Dec 2
The Republican Congress will use the Reconciliation process to extend the tax provisions of the Tax Cuts and Jobs Act of 2017. Below under Politics, I write briefly about the Reconciliation process.
The editorial board of the Wall Street Journal understands that the Republican majority is fragile, in the House just one seat for the first 3-4 months of the Trump Administration.
Support for Republicans is provisional. The GOP has about a year to get anything done. The party is likely to lose the House in 2026, if midterm history is any guide. The Party had better pass legislation it wants in 2025 before Member attention turns to political survival in 2026.
This will require House Republicans in particular to stick together as they haven’t in years. Matt Gaetz will be out of Congress, saints be praised, but other performance artists are still around to blow things up and blame everyone else. Perhaps Donald Trump can keep them in line behind Speaker Mike Johnson. But factionalism will mean the end of a functioning majority and guaranteed defeat in 2026.
My opinion: Republicans will extend the provisions of the Tax Cuts and Jobs Act and not much else. Too many Republicans in the House are performers first and common sense politicians second.
https://www.wsj.com/opinion/the-gop-barely-won-the-house-9d5e1bb5
I hope that I am proved wrong.
The economic and social benefits of more federalism and less central government are increasing. See below under Politics.
Markets and Stocks
The final trading month of 2024 kicks off. This year’s rally is a monster.
A jobs report is on deck as well.
Stocks are at or near all-time highs, and as far as investors are concerned, there appears to be no reason why they can’t go higher still — at least in the near term. The market may be expensive, and sentiment frothy, but cheerful investors point to a strong macroeconomic backdrop and rosy earnings growth forecasts to justify the prices.
My guess is that the market goes higher into year end. I worry, however, that everyone is bullish. And I do think that there is a very high probability of a 5-10% correction in Q1 2025. A catalyst for a correction could be fighting among Republicans in the House. That group is not cohesive.
December is the strongest month for the S&P 500 in any given year and, what’s more, promises the lowest volatility of any month on the calendar, according to Sam Stovall, chief investment strategist at CFRA Research. In data going back to 1945, he noted, the S&P 500 gained an average 1.6% during the month, rising in price more than three-quarters of the time.
The November report is expected to show the U.S. economy added 177,500 jobs this month, per FactSet’s consensus estimate, a huge jump from the 12,000 jobs in the October report, a figure markets largely disregarded as “noisy” given the weather anomalies in the data. On the above, see generally CNBC.
The trend for inflation is lower, but progress is bumpy. I look for one more rate cut, then an extended pause. Wage inflation remains inconsistent with 2% inflation. A little more slack in the labor market is necessary.
@stlouisfed The personal consumption expenditures (PCE) price index, a measure of inflation, increased 2.3% from a year earlier in October, up from 2.1% the previous month. Excluding food and energy costs, the “core PCE” rose 2.8%, up from 2.7% in September.
Markets are currently pricing in roughly a 67% chance of a quarter-point rate cut at the December meeting, according to the CME FedWatch Tool.
The monthly ISM data is out this week. The market pays attention. Look for a turn up in the ISM manufacturing data.
Elsewhere next week, there will be a smattering of earnings reports from enterprise software giant Salesforce, as well as discount stores Dollar General and Dollar Tree. Salesforce is an excellent investment. I have zero interest in the two deep discount retailers.
HPE reports Thursday. I like HPE a lot. It acts well.
I look for a full recovery in Dell.
Disney seems to be on its way to $150.
LLY is acting better.
CME has broken out. Momentum is your friend.
I continue to like Rolls Royce for its small modular nuclear reactor technology.
A few other smaller capitalization names that I am focused on include, FLG, the old NYCB. I think it doubles within three years. Flowserve acts well and should be a big beneficiary of the nuclear power renaissance. And Glacier Bank is a nice very long term play on population growth in Montana. Moreover, under a Trump Administration, bank consolidation should resume. The U.S. has way too many banks. The country has over 4,000.
The U.S. government wants to triple nuclear power by 2050 to shore up an electric grid that is under growing pressure from surging power demand.
Small modular reactors might cost somewhere in the range of $2 billion to $4 billion to build compared to $10 billion to $15 billion for a large nuclear plant.
A modular plant generates 300 megawatts of electricity, enough to power more than 200,000 U.S. households. The average reactor in the U.S. fleet has about 1,000 megawatts of power, enough for more than 700,000 homes.
Economics
@JustinWolfers Professor @UMichEcon Yes, the ultimate incidence of a tariff depends on elasticities, so understanding the incidence requires empirical work..
Here's a summary of the empirical literature from Goldman Sachs. Each study shows that nearly all of a tariff hike is passed through to higher prices.
In an ideal world, fair trade would be the norm. But almost every country tries to game the system to benefit its domestic markets. What Trump does not get is that the trade deficit is largely a function of excess demand caused by the deficit. The trade deficit is also a consequence of the dollar’s reserve currency status. Other nations want to hold dollar reserves. Other nations buy those reserves through exports. In addition, in many very poor countries, the dollar is the only real currency.
Politics
Created by the Congressional Budget Act of 1974, reconciliation allows for expedited consideration of certain tax, spending, and debt limit legislation. In the Senate, reconciliation bills aren’t subject to filibuster and the scope of amendments is limited, giving this process real advantages for enacting controversial budget and tax measures.
The Congressional Budget Act permits using reconciliation for legislation that changes spending, revenues, and/or the federal debt limit.
On the spending side, reconciliation can be used to address most “mandatory” or entitlement spending — that is, programs such as Medicare, Medicaid, federal civilian and military retirement, SNAP (formerly known as food stamps), and farm programs — though the Budget Act specifically prohibits using reconciliation to change the Social Security program
Since the mid-1980s, Senate rules have prohibited including provisions in reconciliation legislation that do not change the level of spending or revenues or the debt limit. (See the “Byrd Rule”)
The Byrd Rule, named after its chief sponsor, the late Senator Robert Byrd of West Virginia, allows senators to block provisions of reconciliation bills that are “extraneous” to reconciliation’s basic purpose of implementing budget changes.
Federalism
To solve the federal deficit and to address intractable political and social problems, the United States should return to the concept of federalism. For example, education is a state and local government matter. Abolishing the Department of Education would be good policy.
Tyler Cowen suggests a return to federalism. He writes at Marginal Revolution:
I do not have any “top down” way of resolving all of the difficult moral and practical issues here. I will simply note that the returns to federalism have risen. Different American states can try out different policies, as indeed they do, and we can see what is happening and judge accordingly.
I believe this point remains underrated. As technology advances, and the world changes more rapidly, the returns to federalism rise. We are coming off a long period when the returns to federalism were relatively low.
Sociology
I spent one night at Lake Butler. When I was in transit, I would go to my assigned bunk, and think now what am I going to do for the rest of the day. We would have eaten dinner by 4.30pm. Prison is waiting and waiting and waiting with absolutely nothing to do. I hate just sitting. I have a bit of a hamster personality; I have got to be on that wheel.
I didn’t have a toothbrush at Lake Butler, I went to the officer and asked him if I could have a toothbrush, he said, ‘no, you get a toothbrush when you get to your permanent camp’. What can you do. In the morning every man in the transit dorm got up around 5am, gobbled breakfast, and was processed, strip searched, shackled, and shuffled back on the bus. I made sure I did not sit next to the guy who picked his nose, I had a window seat. It is kind of pretty in Northern Florida, Lake Butler is about 50 miles west of Jacksonville. After about 30 minutes of travelling on country roads we got on to the Interstate, I10. We travelled for about three hours and then got off I10 and arrived at Calhoun Prison where I would spend the next 26 months.
About half of us got off the bus. We did the strip search routine. We put on our prison blues. And each of us when to the classification office one by one. The classification officer asked me if I graduated from high school, I said yes. I told him I was a graduate of Harvard Law School, he looked down at my charge and nodded, he said ‘I know this is miserable for you but just do as you are told and you will get through it.’ He suggested I become a law clerk but I told him I was a qualified teacher and I had been told that prisons need teachers.
I had thought about being law clerk. I knew there were inmate law clerks in prisons, but in my mind I decided I didn’t want to hear the guys problems, I had to deal with my own problems, that was the correct decision. Being a law clerk brings you face to face with the reality of the crimes of many of the inmates. In addition many of the law clerks tell inmates what they want to hear. They say they will file an appeal and get the inmate out of prison. They charge an inmate several hundred dollars in canteen items. The inmate’s family puts money on the inmate’s canteen account. The inmate buys goodies for the law clerk, that is how the game is played. I said to one of the law clerks, ‘I don’t think that guy has a chance in hell of winning on appeal,’ I was familiar with the situation because the clerks worked along side me in the library where I was teaching. The clerk said ‘you are right, but by the time he finds out that I screwed him, I will be long gone at another camp.’ Everyone has a hustle in prison.