A last ditch political effort led by the Biden Administration to get an interim ceasefire deal between Hamas and Israel will take place tomorrow and Friday in both Dhoha and in Cairo. Israel and Hamas are not talking directly but the diplomats are scurrying between rooms to get an agreement that stops the fighting and de-escalates the region’s tensions. They hope to see Hamas’s Israeli and international hostages released and that there will be a halt in the fighting and a withdrawal of Israeli forces from Gaza. If a deal is actually obtained between the belligerents then the war premium for crude oil would shrink quickly. As a result, travel through the Red Sea would pick up knowing Houthi attacks were over on shipping.

On the other hand, If this fails then Iran may let its proxy ‘war dogs’ out and unleash a major war with Israel.The US now has two aircraft carrier groups in the area as well as a large number of other ships (including submarines) and fighters to counter any massive bombardments by Iran and its proxies (Hezbollah, Houthis and Hamas). Large scale air attacks by Iran and proxies via drones, cruise missiles and ballistic missiles could be shot down by the large forces supporting Israel. Iran would just be emptying their offensive arsenal for no real benefit. Hopefully a deal is made or this could be the beginning of a much wider and dangerous war.

The next days and weeks will be watched carefully to see if there is a rational or irrational result.

In Europe, Ukraine which was on the defensive in Eastern Ukraine took the war directly to Russia. They invaded the Kursk area northeast of Kharkiv with quite a few crack brigades and captured over 70 towns, on a 40-KM front and over 1,000 square miles of Russian territory and captured many surrendering Russian soldiers. Putin’s armies were making progress in taking more land and keeping pressure on the undermanned Ukrainian positions across Eastern Ukraine. However Ukraine’s high risk venture has paid off allowing Zelensky to claim that Ukraine has the battlefield initiative and has clearly embarrassed Putin and his military. Russia is now pulling troops and resources out of occupied Ukraine to have the ability to defeat the Ukrainian offensive. It has begun to use weaponry that clearly shows North Korean markings.The next few weeks will either see the defeat and retreat of the Ukrainian brigades or lift Ukrainian morale so that they have a better chance at the bargaining table to get the war over and Russia out of all of Ukraine. However, the new field of battle of cyber attacks and disinformation may make this nastier and more disruptive.

Overall, these two wars need to be defused or a painful period is ahead. I expect we will be watching a lot of news TV at night to see if rational behavior occurs or we see the nutbars send the areas into conflagrations.

Getting off the soap box and getting to economics the inflation data is coming in more muted (US, CPI and PPI) supporting the case for Central Banks to lower rates. In the US the betting is now that the Fed will cut the Fed Funds rate by 50 BP at their September meeting if the data continues on this mild path. If there is additional weak jobs data like the July report of only 114K jobs then the Fed will have to act. The more they cut over 25 BP the more the fear will be that the recession will be deeper and not a soft landing as the optimists hope for.

Some of the data we are seeing show a recession may be imminent:

• Consumers continue to feel the pinch on their monthly budgets and surveys are showing that over 50% are canceling vacations and 65% are cutting dining out.
• Many retailers are feeling the pinch of rising labour and insurance costs and less revenues, squeezing margins. Layoffs have started and many unprofitable locations are being closed. Walgreen’s has announced the closure of 25% of their stores (2,000+ out of 8,600 stores) that were not making money. Paramount is closing its studio and cutting 15% of its workforce. Blink, a gym fitness chain, filed for Chapter 11 bankruptcy and lastly a major cosmetic company Avon Products filed for bankruptcy on Monday. Dollar Tree, a discount retailer, announced this week the closure of 1,000 underperforming stores. This may occur over years as the leases expire. The chain lost US$1.7B in its recent quarter down from US$452M in the prior year.
• The Administrative Office of the US Courts had 487K bankruptcy filings so far this year versus 419K in the prior year. Business filings were up the most or up by 40.3%.
• Home Depot is seeing a sales slowdown as consumers “are feeling crummy about the economy”.
• The US east coast may face a strike by port employees (The International Longshoremen’s Association, the largest maritime union in North America). If a strike occurred it would be very disruptive to supply chains and increase inflation pressure. More than half of the cargo shipped into the US from around the world comes into the east coast ports. Shipping rates have spiked by all the global events and this strike potential. Here in Canada we may face rail strikes so we are not immune to the impact of a critical industry strike.
• Cisco announced the layoff of thousands of employees in their second round of layoffs.
• Dell is laying off 12,500 employees in their sales and marketing teams due to slower sales.

Summarizing – We surmise that the Fed is boxed in by their policy mistakes. They kept saying in 2023 that inflation was transitory and we now know this as false. They also erred by prematurely calling a pivot in December 2023.  Stagflation is here and consumers are spending less while still facing an onslaught of higher prices making household budgeting tighter. We are likely in the early stage of a consumer recession which is nearly 70% of the US economy. Not a good situation during an election year.

Market Update:  We are watching the economic data carefully as it appears that consumers are tapped out and this could drag economies into recession. The offset for the US is the 6% US spending deficit and large war spending that are keeping some areas of the US, with hot economies. The military industrial complex and areas where weaponry is built are strong economic centers these days. The AI stocks have been the leaders of investor enthusiasm but valuations are at record highs and any pricking of this asset bubble could cause a material stock market decline. We see the Dow Jones Industrials falling to the 36,000 level from 40,000 today. After the Nikkei 12.4% one day plunge and the VIX hitting 62 in the US debacle the warning signs of stock market trouble are clear. If Intel can fall 50% in one day on an earnings disappointment and announce 15,000 manpower layoffs then it tells you there are lots of bubbles that can burst.

Energy stocks peaked in early April as crude reached its high of US$87.67 on the mideast war potential to expand with direct fighting between Israel and Iran. Prices retreated to US$72.48/b in early June as no escalation occurred and global inventories grew. It recovered thereafter to US$84.52/b on optimism of a strong summer driving season. It fell in early August to US$71.67/b and then rose on Middle East war fears. It closed today at US$77.10/b and still has a US$10/b war premium in the price.

If the war fears evaporate then a close below June’s US$72.48/b for WTI should set up the last downphase and a breach of US$70/b.  We would then swing to bullish again and send out new SER Buy Recommendations.

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