Markets and Stocks
I remain positive on equities but obviously the market is undergoing a period of indigestion. Omicron threw rotten eggs into the stomach of the economy. Retail sales for December were soft. See below. The Atlanta Fed lowered its forecast for Q4 GDP from 7 percent plus to 5 percent. But economists continue to look for above average economic growth with inflation, the Fed policy response and UKRAINE as the wild cards.
As noted several times, over 90 percent of the time when the Fed begins a rate hiking cycle equities continue to plow higher, generating average annual returns of about 9 percent. So, my end of year target for the S&P 500 remains 5,100. I believe strong earnings growth coupled with judicious and deliberate Fed policy will enable US equities to continue to deliver solid returns.
Because almost all of the world, China the outlier, is now treating Covid as part of life, global growth is accelerating so great investment opportunities exist in Europe, Japan and selected emerging markets. Japanese equities look especially attractive. Over the last decade Japanese businesses have focused on profit growth not revenue growth and that focus is paying off with consistently higher capital returns. I am not in a position to talk about specific Japanese equities but through a friend of over 35 years I do have access to great research on Japan, just let me know.
As noted above, Friday’s economic data was soft. As the Journal put it: “sales at retail stores, online and restaurants dropped by 1.9%, damping the end of the holiday shopping season. December’s sharp decline followed record-level retail sales that started with a 1.8% gain in October from the prior month.
The Federal Reserve separately said U.S. industrial production fell for the first time since September. Manufacturing output, a key component of the reading, dropped 0.3% as supply-chain issues continue to affect output.
Many holiday shoppers heeded warnings about shipping delays, pushing a large share of the season’s usual gains earlier in the year. Sales were down broadly across spending categories in December, with online sales dropping sharply by 8.7%.
Electronics stores declined by 2.9% over the previous month in December, while furniture and home stores dropped by 5.5%. Restaurant and bar sales dropped by 0.8%.
The overall numbers are terrible, but the details are all over the map,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “We expect a strong rebound in sales once the Omicron wave subsides.”
For now, consumers’ opinions of the economy are worsening. The University of Michigan’s consumer sentiment survey showed a drop on Friday, and expectations for inflation over the next five years rose to 3.1%, up from the 2.9% increase reported in December.
I am in the camp with Ian Sheperdson as I am wagering on a strong rebound in household consumption over the course of Q1. The consumer has $2.7 trillion in excess savings. That is about 12 percent of GDP, a lot of bucks to spend. (Some of that money will be spent at Disney and on travel and leisure more generally.)
Consumer confidence is soft because of inflation and disappointment with the Biden Administration, not because of fears about the economy. Admittedly, I am a conservative, not a Republican, with a small c, so I am biased against Biden, still, even his most ardent supporters must be thinking WTF. The good news however is that now Republicans are prohibitive favorites to take the House in November so we don’t have to worry about the far left policies of progressives. The far left can talk in their echo chamber and go hysterical about Republican control of Congress.
Near term the market is pretty well washed out. Many of the Nasdaq 100 high fliers have been crushed, down 45 percent. Because of worries about costs JP Morgan, Goldman Sachs and some of the other big banks got hammered on Friday. I believe JPM is fully priced. It is trading at over two times book. GS is trading at 1.4 times book. In addition, I see another 10 percent upside in WFC and BAC. Finally, I have taken a position in C. I will be patient. I see 50-100 upside over the course of the next three years.
Importantly, Treasury yields at the long end are steady. Risky credit is performing well. There are no signs of macro credit stress.
I believe Russia will invade Ukraine. If that occurs expect both higher energy prices and a spike in prices for agricultural commodities. Ukraine is an important supplier of grains. I like the oil space. I believe Deere is deeply undervalued.
In addition, if Putin does invade, Congress will increase defense spending. That would be the silver lining to an invasion. The US faces multiple global threats. A large, $200 billion annually, increase in defense spending is necessary. Moderates from both parties would support a big increase in the defense budget. Where to find the money would be the problem and some kind of carbon tax would be the solution.
I am pounding the table on big technology. I explain why in Economics.
Economics
The Journal has a great article on how Amazon, Alphabet, Meta FB and Microsoft have reinvested almost $100 billion of profit in building out the underwater fiber optic cable system which is the backbone of the global internet. Government did not build it, capitalism did. How can anyone not cheer capitalism and boo socialism or dirigiste policy? Is the left blind to truth, that is a rhetorical question, LOL.
“The internet can seem intangible, a post-physical environment where things like viral posts, virtual goods and metaverse concerts just sort of happen. But creating that illusion requires a truly gargantuan—and quickly-growing—web of physical connections.
Fiber-optic cable, which carries 95% of the world’s international internet traffic, links up pretty much all of the world’s data centers, those vast server warehouses where the computing happens that transforms all those 1s and 0s into our experience of the internet.
Where those fiber-optic connections link up countries across the oceans, they consist almost entirely of cables running underwater—some 1.3 million kilometers (or more than 800,000 miles) of bundled glass threads that make up the actual, physical international internet. And until recently, the overwhelming majority of the undersea fiber-optic cable being installed was controlled and used by telecommunications companies and governments. Today, that’s no longer the case.
In less than a decade, four tech giants— Microsoft, Google parent Alphabet, Meta (formerly Facebook ) and Amazon —have become by far the dominant users of undersea-cable capacity. Before 2012, the share of the world’s undersea fiber-optic capacity being used by those companies was less than 10%. Today, that figure is about 66%.
And these four are just getting started. In the next three years, they are on track to become primary financiers and owners of the web of undersea internet cables connecting the richest and most bandwidth-hungry countries on the shores of both the Atlantic and the Pacific, according to subsea cable analysis firm TeleGeography.
Traditional telecom companies have responded with suspicion and even hostility to tech companies’ increasingly rapacious demand for the world’s bandwidth. Industry analysts have raised concerns about whether we want the world’s most powerful providers of internet services and marketplaces to also own the infrastructure on which they are all delivered. This concern is understandable. Imagine if Amazon owned the roads on which it delivers packages. ( I want American big technology to own the internet, and you should too. They know how to make things work. They invest profit. They don’t tax us to the poorhouse. As for Amazon owning the roads, one thing is clear there would be no potholes. Have you ever been in a car in Washington DC in March ?)
But the involvement of these companies in the cable-laying industry also has driven down the cost of transmitting data across oceans for everyone, even their competitors, and helped the world increase capacity to transmit data internationally by 41% in 2020 alone, according to TeleGeography’s annual report on submarine cable infrastructure.
In the past, trans-oceanic cable-laying often required the resources of governments and their national telecom companies. That’s all but pocket change to today’s tech titans. Combined, Microsoft, Alphabet, Meta and Amazon poured more than $90 billion into capital expenditures in 2020 alone.
The four say they’re laying all this cable in order to increase bandwidth across the most developed parts of the world and to bring better connectivity to under-served regions like Africa and Southeast Asia.
That’s not the whole story. Their entry into the undersea fiber-laying business was inspired by the growing cost of buying capacity on cables owned by others, but is now driven by their own insatiable demand for ever more terabytes of bandwidth, says Timothy Stronge, vice president of research at TeleGeography. This has made profits razor-thin for traditional players in the cable-laying industry, like NEC, ASN and SubCom, he adds. (It has done the same to profits of wholesalers of capacity on submarine cables, such as Tata and Lumen.)
By building their own cables, the tech giants are saving themselves money over time that they would have to pay other cable operators. That means the tech companies don’t need to operate their cables at a profit for the investment to make financial sense.
All of these ownership changes to the infrastructure of the internet are a reflection of what we already know about the dominance of internet platforms by big tech, says Joshua Meltzer, a senior fellow at the Brookings Institution who specializes in digital trade and data flows.
The ability of these companies to vertically integrate all the way down to the level of the physical infrastructure of the internet itself reduces their cost for delivering everything from Google Search and Facebook’s social networking services to Amazon and Microsoft’s cloud services. It also widens the moat between themselves and any potential competitors.
“You have to imagine this investment will ultimately make them more dominant in their industries, because they can provide services at ever-lower costs,” says Mr. Meltzer.
And lower costs promote economic efficiency and consumer welfare. So the next time Senator Warren speaks, lol.
Politics
A progressive writes at the blog “noahpinion”
Over the last few years, the U.S. has finally started making real progress on combating climate change. Battery and solar prices are falling, electric cars are moving from niche to mainstream, and there has been substantial investment in grid modernization and clean energy research.
But as the pace of electrification picks up, new clean energy projects are facing opposition from what seems like an unlikely source: large environmental organizations.
America’s biggest green groups are over and over again lining up on the wrong side of decarbonization. The Audubon Society is suing to block California wind farms. The Natural Resources Defense Council campaigned against new clean-energy transmission lines in Maine. The Sunrise Movement is supporting a moratorium on large solar projects in Amherst, MA. And the Sierra Club has organized opposition to solar projects in Florida, California, Maryland and elsewhere.
In Nevada, the Sierra Club and groups like it were the primary challenger to a 14-square-mile solar project. The reason? Affection for the plot of land, which also shelters endangered tortoises.
Big environmental groups frequently say they are ardent supporters of decarbonization. But all too often the groups also say that the tradeoffs needed to construct clean energy infrastructure are too great.
What’s going on here?
The core of the problem is that these groups were founded on principles of conservation—an inherently small-c conservative concept. That’s dangerous during a climate crisis that calls for radical action. Meanwhile, their structure has also made them vulnerable to NIMBYism—raising the temptation to value the fate of a few acres of land over potentially game-changing climate solutions.
I find it all amusing. Environmentalists block necessary energy infrastructure and now they block green energy investment. Their actions are mind-bending.
My takeaway is that for the next few decades, a green economy is an illusion. I want to be long oil and gas.
The Prison Diaries
Because I decided to write more frequently about my prison experiences, and the criminal justice system more generally, I re-subscribed to the Naples Daily News. Naples – Collier County – is a bipolar community. There is the tidy, almost uniformly white, law-abiding community and there is a large F-wit community; White, Hispanic, Black. I knew that if I subscribed to the Naples Daily News I would have plenty to write about with regard to stupid criminal activity. You cannot imagine how stupid some of the people are that you meet in jail or in prison. They are truly F-wits to be avoided, not even to establish eye contact with. In prison, if you stare at a guy, you are disrespecting him. If a guy has a swastika engraved on his forehead, for god’s sake don’t look at it.
On Thursday, five Collier County teens ages 15 to 18 were arrested for armed kidnapping and a violent beating of another Collier County teen. At about 1.30 in the afternoon in East Naples, no specific location, a car pulled up. Three of the occupants dragged the victim into the car and placed a pillowcase over his head. This is something right out of a B movie. They took him to Luigi Roca’s apartment. Luigi age 18 said the victim owed them money. They beat him about the head and face. They pointed a Glock at him and threatened to kill him. They used the victim’s cell phone to call the victim’s family members to coerce the family to send money. When the attempts to extort money failed, the suspects returned him to the intersection where they abducted him, warning him that they would kill his family if he called the police. The victim did call the police. The police located the vehicle of one of the suspects. They stopped the vehicle. Later with a search warrant they found a blood stained pillowcase, a green shirt with blood on it, a Glock, and a 40 calibre magazine for the Glock, that’s plenty of evidence. To compound matters, one of the younger perpetrators was wearing a court order GPS ankle monitor which placed him where the victim said he was kidnapped and later at Luigi Roca’s apartment at the time the victim said he was beaten.
I told you a lot of the guys in jail and in prison are thick as boards. These guys are real dumb fucks. Can you imagine, I had to live with people like this for over four years. Sometimes my head wanted to explode. But I stayed in my own lane. I am laughing now but at the time it was not funny. And of course, this story is not funny either.
These five teens are Fk-ed. Armed kidnapping carries a possible sentence of life in prison. So they face life in prison from that charge alone. They also face charges of violent physical assault with injury, threatening murder, and extortion. The prosecutor will stack the charges. She will give the 18 year old boys two choices, 30 years or life. I don’t know what will happen to the minors but the two 18 year olds are really screwed, they have a big problem. They are clearly dangerous and clearly stupid. Society needs to be protected from people like that.
The two 18 year olds are at the county jail on $500,000 bail, I doubt if family members can post the 10 percent necessary to get them out pending trial. So they will get to sit in the Collier County Jail for a couple of years until they take the plea. And then they will get to go to South Florida Reception Center where they will learn that they are not so tough, and they can go to sleep each night thinking about 30 years behind the wire.
Probably the two 18 year olds will age out of criminal behavior when they are in their early 40s. Long sentences don’t reform but society needs to be protected and society wants revenge. The prosecutor represents the community. In Collier County prosecutors don’t win votes by being soft on crime.
Previous Prison Diary posts are gradually being loaded here..