Dec 15
This is important.
The Supreme Court agreed on Friday to hear a case seeking to challenge California’s ability to set tighter car emissions standards than the EPA.
The challenge from a group of energy companies and trade groups is to the agency’s waiver giving California the ability to set tighter standards than the rest of the country under the law known as the Clean Air Act. The case is part of a long-running legal battle over California’s ability to set its own environmental standards.
SCOTUS will likely issue a decision before the end of the Court’s term in June. See Roll Call etal.
The case is important because the Supreme Court could reassert congressional authority over interstate commerce, which according to the plain language of the Constitution is reserved to Congress.
The EPA’s environmental delegations to the state of California are contrary to the Commerce Clause.
China has a big and growing problem, deflation. When an economy is mired in a deflationary spiral, economic growth is difficult to achieve. Business and households delay purchases in anticipation of lower prices. China’s growth figures are figments of thin air.
Social Networks amplify the loudest voices and when those voices espouse anti social behavior, we all have a problem. But free speech and expression are paramount. Responsible citizens must push back against nihilism.
Markets and Stocks
The market is digesting the strong post election moves. Interestingly Friday’s action culminated a ten-day run of negative market breadth—meaning more decliners than advancers on the S&P 500 for ten consecutive trading days. The last time such an event happened was in the aftermath of 9/11.
This is positive news. Excess enthusiasm is being worked off. Soon, the major averages will move higher.
President-elect Trump’s visit to the New York Stock Exchange was very important. Trump wants economic growth and a strong stock market. His policies are far from perfect but he wants growth. That is good for equities and the nation. When the pie is bigger everyone gets more.
The per capita income in the state of Mississippi, the poorest state is higher than the per capita income in France.
The nation should cheer for wealth creation and technological innovation. The status quo is not acceptable.
The outlook for equities is very positive for the next few years. AI is real. An energy renaissance is upon us. And the incoming administration will be committed to capitalism and economic growth.
I am surprised that the yield on the 10 year Treasury is backing up. The Fed will cut on Wednesday. Moreover, on Friday, the 20th, the Fed’s preferred inflation gauge will be released. Core PCE for November should run at 0.13%. That reading would be consistent with 2% inflation. I look for a powerful rally in Treasuries.
But last week the 10-year Treasury yield surged 25 basis points to 4.4%, the biggest weekly gain since October 2023. The 10-year yield is moving rapidly back toward a six-month peak of just over 4.5%.
WTI climbed 6% to around $71.00 a barrel. I am agnostic about oil and gas. For long term investors, I like APA because of its giant discovery in Suriname.
Though Nvidia has been trading poorly since it reported earnings, the stock remains a great investment. CEO Jensen Huang will speak at the CES conference in January. He almost certainly will provide an update on the Blackwell ramp.
Broadcom is also a must own name even after Friday’s move.
American Express is also a must own name. Wealth in the United States is at all time highs. The more affluent gravitate to AXP.
I like LLY and NVO.
The weight loss drugs are having an impact on society. Bloomberg reports:
For the first time in a decade, obesity in the US is declining — and a new study suggests it’s because of wildly popular medications such as Ozempic. In 2023, something changed: Obesity levels fell to 43.96% from 44.1% the year prior. It’s a small decline, but a meaningful one, researchers say. The biggest change occurred in the South, according to the analysis, which also had the highest concentration of prescriptions written for the drugs.
Dell and HPE remain fantastic investments.
Christopher Mims, senior technology writer for the Journal writes:
Dell specializes in everything sandwiched in between the two ends of the technology stack—between chips and software. It turns out that in the age of AI, there’s a tremendous demand for racks of servers and huge arrays of storage.
Each rack of servers is a stack of computers about the size of a bookshelf. These racks are crammed together inside the vast data centers where the internet actually resides, and the most power-hungry ones, for training AI, can consume as much power as 100 average American homes. They generate so much excess heat that they have to be liquid-cooled. Each one costs hundreds of thousands of dollars—Dell won’t say exactly how much.
In the past two years, his company has sold storage arrays capable of holding a total of 120,000 petabytes, says Dell. For perspective, OpenAI’s latest chatbot, GPT-4o, was trained on about a petabyte of data, which represents all the text on the open internet, the transcripts of over a million hours of YouTube videos, plus countless images.
In that same period, Dell went from having 30 to 40 customers buying AI servers from the company to more than 2,000. “And it will probably be 4,000 in another couple of quarters,” he adds.
Revenue in Dell’s server business grew 58% last quarter, and 80% the quarter before, mostly because the world just can’t stop producing more data at an ever-faster rate. All those short-form videos, social-media posts, hours of streaming entertainment, cloud-gaming services, and fire hoses of consumer-tracking data have to go somewhere, after all. That has translated to an insatiable demand for storage, and computers to process it—and record revenue for Dell.
China’s spiral into deflation is proving hard to fix. Prices in the world’s second-biggest economy have fallen for six consecutive quarters, and if they fall for one more quarter, the run would equal a record deflationary streak set in the Asian Financial Crisis in the late 1990s. See Bloomberg.
And the Journal adds:
Chinese leaders this week pledged to do more to stimulate the economy, including by cutting interest rates and boosting government borrowing. But pressure is building on Beijing to take even more forceful action to prevent a downward spiral of deflation that becomes self-reinforcing, potentially landing China in a longer-term recession.
Prices for goods leaving Chinese factories have fallen year-over-year for 26 consecutive months, dropping 2.5% in November from a year earlier, and there is little sign of them turning up again soon. China’s gross domestic product deflator, a broader gauge of price levels across the economy, has been in negative territory for six consecutive quarters, the longest stretch since the late 1990s.
Politics
At least Musk and Ramaswamy are trying to tame the Leviathan, the federal government. DOGE should be cheered even though its goal will be hard to achieve. If you don’t try, you can’t succeed.
We can wish that the government efficiency agenda were in the hands of someone else, but let’s not pretend that change was going to come from Democrats if they’d only had another term, and let’s not delude ourselves that change was ever going to happen politely, neatly, carefully. However we got here, we may now be in a Godzilla vs King Kong world. Perhaps we’re about to get a natural experiment in which Elonzilla faces off with Larry ElliKong. One of the things we need to be ready to learn is that Elonzilla could lose. Or worse, since Elon and Larry are friends, the expected disruptive could get co-opted. And what would that say about the problem? Conjuring Elon is not bringing a gun to a knife fight. It was never a knife fight.
See also Marginal Revolution.
Alex Tabarrock at Marginal Revolution highlights comments by Fareed Zakaria of CNN and the Washington Post.
Fareed Zakaria on Freakonomics Radio:
ZAKARIA: You can see it in what happened a day after the election results became clear. You got a flurry of tweets from every major C.E.O. in America — every major tech C.E.O., every bank C.E.O. — fawning over Trump, congratulating him and telling him how much they wanted to work well with him.
I think that this is a very sad development that’s happened. It’s not entirely because of Trump. But we have politicized the economy in America. All this industrial policy, these tariffs, these bans.
What that does is it suddenly makes Washington a very crucial arbiter to the success of business. You add to it Trump, who personally loves the idea of fining Caterpillar for doing this and Harley Davidson for doing that and Chase for doing — he views it as his job as president to literally dole out rewards and punishments to companies, depending on whether they do what he regards as the right thing or the wrong thing.
It’s deeply saddening to me as somebody who grew up in India, where this is business as usual. Every business had to slavishly pander to whoever the prime minister at the time was. And you see it in Musk. Tesla stock, in the two days after Trump won, was up 20 percent or something like that, adding tens of billions of dollars to Elon Musk’s net worth. Nothing fundamental in the economics had changed for Tesla. There was just an expectation, now that he was a friend of Trump’s, that he was going to somehow be showered with federal largesse. You know, there’s a guy in India called Adani who’s Modi’s best friend, and his stocks trade at multiples 10 times that of every other Indian company. Because everyone assumes that at the end of the day, being Modi’s best friend is worth $100 billion or something like that.
DUBNER: That’s probably a pretty safe assumption.
ZAKARIA: It’s a safe assumption in India. What’s tragic is it might even be a safe assumption in America. But it’s not what the American economy was supposed to be about. And I think it’s a very sad trend.
My words: AND this is why the administrative state must be tamed and pared back. When the powers of government are weaker, crony capitalism withers.
Sociology
Social Networks are important for children.
Researchers examine pre school education in Chicago and whether positive outcomes endure.
Random assignment to CHECC preschool causes short-term improvements in students’ cognitive skills (Castillo et al., 2020).
During elementary school, students randomly assigned to CHECC preschool did not perform significantly better on standardized tests than students assigned to the control group (Castillo et al., 2020).
However, this average masks an important pattern: students who attended preschool benefit significantly from sharing elementary school classrooms with their preschool classmates.
When preschoolers are assigned to elementary school classrooms with a higher proportion of their preschool peers, they tend to maintain cognitive skills that are notably stronger than those of students who were not randomized to attend CHECC preschool.
In contrast, students with fewer preschool classmates in their elementary classrooms show outcomes comparable to those who were not assigned to CHECC preschool. Therefore, although the fade-out effect is observed, it can be mitigated by an optimal peer composition.
The reduction of the fade-out is driven by elementary school classmates who were part of the same preschool cohort. This suggests that the attenuation of the fade-out effect is largely social, highlighting the importance of social networks, even from an early age.
If every child in elementary school also went to an effective pre school, positive education effects become stickier. That makes sense. If every child is slightly more motivated as well as better behaved, then positive academic outcomes are more likely.
Social networks matter everywhere.
At Calhoun Prison, the warden tried the concept of social networks.
Younger men in prison tend to be harder to control. They have excess energy; I imagine many suffer from attention deficit disorder. Younger men are more aggressive than older men. So the warden tried to put all of the younger more aggressive men in one dorm. He tried to contain the chaos. What do you think happened? It didn’t work.
Fights were frequent, the officers lost control of the younger men. So the warden switched tactics. He distributed the younger more aggressive more disruptive men among the broader inmate population. That worked. Older inmates controlled the young disruptors. The younger men modelled the behavior of the older men. Calhoun calmed down. Even in prison men can learn to model behavior which maximizes their welfare and the welfare of everyone else.
At the Transition House, staff would not tolerate disruptive behaviour. TTH was paradise compared to prison and if the men couldn’t see that, and still acted out, they went straight back behind the wire where they would finish their sentences being screamed at, humiliated and constantly worrying about being shanked or abused.