Risk Commentary
The Sound and the Fury (June 2023)
Did you Know? 47 of the top 50 life insurance companies hold long-term bonds that have solicited ratings by Egan-Jones? [1] [2]
Mercenary Mischief: A Deadly Game - update
It has been confirmed that the Wagner Group has reversed its drive toward Moscow and is returning to its bases. While it is difficult to predict next steps, a reasonable assumption might be that Putin’s safety (and retention of power) has become more of an immediate concern than gains in Ukraine. The Wagner Group has apparently lost its charismatic leader, Prigozhin, whose life may now be in danger.
Many might question the basis for Prigozhin’s sudden reversal and speculate he is vulnerable without his mercenary troops. Even the motivation for the coup is in question - Prigozhin claims to have been motivated by the Russian military's failure to deliver supplies and support, its friendly-fire attack on a Wagner base, and its attempt to integrate Wagner forces. Additionally, Putin had indicated support of many of Wagner’s military efforts. Regardless, it seems the winner from the truncated coup attempt is Ukraine.
The Sound and the Fury
We are rapidly approaching the 2024 election cycle whereby billions of dollars and countless hours will be spent on determining the best candidate to lead the country for the next four years. Despite the “Sound” and in many cases the “Fury”, our view is that the outcome has probably already been established. As we mention regarding our credit analysts, "check your politics, and religion (and without saying, guns) at the door; simply try to generate the most accurate analysis." In that light, it appears that Mr. Biden is the likely Democratic candidate. While many right-of-center voters are watching news on allegations of Mr. Biden’s involvement in foreign payments, if the DOJ and FBI do not actively pursue the allegations, nothing much will happen. Furthermore, time is rapidly running out for any tangible action as there is typically a quiet period of 12 months prior to elections. Certainly, the House can vote for impeachment, but history has shown that such efforts are counterproductive.
On the Republican side, despite the early efforts of Mr. DeSantis to garner support, such efforts have fallen short. Assuming Mr. Trump garners the nomination, the issue in the general election will turn on the independent voter. In the midterms, the catalyzing issue was the repeal of Roe vs. Wade. Our sense is that the issue continues to have legs, particularly for suburban female voters. Yes, there are likely to be numerous secondary and tertiary issues, including Mr. Biden’s age and health, but the recent election of Senator Fetterman of Pennsylvania suggests that party affiliation can be more relevant than a candidate’s health.
To reinforce the afore-mentioned views, below are index results for the various candidates indicating that Mr. Biden is the leading candidate.
Figure I: Presidential Election Odds 2024 (June 25) [3]
Some might argue that the election system is broken by pointing to the flaws in the two leading candidates. Our view is that while those opinions might be valid, they do not change the current conditions. If Mr. Biden is re-elected, it is highly likely that the bulk of the current policies remain in place even if Ms. Harris steps in prior to 2028. Bear in mind a lot can happen in the next 18 months, and therefore vigilance is warranted. Perhaps the one caveat to watch for is well-broadcasted event indicating Mr. Biden’s health has materially deteriorated or if Mr. Trump decides to bow out or is hobbled. Regardless, we will be watching. (Proper deference to William Faulkner regarding the title of this latest installment.)
Inflation Deflation
As if on cue (see our prior reports), inflation has eased from more than 8% to merely 4% per a recent WSJ story (see the below graph) [4]. The decline has eased pressure on the FED’s inflation-fighting efforts and might over time result in some easing of rates.
Figure II: Consumer-price Index (%)
In response to the easing of inflation, both the 2-year and 10-year have been moderating over the past couple of months, and the trend is likely to persist if recent progress continues.
Figure III: Market Yield on US Treasury Securities at 10-Year & 2-Year Constant Maturity
Interestingly, the Central Bank of China has been cutting rates in an effort to stimulate their weakened economy [5].
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[1] Data Source: National Association of Insurance Commissioners, by permission. The NAIC does not endorse any analysis or conclusions based upon the use of its data. Market share determined by direct written premiums.
[2] The analysis of the NAIC data by Egan-Jones has been validated by RiskSpan, Inc.
[3] Electionbettingodds.com
[4] WSJ, June 14, 2023
[5]https://www.reuters.com/markets/asia/chinas-central-bank-cuts-short-term-borrowing-cost-first-time-since-aug-2023-06-13/
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