By Tsvetana Paraskova of OilPrice.com,

Oil and gas operators in Texas should be prepared for severe winter weather this week, the Railroad Commission of Texas (RRC) said on Sunday, as snow and ice conditions are expected in parts of the biggest U.S. oil-producing state, including in parts of the Permian basin.

The RRC advised all operators under its jurisdiction in areas of potential impact to heed all watches, warnings, and orders issued by local emergency officials, and secure all personnel, equipment, and facilities to prevent injury or damage. Operators were also advised to monitor and prepare operations for potential impacts, as safety permits.  

Severe winter weather with low temperatures could lead to freeze-offs of oil- and gas-producing equipment and frozen pipeline valves and other infrastructure.

Winter Weather Advisories and Winter Storm Watches are in effect across parts of Texas, Oklahoma, and Arkansas for winter weather and hazardous travel starting Monday, the National Weather Service said on Sunday.

The Midland chapter of the NWS said that a Winter Weather Advisory is in effect on Monday morning for the eastern Permian Basin, where a light glaze of ice is expected. On Tuesday and Wednesday, A Winter Storm Watch is in effect for the eastern Permian Basin for potential ice accumulations up to 0.25″.

Early on Monday, freezing drizzle continued to spread across the Permian Basin, with visibility lowered in Hobbs and Midland/Odessa.

The previous severe winter event occurred just before Christmas when Winter Storm Elliott exposed the vulnerability of the energy system as natural gas and power supplies were strained, wells froze off, and utilities vastly underestimated the power demand during the huge storm.

Back then, Texas managed to avoid rolling blackouts, but power providers in other states implemented planned interruptions to manage the surge in power demand during the storm. While the Texas power grid managed to avoid catastrophic failures during the storm, the Electric Reliability Council of Texas (ERCOT) underestimated the surge in power demand.  

From Politico to Vice to various news agencies, mainstream media is busy echoing the conspiracy theories and wild speculations of some Western officials – with the latest being based on allegations by Finland’s foreign minister…

“Finland’s foreign minister hinted that Russia may have been involved in last week’s Koran-burning protest that threatens to derail Sweden’s accession to NATO,” Bloomberg writes.

FM Pekka Haavisto said over the weekend that the episode “raises the question of whether some third party is seeking to stir the pot — for example Russia — or some other party opposing the NATO membership and looking to provoke to achieve that. This is unforgivable.”

Here’s what Politico also wrote on Saturday: “Unfortunately, various activists in Sweden, some Kremlin linked, then decided to exploit this highly fraught situation, and by aggravating Erdoğan and Turkey, they’ve now helped turn the country’s NATO accession from virtually guaranteed to one that’s now in serious jeopardy — and other countries should learn from this mess.”

Turkey has suspended all high-level talks with Sweden related to its NATO application, and more recently suggested that Finland could be accepted alone, without its Scandinavian partner.

President Erdogan and his top officials expressed outrage that the Quran-burning activist Rasmus Paludan, who is leader of Danish far-right political party Hard Line, has had police protection during what are at this point multiple Quran-burning demonstrations over the past week-and-a-half.

Finland has still voiced that it wants to stick by Sweden in their joint NATO bids, and hopes to receive approval to join the military alliance by July, according to Monday statements. Turkey has remained the big veto standing in the way.

One key and obvious problem in presenting Paludan’s latest Quran-burnings as part of some high level Kremlin sponsored plot to derail Sweden’s NATO bid is that he’s been well-known going back years as holding highly controversial, anti-Islam demonstrations featuring Koran-burnings.

This has actually happened in multiple northern European countries, to the point that some have imposed temporary bans on his entering their borders. In past decades, similar incidents have provoked fury and media attention in the United States as well, for example in the case of Florida pastor Terry Jones. This hugely controversial phenomenon, part of some fringe far-right movements, hardly needs ‘Russian influence’ for it to be a thing.

The Biden administration has halted the provision of licenses for US companies to export technology to Huawei, as it moves closer to imposing a total ban on the sale of American technology to the Chinese telecom equipment maker.

According to the Financial Times, the commerce department has sent notification to various companies to let them know that it would not longer grant export licenses to sell American technology to Huawei – which US national security officials believe helps China engage in espionage.

The move comes after the Trump administration imposed severe restrictions on exports to the Chinese telecom giant, placing it on the “entity list,” however the commerce department had still been granting licenses to various companies for products that were unrelated to 5G telecom networks.

The move comes as Washington steps up efforts to work with allies to slow China’s push to develop cutting-edge technology such semiconductors that are used in artificial intelligence and hypersonic weapons. The US last week reached a trilateral deal with Japan and the Netherlands that would impose restrictions on companies in those countries exporting certain chip-making equipment to China. -FT

In October, the Biden administration imposed unilateral restrictions on the export of semiconductor manufacturing tools. 

Developing…

Via SchiffGold.com,

There is a relentless push to raise the minimum wage, both at the state and national levels.

Minimum wage advocates somehow think that their wishful thinking can override basic economics. But no matter how much they tell you otherwise, supply and demand are a thing. Raising the cost of labor will mean less labor employed, all other things being equal.

But every so often, we get an economic study that claims basic economics has been overturned.

But as André Marques explains, no matter what these studies purport to show, the minimum wage creates unemployment and a lack of opportunity for people with little or no work experience or skills.

The following was originally published by the Mises Wire. The opinions expressed are the author’s and do not necessarily reflect those of Peter Schiff or SchiffGold.

The 2021 Nobel Prize in Economic Sciences was awarded to David Card, Joshua Angrist, and Guido Imbens. David Card received the award for his paper (coauthored with Alan Krueger) “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.” This was used by some as scientific proof that the minimum wage does not create unemployment and should be raised. However, this is untrue, and even Card and Krueger do not draw this conclusion.

Why the Minimum Wage Creates Unemployment

According to Austrian economic thinking, the scientific method (isolating variables and changing others to verify the possible relationships between them) is not applicable to economics, which is not a natural science.

Instead, Austrian economics relies upon praxeology, the study of human action, which is complex and not very predictable since one cannot use control variables in this context. It is only possible to carry out “pattern predictions” as F.A. Hayek explains and Jesús Huerta de Soto mentions in this book:

These predictions are of an exclusively qualitative and theoretical nature and refer to the prediction of mismatches and effects of lack of social coordination caused by institutional coercion (socialism and interventionism) that is exerted on the market.

Here are some examples:

1. The increase in the money supply tends to cause prices to increase, but it is not possible to know exactly what the level of price inflation will be. The government releases several price inflation indices, but for many reasons, they do not represent the actual price.

2. Taxes harm the economy because the government wastes resources in unnecessary and unsustainable ventures since the government does not operate under the profit/loss mechanism.

3. Artificially low interest rates create malinvestments that lead to business cycles. This prevents efficient resource allocation since interest rates do not represent real-time preferences.

The minimum wage is a barrier to entry for people with little or no work experience or skills. If the minimum wage is above the value that a person creates, there will be no incentive for the company to hire.

Thus, like other government interference in voluntary transactions between an employee and an employer, the minimum wage harms the weakest party of the transaction. The employee gets a lower salary (since the company must bear these costs) and consumers ultimately pay higher prices. The cost of any imposed law or of a voluntary transaction is always paid by the weakest party in the transaction.

The freer the market, the greater the degree of competition or potential competition. Companies must invest in productivity to lower their prices. The freer the market, the better the working conditions that companies must provide. After all, if there is a high degree of competition or potential competition, it is easy for another company to attract professionals by providing working conditions that are at least a little better.

All labor costs and regulations make hiring more expensive. Thus, the higher the salary (generally in jobs that require specific training), the higher the cost of the employee, and the lower the chance less experienced people will start a career. To offset the cost, companies will only hire the most experienced and skilled people.

It can be argued that the minimum wage in Germany is €10.50 per hour, and Germany has a lower unemployment rate than Portugal, which has a minimum wage of €4.75 per hour. However, the minimum wage is not the only government intervention in voluntary transactions. According to the Heritage Foundation, Portugal is less economically free than Germany. Portugal also has a higher public debt to gross domestic product ratio.

Germany is not much more economically free than Portugal, but Germany is free enough for the Germans to be more productive than the Portuguese. Thus, a minimum wage of €10.50 per hour in Germany does not do more damage than a minimum wage of €4.75 per hour in Portugal, which has a weaker economy.

Card and Krueger’s Case Study

Card and Krueger’s paper analyzes the effect of the minimum wage on the fast-food industry in Philadelphia (a city split between Pennsylvania and New Jersey). In April 1992, the minimum wage in New Jersey was raised from $4.25 per hour to $5.05 per hour. Pennsylvania’s minimum wage did not change at the time.

Therefore, Card and Krueger chose a “natural experiment” (mentioned in Joshua Angrist’s and Guido Imbens’s studies), a situation that occurs spontaneously but allows for an experiment. Two examples of natural experiments include the Cold War separation of East and West Germany and the separation of North and South Korea. Note that natural experiments, unlike experiments in the natural sciences, cannot be controlled. They are also neither spontaneous nor natural as they did not occur by individuals’ choices. But it is possible to observe some differences between each variable (the sides of each territory).

Card and Krueger’s study examined the side of Philadelphia with a minimum wage increase (New Jersey) and the side with an unchanged minimum wage (Pennsylvania). Normally, there should be an increase in unemployment on the New Jersey side, correct? The paper shows that, in fact, there was a small increase in employment. Why?

In the conclusion, Card and Krueger state that none of the existing models explain what happened: “Taken as a whole, these findings are difficult to explain with the standard competitive model or with models in which employers face supply constraints (e.g., monopsony or equilibrium search models).”

Card and Krueger also note that fast-food prices “increased in New Jersey relative to Pennsylvania, suggesting that much of the burden of the minimum-wage rise was passed on to consumers.” They mention later that no evidence was found to prove that “the rise in New Jersey’s minimum wage reduced employment at fast-food restaurants in the state.”

The paper also shows that wages have increased to a median value within New Jersey’s wage range. Therefore, some businesses were already paying more than the new minimum wage, and the increase did not make much difference. But this happened specifically in the fast-food industry. There is no evidence that it did not cause unemployment in other sectors or long-term unemployment (including the fast-food industry since the study was limited to a single city using data from two years after the minimum wage increase).

The Consequences of the Minimum Wage Increase in New Jersey

In economics, consideration is given to that which is seen, and that which is not seen. Imagine that the government decides to build a bridge and it raises taxes to do so. We can see people who are employed in the construction and people using the bridge after it is finished. However, we do not see the people who became unemployed, did not get (or got smaller) raises, or the people that were unemployed and could not get jobs because of the tax increase (which forcibly diverted resources that would have been used voluntarily in other ventures).

In the case of the minimum wage increase in New Jersey, we see that there was no increase in unemployment in the fast-food industry, but there are two things we do not see:

1. The consumption that individuals had to cut due to the increase in fast food prices

2. The reduced revenues in other industries (since consumers had to pay more for fast food), which invested less in increasing productivity (i.e., because they had a harder time maintaining or lowering their prices) and hired fewer or even fired some people

Of course, these are extreme extrapolations. But given that consumers had lower disposable income, these consequences occurred at least to some degree.

Conclusion

The minimum wage creates unemployment and a lack of opportunity for people with little or no work experience or skills. Only if the minimum wage was set below the productivity of all individuals, would it not cause unemployment. This is unlikely since the minimum wage would have to be low enough that it would become irrelevant as a government voting tool.

It may come as a bit of a shock to those who have been following the creeping freeze in housing transactions as the bid-ask spread grows to monstrous proportions, leading to a record crash in pending home sales…

… and collapse in US home prices, especially on the West Coast…

… but even though mortgage rates ticked higher back to 6% in January, there is growing speculation that the housing market has bottomed. Why? Because as Goldman’s Rich Provorotsky notes, “bet you didn’t know there were housing price futures…they bottomed in Q4 and have been rallying.” Indeed, the Housing Composite Index traded on the CME is up decidedly in the past month after hitting a 16 month low in November.

Why this surprising bounce? A big reason for the unexpected rebound may be a recent report from real estate company Redfin which last Wednesday reported that “the housing market has begun to recover from a trough in the second week of November with buyers returning at a faster pace than sellers. The number of Redfin customers asking for first tours has improved by 17 percentage points from the November low, and the number of clients contacting.”

Furthermore, according to the report, Redfin agents to begin the home-buying process has improved by 13 points: “I’ve seen more homes go under contract this month than in the entire fourth quarter,” Angela Langone, a San Jose, California, agent, said in the report.

Among notable market moves, Redfin points to mortgage applications which are up 28% from early November as the average 30-year-fixed mortgage rate has dropped to 6.15% from its peak of 7.08% in November, the biggest decline since 2009. Pending home sales rose 3% in December from November.

Preliminary data on the share of Redfin agents’ offers facing bidding wars points to small upticks in the Seattle and Tampa markets this month (however, since this is an uneven trend, expect it to take some time before bidding wars nationally show an upward trend).

“Bidding wars are back in Seattle,” said local Redfin real estate agent Shoshana Godwin. “One of our Issaquah listings got 12 offers and is under contract for $155,000 over the $1.4 million list price. The buyer waived every contingency, handed over $300,000 of earnest money and is letting the seller stay for free for two months after closing. Another home in Seattle’s popular Ballard neighborhood was recently delisted after sitting on the market for over three months. The seller relisted it last week and it went pending in under a day.”

Eric Auciello, Redfin’s team manager in Tampa, has seen three modest single-family homes priced around $300,000 wind up in bidding wars in central Florida this month, with 16, 17 and 23 competing offers, respectively.

More in the full report here.

But while one can accuse Redfin of bias – after all the company recently laid off some 13% of its employees due to the housing market collapse so it is certainly interested in sparking some animal spirits in the sector – it is not alone in predicting a housing recovery. One week ago, Goldman’s Jan Hatzius published the bank’s Housing Outlook for 2023 in which he predicted that “home sales appear set to turn higher.” That’s because “mortgage purchase applications have averaged 9% above their October trough so far in January and survey-based measures of purchasing intentions have rebounded sharply” and while Goldman expects that existing home sales could decline slightly further “but will likely bottom in Q1 (GS forecast: Q1 average of 3.85mn saar vs. 4.02mn in December) before rebounding modestly by year-end (GS forecast: Q4 average of 4.1mn).”

Here are some more observations from the Goldman note (full report available to pro subs):

We forecast that housing starts will take longer to stabilize, declining to a trough pace of 1¼mn in 2023Q4 (vs. 1.4mn in 2022Q4) before recovering next year. We expect completions to total 1½mn this year, the most since 2007, which will help to clear the backlog of homes under construction and contribute to a modest increase in the homeowner vacancy rate (GS forecast of 1.2% in 2023Q4 vs. 0.9% now and 1.4% in 2019Q4).

We expect a peak-to-trough decline in national home prices of roughly 6% and for prices to stop declining around mid-year.

On a regional basis, we project larger declines across the Pacific Coast and Southwest regions—which have seen the largest increases in inventory on average—and more modest declines across the Mid-Atlantic and Midwest—which have maintained greater affordability over the past couple years.

Higher rates and lower home prices will increase the drag on GDP growth from negative wealth effects and declining mortgage equity withdrawal, but we believe that the aggregate drag on GDP growth from the housing sector peaked in 2022Q4 at 1.1pp and will moderate to just 0.25pp by 2023Q4.

If the housing price futures market – and Goldman – is right in pricing in a housing trough than the consequences could confound markets: on one hand, a stabilization in housing will likely make any coming recession less severe; on the other, since housing is the primary channel by which the Fed can slowdown the economy, any failure to cripple this key US asset, could mean that Powell will be stuck in a “higher for longer” mode for, well, longer than the market expects. As a reminder, as the following Morgan Stanley chart shows, consensus is that the Fed is about 8 months away from its first rate cut, which will be promptly followed by ~4.5 25bps rate cuts.

More in the full Goldman note available to pro subs.

Via ‘The Space Worm’ Substack,

Mainstream outlets perfectly content with shallow coverage as long as they can juxtapose “Elon” and “Fraud” in the same headline…

Am considering taking Tesla private at $420. Funding secured.

— Elon Musk (@elonmusk) August 7, 2018

This tweet spawned a potential billion-dollar lawsuit.

Before looking into the trial, I did not think it would be all that interesting but was surprised at how many relevant facts surrounding the case — from the lead plaintiff’s blatant lie on the stand to the glaringly illogical basis for the suit — were being omitted by mainstream coverage. So, I decided to describe the situation in more detail. Hope you enjoy…

Background of Lead Plaintiff

In 2018, Glenn Littleton was chosen as lead plaintiff — the representative of the class-action suit — among nine candidates who initially attempted to sue Mr. Musk over the above tweet. Six of the other vying plaintiffs were investment firms. Littleton himself is a veteran derivatives and commodities trader, and while he’s now 71, he hasn’t slowed down one bit. He traded over $10 million in Tesla options in Aug ‘18 with over 470 unique trades for the month, public court filings revealed. Several individual transactions exceeded $250,000 in value. In 1984, Littleton was fined by the Commodity Futures Trading Commission (CFTC) for “wash trading” — fake transactions that inflate an asset’s perceived trading activity. His license with the commission was briefly suspended as a result. In short, he’s been around the block and knew the risks he was taking on.

Taking the stand on the second day of the trial, Littleton said he viewed Musk’s “funding secured” tweet as “absolute,” then scrambled to unwind his options positions. Disclosed emails between Littleton and his stock broker at the time reveal this to be a complete lie.

“A lot of people thought it was a hoax… I saw so many red flags with Elon and Tesla,” Littleton wrote, not even four hours after the tweet was published. 

An earlier email further demonstrates Littleton’s attitude towards the tweet, calling it a “rumor” and saying, “I don’t think there is a chance in hell that the other shareholders would agree to that price.”

Littleton’s impression of the veracity of Elon Musk’s tweet could not be further from “absolute.”

Now for an analysis of the lead plaintiff’s derivatives trading and the losses he has claimed…

Littleton says the tweet has cost him $3.5 million. In a prior 2018 hearing, Calif. Judge Lucy Koh stipulated that Littleton’s “argument fails,” stating that “[Mr. Littleton] received more money from selling at fraudulently inflated prices than he spent purchasing.”

“Even if he lost money in all of his transactions, this amount was reduced by his Class Period sales when the prices were inflated,” the judge continued. Here, Class Period refers to Aug 7 – Aug 17, 2018 (which is the timeframe the plaintiffs are alleging was affected by Musk’s tweet).

We will get to whether prices were actually “inflated” shortly, but assuming they were (as the prosecution is alleging), this would be true. However, Littleton includes several trades outside the Class Period in his Profits & Losses statement to exacerbate his losses. To be fair to Littleton, there’s a case to be made that if one bought a derivative before the “funding secured” tweet and sold amid the panic, then those losses should be included too.

Let’s look at when Littleton entered into most of his contracts:

Littleton bought and sold a mixture of calls and puts but was overwhelmingly long Tesla and owned far more contracts than he had sold short. Given he exited these positions at relatively similar prices to when he entered, he lost money on nearly all of his pre-August contracts. Anyone who has traded options will tell you (and as someone who has lost a considerable amount of money trading them): IF SEVERAL MONTHS TRANSPIRE WITHOUT A SIGNIFICANT MOVE IN THE UNDERLYING STOCK PRICE, YOU ARE GOING TO LOSE MONEY OWNING OPTIONS.

There is no argument to be made that if he had held beyond the period afflicted by Elon’s tweet, that he would have been made whole. The stock price gyrated a bit thereafter, but by January of 2019 (when roughly half of his contracts expired), it’s hovering around Littleton’s entry points. In fact, it’s a bit lower, so assuming he remained long, his losses would have been far greater. 

Judge Koh was absolutely correct. If anything, Musk saved Littleton from even further degradation in the price of his options.

Logical Incoherence of Lawsuit

Now to assess the inflation allegation…

The entire basis for the lawsuit is — according to the presiding Judge Edward Chen — that “Mr. Musk’s statements led to a trading frenzy that drove up the value of Tesla’s shares.” Additionally, the jury is being asked to “determine the amount of artificial inflation” on Tesla’s share price “during the Class Period” (which remember is Aug 7 – Aug 17, 2018).

However, it is objectively NOT the case that the stock inflated (even relative to other tech stocks) during that time frame.

Yes, Tesla stock did rally 11 percent on the day of the tweet but moderated two days later to just 3.1 percent above pre-tweet levels. It fell further from there, down 10.7 percent for the period in question, a span during which the tech-centric Nasdaq Composite index increased by 1.2 percent.

Either reduce the Class Period to a span of three days or change the argument to say that Elon “manipulated” as opposed to “inflated” or “drove up” the stock price. The current structure of this case is completely incoherent.

Lastly, the computational tasks being asked of the jury are truly outlandish. If determining the degree to which Musk’s tweet affected the stock price wasn’t hard enough, try retroactively calculating the changes in implied volatility for 17 different options contracts assuming that Elon Musk did not publish his tweet. This is — no joke — what the jury will have to discern on Feb 3:

Explained in a different wording in the court document, the jury will be asked to calculate “what the implied volatilities for each Tesla stock option traded during each day of the Class Period would have been but for Mr. Musk’s tweets.”

The court is essentially saying to the jury: “Imagine, if you would, a world in which Elon Musk did not publish his $420 tweet. Now, how do you think the IV component of these option contracts would have fluctuated over the course of that week in August?” By the way, here is part of the equation involved in calculating an option’s implied volatility:

On what planet could anyone — let alone a random collection of San Franciscans — possibly know the answer to this?! And their answers have bearing on whether Musk must dole out billions of dollars…

Conclusion

I could see this class-action having merit if the people affected were long-term investors, not speculating options traders. To be eligible, one should have to prove they held equity (not a derivative) in Tesla for at least one year prior to the disputed tweet. The thing is, if those were the requirements this lawsuit would never have come to pass in the first place. What equity investor would sell at ~$370 when they can wait for a rumored buyout at $420? And Tesla investors who have held until today have nothing to complain about. Keep in mind, these are pre-stock split prices. The stock is currently worth over 6x what it was then.

This trial is ridiculous and I suspect much of the media coverage is intentionally shallow. That way, it’s easier to create a fantasy in which Elon has manipulated “the little(ton) guy” with his lies and irresponsible antics.

As for Elon’s tweet and whether the funding was truly “secured,” there is an argument that this was not technically true at the time it was made. I won’t go into the weeds here as it’s not relevant to the critiques contained in this article, but a text exchange between Musk and the top Saudi investor demonstrates that the deal was VERY serious and had expected to go through. That, and just two weeks later, internal documents reveal Tesla met with Goldman Sachs and Silver Lake representatives who assured Tesla’s board that “the funding was available from a variety of sources.”

So… if we are going to start policing the fringe cases of fraud that border on harmless exaggeration, I’ve got several restaurants in my neighborhood claiming to sell the “best burger in town” whom I’d like to sue.

*  *  *

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Authored by Daniel Lacalle,

Every time the United States reaches its debt limit, we read that it is important to reach an agreement to lift it. The narrative is that the debt ceiling must be raised, or the US economy will suffer a severe contraction. There is even an episode of a TV series, “Designated Survivor”, where the character played by Kiefer Sutherland places lifting the debt ceiling as the priority to get the U.S. economy on track. The debt ceiling is viewed as an evil and anachronistic burden on growth. It is not.

Analysts all over the world consider the debt ceiling a non-event because Congress always agrees to increase it. As such, markets do not even care. Congress has raised the debt ceiling on time on over eighty occasions since 1960, according to S&P Global. The rating agency points out that Congress has passed legislation to raise or suspend the debt ceiling seven times in the last twelve years (in 2011, 2013, 2017, 2018, 2019, and twice in 2021).

The U.S. Treasury has announced it will start implementing “extraordinary measures” to fulfill its legal obligations. These extraordinary measures would give the government the possibility of extending the deadline until early June. Analysts and commentators say that Congress faces two options: either raise the debt ceiling or suspend it. Really? No one seems to think of the urgent need to cut spending.

The problem of the United States’ debt is not one of receipts. It is created by the constant increase in mandatory spending. Governments continue to raise taxes, and when the economy grows, they spend more. However, when the economy stalls or declines, they spend even more. In fiscal year 2022, the government spent $6.27 trillion. In 2015, it was $4.7 trillion. There is no revenue measure that would cover an increase of such magnitude and maintain it every year.

Blaming the deficit on tax cuts makes no mathematical sense and assumes a confiscatory and extractive view of the economy, where the private sector must always provide rising revenues to a government that always spends more.

It is interesting to see how the debate has shifted to tax cuts, which did not reduce receipts, instead of spending that never generates the announced fiscal multiplier or reduces the deficit.

Those who say that the deficit would have been solved by eliminating the last tax cuts have a problem with mathematics. There is no way that any form of revenue measure could have covered a $1.6 trillion spending increase. Even if you believe in the idea that the government will always collect higher receipts from massive tax increases, which is false, only one year of mild recession would balloon the deficit and debt again.

The solution to the United States budget deficit is not more taxes. Even in the most optimistic receipt scenario, there is no tax hike program that would even start to address the structural deficit, estimated at one trillion dollars a year. Expenses are annual and consolidated, but receipts are cyclical and depend on the health of the economy. Therefore, revenue measures never reduce debt.

When governments say they will only tax the rich, they are treating citizens as if they were children. There is simply no way in which the government would collect every year between half a trillion to a trillion more only from a handful of rich people whose wealth is mostly in shares.

Deficits are always a spending problem. However, none of the parties want to address the ballooning levels of US debt by reducing expenditure. Therefore, they always agree on increasing public debt, which makes the economy weaker.

The solution for many is printing money and raising taxes. More taxes hurt the recovery, damage the job improvement potential, and reduce investment in the economy. More taxes mean less growth and no deficit improvement. More taxes and more printing mean that, added to those negatives, real wages decline, deposit savings evaporate, and the inflationary tax destroys the middle class.

Those that say deficits are reserves that the government creates for the private sector and that deficit spending is good for growth because a monetary sovereign country like the United States can spend and borrow as it pleases are simply lying. If deficit spending were a source of reserves that benefited the private sector, the United States’ productivity, growth, investment, and consumption in real terms would be off the charts, not sluggish, and real wages would be rising, not falling. The United Kingdom and Japan have proven that pushing the limit on debt, taxes, and spending only brings stagnation and declining real wages.

Printing and raising taxes are not social policies. It is profoundly anti-social, as it destroys the middle class and makes the economy weaker. Raising the debt ceiling is also extremely negative for the middle class because it means more taxes, lower purchasing power of the currency, and stagnation in the future.

There is plenty of room for efficiency in the United States budget. However, if there is an incentive to pass the imbalances to the next generation, governments and voters will agree to do it. There will be a point where the United States’ ability to disguise its massive imbalances using the currency and debt markets will evaporate as confidence in the economy and the government diminishes. If uncontrolled spending is not addressed, that moment may come sooner than many think.

Mining giant Rio Tinto somehow lost a radioactive capsule containing Caesium-137 during transport along a 1,400-kilometer (870-mile) stretch of highway in Western Australia, reported Bloomberg. 

“We are taking this incident very seriously … and recognize this is clearly very concerning and are sorry for the alarm it has caused in the Western Australian community,” Rio Tinto head of iron ore Simon Trott said in a statement on Sunday.

Last Friday, the Department of Fire and Emergency Services WA issued a radiation alert for parts of Western Australia. 

RADIOACTIVE SUBSTANCE RISK in parts of the Pilbara, Midwest Gascoyne, Goldfields-Midlands and Perth Metropolitan regions.

There is a radioactive substance risk in parts of the Pilbara, Midwest Gascoyne, Goldfields-Midlands and Perth Metropolitan regions.

A capsule containing a radioactive substance has been lost during transportation from north of Newman to the north-eastern suburbs of Perth. The substance is used within gauges in mining operations.

The radioactive material is used in devices to measure the density of iron ore. Here’s a map of where the radioactive capsule was lost. 

Emergency services said anyone who comes in contact with Caesium-137 could experience “radiation burns or radiation sickness.” They also posted a picture of the capsule. 

Emergency services said, “the gauge was unpacked for inspection. Upon opening the package, it was found that the gauge was broken apart with one of the four mounting bolts missing and the source itself and all screws on the gauge also missing.” 

… and just how the Caesium-137 vanished while being transported remains a mystery. 

By Michael Every of Rabobank

Stop projecting; and start projecting

This week is obviously dominated by the upcoming Fed meeting. On which note, please – stop projecting, at least in one regard.

US personal income and expenditure data on Friday showed a now-established decline in spending on goods and the start of a slowdown in spending on services, which had been hotter, while savings starting to rise again. That’s exactly what the Fed wants to see, and adds to recent softness in other data. However, to project this means the Fed will be slashing rates soon is projection in a psychological sense, i.e., putting one’s own feelings onto the actions of others. It’s the desire for big Fed rate cuts, leading to lower bond yields, and a weaker US dollar, and higher asset prices, and the status quo ante of the past 40 years.

We are seeing deflation: in memory chips, used cars (US auto delinquencies are now looking worse that during the GFC, apparently), and housing. The US fiscal tap may remain turned off in the outside the defence sector too. Yet the unemployment rate remains low, and so do weekly initial claims: Covid has changed things through deaths, early retirement, and walking away. Moreover, Europe may avoid recession and China has reopened and says –again– that it will boost consumption: they are proposing higher welfare payments for rural immigrants to cities, for example. In short, while inflation will fall back near-term, it could potentially start to rise again later this year.  

Stubbornly high inflation is finally easing as supply chain disruptions fade and interest rates at 15-year highs put the brakes on demand

But Fed officials have voiced unease that any disinflation might be short-lived because labor markets are so tight https://t.co/Niaawe7pKj

— Nick Timiraos (@NickTimiraos) January 29, 2023

Consider what slashing rates would do against that backdrop. Indeed, alongside the easing in US financial conditions vs. a few months ago (the S&P +6% year-to-date; US 10-year yields 35bp lower) we see: Brent crude +1.8% y-t-d; copper +11.2%; gold +5.8%; and even Bitcoin +43.7%. Somebody is projecting more growth, more bubbles, and more supply-side inflation.   

Worse, markets are refusing to project headlines such as the Financial Times saying: ‘Top US air force general predicts China conflict in 2025’: if you cover the Fed or the ECB, or pensions or potatoes, or stocks or bonds, that headline warns current projections could be more dramatically wrong in 2025 than they were in 2022.

Of course, market analysts can never say what will happen in geopolitics, let alone markets. Yet the standard procedure in research is to note such a headline and say, “That’s wrong!” – with no professional experience in such matters; or to pretend one did not see it; or to say, “We don’t (know how to) look at such issues,” and, rightly, “We can’t price for them,”…and so to continue to project what one does know about and can price for; like Fed rate cuts and asset markets rallying. But is that really a good way to project things?

That headline is likely lobbying for even higher Pentagon budgets and more friend-shoring – yet that has inflationary implications and flusters businesses.  So does Japan and the Netherlands joining the US in restricting exports of chip and chip-manufacturing tech to China (though the Dutch allowed millions of chips to be sold to Russia despite a US ban); and the headline, ‘Key lawmaker: Biden mulling broad prohibitions on U.S. investments in Chinese tech’, noting, “The Biden administration “is talking about a theory where they would stop capital flows into sectors of the economy like AI, quantum, cyber, 5G, and, of course, advanced semiconductors… They actually want to say, right, you can’t invest in any [Chinese] company that does AI. You can’t invest in any company does cyber” or other similar sectors.

Nearer term, a few weeks from the first anniversary of the war, Russia is close to a new surge in Ukraine, which won’t get a small number of Western tanks for months. The fora discussing sending tanks a few months ago, as Germany said it would never allow that to happen, are now discussing sending fighter jets,… which Germany says it will never allow to happen. The escalatory spiral is obvious. The risks of an inflationary spiral should not be underestimated either, especially if Russia strikes at, or for, a Ukrainian port, and/or the Black Sea Grain Deal collapses.

Israeli drones just attacked Iranian factories manufacturing the drones they are exporting to Russia for use against Ukraine. While there are no immediate risks of outright Iran-Israel war on the back of that, despite the recent, huge US-Israeli military exercise for exactly that kind of thing, it is literally explosive in a volatile region again central to global energy-price —and so inflation— projections.

Against this backdrop, Germany’s Chancellor Scholz was just in Latin America, ‘racing with China for lithium’, as Bloomberg puts it. That’s for his auto sector facing a pincer squeeze from surging Chinese auto exports, notably of lithium-using EVs, and a higher cost of energy now Russian pipeline gas is gone, benefitting the US, who are selling the LNG replacing Russian pipeline gas. Meanwhile, arms-maker Rheinmetall is ready to greatly boost the output of tank and artillery munitions to satisfy strong demand in Ukraine and the West, and may start producing HIMARS multiple rocket launchers in Germany, says its CEO. So, a shift in German industry from cars to tanks? However, after the debacle over German-built tanks, demand for them is, excuse the pun, tanking. So, a shift from German-made cars to US-brand military goods? What does this project about EU “strategic autonomy”, or even the level of the Euro, longer term?

Though it addresses deglobalisation more loosely, and focuses more on demographics, the Financial Times also has a pre-Fed op-ed worrying about structurally higher inflation rates – ‘The world is not ready for the long grind to come’. At least markets aren’t if they continue to project a 25bp hike this week, then a short pause, and then rate-cutting business as usual. What if the Fed goes 25bp, but hawkishly stresses that not only might it do so again one more time, but that it won’t be cutting rates for a *long* time? Could Powell push back directly against the market’s constant easing of financial conditions? If so, how do people with psychological projection problems react when confronted? Denial, then anger, then denial; and then very expensive therapy, if they want to become better-adjusted.

Relatedly, last week I noted famed economist Schumpeter, seen as always favoring “creative destruction”, ended up arguing for a quasi-‘Christendom’ corporatism to deal with problems of economic imbalances, based on the Catholic principle of Quadragesimo anno put forward by Pope Pius XI in 1931 – to no effect at all, as we saw from 1939-45. On that note, Friday saw economist Mariana Mazzucato (‘For the Common Good’), argue we should follow the call of the current Vatican in a similar light: “Tackling our biggest challenges and reversing the undue concentration of wealth and power will require a fundamental change in political economy. Currently, the principle of the common good is seen as merely a corrective for the current system’s excesses, but it should be the system’s primary objective.”

Despite having argued for years that political economy and “-isms” were going to be the next big thing, I am in no way projecting that the change described above is going to happen anytime soon, or at all: would that it could. Yet project this: would a return to big Fed rate cuts make things relatively better or worse in that regard? Geopolitically, the answer is also clear: higher rates are a US weapon – yet, oddly, one the market expects to soon be holstered.

As BofA rates strategist Ralf Preusser writes in his weekly preview, “this week is one for the record book. We have not seen these three major central bank decisions (Fed, BoE, ECB); and key data releases (US ISM, payrolls, and the employment cost index, as well as Euro Area inflation, GDP, and confidence data) in the same week before. Not to mention in combination with month-end flow, which given the incidence of supply in Europe should be sizeable in both EUR and GBP.”

DB’s Jim Reid agrees writing that this week is set to be action packed for scheduled activity: “The main highlight is of course the FOMC conclusion (Wednesday), but the ECB and the BoE (both Thursday) will also likely hike. However, there’s plenty of other events on the macro calendar, including the US jobs report on Friday, the flash CPI release from France and Germany (tomorrow), the Euro Area aggregate (Wednesday), regional and Euro Area Q4 GDP (tomorrow), global manufacturing (Wednesday) and services (Friday) PMIs/ISMs, China’s equivalents (tomorrow and Wednesday), US JOLTS (Wednesday), and US ECI (tomorrow).”

If that’s not enough, 12% of the S&P 500 by market cap report within a few moments of each other on Thursday night after the bell with Apple, Alphabet and Amazon the highlights in a busy week for earnings. Overall, a whopping 35% of S&P earnings by sector are set to report this week.

Going back to central banks, at the time of writing, the Fed is priced to deliver 26 bp, the ECB 50 bp, and the BoE 46 bp. BofA expects both the Fed and the ECB to deliver what is priced in, and sees a 25 bp hike from the BoE – marginally more likely than before after new lows in the PMIs – but risks are clearly skewed towards 50 bp.

DB’s Reid adds that with a downshift to a 25bps Fed hike already priced in for Wednesday, the meeting will be all about what the Fed tone implies for further meetings. DB still think there’ll be two more 25bps hikes after this one partly as the Fed won’t want to see financial conditions ease too much as a result of being too dovish.

Assuming central banks deliver on forwards, the key focus for the market will be the accompanying messages. The Fed’s message will likely be strongly influenced by critical data prints between now and Wednesday: PCE, ECI, ISM, JOLTS. And that message in turn risks looking dated already by the end of the week with ISM Services and NFP prints to come, also. Our economists remain hawkish relative to market pricing, expecting a terminal FF target range of 5.00-5.25% and the first cut not until Mar-2024, for which forwards price 100 bp more cuts than our colleagues expect.

The last big and very important data point for the Fed before their meeting will be tomorrow’s Q4 ECI release (consensus 1.1% vs. +1.2% previously). Chair Powell is very focused on the relationship between core services ex-shelter inflation and wage pressures, with ECI near the top of their dashboard. JOLTS (Wednesday) is similarly important and may get a reference in the press conference.

Staying with labor markets, although Friday’s employment report will come after the FOMC, it will as ever be a lightening rod for the market. For the headline, consensus is at +185k vs. +223K last month, and 3.6% for unemployment (DB also at 3.6%, vs. 3.5% last month). All eyes also on average hourly earnings and importantly the work week length which was soft last month hinting at a small crack in the labor market.

With regards to the ECB (Thursday), most economists expect another +50bps hike that would take the deposit rate to 2.50%. They also emphasize the importance of communicating expectations for the March meeting since core and underlying inflation remain sticky. The team sees further +50bps and +25bps hikes in March and May, respectively, and a terminal rate of 3.25%.

For the BoE decision that same day, DB economists differ with BofA and see another +50bps (vs 25bps) hike that will take the Bank Rate to 4%. That will potentially be the last ‘forceful’ hike in this tightening cycle. Although their view is that services and wages data warrant such a move, the risks are tilted to the downside. They continue to call for a 4.5% terminal rate as inflation pressures remain resilient.

European markets have lots of data to run through ahead of those decisions, with Eurozone Q4 GDP, inflation and labor market data all released early this week. Most of the key data will be out tomorrow, including Q4 GDP data for Germany, France, Italy and the Eurozone as well as CPI reports for Germany and France. Eurozone aggregates for the CPI and unemployment rate are released on Wednesday. DB economists expect Eurozone HICP to decline to 8.4% in January (vs 9.2% yoy in December) and continue falling to c.3.5% in Q4 this year. Core inflation is seen staying in a 5.0-5.5% range throughout first half of this year.

Finally, let’s not forget about earnings, although that’s impossible with a whopping 107 S&P companies reporting, including Apple, Amazon, Alphabet, Meta, Ford, AMD, Amgen, Qualcomm, Starbucks and dozens more.

Courtesy of DB, here is a day-by-day calendar of events

Monday January 30

• Data: US January Dallas Fed manufacturing activity, UK January Lloyds business barometer, Japan December jobless rate, retail sales, industrial production, Italy December PPI, Eurozone January economic, industrial and services confidence
• Central banks: ECB’s Villeroy speaks
• Earnings: Sumitomo Mitsui Financial, NXP Semiconductors, Ryanair
• Other: IMF’s world economic outlook update

Tuesday January 31

• Data: US Q4 employment cost index, January Conference Board consumer confidence, MNI Chicago PMI, Dallas Fed services activity, November FHFA house price index, China January PMIs, December industrial profits, UK December consumer credit, mortgage approvals, M4, Japan January consumer confidence index, December housing starts, Italy Q4 GDP, December unemployment rate, hourly wages, Germany Q4 GDP, January CPI, unemployment change, France Q4 GDP, January CPI, December PPI, consumer spending, Eurozone Q4 GDP, Canada November GDP
• Central banks: Euro Area bank lending survey
• Earnings: Samsung Electronics, Exxon Mobil, Pfizer, McDonald’s, UPS, Amgen, Caterpillar, AMD, Stryker, Mondelez, UBS, Moody’s, GM, MSCI, Electronic Arts, Spotify, Snap

Wednesday February 1

• Data: US January ISM manufacturing index, total vehicle sales, ADP report, December JOLTS report job openings, construction spending, China Caixin manufacturing PMI, Japan January monetary base, Italy January CPI, manufacturing PMI, new car registrations, budget balance, Eurozone January CPI, December unemployment rate, Canada January manufacturing PMI
• Central banks: Fed decision
• Earnings: SK Hynix, Novo Nordisk, Meta, Orsted, Thermo Fisher Scientific, Novartis, T-Mobile, Altria, Boston Scientific, GSK, BBVA, Peloton

Thursday February 2

• Data: US Q4 unit labor costs, nonfarm productivity, December factory orders, initial jobless claims, Germany December trade balance, France December budget balance, Canada December building permits
• Central banks: ECB, BoE decision
• Earnings: Apple, Alphabet, Amazon.com, Sony, Mitsubishi UFJ Financial, Mizuho Financial, Eli Lilly, Merck, Roche, Shell, Bristol-Myers Squibb, ConocoPhillips, QUALCOMM, Honeywell, Starbucks, Gilead Sciences, Estee Lauder, JD.com, ICE, Banco Santander, Ford, Ferrari, Infineon

Friday February 3

• Data: US January jobs report, change in nonfarm payrolls, unemployment rate, labor force participation rate, average hourly earnings, ISM services, China Caixin services PMI, UK January official reserves changes, Italy January services PMI, France December manufacturing and industrial production, Eurozone December PPI
• Central banks: ECB Survey of Professional Forecasters
• Earnings: Sanofi, Regeneron, Intesa Sanpaolo

* * *

Finally, looking at just the US, Goldman writes that the key economic data releases this week are the employment cost index on Tuesday, JOLTS job openings and ISM manufacturing on Wednesday, and the employment situation report on Friday. The February FOMC meeting is on Wednesday. The post-meeting statement will be released at 2:00 PM ET, followed by Chair Powell’s press conference at 2:30 PM.

Monday, January 30

• 10:30 AM Dallas Fed manufacturing index, January (consensus -15.5, last -18.8)

Tuesday, January 31

• 08:30 AM Employment cost index, Q4 (GS +1.1%, consensus +1.1%, prior +1.2%): We estimate that the employment cost index (ECI) rose 1.1% in Q4 (qoq sa), which would boost the year-on-year rate by one tenth to 5.1%. Our forecast reflects sequential slowing in the private wages ex-incentives category following net softer readings of production and nonsupervisory average hourly earnings and the Atlanta Fed wage tracker. However, we expect another strong reading for the benefits category as firms expand health insurance and supplemental pay programs in order to attract and retain talent.
• 09:00 AM FHFA house price index, November (consensus -0.5%, last flat)
• 09:00 AM S&P/Case-Shiller 20-city home price index, November (GS -0.6%, consensus -0.7%, last -0.5%): We estimate that the S&P/Case-Shiller 20-city home price index declined 0.6% in November, following a 0.5% decline in October.
• 09:45 AM Chicago PMI, January (GS 45.1, consensus 45.3, last 45.1): We estimate that the Chicago PMI was unchanged at 45.1 in January, reflecting weaker industrial activity in the US and a continued drag from the covid wave in China.
• 10:00 AM Conference Board consumer confidence, January (GS 109.5, consensus 109.0, last 108.3): We estimate that the Conference Board consumer confidence index increased to 109.5 in January.

Wednesday, February 1

• 08:15 AM ADP employment report, January (GS +190k, consensus +170k, last +235k): We estimate a 190k rise in ADP payroll employment in January, reflecting strength in Big Data indicators.
• 09:45 AM S&P Global US manufacturing PMI, January final (consensus 46.8, last 46.8)
• 10:00 AM Construction spending, December (GS +0.2%, consensus flat, last +0.2%): We estimate construction spending increased 0.2% in December.
• 10:00 AM ISM manufacturing index, January (GS 48.0, consensus 48.0, last 48.4): We estimate that the ISM manufacturing index declined 0.4pt to 48.0 in January, reflecting weaker industrial activity in the US and a continued drag from the covid wave in China. Our GS manufacturing tracker declined 1.3pt to 47.0.
• 10:00 AM JOLTS job openings, December (GS 10,350k, consensus 10,300k, last 10,458k): We estimate that JOLTS job openings declined to 10,350k in December.
• 02:00 PM FOMC statement, January 31 – February 1 meeting: The key question for the February meeting is what the FOMC will signal about further hikes this year. As discussed on our FOMC preview, we expect two additional 25bp hikes in March and May, but fewer might be needed if weak business confidence depresses hiring and investment, or more might be needed if the economy reaccelerates as the impact of past policy tightening fades. Fed officials appear to also expect about two more hikes and will likely tone down the reference to “ongoing” hikes being appropriate in the FOMC statement.
• 05:00 PM Lightweight motor vehicle sales, January (GS 15.8mn, consensus 14.4mn, last 13.3mn)

Thursday, February 2

• 08:30 AM Nonfarm productivity, Q4 preliminary (GS +2.5%, consensus +2.4%, last +0.8%); Unit labor costs, Q4 preliminary (GS +1.5%, consensus +1.5%, last +2.4%): We estimate nonfarm productivity growth of +2.5% in Q4 (qoq saar) and unit labor cost—compensation per hour divided by output per hour—growth of +1.5%.
• 08:30 AM Initial jobless claims, week ended January 28 (GS 190k, consensus 200k, last 186k); Continuing jobless claims, week ended January 21 (consensus 1,684k, last 1,675k): We estimate initial jobless claims increased to 190k in the week ended January 28.
• 10:00 AM Factory orders, December (GS +2.5%, consensus +2.4%, last -1.8%); Durable goods orders, December final (last +5.6%); Durable goods orders ex-transportation, December final (last -0.8%); Core capital goods orders, December final (last -0.2%); Core capital goods shipments, December final (last -0.4%): We estimate that factory orders increased 2.5% in December following a 1.8% decrease in November. Durable goods orders increased 5.6% in the December advance report, reflecting a $15.5bn increase in nondefense aircraft orders, while core capital goods orders decreased 0.2%.

Friday, February 3

• 08:30 AM Nonfarm payroll employment, January (GS +300k, consensus +185k, last +223k); Private payroll employment, January (GS +250k, consensus +185k, last +220k); Average hourly earnings (mom), January (GS +0.4%, consensus +0.3%, last +0.3%); Average hourly earnings (yoy), January (GS +4.4%, consensus +4.3%, last +4.6%); Unemployment rate, January (GS 3.5%, consensus 3.6%, last 3.5%); Labor force participation rate, January (GS 62.3%, consensus 62.3%, last 62.3%): We estimate nonfarm payrolls rose by 300k in January (mom sa). Our well-above-consensus forecast reflects the elevated level of labor demand, the strong recent payroll trend, a 36k boost from the return of striking education workers, strength in Big Data employment indicators, and a boost from favorable seasonal factors that are spuriously fitting to last winter’s Omicron wave. Jobless claims remain extremely low, and while corporate layoff announcements have increased in recent months, only 15% of California layoff filings since December had been implemented by the January payroll period. We estimate the unemployment rate was unchanged at 3.5%, reflecting a rise in household employment offset by flat-to-up labor force participation rate (we estimate unchanged on a rounded basis at 62.3%). We estimate a 0.4% increase in average hourly earnings (mom sa), reflecting a 0.05pp boost from start-of-year wage hikes and neutral calendar effects.
• 09:45 AM S&P Global US services PMI, January final (consensus n.a., last 46.2)
• 10:00 AM ISM services index, January (GS 51.0, consensus 50.5, last 49.2): We estimate that the ISM services index rebounded by 1.8pt to 51.0 in January, reflecting the rise in our survey tracker (+1.0pt to 51.1).

Source: DB, Goldman, BofA