September 13
Barracuda. Peace through superior firepower. China is our enemy. Please follow the link.
Markets and Stocks
Inflation is falling.
@jasonfurman The CPI-based Ecumenical Underlying Inflation Measure came in at 2.2% in August, the lowest of the inflationary period. The is the median of eight different measures over 3, 6 and 12 months. Note that 3 of these measures are ex shelter which is running lower now.
August producer prices were slightly hotter than expected but as noted above inflation is falling and the Fed will be cutting.
Wages and prices will converge. With the strong productivity data, wage inflation is not a source of upward pressure on prices. Unit labor costs are low.
Core inflation is at about 2.5. The Fed Funds rate is at 5.375%. Policy is very restrictive, too restrictive.
The Fed will begin a long rate cutting cycle next week. Over the course of the next year, rates will fall by a minimum of 1.25%. Lower rates support higher equity valuations.
The economy is growing. Weekly jobless claims are running around 230,000. That is consistent with a solid labor market. The employment market is NOT rolling off a cliff. Households are enjoying real income gains coupled with record wealth. Debt service payments are NOT excessive.
Households are seeing real wage growth.
Mortgage rates are falling fast.
I like the market. My four month target is 6,000 on the S&P 500, up about 9% from current levels. My top five picks are: ASML, NVDA, AXP, LLY and Meta.
I continue to like the hyper scalers and Tesla. But the above five stocks are the ones I would buy right now with new money.
I continue to like the semiconductors.
I continue to like JPM, GS and BAC.
In the industrial sector I am using ETN, CAT and DE.
And I really like Rolls Royce and the uranium sector. Small nuclear reactors are coming soon.
Speaking at a Goldman Sachs conference, Nvidia CEO Jensen Huang said
that the scramble for a limited amount of supply of Nvidia chips has frustrated some customers and raised tensions.
“The demand on it is so great, and everyone wants to be first and everyone wants to be most,” he told the audience at a Goldman Sachs Group Inc. technology conference in San Francisco. “We probably have more emotional customers today. Deservedly so. It’s tense. We’re trying to do the best we can.”
Huang’s company is experiencing strong demand for its latest generation of chips, called Blackwell, he told the audience.
And Barron’s reports: Oracle operates 162 datacenters right now but that number could eventually rise to 2,000, he said, with one site it’s currently designing expected to use up a gigawatt of power and run on nuclear reactors.
Nvidia’s dominates the market for AI chips, and Oracle isn’t the company’s only Big Tech customer with expansion plans. Elon Musk’s start-up xAI has loaded up on Nvidia GPUs to build up its Colossus AI training infrastructure, and Meta Platformsplans to have bought billions of dollars worth of H1 chips by the end of this year.
https://www.barrons.com/articles/nvidia-stock-price-chip-demand-d1183754
ARM stock was the leading stock in the Nasdaq after an analyst at Morgan Stanley provided optimistic commentary about demand for the company’s chips.
Analyst Lee Simpson rates Arm as Overweight with a $175 price target, which implies a 38% increase from the stock’s closing price of $127.22 on Tuesday. He wrote in a research note Wednesday.
https://www.barrons.com/articles/arm-holdings-stock-top-pick-ad272c3a
Open AI is in talks to raise $6.5 billion from investors at a valuation of $150 billion, according to people familiar with the situation. See Bloomberg.
Foreign direct investment is falling in China and rising in India and Indonesia.
Economics
Deficits are a source of upward pressure on prices.
This paper measures the causal effect of deficits on inflation using a “high frequency narrative approach”.
We identify an event that released news about the 2021 deficits in the United States—the Georgia Senate election runoff. We calculate the size of the shock using new narrative data from investment banks. We then study the high frequency response of inflation forecasts from asset prices, in order to separate deficits from other factors affecting inflation.
We estimate an “inflation multiplier” of 0.18% price level growth over two years, for a 1% deficit-to-GDP shock. Our estimate implies that the 2021 deficits caused around 30% of the 2021-22 inflation—meaning deficits were important but not the only cause.
A standard heterogeneous agent New Keynesian model quantitatively matches the size and dynamics inflation multiplier.
https://jadhazell.github.io/website/Fiscal_Inflation_Draft.pdf
See also Marginal Revolution.
James Pethokoukis writes at his blog “Faster, Please,”
Meet the Progress and Prosperity Party (symbol: a spritely unicorn). It mostly consists of the center right and center left of the old Democratic and Republican parties—people who voted for early 2000s politicians such as Barack Obama, Hillary Clinton, George W. Bush, and Mitt Romney.
The P&P takes historical inspiration from Founding Fathers such as Benjamin Franklin (a scientist and inventor who fully believed in man’s capability to adapt the world around himself for the better) and the upward-striving Alexander Hamilton.
It’s a drawbridge-down party that broadly favors economic openness—liberal trade and immigration policies, for instance—and the “proactive principle” of governing: public policy should encourage innovation even if all the consequences aren’t well understood and it causes economic disruption.
Pedal to the metal on advancing artificial intelligence. Human-level AI can’t some too soon.
Sounds good to me.
Politics
At the Washington Examiner, Thomas Rogan writes about U.K. foreign policy under the new Labour Government.
Since entering office in early July, British Prime Minister Keir Starmer has begun to chart a foreign policy path away from that of his predecessor, Rishi Sunak. What this foreign policy might look like will be foremost on the agenda when Starmer meets President Joe Biden at the White House on Friday.
On some issues such as the war in Ukraine, Starmer’s approach is ‘steady as she goes.’ But on other concerns such as those relating to China and the Middle East, Starmer clearly wants to shake things up. Here, he is showing a tentative willingness to separate U.K. foreign policy from that of its special relationship partner, the United States. This reflects an important truth. Namely, that while the U.S.-U.K. relationship is centered in enduring and extensive intelligence/military cooperation, London and Washington adopt different strategies in some key areas.
Take Starmer’s policy toward Israel.
Foreign Secretary David Lammy (U.K. equivalent of the U.S. secretary of state) recently announced that the United Kingdom would suspend around 10% of its arms export licenses to Israel. Lammy said this was necessary because “there exists a clear risk that they might be used to commit or facilitate a serious violation of international humanitarian law.” These restrictions serve more as a diplomatic rejoinder than a limitation on Israel’s military capability. Nevertheless, they are noteworthy.
Starmer is also hinting that he will maintain the transactional economic agenda that has dominated U.K. foreign policy in recent years.
Shortly after taking office, Starmer spoke with Saudi Crown Prince Mohammed bin Salman. Much as in the U.S., the U.K. intelligentsia continue to identify the de facto Saudi ruler via his brutal murder of Jamal Khashoggi. The problem is that this emotive assessment overemphasizes Khashoggi’s fate in the context of far more significant Western interests vis-a-vis Saudi Arabia. Starmer’s call with bin Salman indicates his appreciation for that concern. A read-out from Starmer’s office described how the two leaders were focused on “working together to strengthen areas of shared interest, including trade, investment and defense cooperation.” For the U.K., the manifest emphasis here is “trade” and “investment.”
Until now, the U.K. has adopted a policy of resolute support for Ukraine. This policy has now extended across three premierships: Boris Johnson, Liz Truss, Rishi Sunak. Starmer seems set to maintain this policy. Starmer’s government has pledged to provide new weapons to Kyiv. Of note, the U.K. has adopted a far more risk-tolerant approach in its support for Ukraine than has the U.S. As first reported by the Washington Examiner in August 2022, the U.K. has frequently deployed its own special forces very close to the front lines. Ukrainian sabotage against Russian targets inside Russia proper also reflect British special forces doctrine. (U.K. forces have not directly participated in these operations.) Manned British spy planes also operate more robustly than their American counterparts against Russian forces. Successive British governments have also pushed the Biden Administration to allow Ukraine to use Western provided long range weapons inside Russia, a development that appears likely to occur later this week. The U.K. had been reticent to provide such an authorization itself absent similar U.S. agreement.
This forward-leaning U.K. approach has sometimes frustrated the Biden administration, particularly the risk-averse national security adviser Jake Sullivan. But whether Vice President Kamala Harris or former President Donald Trump enters the Oval Office in January, the U.K. is likely to maintain this strategy. For Starmer as for those who preceded him, the outcome of this war is a defining test of European stability. London also perceives its support is crucial towards showing its continued relevance as a global power.
Of course, Trump looms large. Underlining this point and Starmer’s interest in establishing a workable foundation for Trump’s possible return to office, Lammy haspublicly echoed calls by vice presidential nominee JD Vance that European nations must do more for their own defense. If the former president wins in November, expect Starmer to attempt to woo Trump by acting as his ‘Europe must do more for Ukraine and on defense spending’ voice in Europe. As an extension, this concern underlines why Starmer is unlikely to authorize significant cuts to defense spending in the October budget.
The foreign policy docket is clearly stacked high. Still, China is the No. 1 concern for U.S.-U.K. relations.
In a rare public appearance in London on Sunday, CIA Director Bill Burns joined his SIS/MI6 counterpart Richard Moore to discuss various security issues. But while both men agreed that China was their highest priority, both took equal care to emphasize the importance of dialogue with Beijing. Considering that the CIA views China through the prism of an approaching war, Burns’ politeness here was likely driven by his desire to support Moore’s need to avoid antagonizing Starmer or Lammy (Moore’s reporting minister). Moore knows that China is especially sensitive to rhetoric.
That matters because Starmer last month spoke with Xi Jinping in Xi’s first call with a U.K. prime minister since 2022. And as with his Saudi strategy, Starmer plainly wants to attract increasing Chinese imports of U.K. goods and Chinese investment into the U.K. Yet, recognizing the heavy U.S. pressure on its close allies to mitigate their links to Beijing, Starmer must be cautious.
He cannot afford to lose privileged U.K. trade access to the U.S. economy. Especially when a transactional president like Trump might be back in the picture. The U.S. is the U.K.’s largest export market, nearly twice the size of its next highest export market (Germany). U.K. exports to the U.S. stood at $64 billion in 2023, and imports at $74 billion. Considering Trump’s hawkish trade and security policies toward China in his first term, Starmer will thus proceed cautiously in his engagement with Beijing. At least until the U.S. presidential election results are clear.
Yet China clearly wants to woo Starmer into a more conciliatory relationship. It wants to see a shift similar to that in Australian policy toward China from Scott Morrison to current prime minister Antony Albanese.
Behind the scenes, the U.K. and U.S. intelligence services and military cooperate very, very closely in robust actions against China. The U.S. considers MI6’s human agents inside China as the crown jewels of this cooperation. And although it is kept classified for security and diplomatic reasons, the U.S. and British militaries have engaged in planning/training for war with China over Taiwan.
These actions explain why a future Harris administration would likely tolerate a degree of increased U.K. economic engagement with China without riposte (assuming it avoids technology sectors). Again, however, a restored Trump may demand a more overtly hawkish U.K. policy toward Beijing as the price tag for the continued special relationship (and a restart to talks on a U.S.-U.K. trade deal).
My words: Great Britain will continue to be an ally of the United States but the Labour Government needs foreign investment; so, policy will be transactional, particularly with regard to China.
As an aside, Britain enjoys a strong comparative advantage in financial services and in legal services as well as in very high end intellectual capital. The Labour Government will not do it, but taxes should be cut on the most productive high earners. Britain wants more of what they do.
Sociology
The incarceration rates are represented as a rate per every 100,000 people in each subpopulation For the age range 18–54, native -born Americans have an incarceration rate 3.5 times higher than that of all Haitian immigrants. Haitian illegal immigrants have an incarceration rate 38 percent below native-born Americans and legal Haitian immigrants have an incarceration rate about 81 percent below native-born Americans.
It is myth that immigrants, legal or illegal commit more crimes than native born Americans. Immigrants are more law abiding.
The British government and the Indian conglomerate Tata said on Wednesday that they would jointly invest 1.25 billion pounds, or about $1.6 billion, in the country’s largest steel mill, in Port Talbot, Wales, to make operations there less polluting.
As part of the overhaul, about 2,800 of the company’s 8,000 steel jobs in Britain will be lost over time, a spokesman for Tata said, in part because the electric technology will require fewer workers.
Still, the plan was, from the point of view of employees, an improvement on a proposal announced last year when Britain’s Conservative government was in power. Both deals include the same £500 million in government support, but workers facing layoffs will now be offered the option for paid retraining for other occupations.
The government says this project will cut overall emissions in Britain 1.5 percent by shifting steel production to a process of melting down scrap metal — an operation that depends on the availability of this raw material and, some critics say, cannot be used for producing the highest-quality grades of steel.
https://www.nytimes.com/2024/09/11/business/steel-britain.html
My words: the men and women who lose their jobs will be discouraged. I doubt if many, especially the men, will accept retraining. I am curious about how the community of Port Talbot looks in a decade. I am not optimistic.