukrainian forces in the south. With neither side willing to even consider a compromise, could there be a wild card? Russian troops reportedly are balking at fighting unless they get basic supplies, such as drinking water. They gave up in 1918; could they do it again?
WE CONTINUE TO BELIEVE that Russia cannot win this war, as troop morale plummets and grumbling grows louder in Moscow. Thanks to the U.S. and other western allies, Ukraine has sophisticated weapons and the ability to halt Russian advances, but a stalemate is likely through the winter.
ONLY A WILD CARD could change the outlook — a health crisis for Vladimir Putin or an insurrection among his generals, but we wouldn’t bet on either. Putin has played his energy trump card adroitly and undoubtedly wants to see how Europe can handle a cold winter.
THE BIGGEST SURPRISE THIS SUMMER was that Western nations, including the U.S., have been steadfast in supporting Ukraine. Despite predictions that Western support eventually will wane, it’s still remarkably resolute.
A RECESSION LOOMS in Western Europe, largely because of energy shortages and a spike in prices, which will keep inflation elevated, especially in Great Britain. The Euro has hit parity with the U.S. dollar and — incredibly — the pound could as well. This will force rate hikes in Europe to match the hawkish Fed, which will hike rates through the winter.
THE OTHER BIG SURPRISE this summer has been the political comeback by Joe Biden, whose polls have improved significantly. As predicted, the intrusion by Donald Trump into House and Senate races has been a negative for Republicans, but the GOP is still likely to capture the House with a net gain of only 8 to 12 seats; they need five to regain control.
THE DOMESTIC ISSUE OF THE FALL will be abortion, a major reason why we think the GOP may squander an opportunity to capture the Senate. But the GOP only has to capture one of the two houses, which which would effectively kill Joe Biden’s agenda in the final two years of his term as president.
WE’LL WRITE TOMORROW about this fall’s Congressional agenda, which will be dominated by spending issues — including a massive new military aid package for Ukraine. Biden is determined to win this war, but until there are signs of a diplomatic breakthrough, the inflationary Ukrainian war will insure volatility for Western economies — and Western markets.
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