text: ODAY’S BRIEFING:READ TIME: 7 mins 53 secondsInFocus: “Whiplash” tops emerging economic concernsInside the BeltwayDomestic INSTUMGeostrategic INTSUMLow Intensity Conflict Activity Rollup & OutlookInFocus: “Whiplash” tops emerging economic concernsThe Dallas Federal Reserve released several indexes this week, each of which showed worsening economic conditions and outlooks. The Texas Manufacturing Index of General Business Activity measured at -17.7 for June, a significant drop from May’s -7.3. The Texas Service Sector Index of General Business Activity fell from 1.5 in May to -12.4 in June. The manufacturing delivery time index increased from 4.3 to 19.9, shipments decreased to 1.2 from 13.1, and the growth rate of orders decreased from -5.3 to -16.2. In a recent interview with CNBC, ARK’s Cathie Wood said she believes the U.S. is already in a recession. “We [ARK] think the big problem out there is inventories, the increase of which I’ve never seen this large in my career,” she said. This generally mirrors local activity in Texas, where manufacturing has significantly decreased as inventories begin to pile up, driving revenues down and leading employers to reduce their workforce.Scion Capital’s Michael Burry, made famous by his “Big Short” in the lead up to the 2008 Great Financial Crisis, referenced this “whiplash” effect where higher inventories – a “retail supply glut” – will lead to lower prices. Burry appears to be calling for deflation later this year, which he says will cause the Fed to reverse its tightening cycle, which will lead to even higher inflation. Burry has been very vocal in warning about eventual hyperinflation. Until then, high inventories support this “whiplash” theory. This is something I mentioned back in April in “Inventory Tells the Story”.QUOTE: “While inflation might be the obvious cause, the U.S. economic slowdown is at least partially caused by high inventories, shown in the charts [below]. Due to increased demand coming out of pandemic lockdowns, retailers, in some cases, doubled and tripled orders expecting sustained demand. Retail and wholesale inventories went parabolic, but high inventories become cost-prohibitive, which is likely leading to a slowdown. The latest ISM surveys for manufacturing and non-manufacturing are both trending down, which would confirm an economic slowdown… With inflation ticking up, consumers worried about a recession, and the Fed’s intent to destroy demand, we’ll likely see a pullback on consumer spending that could end in recession. Ultimately, decreased consumer demand and high inventories mean there should be some pretty good sales and discounts this year.”Although we should see retail outlets slashing prices to liquidate excess supply, I expect food and commodities prices, in general, to remain high due to supply, production, and distribution challenges. In a recent note to clients, investment firm JPMorgan warned of potential “unplanned supply outages” due to geopolitical instability, which will drive prices higher.For now, the Federal Reserve is committed to using interest rate policy to combat inflation. Federal Reserve Chairman Jay Powell appears favorable to hiking interest rates higher, even if it lands the U.S. in a recession, signaling that the risk of runaway inflation is greater than that of economic contraction. My expectation is that higher interest rates and tightening will take the edge off inflation temporarily, but not kill it. Powell said this week that there’s “no guarantee” that the Fed can adequately fight inflation, which I see as a bellwether statement. This means generally high prices across the board for most items, while financial assets and home prices recede due to tightening.