Daily SITREP: Gundlach: Recession Response Will Be a “Disaster” (Wed, 20 September 23) – Forward Observer

Daily SITREP: Gundlach: Recession Response Will Be a “Disaster” (Wed, 20 September 23)


Good morning. Here’s your Daily SITREP for Wednesday, 20 September 2023.


  • READ TIME: 5 Minutes, 35 Seconds
  • Inside the Beltway
    • (1) Heritage Project 2025 Wants to Tear Down Bureaucracy
    • (2) Biden Official: Industry Holding Back Arms to Taiwan
    • (3) Ukraine Funding Dead on Arrival Before Zelensky Visit
  • Domestic INTSUM
    • (4) Gundlach: Recession Response Will Be a “Disaster”
    • (5) Morgan Stanley: This May Predict the Fed’s Next Move
  • Global SITREP
    • (6) China Accelerates Its U.S. Treasury Sell-Off
    • (7) Army Sec: Army Cannot Fight Major War With Less Than 450k Soldiers
    • (8) Syrian President Bashar al-Assad Heads to China
    • (9) Ceasefire in Nagorno-Karabakh After Russia Mediation


  • (1) HERITAGE PROJECT 2025 WANTS TO TEAR DOWN BUREAUCRACY: The Heritage Foundation is launching what it calls Project 2025, headed by lawyer Paul Dans, which seeks to dismantle the FBI, defund the Justice Department, eliminate the Departments of Education and Commerce, and place the federal bureaucracy under the control of the President.
    • Dans said the think-tank is recruiting conservative lawyers who will be placed in general counsel offices throughout the federal bureaucracy, and almost 1,000 people are already going through the Heritage Foundation’s training program.
    • Why It Matters: The Trump administration attempted a more limited version of this plan by introducing Schedule F. This civil service classification would make it easier for the President to fire federal employees. This goes beyond Schedule F and doesn’t hinge on Trump being elected President. It’s also likely to rile up Democrats and provide ammunition for them to drive their base turnout in 2024 in a way “Bidenomics” is not. – R.C.
  • (2) BIDEN OFFICIAL: INDUSTRY HOLDING BACK ARMS TO TAIWAN: Deputy Assistant Secretary of State for Regional Security Mira Resnick told lawmakers that slow defense industry production timelines are responsible for delayed efforts to send U.S. weapons to Taiwan.
    • Rep. Sara Jacobs (D-CA) said the defense industry needs to “step up” and that the defense industry has not made investments in production without multiyear procurement guarantees was “neglectful.”
    • Why It Matters: The destitution of the U.S. defense industrial base and the hundreds of billions in arms sent to Ukraine are now making it more difficult for the U.S. to prepare Taiwan for a possible Chinese invasion. Even if the lack of production capacity and the shortage of arms is exaggerated, publicly acknowledging it signals to Beijing that the U.S. can’t intervene in Taiwan, making Chinese military action in the form of a blockade or invasion more likely. – R.C.
  • (3) UKRAINE FUNDING DEAD ON ARRIVAL BEFORE ZELENSKY VISIT: Ukrainian President Volodymyr Zelensky is in Washington D.C. this week for meetings with President Biden and the Senate, but a senior GOP lawmaker said it is “just crazy” and that there are not enough votes in the House Republican Conference to pass any more funding for Ukraine.
    • Another senior GOP lawmaker said House Republican leadership has “grossly underestimated the resistance” against more aid for Ukraine, and if aid is passed, it would put Speaker Kevin McCarthy’s (R-CA) leadership position in jeopardy.
    • Why It Matters: The White House has made Ukraine aid a demand for their support of any stopgap bill, and like immigration, aid for Ukraine is quickly becoming another obstacle to avert a shutdown before the 01 October deadline. The House holds the power of the purse strings, so this could spell doom for the Biden administration’s future support for Ukraine. – R.C.


  • (4) GUNDLACH: RECESSION RESPONSE WILL BE A “DISASTER”: Jeffrey Gundlach, founder and CEO of DoubleLine Capital, warns that stock investors are not ready for a 2024 recession and a collapse of the U.S. dollar.
    • “The economy is definitely weakening. I look for one [a recession] next year, and I think the indicators are getting really convincing in that regard,” Gundlach said.
    • Gundlach forecasts that the response to the recession will be a “disaster relative to our fiscal position,” and this could lead to a “complete abandonment” of the dollar when the world realizes that the U.S. is bankrupt.
    • Why It Matters: Gundlach has been negative on the U.S. economy for years, but he’s likely correct on this 2024 recession call. Higher interest rates are weighing down the housing market and small business refinancing, credit card debt is rising, and the U.S. budget deficit is 8% of Gross Domestic Product (GDP) – the same level as the Global Financial Crisis. – H.B.
  • (5) MORGAN STANLEY: THIS MAY PREDICT THE FED’S NEXT MOVE: Morgan Stanley economists are eyeing next week’s potential downward GDP revision as an indicator that the Federal Reserve won’t hike interest rates further.
    • GDP will likely be revised downward by -0.5% to -0.8%, according to Morgan Stanley’s forecast.
    • Why It Matters: The investment bank consensus is that the Fed won’t hike interest rates today. Some banks like Morgan Stanley project that the Fed is done raising rates, but others like Goldman Sachs expect one more rate hike this year and interest rate cuts in 2024. – H.B.


  • (6) CHINA ACCELERATES ITS U.S. TREASURY SELL-OFF: China has again reduced its U.S. Treasury holdings, while France, Germany, and other countries bought more U.S. debt, according to the just-released Treasury International Capital (TIC) Report for July.
    • China has reduced its Treasury holdings by 1% per month on average since July 2022, but China sold U.S. debt at about 1.5x that rate in July 2023.
    • Why It Matters: This U.S. Treasury sell-off is listed as a key indicator of Chinese intentions to take Taiwan. By selling more U.S. Treasuries, China can diversify out of America and avoid sanctions, make more money available for its BRICS+ trade partners, and strengthen its economy. – H.B.
  • (7) ARMY SEC: ARMY CANNOT FIGHT MAJOR WAR WITH LESS THAN 450K SOLDIERS: Yesterday at a Strategic Landpower panel, Secretary of the Army Christine Wormuth said, “there is a point at which the army could become too small to be able to do everything that it needs to do. You could not fight a major war in Europe or in Asia with an army – you couldn’t fight very effectively – with an army of less than 450,000.”
    • Secretary Wormuth said they do not expect to meet this year’s recruiting goals on the same panel. She also said there needs to be a “profound change” in recruiting and that she will make announcements in the near future.
    • The Army has 452,689 soldiers as of 31 July 2023, down approximately 12,000 from a year prior and down 29,000 since the summer of 2021, according to the Defense Manpower Data Center.
    • Why It Matters: The Army is averaging 1,208 fewer soldiers per month. At this rate, the Army will be too small to effectively fight in either major theater by Thanksgiving this year.  – J.V.
  • (8) SYRIAN PRESIDENT BASHAR AL-ASSAD HEADS TO CHINA: Syria’s President Bashar al-Assad will travel to China later this week for his first visit to the country since a 12-year conflict that began over a U.S. attempt to overthrow the government in Damascus.
    • China has been a major backer of the Assad regime behind the scenes throughout the current civil war.
    • Assad’s office said the Syrian leader was invited to Beijing by Chinese President Xi Jinping for a summit on Thursday.
    • Why It Matters: China has been a backer of the Assad regime since 2011, when U.S.-backed “democracy” protests turned into a deadly civil war. China is likely looking to bring Syria into the anti-Western fold and provide the Assad regime with extra firepower to defeat U.S.-backed Kurdish rebels occupying Syria’s eastern territories. The Syrian conflict may allow Beijing to expand its influence in the Middle East when Washington is occupied with a foundering Ukrainian battle against ally Russia. – M.M.
  • (9) CEASEFIRE IN NAGORNO-KARABAKH AFTER RUSSIA MEDIATION: Karabakh Armenians in Azerbaijan’s breakaway region of Nagorno-Karabakh agreed to a Russian proposal for a ceasefire on Wednesday, 24 hours after Azerbaijan began an offensive to take control of the enclave.
    • Nagorno-Karabakh is recognized as Azerbaijani territory but has been under the control of Armenian separatist groups.
    • U.S. Secretary of State Antony Blinken had called on Azerbaijan to halt its operations immediately.
    • Why It Matters: The ceasefire agreement gives Russia some breathing room to get control of its ally Armenia and tamp down the on-again-off-again conflict. Russia views Armenian Prime Minister Nikol Pashinyan as too pro-West, and Armenian pro-Russian elements are calling for a coup against his government. Continued fighting in the region could alter the geopolitical balance in an area crisscrossed with oil and gas pipelines that feed European states. – M.M.


M.S. indicates analyst commentary from Mike Shelby

M.M. indicates analyst commentary from Max Morton

J.V.  indicates analyst commentary from Jared Vaughn

R.C. indicates analyst commentary from Robert Cook

H.B. indicates analyst commentary from Harrison Burge

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