Liquidity makes the world go ’round. Accordingly, until Federal Reserve officials quit their hawkish jawboning, investors will continue to be thwarted.

Wall Street was cheered by the release last Wednesday of March data for the U.S. consumer price index (CPI), which showed inflation cooling. The long-awaited Fed pause seemed at hand.

But not so fast. Two days later on Friday, Fed Governor Christopher Waller rained on the parade.

“I would welcome signs of moderating demand, but until they appear and I see inflation moving meaningfully and persistently down toward our 2% target, I believe there is still work to do,” Waller said in a buzz-kill speech in Texas.

There’s been a divergence between market expectations for rate cuts and what the central bank is actually signaling. The bond market is pricing in about two rate cuts by the end of the year, while Fed officials such as Waller argue against the case.

Wall Street seems to be hitting the “hopium” pipe.

Hopium isn’t a real drug, of course. It’s a popular term for unrealistic hopes that are pursued like a drug. This habit-forming behavior is dangerous to the health of your investment portfolio. Investors hoping for a near-term Fed pivot should perhaps check into hopium rehab.

Mixed signals on earnings…

Another source of frustration is first-quarter 2023 earnings season, with 60 S&P 500 companies slated to report this week. There’s been initial good news on that front, but overall Q1 2023 expectations are downbeat.

For Q1, with 6% of S&P 500 companies so far reporting results, 90% of S&P 500 companies have reported a positive earnings surprise and 63% of companies have reported a positive revenue surprise.

However, the blended year-over-year earnings decline for the S&P 500 for Q1 is -6.5%. If -6.5% is the actual decline for the quarter, it will represent the largest earnings decline reported by the index since Q2 2020 (-31.6%).

That said, the biggest U.S.-based banks last Friday started earnings season with a bang, assuaging anxieties about the financial sector and economy.

The positive earnings surprises reported by JPMorgan Chase (NYSE: JPM), $4.10 vs. $3.41, and Citigroup (NYSE: C), $2.19 vs. $1.65, have been the largest contributors to the decrease in the earnings decline for the S&P 500 index since March 31.

Regional banks have wobbled lately, in the wake of Silicon Valley Bank’s collapse, but the money center banks have shown that they’re well-capitalized, profitable, and optimistic about the rest of the year. That’s a tailwind for the overall economy and stock market.

Three sectors have posted an improvement in their Q1 earnings growth rate or a decrease in their earnings decline since the end of Q1 due to upward revisions to earnings estimates and positive earnings surprises, led by financials (to 5.4% from 2.9%). The financials sector is also the largest contributor to the increase in earnings for the index since March 31.

The political slugfest…

The debt ceiling is emerging as an investment risk, with both parties still squabbling over the federal budget.

U.S. national debt currently hovers at $31.5 trillion. Since the 1980s, the U.S. has witnessed three Republican and three Democratic administrations.

Contrary to the partisan myths you may have heard on your favorite cable news channel (left or right), U.S. debt has climbed steadily throughout the decades no matter which party controls the White House (see chart).

In return for extending the debt limit, House Speaker Kevin McCarthy (R-CA) and his leadership team are insisting on cuts to popular domestic programs; the Democrats refuse to go along.

McCarthy grapples with a narrow majority, as well as a tenuous grip on the speakership. The Senate is less fractious, but Democratic control is likewise narrow. Congress faces a rocky road in raising the debt limit.

When the federal government runs out of cash, probably in late summer 2023, it will be forced to borrow more money or it won’t have enough revenues to pay its bills, leading to a possible debt default.

The vitriol and mistrust are so bad on Capitol Hill, it’s actually possible that Congress might let the U.S. government lapse into default. The results would be catastrophic.

If investors lose faith that the U.S. Treasury will meet its obligations, it could trigger a global financial crisis. U.S. debt is a linchpin of the global financial system, largely because of its stability, so a default would wreak mayhem on economies and markets around the world.

However, there’s money to be made in mayhem. That’s why we launched the Mayhem Trader investment service two years ago.

Mayhem Trader, helmed by my colleague Jim Pearce, made a lot of money for its subscribers last year, and 2023 is shaping up to be another banner year.

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John Persinos is the editorial director of Investing Daily.

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