June 15
It is full steam ahead for the US economy. The only question is whether a pipe will burst because of inflation, only time will tell. Today we get more confirmation on the strength of the economy. We get data for May retail sales and for May industrial production. Tomorrow the week’s headline event will take place - Fed Chair Powell will hold his press conference at the conclusion of the two day Fed meeting. That takes place around 2.15pm NY time. We will also get the Fed statement on the economic outlook. The statement comes out at 2pm NY time. I will be watching.
I will return to the outlook for markets and stocks below but first I want to highlight how far progressives have strayed from belief in the Constitution and the rule of law. Democrats hold 50 seats in the Senate. Republicans hold 50 seats in the Senate. Only because of the Constitutional provision allowing the Vice President to cast a vote in the event of a tie, do Democrats control the agenda in the Senate. Common sense says that a 50/50 split in the Senate is hardly a mandate to enact radical policy, and it is not a mandate to break the law.
Progressives continue to celebrate the law breaking with regard to the leak of tax information on America’s wealthiest citizens. The hypocrisy of progressives is illustrated by the New York Times hysteria over the Trump Administration’s efforts to plug leaks. When Trump was President, progressives and the editors of the NYT were interested in privacy. Now that Biden is President, progressives and the editors don’t care about privacy. They don’t care about the rule of law, they don’t care about the Constitution, they don’t care about the welfare of the population. All they care about is transforming the United States economic system into a Western European-style welfare state.
Progressives are filled with rage because moderate members of the Democratic Party and the rules of Congress are preventing them from jamming socialism down the throat of the nation. Progressives can’t stand it that they are bound by law, rules and norms.
Below under Politics I will discuss Reconciliation which is a way for Congress to enact legislation on taxes, spending, and the debt limit with a simple majority. Reconciliation is a way to get a tax and spending bill to the President’s desk even if all 50 Republican Senators say no. But Reconciliation can only be a path to a simple majority vote if the underlying legislation directly involves, taxes, spending and the debt limit. Reconciliation can’t be used for everything.
Since 1980 when Reconciliation was first used, only 22 bills have been passed under the Reconciliation provision. 22 bills in 41 years, demonstrates that the Reconciliation path is narrow, not wide.
MARKETS AND STOCKS
Yesterday, Becky Quick of CNBC Squawk Box interviewed Brian Moynihan, the CEO of Bank of America. Moynihan gave an upbeat forecast for the US economy. Bank of America touches half of all US households. Moynihan said that card activity, credit and debit, is up 20 percent over 2019. He said consumers are spending and that they still have a lot of firepower in their bank accounts. He said America’s households have only spent about 35 percent of government stimulus dollars. Perhaps more importantly he said that loan demand by small businesses is beginning to surge. He said the bank’s commercial loans business is up 20 percent from 2019. He concluded by saying credit quality is outstanding. He is optimistic on the economy, he is optimistic for his bank. BAC remains a great investment.
In the financial space I prefer Goldman Sachs. But BAC will also make you money.
Investors are betting that a green energy focus will push up oil prices. Money managers are lining up trillions for wind, solar and other renewables programs while capital expenditures on oil are flat to down. The drop in capital investment in oil and gas is becoming so severe that in a few years energy companies could struggle to quench the world’s thirst for energy. I think that is right. I think investing in oil companies and in oil service companies is a no brainer. My target on Baker Hughes is $40, the stock is trading around $26, my target for FANG is $120, the stock is trading around $90. On a two year timeframe, I think Baker Hughes can double. See comments by Tom Lee on CNBC. I worked with Tom Lee for a little while.
When oil hits $100 a barrel, and Americans are paying $4-5 a gallon for gas, politicians will blame greedy oil companies. They should be looking in the mirror. And we wonder why trust in government is so low.
It is high risk, but I have a small position in Nokia. Nokia is a global leader in 5G infrastructure. Nokia has only two non-Chinese competitors, Samsung and Ericsson. The United States strategy against Chinese 5G is moving from threats to incentives. Washington is organising workshops and offering a handbook to help policy makers in places like central and eastern Europe as well as other geographies to avoid using Chinese made equipment. For high risk tolerant investors, I think Nokia is worth a look.
Global ad spending is rebounding stronger than expected. It should be up 25 percent this year, to $16 billion. Global ad spending should double by 2026. The big winners will be the digital behemoths, Amazon, Alphabet and Facebook, and Pinterest. My year end target on Alphabet is $3000 up 20 percent from current levels. My target on Facebook is $400, up 25 percent from current levels, my target on Pinterest is $100, the stock is trading at $68. Amazon though expensive is attractive for long term investors.
I like YETI the outdoor leisure gear company. Americans are going outdoors. Over the past two years there has been a 30 percent increase in visits to Canyonlands National Park in Utah, and there has been an increase of 15 percent in visits from April 2019 to Utah’s Arches National Park. The parks are reaching capacity by 9am. When Americans go outdoors, they won’t travel without YETI. I like the stock. I also like the symbol, it reminds me of the Disney rollercoaster ride at Animal Kingdom. I love rollercoasters.
ECONOMICS
In 1996 James Mirrlees was awarded the Nobel prize in economics for fundamental contributions to the economic theory of incentives. Innately people are born with different abilities and motivations. A handful of people are great athletes and command huge salaries. A handful of people are great entrepreneurs and provide a nation with trillions of dollars of national welfare. See tomorrow’s note for the contributions of Amazon, Berkshire Hathaway and Tesla to the national welfare of this nation.
Most people by definition have average ability, and average motivation. The inequality of ability and its natural outcome, unequal distribution of income, bothered Mirrlees. As a young man he had been an adviser to Britain’s Labour Party which for decades imposed marginal tax rates in excess of 80 percent. Mirrlees’ contribution to economic theory was his not surprising conclusion that when the government imposes such high marginal tax rates on the highest income people, it reduces the incentive of the most productive people to be productive.
I know from my experience of living in London under Tony Blair’s Labour government, that the combination of high marginal tax rates with a national VAT has a clear negative effect on high achievers. British golfers emigrate to Florida, English footballers end their careers in low tax jurisdictions.
High achievers say, ‘fuck it.’ Anyone who doubts that can talk to me. I said 'fuck it,' went to the pub, and ended up in prison. Life is beautiful now, I’ve been sober for almost 10 years but I am still consumed by rage when I read progressive nonsense on how very high marginal tax rates will improve national prosperity.
As noted above, Mirrlees found that high marginal tax rates do reduce incentives for hard work. Generous welfare benefits also reduce motivations to get up in the morning.
Mirrlees found that the top marginal tax rate should only be about 20 percent; moreover, it should be about the same 20 percent for everyone. Mirrlees’ work justified what is now known as a flat tax. Mirrlees wrote, ‘I must confess that I had expected the rigorous analysis of income taxation in the utilitarian manner to provide arguments for high tax rates. It has not done so. See ‘An Exploration in the Theory of Optimum Income Taxation’, 1971.
POLITICS
One feature of the Reconciliation process is the Byrd Rule in the Senate. The Byrd Rule named after the late Senator Robert Byrd D West Virginia, prevents ‘extraneous’ provisions from benefitting from the expedited Reconciliation process. Merely incidental provisions, for example an earmark for a tunnel under the Hudson River, cannot be used under Reconciliation. The Senate Parliamentarian, a nonpartisan position, makes determinations on what is ‘merely incidental’
Democrats want to use Reconciliation for infrastructure. They could provide block grants to states but block grants reduce Congressional oversight and influence. Congress does not like block grants. It is also difficult to use Reconciliation for social welfare measures. For example, an increase in the minimum wage cannot be implemented through Reconciliation. An increase in the minimum wage does not involve taxes, spending or debt. Because of the Reconciliation rule, progressive dreams of a large expansion of federal government will not be realized. Congress will pass a traditional infrastructure bill which will provide funding for roads, bridges and broadband. That is all.
SOCIOLOGY
Doctor Scott Gottlieb is optimistic about US progress against the virus. He thinks Americans will enjoy a relatively virus-free summer. But he expresses concern about the Delta (Indian) variant. Data from the UK suggests that the Delta variant is 60 percent more transmissible. People with the Delta variant have a higher virus load. Currently in the United States, the Delta variant makes up 10 percent of new covid cases. That rate is doubling every two weeks. In Britain, the Delta variants accounts for 90 percent of new cases.
Gottlieb said that the Delta variant will be the dominant variant in the United States by the middle of July. Current vaccines are highly effective against the Delta variant so people who have been vaccinated have nothing to worry about. The problem is vaccination hesitancy.
There are two groups of the American population who are hesitant to get vaccinated. 25 percent of people who identify as Republican say they won’t be vaccinated. That’s about 10 percent of the population. Black Americans, who live in the South are also hesitant. Across Louisiana, Mississippi, Alabama, and Tennessee, vaccination rates among Blacks are running 33 percent below overall Black population levels. I don’t know Whites are hesitant, but from my experience in prison I know why many Blacks are hesitant. Because of past history, Tuskegee and syphilis, and eugenics in Virginia, as late as 1979, Blacks don’t trust government and they don’t trust the medical profession. If the United States wants to avoid pockets of Covid when winter arrives, government must do more to encourage all Americans to get vaccinated. We all need to up our game.
Novavax released data on its Covid vaccine. The vaccine has 90 percent efficacy against all strains and it has 100 percent efficacy against serious illness and death. This is great news for the people of this planet.
https://acluva.org/en/news/shameful-history-eugenics-virginia