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We see this everywhere. Lululemon knocks it out of the park while TGT, WMT & DG suffer. As I said the other day, credit card debt is up 27% and student loan debt repayments start up in September. The bottom three economic quintiles will continue to get squeezed.
No fear. The VIX is below 15 at 14.8. To put this in perspective, the VIX spent a good part of 2019 below 15 and often closer to 12.
Debt ceiling bill passed and unsurprisingly the markets are happy. The SPX has spent most of the morning above 4,250.
A bit more on commercial real estate. The 350 California building in San Francisco's financia district was appraised at $300MM in 2019. After the pandemic and work from home, the owner took it off the market in 2021 when bids peaked at $180MM. Last month they had to sell for about $60MM. We're finally getting to near the bottom of the market.
350 California
The SPX is close to testing Tuesday's high of 4,231. This is the highest level since August of 2022.
Republicans who are all about trimming deficit spending without raising a penny of taxes on the uber wealthy are now complaining in the Senate about the mere 3% raise in military spending. Collins called it "woefully inadequate" and Graham hilariously said we were going to "neuter" the military. He apparently has fantasies we don't understand..:).
It's likely bank specific and really depends on their portfolio. Same is true for insurance companies who've done a lot of commercial lending. The key for banks at this point is to do more high yield lending but many/most have tightened lending policies. I don't see this issue or the student loan issue or continuing high rates as a crisis but the combination of issues will surely slow the economy. Between student loans and revolving debt, Americans now have almost exactly $3T in debt for "stuff" many probably wish they hadn't bought.
With the economy slowing that makes sense. I suspect it will slow down more over the summer as the resumption of student loan payments begin.
Litigation nightmares are only in round one for 3M. The bell is about to ring for round two; PFAS, trails begin next week in South Carolina.
Coastal Town Brings Mass Litigation—and an ‘Existential Threat’—to Chemical Giants
Compounds used in firefighting foam seeped into the groundwater in Stuart, Fla. Now it’s at the forefront of thousands of suits against the makers
STUART, Fla.—In 2016, city leaders gathered to discuss some alarming news about their coastal town.
An aide to a local congressman had told them that the drinking water in Stuart, a community of about 18,000, contained levels of chemicals that exceeded new federal guidelines.
Most of the officials present at the meeting at city hall had never heard of the chemicals or knew why they were a problem. Stuart had twice won a state award for having the best-tasting water around. The water manager paced the room in disbelief, according to Mike Mortell, Stuart’s city attorney, who retreated to his office to scour the internet for any information he could find.
Seven years later, the small city of retirees and tourists 40 miles north of Palm Beach is at the forefront of one of the nation’s biggest environmental legal battles, over a class of chemicals known as PFAS. The fight pits hundreds of municipalities and about a dozen states against corporate giant 3M and other companies that made or sold the chemicals or firefighting foam containing them.
Cities from Philadelphia to San Diego allege that for decades companies supplied the foam despite knowing it was toxic and would eventually taint water supplies. The foam was good at putting out fires, the cities say, but created a different risk: People could get sick from drinking the local water.
Stuart’s lawsuit is now one of more than 4,000 against 3M and other companies. Stuart is one of 300 cities seeking to recover the cost of filtering the chemicals out of water. Many other lawsuits allege personal injuries from exposure to the foam.
Stuart, which bills itself as the Sailfish Capital of the World, has been chosen by plaintiff and defense attorneys as the first case to go to trial. Jury selection is set to begin June 5 in federal court in Charleston, S.C., where the cases have been consolidated.
3M and the other companies have said in legal filings that the chemicals haven’t been shown to cause health problems at the levels being discovered in drinking water.
“As the science and technology of PFAS, societal and regulatory expectations, and our expectations of ourselves have evolved, so has how we manage PFAS,” 3M said. “We will continue to fulfill our PFAS remediation commitments and address litigation by defending ourselves in court or through negotiated resolutions, all as appropriate.”
The company said that “PFAS are safely made and used in many modern products” but that it would no longer manufacture the chemicals by the end of 2025 because of increased regulations focused on reducing their presence in the environment.
Leading up to the Stuart trial, 3M has argued in court filings that the city is seeking “wildly inflated damages.”
Presiding Judge Richard Gergel said at a hearing that the case could represent “an existential threat” for the companies if the trial doesn’t go their way. Industry analysts have estimated the potential liability from firefighting-foam cases at more than $15 billion for 3M alone. The company didn’t comment on that estimate.
PFAS are man-made chemicals and were once renowned for their ability to resist heat, water, grease and stains. In recent years, hundreds of the compounds have been used to produce a wide range of goods, from nonstick pans to semiconductors. For years, Stuart’s firefighters used foam containing the chemicals in training exercises at the city’s two fire stations.
The chemicals accumulate in people, and industries from clothing to cosmetics and fast food are eliminating them from their products amid mounting evidence linking PFAS to cancers and other serious health problems. Some states are moving to ban the chemicals entirely.
In March, the Environmental Protection Agency proposed the first-ever federal limits on six PFAS chemicals that are showing up in drinking water. The regulation, if adopted, could require water utilities that collectively serve up to 90 million people to install costly filtering systems, the agency said.
In November, the EPA described PFAS chemicals as “an urgent public health and environmental issue facing communities across the United States.” In many cases, the presence of PFAS in drinking water has been traced to industrial discharges and landfills—and firefighting foam.
As the trial approaches, the sides are presenting vastly different accounts of the chemicals’ risks and who should pay for cleaning them up.
“If you ask the plaintiffs’ counsel, they would say, ‘This is like one of the greatest environmental tragedies in the history of man,’” the judge said during a hearing. “And the defense lawyers said: ‘I’ll drink it by the bottle, and it won’t hurt us.’”
At the edge of a field behind Stuart’s ocean blue and teal firehouse sits a large plastic vat draped in a tarp. A sign reads “Danger Hazardous Chemicals,” a warning about the 150 gallons of foam the city has yet to dispose of.
From about 1990 through early 2016, Stuart firefighters trained nearly once a week with what is called aqueous film-forming foam, which included PFAS in its ingredients. In hundreds of training sessions, crews sprayed the foam on a field, blanketing the ground as they would for a fuel-driven fire or a large fuel spill, said Fire Chief Vincent Felicione.
Afterward, he said, they hosed the foam down to keep it from blowing into yards, and watched as it sank into the ground.
In 2013, the EPA began requiring water systems of a certain size to test for PFAS. Subsequent testing revealed that all 26 of Stuart’s municipal wells had detectable levels of the chemicals. The city took the three wells that had the highest levels offline and notified residents about the situation.
Like hundreds of other cities, Stuart officials said they didn’t initially know how PFAS had gotten into the water. The area, with its Old Florida bungalows and boat slips along the St. Lucie River, had dealt with other water issues before. But those stemmed from agricultural runoff that caused toxic algae to cloud the river and its tributaries.
An environmental consulting firm found the highest levels of the chemicals near the main firehouse and a second firehouse where training with the foam also took place, and concluded they would continue to leach into the drinking water supply for years.
The chemicals were also discovered in private wells at a trailer park near a retirement community called Leisure Village. Florida’s Department of Environmental Protection began hauling in bottled water for residents, mostly immigrants from Honduras, Mexico or Guatemala.
Seeking a longer-term solution, Stuart allocated funds to build a new filtration system at the water treatment plant. It also hired a lawyer to look into getting the chemical companies to foot the bill.
The town, the seat of a heavily Republican county, was hardly a hotbed of environmental activism. It had rarely filed lawsuits, said Mayor Troy McDonald. But in early 2018, the city commission voted to sue 3M and other companies that sold it firefighting foam.
The city is suing for roughly $115 million. That includes $3 million spent to build the filtration system, another $2 million to expand it, plus $80 million to operate the system for the next 40 years and $30 million to clean up contaminated soil.
Chemical companies were already facing litigation. In 2017, DuPont had agreed to pay $670 million to settle 3,600 claims by West Virginia and Ohio residents alleging that cancer and other ills they contracted resulted from one particular PFAS chemical, called PFOA, in their water. The contamination was traced to a nearby plant that made Teflon.
A year later, 3M agreed to pay $850 million to settle a suit by the state of Minnesota alleging that groundwater was polluted by PFAS, dumped in landfills.
The companies didn’t admit wrongdoing in the settlements. But the suits unearthed a trove of internal health studies and communications about the chemicals.
Starting in the 1970s, animal studies by 3M scientists found that a type of PFAS the company had long produced, PFOS, caused effects in mice, rats and rhesus monkeys, from tremors to death, according to company memos. By the late 1970s, 3M officials realized the chemical was toxic and in the blood of the general population, according to an internal company timeline.
In a 1998 memo, a 3M scientist said a safe level for that chemical in human blood was 1.05 parts per billion, which was 1/30th the average level of it found in the general population’s blood supply at the time.
That year, a 3M official referred to PFOS in a memo as “insidiously toxic.”
Businesses are playing financial games with their accounting numbers. It can't go on for long. Good article from the WSJ that explains what's happening.
Business Is Slowing. So Companies Are Juicing Profits
Reallocate costs. Unwind charges. Delay depreciation. Companies are using nontraditional ways to boost the bottom line
Business slowed last year for Google’s parent, Alphabet. The tech giant still beat earnings expectations in this year’s first quarter, in part because it said that its computer servers would last longer than expected.
The shift reduced its depreciation expense by nearly $1 billion and helped push per-share earnings ahead of analysts’ estimates.
Google isn’t alone in boosting its earnings in surprising ways. When business slows, companies often try to make their numbers look better. That appears to be happening now, from tech giants to used-car dealers.
A spokeswoman for Google declined to comment.
More companies are beating analysts’ expectations and by bigger amounts. Businesses’ nontraditional earnings metrics are beating reported earnings by a lot more than last year, and a measure of the likelihood of earnings manipulation is at its highest level in about 40 years.
Companies have long engaged in earnings management, by which executives use the flexibility in accounting rules to improve reported earnings per share.
The moves, many of which are allowed under accounting rules, nonetheless have detractors. In a letter to investors earlier this year, Warren Buffett called the practice “one of the shames of capitalism.”
One way companies are trying to make their results look better is to provide numbers that don’t adhere to accounting standards—what are often referred to as pro forma measures—alongside the official data.
A report published Thursday by research firm Calcbench compared the net income based on accounting standards for 200 randomly selected companies in the S&P 500 with their adjusted net income, which can include or exclude items that would normally be counted. The adjusted numbers were higher by $1.1 billion on average last year, an increase of more than 130% over a similar sample from the year prior.
Another measure used to predict the likelihood of earnings flattery is the Beneish M-score, named for its creator, Indiana University accounting professor Messod Beneish. Recently, academics found the aggregate score of a sample of nearly 2,000 companies was at its highest level in more than 40 years, the most recent data shows. Historically, the aggregate score peaks ahead of a downturn.
First-quarter earnings exceeded expectations by an unusually large amount. Of the 485 companies on the S&P 500’s roster that had reported first-quarter earnings as of May 26, 77% surpassed analysts’ expectations, according to data provider Refinitiv. Since 1994, 66% of companies beat expectations in an average quarter.
The magnitude of the overperformance also stands out. Companies in aggregate are reporting earnings 6.9% above expectations, compared to a long-term average of 4.1%, according to Refinitiv. Some of that outperformance was the result of changes in the way the numbers were calculated.
The heightened use of the measures comes as regulators are scrutinizing nontraditional calculations and earnings manipulation. The Securities and Exchange Commission as recently as December warned companies that pro forma measures that replace traditional accounting methods with individually tailored disclosure could violate its rules.
The SEC has also said companies must reconcile how they get to the pro forma figures from the reported ones. In December, the regulator expanded the guidance with more details on what constitutes a possible violation.
Google came into 2023 on a cold streak, having missed analysts’ consensus for earnings in every quarter of last year as the slowing economy dragged on its core advertising business.
In April, the company broke the trend. Despite a continued slowdown in the company’s ad sales, Alphabet reported earnings per share of $1.17, beating analysts’ expectations of $1.08 a share. Google’s shares have risen some 18% since its earnings report.
The company’s filings noted two material changes in its accounting that helped boost the bottom line.
First, the company revised its estimates on the useful life of its server infrastructure, saying it would last up to six years instead of four. The change, the second such extension in two years, added 6 cents a share of earnings, according to the company. The change mirrored similar moves by competitors.
Separately, the company said it was shifting its stock-compensation awards for employees from January to March, resulting in the company recognizing less expense in the first quarter relative to the rest of the year.
The company’s filings didn’t disclose the precise impact of the move on first-quarter earnings but mentioned it several times as a material offset to expenses. In a filing, the company said the move was due to a previously announced change to employee evaluations.
Some accounting professors questioned the treatment. “It’s highly suspect,” said Melissa Lewis-Western, an accounting professor at Brigham Young University. “Actual performance hasn’t changed, you’re just changing the allocation of the cost.”
Online used-car seller Carvana was coming off a dismal year in 2022, in which its shares lost 97%.
Analysts expected the company to post a loss of $2.03 a share for this year’s first quarter. Ten days before the quarter ended, Carvana executives said they expected adjusted gross profit per car sold to come in between $4,100 and $4,400 for the quarter.
Carvana surprised Wall Street by losing only $1.51 a share, which sent the company’s shares soaring. Driving the beat was a better-than-forecast adjusted gross profit per car sold of nearly $4,800.
One reason Carvana’s earnings jumped was because it unwound $51 million in charges it made in the previous quarter. The company took the charges because it had expected to sell cars in its inventory for less than it had once expected but was then able to sell them for more as used car prices appreciated.
Unwinding the allowances boosted earnings by 48 cents a share, nearly all of the company’s beat of analysts’ expectations.
A spokesman for Carvana said the allowance’s potential impact was widely communicated to the market before the earnings release.
The company’s shares are up roughly 80% since it reported earnings.
The market may get a boost when the Senate passes the debt ceiling bill but there are still serious financial issues to manage the rest of this year. I've decided to stay in fixed income for the remainder of the year or until rates are no longer attractive. The taxes are higher but I'm still making a nice income without much concern about the debt nonsense or the upcoming student loan crisis. Here are some rough numbers:
It seems clear that student loan payments will begin again in September. That's $1.75T over 45 million borrowers or an average of ~$39,000 per borrower. In case anyone wants to do the math, @ 6%, that's $8.75B in interest per month. To that number you can add in revolving credit which FRED reports is up from a low of $971B in April of 2021 to $1.24T in March 2023. That's an increase of 28%.
Americans have discretionary purchased themselves into deep debt hole from which they'll have to begin to work themselves out. And all of this is happening while business is slowing. See my next post.
While I might avoid the emotionally charged term, 'crash' to describe commodity movement, they are certainly down from last year's peak. This 5-year chart of wheat is typical. We're back in the mid-range for pricing. The article mentions challenges in Europe and China but did not site the expected slowing growth of GDP in the US over the next several years, (referenced in the WSJ earlier this week). Investing may be challenging for longer than we currently think.
Wall Street does not trust DC. That last 15 minutes was ugly. I'll be watching the vote tonight. Don't ask, it's a sickness..:)
Case Shiller Core Logic all home price index came out yesterday and the rise in prices from February was confirmed for March. Other less rigorous data I have for April and May also confirms that prices continue to rise marginally as the large cohort of millennials forms households and inventory remains bleak. We're listing another house next week. I'll report to the board how this one goes.
Reviewing crude oil continuous contracts, the price is getting close to $50 a decade out. At the upcoming OPEC meeting they may lower output again.
China's economy is slowing as their debt continues to rise. From the WSJ.
China’s Fading Recovery Reveals Deeper Economic Struggles
Ballooning debt, tepid consumption and worsening relations with the West to weigh on growth, economists say
China’s era of rapid growth is over. Its recovery from zero-Covid is stalling. And now the country is facing deep, structural problems in its economy.
The outlook was better just a few months ago, after Beijing lifted its draconian Covid-19 controls, setting off a flurry of spending as people ate out and splurged on travel.
But as the sugar high of the reopening wears off, underlying problems in China’s economy that have been building for years are reasserting themselves.
The property boom and government overinvestment that fueled growth for more than a decade have ended. Enormous debts are crippling households and local governments. Some families, worried about the future, are hoarding cash.
Chinese leader Xi Jinping’s crackdowns on private enterprise have discouraged risk-taking, while deteriorating relations with the West—exemplified by a new campaign against international due-diligence and consulting firms—are stifling foreign investment.
Economists say these worsening structural problems are hobbling China’s chances of extending the growth miracle that transformed it into a rival to the U.S. for global power and influence.
Instead of expanding at 6% to 8% a year as was common in the past, China might soon be heading toward growth of 2% or 3%, some economists say. An aging population and shrinking workforce compound its difficulties.
China could drive less global growth this year and beyond than many business leaders expected, making the country less important for some foreign companies, and less likely to significantly surpass the U.S. as the world’s biggest economy.
“The disappointing recovery today really suggests that some of the structural drags are already in play,” said Frederic Neumann, chief Asia economist at HSBC.
China’s economy expanded at an annual rate of 4.5% in the first quarter, boosted by the end of Covid-era restrictions.
Yet more recent signals suggest the revival is ebbing. Retail sales rose 0.5% in April compared with March. A bundle of data on factory output, exports and investment came in much weaker than economists were expecting.
More than a fifth of Chinese youths aged 16 to 24 were unemployed in April. E-commerce companies Alibaba and JD.com reported lackluster first-quarter earnings. Hong Kong’s Hang Seng Index, dominated by Chinese companies, is down 5.2% year to date, and the yuan has weakened against the U.S. dollar.
Most economists don’t expect China’s problems to lead to recession, or derail the government’s growth target of around 5% this year, which is widely seen as easily achievable given how weak the economy was last year.
McDonald’s and Starbucks have said they are opening hundreds of new restaurants in China, while retailers including Ralph Lauren are launching new stores.
A boom in electric-vehicle production allowed China to surpass Japan as the world’s largest exporter of vehicles in the first quarter. Beijing’s industrial policies and China’s manufacturing prowess mean it is still finding ways to succeed in some major industries.
“We still have confidence in the long-term growth story of China,” said Phillip Wool, head of research at Rayliant Global Advisors, an asset manager with $17 billion under management. He said the country’s transition to one that relies more on domestic consumption instead of exports will help keep it on track.
Still, many economists are growing more worried about China’s future.
The big hope for this year was that Chinese consumers would step up spending, as the main drivers of China’s past growth—investment and exports—languish.
But while people are spending somewhat more after almost three years of tough Covid-19 controls, China isn’t experiencing the kind of surge other economies enjoyed when they emerged from the pandemic.
Consumer confidence is low. More important, some economists say, is that Beijing hasn’t been able to meaningfully change Chinese consumers’ long-running propensity to save rather than spend—a response to a threadbare social-safety net that means families must sock away more for medical bills and other emergencies.
Chinese household consumption accounts for around 38% of annual gross domestic product, according to United Nations data, compared with 68% in the U.S.
“Consumer-led growth has always been a bit of an aspirational target” for China, said Louise Loo, China lead economist in Singapore at Oxford Economics, a consulting firm. Now, it might be even harder to achieve, she said, given how cautious Chinese consumers are coming out of the pandemic.
Although Beijing is trying to make it easier to borrow this year, lending data indicate households prefer to pay down debt than take on new loans.
In March, Zi Lu dipped into her dowry and paid off the remaining 1.2 million yuan, equivalent to about $170,000, on her mortgage for an apartment she bought in Shanghai two years ago. Working for an e-commerce retailer, she said sales have been underwhelming this year. Lu said she is anxious and wants to reduce her debt burden.
“I’m scared of getting laid off out of the blue,” she said.
Also looming over the economy is its massive debt pile.
Between 2012 and 2022, China’s debt grew by $37 trillion, while the U.S. added nearly $25 trillion. By June 2022, debt in China reached about $52 trillion, dwarfing outstanding debt in all other emerging markets combined, according to calculations by Nicholas Borst, director of China research at Seafarer Capital Partners.
As of last September, total debt as a share of GDP hit 295% in China, compared with 257% in the U.S., data from the Bank for International Settlements shows.
Viewing the debt buildup as a threat to financial stability, Xi has made deleveraging a centerpiece of his economic policy since 2016, weighing on growth.
To help deflate the country’s housing bubble, regulators imposed strict borrowing limits for property developers from late 2020. Property development investment fell 5.8% in the first quarter of this year despite policy efforts to stem the pace of the slide.
Two-thirds of local governments are now in danger of breaching unofficial debt thresholds set by Beijing to signify severe funding stress, according to S&P Global calculations. Cities across the country from Shenzhen to Zhengzhou have cut benefits for civil servants and delayed salary payments in some cases for teachers.
These problems are deepening when China’s appeal as a destination for foreign firms is waning, data show, as tensions rise with the U.S.-led West.
Foreign direct investment into China tumbled 48% in 2022 compared with a year earlier, to $180 billion, according to Chinese data, while FDI as a share of China’s GDP has slipped to less than 2%, from more than double that a decade ago.
Competition for investment with countries including India and Vietnam is heating up as firms seek to diversify supply chains, partly in response to the risk of disruption from conflict between the U.S. and China.
Jens Eskelund, president of the European Union Chamber of Commerce in China, said uncertainty over China’s long-term economic prospects is another factor in companies’ investment decisions.
“Naturally, it dampens the willingness to go out and invest in additional capacity if you are not super optimistic about the economic outlook,” he said.
Reforms to foster more productive, private-sector activity have stalled under Xi, who is placing greater emphasis on security than economic growth. Beijing has tightened regulation of sectors including technology, private education and real estate, leaving many business owners unwilling to invest more.
In the first four months of this year, fixed-asset investment made by private firms grew 0.4% from a year earlier, compared with 5.5% growth in the same period in 2019.
Chinese leaders have dialed up rhetoric to reassure entrepreneurs and investors. Li Qiang, China’s No. 2 official and new premier, said in March that China will open further to foreign players, and told Communist Party officials to treat private entrepreneurs as “our own people.”
Economists are split over whether policy makers, who have held off on launching large-scale stimulus as they did in 2008 and 2015, will resort to more aggressive stimulus now. Some, including economists from Citigroup, expect China’s central bank to cut interest rates in the coming months to lift sentiment.
Others say that Beijing’s restraint stems from fear of compounding already-high debt levels, and that more stimulus might do little to trigger demand for credit anyway.
Jeff Bowman, chief executive of Cocona, which makes temperature-regulating materials used in apparel and bedding, said he is still optimistic about China. He said that during a recent two-week business trip to Taiwan and China, customers who were focused on China’s domestic market were far more upbeat than their counterparts exporting to the U.S. or Europe, who he said “are hurting for sure.”
He said that Cocona, based in Boulder, Colo., plans to set up a subsidiary in China to expand its business there.
But many analysts still wonder where the growth will come from.
“The big question is, have we reached the point where awareness of the structural slowdown is becoming a near-term issue for confidence? Then it’s a bit of a vicious cycle,” said Michael Hirson, head of China research at 22V Research, a New York-based consulting firm.
Using FRED data; this from the WSJ. When lending standards are raised, 2000, 2008, 2020, a recession follows. This combination of rising interest rates and rising lending standards may be leading us toward a 2023 recession. At best, growth will remain minimal for several months. Also, the Chinese economy is faltering again. With the world's two major economies struggling to grow, it's looking a bit sketchy for a market recovery this summer.
The debt ceiling bill is out of committee and McCarthy got the 7 Republicans he needed so the Dems could feign anger while voting no and 2 Republicans could perform Kabuki theater style and also vote no, saving McCarthy from falling on his sword. The vote in the House should be tomorrow with, one would expect, more Kabuki performance from the far right before the bill passes and moves on to a bit more sanity in the Senate.
Hat tip to Elroy who appears to have seen this play before.
The SPX was up 7/100ths of one point today. Tech saved it.
Also not my strong suit but I believe there are 13 committee members; 9 Republicans and 4 Democrats. The problem for McCarthy is that he needs 7 Republicans out of the 9 to vote for it. If he has 3 then the 4 Dems will vote for it and he effectively will have shunned the crazy caucus and sided with moderate Democrats and a few Republicans. Dark Brandon appears to own McCarthy now as it looks like he'll need Dems to vote for him to remain speaker. Crazy times.
The SPX is trying to hold above 4,200. Market is looking for some good news but it's not going to happen today.
It appears Biden and McCarthy plan to carve out the middle of both parties to secure enough votes to pass the debt ceiling bill if they can get it out of committee. How McCarthy maintains his post as speaker is another issue.
You've created a false dilemma Dew. I addressed a possible solution that doesn't support the continuation of one of the biggest deficit creating tax cuts in US history. An AMT would solve both the problem of high corporate taxes and corporations paying no taxes.
We just bounced off upper resistance at 4,211. A gambler would short this market over the weekend anticipating that talks will fall apart on the details. That's not me..:)
Of course, they may not and you could be well under water if the market stays this happy.
Nick, do you think the market will do some just in case selling during the last hour or two? The market seems a bit too happy considering the close vote count in both the House and the Senate. A deal that could get votes from the Freedom Caucus may not get votes from the Senate Progressive Caucus, (the AOC caucus). From what little detail I can gather it appears student loan debt relief is getting the ax along with at least a portion of new IRS agents. Student loan relief was probably getting axed by the Supreme Court anyway. That ruling is coming next month. If ~44MM Americans have to start paying off student loan debt in September, discretionary spending is going to suffer. Or maybe Biden will just kick the can down the road again.
Attached below is a chart of the 20-day moving average for the CBOE put-call ratio. This chart goes back to January 2020 which gives a sense of the ratio pre-pandemic, pandemic bottom and the complete overshoot - nothing could ever go wrong again - peak at the end of 2021. This chart makes a strong suggestion that the market bottom was October of 2022. I will look for a successful retest of support before beginning to re-enter the market.
The administration trotted out their Treasury under secretary to confirm they won't use the 14th Amendment to cure the debt ceiling impasse. The market appears to think that means they almost have a deal with McCarthy and the band of pranksters. I'm not so sure. If they don't before the market opens on Tuesday 5/30 the market may not be so sanguine.
A decade ago my partners and I were shipping 20-25 containers a month out of Asia. Contract prices to the West Coast were roughly double the current spot price. When we began in late 2008 the spot price was about half what it is today and we were only shipping a couple of containers a month. Considering the cost per unit, ocean shipping was basically free. The ocean freight business is a tough one. If this goes on much longer, ships will be taken out of service and a new cycle will begin.
The bulls are winning this morning as the SPX is tackling resistance at 4,200 again. The short term high was on May 19 @ 4,211.
The Gulf Stream along the eastern US coast, the Canadian Maritimes and Western Europe has been slowing as well. It's going to create warmer summers and colder winters, especially in Northern Europe. It's the same problem; fresh water from melting ice is disturbing the flow.
Here's an over simplified explanation: As the Gulf Stream moves warm water northward, water evaporates making the water more dense. As it becomes more dense it sinks creating momentum. Adding additional fresh water slows that momentum.
One area that doesn't have to worry about weather change is Southern Florida as it will be mostly under water by the end of the century. Fun times.
We've got some very short term, (hourly), resistance in this area of the SPX.
A few of my favorites unmentioned by AI:
“I would challenge you to a battle of wits, but I see you are unarmed!”
“To thine own self be true..."
“We know what we are, but know not what we may be.”
“Suspicion always haunts the guilty mind.”
And it only starts there with the round globe lies. Gravity is a deep state invention. Before they created gravity to keep us down, everyone could fly...they kept it out of the Bible but it's still in the Apocrypha. Air used to be oxygen but now it's only 21% oxygen. Having trouble breathing? Deep state. And they're about to flip the magnetic poles, that's why they're melting the ice so it can flip easier. I can go on all day with this. Stupid people will believe anything and most will pay you to lie to them. I went into the wrong profession.
This is the 21st Century version of kicking grandma to the curb.
You're on a roll this morning Elroy.
This is so last year, we've already had a president who can do that..:)
Nick, looking at a short term chart of the SPX, (10 minute/3 week), the market is not down, it's still flat as a pancake with a little six day hill of hope-apathy-fear. The short term bottom is ~4,100 and top is 4,187. Other technicals suggest that we're close to the top for today barring any breakthrough on the debt ceiling.
One of the things we've learned about Uncle Joe is that just when we think he's sleeping away peacefully in his rocker he may unleash his Dark Brandon alter ego to smite the non-believers with the 14th Amendment. And I sayeth unto you; the debt of the United States shall not be questioned..:)
For anyone interested in the legal side of the debt ceiling, this seems to be a solid lawsuit. Forwarded to my Twitter feed from Lawrence Tribe. The article appeared in The New Republic.
The Lawsuit That Might Force Biden to Ignore the Debt Ceiling
An organization representing government workers is making a preemptive strike against the mounting default crisis.
During the two years they spent holding power in Washington, Democrats failed to disarm the debt ceiling time bomb that Republicans have repeatedly wielded over the past decade. Now they are wrestling with the potential consequences of the latest and greatest standoff over raising it. President Joe Biden and Speaker Kevin McCarthy are reportedly making little progress in negotiations over the trillions in unpopular spending cuts and new restrictions that the House GOP wants to enact in exchange for not blowing up the economy.
One solution would be for the Biden administration to recognize that the debt ceiling is unconstitutional. The Fourteenth Amendment declared in 1868 that the “validity of the public debt authorized by law ... shall not be questioned.” A logical reading of that language is that Congress cannot authorize spending that exceeds the nation’s tax revenues and then later forbid the Treasury to pay off that debt. But Biden aides are reportedly downplaying the use of this option to progressive lawmakers.
A recent lawsuit could nonetheless force their hand. The National Association of Government Employees, or NAGE, filed a federal lawsuit against the Biden administration earlier this month to block it from enforcing the debt ceiling. The union argued in a court filing last week that the debt ceiling violates the public debt clause and that abiding by it is already injuring NAGE’s members. A hearing on a preliminary injunction is set for next Wednesday. While its chances of success are uncertain, the lawsuit itself underscores the constitutional netherworld in which the nation’s leaders now find themselves.
Most debates over the debt ceiling’s constitutionality imagine that it will not become a courtroom matter until the bomb actually goes off. When that happens, the Biden administration will essentially have two choices. Treasury Secretary Janet Yellen can stop paying off existing debts and thereby default on the national debt for the first time in American history. Alternatively, she can “prioritize” making those debt payments over things like paying civil servants and mailing out checks to veteran pensioners. That would bring the United States into a state of technical default while theoretically mitigating some of the damage.
If Yellen instead chose to continue issuing new bonds to cover existing debt, that would violate the debt ceiling and likely set up a showdown at the Supreme Court. Most observers imagine in this hypothetical scenario that Biden or Yellen or a lawyer working for them would just say “Fourteenth Amendment!” while issuing the bonds; conservative legal scholars have argued that ignoring the debt ceiling on those grounds would itself be unconstitutional. “The idea that the Fourteenth Amendment gives the president unilateral power to borrow is dangerous nonsense,” Michael McConnell, a former federal judge, recently argued in a New York Times op-ed.
NAGE’s lawsuit spins some of these assumptions on their head. Most discussions of the debt ceiling depict it as a burden imposed upon the executive branch by Congress. The union argued that the debt ceiling actually amounts to a line-item veto for the president to wield at his own discretion. What appears to be a restriction based on the political dynamics of the situation is actually, according to the filing, an unconstitutional transfer of congressional power.
“Already near the debt limit, the last Congress adopted in the current fiscal year a budget that would require adding $1.5 trillion in debt without identifying or indicating any priority of payments once the limit on indebtedness was reached,” the lawsuit claimed. “Congress then failed to raise the debt ceiling or increase taxes and effectively offloaded the dirty work of repealing parts of the spending that Congress itself had just approved.”
The Supreme Court previously struck down a line-item veto in the 1998 case Clinton v. New York. Writing for the court, Justice John Paul Stevens noted that the Constitution had carefully and deliberately laid out the process by which bills become law. Deviations from that “finely wrought” structure are unconstitutional, especially when they result in “truncated versions” of the laws that were actually passed by Congress.
It would be one thing if Congress had laid out the order in which federal spending must be “prioritized” after the debt ceiling is met, the union noted. But it argued that Congress effectively delegated that power to decide which federal spending must be cut or canceled to the executive branch. By crafting a debt ceiling, Congress ceded a core legislative power to another branch of government and compromised its authority over federal spending.
Some legal scholars have already pointed out that the debt ceiling’s existence amounts to a constitutional no-win scenario for a president. Law professors Neil Buchanan and Michael C. Dorf recently noted that Congress had placed the executive branch in a “trilemma,” in which he must violate the Constitution in some way. “Once we hit the debt ceiling, Biden will bump into a constitutional obstacle no matter what he does,” they wrote in a Los Angeles Times op-ed. “Failing to spend appropriated funds, raising taxes, or borrowing money to pay the bills would all infringe on Congress’ constitutional powers.”
NAGE’s lawsuit also emphasized this quandary for the president. “The Debt Limit Statute has placed the President in an impossible position, without legislative permission or constitutional authority as to how to proceed,” the union said in its original complaint. “Under Article II of the Constitution, the President is obligated to execute all the laws, without exception, and may not be placed by Congress in a position where the President has to determine what laws are of continuing force and require payment, once the limit on total indebtedness is reached.”
What makes the union’s lawsuit noteworthy is also how it avoids some of the procedural questions that might bedevil other debt ceiling lawsuits. The U.S. technically already hit the debt ceiling on January 19, as Yellen informed Congress at the time. The Treasury has avoided default thus far by relying on what it describes as “extraordinary measures,” or certain creative accounting maneuvers. In this case, Yellen told lawmakers that she would suspend the Treasury’s investment and reinvestment in various civil servant retirement funds that were authorized by law, to give the country some breathing room.
In the filing, the union argued that this amounted to a legal injury for its members. “The debt issuance suspension period continues in effect and continues to diminish the value of the assets of the benefit plans of the CSDRF and Thrift Savings Plans in which [NAGE’s] members are participants,” it claimed. “While [Yellen] is required by 5 U.S.C. 8348 to make good on these losses when the debt issuance suspension period ends, there is presently no end in sight or increase in the debt ceiling, and the retirement plans continue to lose value.”
Maryland Representative Jamie Raskin told The Washington Post in a recent interview that, in his view, the Supreme Court is usually “fastidious” about whether a party has legal standing in a particular lawsuit, which would insulate ignoring the debt ceiling from legal challenges. NAGE argued that it had overcome the standing hurdle, albeit from the opposite direction. “Aside from this actual injury, [NAGE’s] members face certain and imminent harm when the United States runs out of cash to pay its bills,” the union also noted. “Although individual members may or may not be furloughed, and there will be different degrees of individual injury from layoffs, all of [NAGE’s] members face an imminent and certain injury from delay in their paychecks, whether for days, weeks, or months.”
Naturally, this is not how things are supposed to work. When Congress added the public debt clause to the Fourteenth Amendment during the Reconstruction era, its drafters’ immediate concern was various Civil War debts. But they also made clear that they had much broader aspirations in mind. “I have no doubt that every man who has property in the public funds will feel safer when he sees that the national debt is withdrawn from the power of a Congress to repudiate it and placed under the guardianship of the Constitution than he would feel if it were left at loose ends and subject to the varying majorities which may arise in Congress,” Massachusetts Senator Benjamin Wade told his fellow lawmakers during the drafting debates.
Will the Supreme Court agree? It’s impossible to say. Predictions about how the court would rule on particular cases are difficult even when they traverse familiar areas of constitutional law. The Supreme Court has heard vanishingly few cases on the public debt clause’s meaning since its enactment, however, and none of the court’s current members have ever been part of one. If the dispute reaches the justices, it might be one of the highest-stakes cases they ever hear. Nothing less than the integrity of the national debt and the stability of the American financial system would be on the line.
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I'm not dead.