Daily SITREP: Moody’s: Gov Shutdown Bad Sign for U.S. Credit Rating (Tue, 26 September 23) – Forward Observer

Daily SITREP: Moody’s: Gov Shutdown Bad Sign for U.S. Credit Rating (Tue, 26 September 23)


Good morning. Here’s your Daily SITREP for Tuesday, 26 September 2023.


  • READ TIME: 6 Minutes, 2 Seconds
  • Inside the Beltway
    • (1) Moody’s: Gov Shutdown Bad Sign for U.S. Credit Rating
    • (2) Moderates Throw McCarthy Under Bus for Discharge Petition
    • (3) Military to Go Unpaid During Shutdown Without Defense Bill
  • Domestic INTSUM
    • (4) Markets Defy Federal Reserve’s Forecast
    • (5) Ackman: Higher Yields, Inflation Won’t Fall to 2%
    • (6) Miami Man Guilty in Sale of Adulterated Medicine to Suppliers
  • Global SITREP
    • (7) Chevron to Restart Drilling in Venezuela
    • (8) Carrier Failure to Launch May Trigger China
    • (9) Ethnic Armenians Flee Nagorno-Karabakh
    • (10) Philippines Refuses to Back Down to China


  • (1) MOODY’S: GOV SHUTDOWN BAD SIGN FOR U.S. CREDIT RATING: Moody’s Investors Services said while a shutdown would not impact debt service payments, it will “underscore the weakness of U.S. institutional and governance strength” compared to other AAA-rated sovereigns.
    • William Foster from Moody’s said “persistently high fiscal deficits and higher than expected interest costs” will ultimately impact the U.S.’s AAA credit rating.
    • Why It Matters: Moody’s is the last of the three major sovereign credit ratings agencies to still rate the U.S. at AAA after Fitch downgraded the U.S. to AA+ earlier this year. This could be a sign that Moody’s is considering a sovereign debt credit rating downgrade soon, and the shutdown that Washington D.C. is now treating as inevitable could be the driver for that downgrade. – R.C.
  • (2) MODERATES THROW MCCARTHY UNDER BUS FOR DISCHARGE PETITION: Republican moderates in the House are reportedly planning to push a Discharge Petition, forcing a vote on a Continuing Resolution, with the cooperation of some Democrat lawmakers to limit a possible government shutdown after 01 October.
    • Reps. Mike Lawler (R-NY) and Marc Molinaro (R-NY) said Republicans in vulnerable seats President Biden won in 2020 are “not in a position to support shutting the government down.”
    • Why It Matters: A shutdown now seems certain, and moderate Republicans are attempting to circumvent the normal order of the House and hitting the panic button with a Discharge Petition to keep it as short as possible. If enough Democrats do cross the aisle to get a Discharge Petition on the floor, Minority Leader Hakeem Jeffries (D-NY) has said the Democratic Conference will not save McCarthy, and moderate McCarthy allies could be throwing McCarthy under the bus for a stopgap that may not even pass. – R.C.
  • (3)MILITARY TO GO UNPAID DURING SHUTDOWN WITHOUT DEFENSE BILL: Unlike previous shutdowns, the military is at risk of going unpaid for its duration. The most recent shutdowns had pre-passed defense appropriations bills that covered military pay.
    • Rep. Jen Kiggans (R-VA) has a bill submitted to cover military pay, but the bill is not on the floor as of Tuesday morning. 
    • Why It Matters: The U.S. military is in the midst of a recruiting crisis that could be significantly worsened by a high-profile period without pay. During the 2018-19 shutdown, Navy Federal Credit Union, an institution catering to the military, offered to cover the first paycheck for unpaid service members as long as they were receiving direct deposits with them. However, there is no guarantee they will be able to cover it again. – J.V.


  • (4) MARKETS DEFY FEDERAL RESERVE’S FORECAST: The Federal Reserve forecasts one more interest rate hike in 2023 and 5%+ rates through 2024, but financial markets are betting against the Fed.
    • Interest rate futures contracts are pricing in about a 50% chance of no more rate hikes in 2023 and several cuts next year.
    • Traders anticipate lower inflation, a loss of economic momentum, and slowing job growth – factors that would lead to interest rate cuts sooner than the Federal Reserve forecasts.   
    • Why It Matters: “Don’t fight the Fed” was the saying when interest rates were falling. But now that interest rates are rising, markets want to fight Fed Chair Jerome Powell, who has been clear that he’ll be data-dependent and wants inflation back to 2%. Markets are underestimating the coming second wave of inflation, which will prompt the Fed to hike rates at least once more in 2023 and keep 5%+ rates through next year as planned. – H.B.
  • (5) ACKMAN: HIGHER YIELDS, INFLATION WON’T FALL TO 2%: Billionaire hedge fund manager Bill Ackman is betting that yields on government bonds will rise and higher oil prices will change the market’s inflation expectations.
    • “The world is a structurally different place than it was,” Ackman wrote on X (formerly Twitter). “The peace dividend is no more. The long-term deflationary effects of outsourcing production to China are no more. Workers’ and unions’ bargaining power continues to rise. Strikes abound, with more likely to come as successful walkouts achieve substantial wage gains.”
    • Ackman believes that America’s economy will be resilient, supported by U.S. government spending.
    • Why It Matters: Ackman was correct about big economic and financial changes in 2020-2021, and his asymmetric bets turned $204 million into nearly $4 billion. He’s likely correct about higher interest rates and inflation. The market will eventually catch up to Ackman’s investment thesis, and he’ll probably be hundreds of millions of dollars richer. – H.B.
  • (6) MIAMI MAN GUILTY IN SALE OF ADULTERATED MEDICINE TO SUPPLIERS: Armando Herrera and co-conspirators in Miami, Florida, established companies in Florida, Texas, Washington, and California that they used to sell adulterated prescription drugs to wholesale pharmaceutical suppliers.
    • Herrera and co-conspirators forged documents to show suppliers that the medications were acquired legitimately, who then sold the adulterated medicine to pharmacies, which then distributed them to unwitting patients.
    • Why It Matters: The Food and Drug Administration (FDA) has struggled to maintain quality and safety standards for foreign drug and precursor suppliers in China and India, to the point the Department of Defense is partnering with private labs in the U.S. for medicine quality control. The domestic medicine supply chain is also vulnerable to fraud and the distribution of fake and adulterated medications, and it is unlikely that this is an isolated incident. – R.C. 


  • (7) CHEVRON TO RESTART DRILLING IN VENEZUELA: Chevron is planning its first major drilling campaign in Venezuela since the Biden administration issued a special license last year.
    • Chevron’s joint venture with state-owned Venezuelan oil company PDVSA could increase Venezuela’s oil production from 785,000 barrels per day to over 1 million barrels per day by 2024.  
    • Other foreign oil companies with PDVSA joint ventures are planning possible drilling campaigns in Venezuela.
    • Why It Matters: This is another example of the Biden administration’s chaotic, contradictory economic and environmental policies that harm Americans and enrich foreigners. President Biden blocked oil drilling and exploration in the Arctic National Wildlife Refuge (ANWR), citing environmental protection. However, the administration is issuing licenses for favored companies to produce oil in authoritarian countries that have less regard for the environment. – H.B.
  • (8) CARRIER FAILURE TO LAUNCH MAY TRIGGER CHINA: The Navy reports that the USS Ronald Reagan failed to get underway five times in the last week after pulling into her homeport on her deployment.
    • The Navy refrained from disclosing the delay’s cause.
    • Why It Matters: There are currently no Carrier Strike Groups underway in the Asian Pacific or available to respond if the Chinese decide to blockade Taiwan. Only the USS America Amphibious Readiness Group is underway. However, they are trained to a different mission set than surface warfare. The next closest carrier would take weeks to respond. We are on the cusp of the autumn amphibious window for an invasion of Taiwan. China is unlikely to move on Taiwan before the Reagan is fixed, but they may not have a better opportunity. – J.V. 
  • (9) ETHNIC ARMENIANS FLEE NAGORNO-KARABAKH: Ethnic Armenian civilians are fleeing the Nagorno-Karabakh region over fears of new ethnic cleansing by Azerbaijan following last week’s cease-fire.
    • Approximately 14,000 of the estimated 120,000 Armenians in Nagorno-Karabakh had fled the region on Monday.
    • The U.S. called on Azerbaijan “to maintain the ceasefire and take concrete steps to protect the rights of civilians in Nagorno-Karabakh.”
    • Why It Matters: This could set up another refugee flow into Western Europe amid an already crushing number of North African refugees that are overwhelming European governments. Should the Azerbaijan military commence ethnic cleansing operations in the region, expect a rebirth of Armenian resistance and a potential resurgence of fighting. – M.M.
  • (10)PHILIPPINES REFUSES TO BACK DOWN TO CHINA: On Tuesday, the Philippines said it would not back down in the face of a Chinese effort to block its fishermen from a fiercely contested shoal in the South China Sea, while Beijing warned Manila not to “provoke and cause trouble.”
    • The dispute and the current standoff are at Scarborough Shoal, a Philippine possession that China has illegally expropriated.
    • Manila cut a floating 300-m (980-ft) barrier installed by Beijing at the shoal on Monday while both nation’s Coast Guard vessels monitored each other.
    • Why It Matters: This is an ongoing territorial dispute between China and the Philippines. The U.S. and the Philippines have an active mutual defense treaty and, in the past, have used joint military exercises to practice a response to a Chinese seizure of Philippine territory. The Scarborough Shoal dispute could spark off a direct conflict between the U.S. and China should Beijing decide to escalate actions against Manila. – 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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