San Francisco will invoke the Supreme Court’s landmark ruling from last month that weakened federal regulators’ power in its upcoming case challenging federal wastewater discharge regulations, according to a brief that the city filed with the high court on July 19.
The city is arguing that Environmental Protection Agency (EPA) officials misinterpreted a provision of the federal Clean Water Act of 1972 when they issued a discharge permit. In issuing the permit, the officials deviated from the framework of the statute so much that they revived the old regulatory approach that the law had replaced, according to the city.
The city argues that the Supreme Court’s June 28 decision in Loper Bright Enterprises v. Raimondo, which invalidated the 40-year-old bureaucracy-empowering Chevron deference doctrine, has a bearing on the case. Critics say the now-defunct doctrine, which required judges to defer to the legal interpretations of unelected federal agency officials when enforcing federal laws that they deemed ambiguous, led to the explosive growth of the federal government in recent decades.
The Loper Bright ruling is expected to be widely cited in lawsuits challenging federal regulations. It’s also expected to make it more difficult for government officials to generate new regulations.
The issue in the case, known as City and County of San Francisco v. EPA, is whether the agency is allowed to impose vague limitations on how much pollution may be present in wastewater discharged by water utilities.
The Supreme Court granted the city’s petition without comment on May 28. Oral arguments in the case haven’t yet been scheduled but are expected to take place at some point during the court’s new term, which begins in October.
In its petition filed on Jan. 8, San Francisco stated that the discharge permits issued by the EPA order tells cities not to pollute water bodies “too much,” but don’t provide a specific limitation.
According to the city, its most recent permit is one of many issued across the country that failed to notify the permit holders about what they must do to comply with the Clean Water Act.
The city’s permit states that San Francisco may not cause or contribute to “exceedances” of water quality standards. Instead of simply advising the city “how much it needs to control its discharges to comply with the Act,” the EPA’s “generic prohibitions leave the City vulnerable to enforcement based on whether the Pacific Ocean meets state-adopted water quality standards,” the petition states.
In July 2023, a divided U.S. Court of Appeals for the Ninth Circuit rejected San Francisco’s appeal and affirmed the EPA’s power to specify generic limits or “general narrative prohibitions” on discharges under the Clean Water Act.
In an April 12 brief, U.S. Solicitor General Elizabeth Prelogar had urged the Supreme Court not to accept the case.
The permit issued to the city is sufficiently specific, she wrote.
For example, it states that the discharged water cannot adversely affect the pH of the water into which it is released and that “floating particulates and grease and oil shall not be visible,” Ms. Prelogar wrote.
In the city’s new brief, filed on July 19, which helps to lay the foundation for its upcoming oral arguments, San Francisco argues that EPA officials misinterpreted the Clean Water Act and in the process “effectively resurrect[ed]” the old regulatory regime that the statute had replaced.
When the EPA renewed the city’s permit “to discharge treated effluent into the Pacific Ocean … EPA imposed conditions that require the City to avoid any discharge that causes or contributes to a violation of water quality standards.”
Effluent is liquid waste or sewage discharged into a body of water.
The Ninth Circuit erred in upholding the permit conditions which “impermissibly measure the City’s compliance based on whether the receiving waters meet water quality standards, instead of whether the City’s discharges meet effluent limitations,” according to the brief.
The agency’s interpretation of the Clean Water Act makes it difficult to comply because “a waterbody’s ability to meet water quality standards at any time depends on pollutants that all sources—not just San Francisco—contribute.”
This means that the city doesn’t have the advanced notice it needs to “control its discharges to comply with the Generic Prohibitions,” the brief states.
On June 4, the Supreme Court directed the EPA to file its brief on the merits by Aug. 26.
The U.S. Department of Justice, which is representing the EPA, didn’t respond by publication time to a request by The Epoch Times for comment.
Global IT systems crashed on Friday. Two days later, a week after the attempted assassination of former President Trump, President Biden crashed. It seems full steam ahead for Kamala Harris, so far. Elsewhere, Israel destroyed the Houthis’ port and oil storage, yet Russia may now arm them, all risking wider Mid-East war; as ‘China and Russia are breaking the world into pieces’, says Hal Brands, as “Global governance and problem-solving increasingly look like artifacts of a happier age. International violence is intensifying, as the risk of major war –even global war– ticks higher. US power still looms large, but America’s behaviour grows more erratic as its politics become less stable.” Indeed, 80 years ago last weekend, at Bretton Woods, the world set up a (gold) US dollar-centric economic architecture, which we all live with today (absent gold). Now, concerns are it will face a blue screen of death: and neither IT systems, nor US politics, geopolitics, nor the global economy can be easily re-set by turning them off then back on again.
Indeed, *what* a mess the West is in. Inflation is lower – but still too high in key areas. Real GDP per capita has flat-lined or fallen for years–and median GDP is worse. Housing is ever less affordable in many places – but making it cheaper slows ‘growth’. Ageing populations mean poorer health, at huge cost, and labor and skills shortages – yet there is less appetite for mass immigration. Debt is too high everywhere even as we pay more tax. We are deindustrialising. Energy costs are too high – yet we need to make a green transition that will cost trillions. Defense spending must soar – but there’s no money, no supply chains, nor young people to fight for their country. China dominates global production – everyone else wants to reclaim it. War rages on several fronts – everyone fears more. Far right and far left voices are loud as polarisation increases. Europe is unable to move forwards; and conspiracy theories are clotting round the assassination attempt on one 78-year old US presidential candidate, and what some see as a possible ‘palace coup’ against the 81-year old other, who is still the leader of the free world.
As historian Niall Ferguson just put it, “We’re all Soviets now.” I made the same point years ago, arguing neoliberal ideology guaranteed economic failure, then socio-political and geopolitical chaos; yet we remained wedded to it because we refused to embrace the political-economy changes required, the same way the late Soviet bloc knew it was failing, but just built new statues of Marx or Lenin and hoped something would turn up. Until Gorbachev did.
Today, it’s the West which needs reform and openness about what that pain will have to mean. As Brands puts it:
“The battle of ideas is on again. Russia and China didn’t get the memo about the irresistible triumph of democracy. They are rewiring international norms and organizations to make autocracies more secure. They believe their illiberal systems can produce greater discipline, effort and strength than decadent democracies.”
On that side, Bloomberg notes, ‘Xi Cements Role as ‘Chief Economist’, Shrinking Space for Debate’, underlining that Beijing sees the pro-market actions of the past as responsible for many of China’s current weaknesses. Elsewhere, @henrysgao argues the CCP’s 3rd Plenum language on “the dominant position of public ownership” suggests a mixed-ownership economy ahead – meaning private capital following state goals. The Plenum certainly recognized affordable housing, state built and owned, as needed; and it clearly has no issue with deflation if it means lower prices – and more Chinese exports to the world. The irrelevant 10bp PBOC rate cut this week will help CNY weaken, so exports grow, but won’t boost domestic demand.
On the other side, what can the West now be starting from here? Is it already a has-been? In answering, it’s important to know we’ve been here before. There is the now-common Cold War analogy, for one. Yet there is also the comparison with the problematic period after the official Bretton Woods system collapsed in the early 70s, Middle East and South-East Asia wars raged, then inflation was unleashed. In 1978, ex-Soviet dissident Solzhenitsyn, noted in ‘A World Split Apart’:
“The anguish of a divided world gave birth to the theory of convergence between the leading Western countries and the Soviet Union. It is a soothing theory which overlooks the fact that these worlds are not at all evolving toward each other and that neither one can be transformed into the other without violence…
The Western world has lost its civic courage, both as a whole and separately, in each country, in each government, in each political party, and, of course, in the UN. Such a decline in courage is particularly noticeable among the ruling and intellectual elites…
It has become possible to raise young people.., preparing them for and summoning them toward physical bloom, happiness, the possession of material goods, money, and leisure, toward an almost unlimited freedom in the choice of pleasures. So, who should now renounce all this, why and for the sake of what should one risk one’s precious life in defence of the common good and particularly in the nebulous case when the security of one’s nation must be defended in an as-yet distant land?
…a society without any objective legal scale is a terrible one indeed. But a society with no other scale but the legal one is also less than worthy of man… And it will be simply impossible to bear up to the trials of this threatening century with nothing but the supports of a legalistic structure.
Today’s Western society has revealed the inequality between the freedom for good deeds and the freedom for evil deeds. A statesman who wants to achieve something important and highly constructive for his country has to move cautiously and even timidly… Thus mediocrity triumphs under the guise of democratic restraints… Society has turned out to have scarce defence against the abyss of human decadence… The culprit can go unpunished or obtain undeserved leniency – all with the support of thousands of defenders in the society. When a government earnestly undertakes to root out terrorism, public opinion immediately accuses it of violating the terrorists’ civil rights.
The press, too, of course, enjoys the widest freedom… Because instant and credible information is required, it becomes necessary to resort to guesswork, rumours, and suppositions to fill in the voids, and none of them will ever be refuted; they settle into the readers’ memory.
Without any censorship in the West, fashionable trends of thought and ideas are fastidiously separated from those that are not fashionable, and the latter, without ever being forbidden, have little chance of finding their way into periodicals or books or being heard in colleges…
It is almost universally recognized that the West shows all the world the way to successful economic development, even though in past years it has been sharply offset by chaotic inflation. However, many people living in the West are dissatisfied with their own society. They despise it or accuse it of no longer being up to the level of maturity attained by mankind…
Some people sincerely wanted all wars to stop just as soon as possible… But if the full might of America suffered a full-fledged defeat at the hands of a small Communist half-country, how can the West hope to stand firm in the future? …In the 20th century Western democracy has not won any major war by itself; each time it shielded itself with an ally possessing a powerful land army, whose philosophy it did not question…One must be blind in order not to see that the oceans no longer belong to the West, while the land under its domination keeps shrinking… The West kept advancing steadily in accordance with its proclaimed social intentions, hand in hand with a dazzling progress in technology. And, all of a sudden, it found itself in its present state of weakness.”
I won’t apologize for the lengthy quotes because they are such an eerily familiar litany of woes. Yet within just a few years the US had leaped, and borrowed its way, into the dayglo, ‘Top Gun’ 1980s – and by the end of that decade, decisively won the Cold War.
The problem is that there can’t be any easy repeat of that formula now. More freedom isn’t the solution. Lower taxes, alone, aren’t the solution. More state spending, alone, isn’t the solution. Lower rates, alone, aren’t any solution. The old playbook simply won’t work vs. a ‘USSR’ that makes everything that the West consumes. Such ideas are all has-beens.
So are many of the easy alternatives, i.e., higher taxes, less state spending, and higher rates – alone. As a result, things will have to change.
Indeed, in ‘Trump and Gorbachev’, inequality expert Branko Milanovic draws a structuralist comparison between the Soviet leader who ended up destroying the USSR and Warsaw Pact, and billionaire Trump. Gorbachev sat at the head of a Soviet hierarchy where nobody could resist him when he started to dismantle the pillars that held up communism. He parallels that with the post-1945 architecture –WTO, IMF, NATO, EU, etc.– which Trump will undermine to cement US power. (However, there is clearly lots of opposition to Trump fighting tooth, nail, and bullet, albeit often then following his policy lead on China and trade.)
His conclusion is that even if the Western elite are as at a loss as those of the East were 30+ years ago (and they themselves were before 40+ years ago), Western democracies, unlike Soviet one-party states, are flexible enough to pivot when needed.
Reassuringly, Milankovic adds, “Trump will not, I think, destroy some essential structures of the Western system as it was built after WW2, but he might, with his rough, chaotic and unpredictable government, scare the ruling elites in the West, encourage “revisionists”, and bring about changes that will alter the world as it was created in Yalta and Potsdam. Trump is unlikely to create a new structure, but he can break parts of the old one. If he does that, he might usher in a post-Cold War era, and close the book on 1945. But note that the Cold War had one good feature: it was “Cold”.”
I have also referred to Potsdam and Yalta in the past few weeks, which underlines how extremely large the policy pivots we may yet see are. Indeed, the key questions are this:
Is it to be one world economy or blocs? Which blocs, if so? Can we choose which we are in? Trading with others how?
Will the US dollar be globally dominant?
Will US Treasuries be globally dominant? This is not necessarily the same as the dollar!
What energy policy will be used?
Only then do we get to monetary and fiscal (and industrial, trade, housing, transport, labour, and defence) policies each bloc will use – but they will have to work in sympathy with the above, not in the opposite direction.
In short, potential ‘Trump’ or ‘Harris’ trades should start with the questions above and work their way down to imagine what can be, unburdened by *what* has-beens.
For those who want a deeper overview of this theme, and what it means, see what I wrote in ‘The Great Game of Global Trade’ in January 2017, which is still relevant in July 2024. (Though critics would then add. ‘You mean you got the timing wrong!’)
US existing home sales slumped for the fourth straight month in June, plunging a worse than expected 5.4% MoM (the worst MoM drop since Nov 2022) and dragging sales down 5.4% YoY…
Source: Bloomberg
Notably, existing home sales have not risen on a YoY basis since July 2021, with the SAAR total back below 4mm, near COVID lockdown lows…
Source: Bloomberg
The only segment of the market that saw sales rise the $1 million-plus cohort – which saw sales rise 3.6% YoY…
Source: Bloomberg
Meanwhile, the median home price rose 4.1% from last year to $426,900…
Source: Bloomberg
That’s a new record high median price for existing homes in the US… and once again above the median price for a new home…
While speculation of Joe Biden’s condition and whereabouts continues to mount, things were not made any clearer as Biden phoned in to a press gathering at the now Harris HQ, leading to several minutes of absolute cringe exchange between the pair.
An odd sounding Biden addressed the staffers who had no idea he was dropping out until they saw it on X Sunday at the same time as everyone else.
Biden has phoned in to a Kamala Harris event to address his staffers who had no idea he was dropping out. Rumours of his demise continue to circulate. https://t.co/oVzZLnQJDBpic.twitter.com/MCZ72RPiOv
She made sure to let everyone know that Biden has endorsed her as his frail mumblings were piped over loud speakers.
This is just getting too weird now. Voice of Biden piped in from somewhere beyond the rainbow…Everyone gonna be saying it’s totally fake in 3, 2, 1… pic.twitter.com/9cVGuw11UP
Imagine four years of her laughing at every sentence anyone says. What a total embarrassment.
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The conventional thinking is that Ukraine isn’t interested in resuming peace talks with Russia unless the latter capitulates to its unacceptable ultimatums, otherwise it’ll continue fighting “until the last Ukrainian”, but that might be about to be turned on its head as a result of recent developments. In the span of less than a week: Trump talked to Zelensky about his peace plan; the Vatican’s top diplomat visited Ukraine; and Ukraine’s Foreign Minister is visiting China, the last two for the first time since 2022.
From the looks of it, Ukraine is fretting about Trump’s likely return to power and wants to get ahead of the curve by exploring paths to peace, which are intended to give it a chance to shape the process instead of being completely controlled by it if the US suddenly decides to end its latest “forever war”. The supplementary developments that led up to the three aforementioned ones are Orban’s peace missions and the unveiling of former British Prime Minister Johnson’s peace plan.
Regarding the first of these two, this saw the Hungarian leader travel to Kiev, Moscow, Beijing, DC, and Mar-a-Lago, after which he recommended in a report to the EU that their bloc explore the modalities of the next peace conference with China and resume dialogue with Russia. As for the second, this infamous hawk proposed territorial compromises with Russia and Ukraine protecting the rights of Russian speakers. These five developments were also just followed by an unexpected proof of concept.
It was announced on Tuesday that 14 Palestinian factions signed the Beijing Declaration that’ll end the years-long divisions between Hamas and Fatah, thus showing that lightning does indeed strike twice after China brokered the Iranian-Saudi rapprochement last year. For background, it was explained here how China is trying to organize a Brazilian-fronted parallel peace process on Ukraine ahead of and/or during November’s G20 in Rio, which is more realistic than ever now.
To explain, Zelensky read the writing on the wall over the past few weeks about Biden’s inevitable departure from the campaign, especially after Trump’s famous fist-pumping picture that followed his miraculous survival of an assassination attempt earlier this month turned him into a hero. This places his unprecedented proposal of Russia participating in the next round of Swiss-like Ukraine talks in November into context even though he hasn’t yet at this point signaled any willingness to compromise with it.
He suggested this on 15 July, and it was sometime last week that the Vatican’s and Ukraine’s top diplomats finalized their trips, the first to Ukraine and the second to China. 19 July then saw Johnson publish his peace plan, the details of which he likely conveyed to Ukraine and others beforehand, which was the same day as the Trump-Zelensky call. Then the previously mentioned diplomats set off on their respective trips and China coincidentally proved yet again that it can broker game-changing peace deals.
The EU disavowed Orban’s peace mission and associated report, yet the visit of the Vatican’s top diplomat to Ukraine hints that they might be relying on the Holy See as a backchannel for finding out whether the political fallout from Biden’s disastrous debate with Trump changed Zelensky’s views.
After all, Orban visited Kiev less than a week afterwards when it wasn’t yet clear what its full implications would be, so it’s sensible to dispatch someone else a few weeks later to follow up on everything.
Zelensky’s unprecedented proposal last week for Russia to participate in the next round of Swiss-like Ukraine talks in November showed the world that he’s becoming more flexible at least in his rhetoric, thus paving the way for the Vatican’s top diplomat to visit Kiev and for his own such one to visit Beijing.
Johnson’s peace plan also contained some carrots in it for Russia pertaining to its return to the G7 and the resumption of its partnership with NATO, which Trump may or may not have discussed with Zelensky.
The last part remains unclear since Johnson noted in his op-ed that he talked about the conflict with Trump but clarified that the views expressed therein are his own and claimed that he supposedly doesn’t know how the former American leader might try to resolve this conflict if he’s re-elected. Nevertheless, it’s more likely than not that Johnson sought to informally float at least some of Trump’s proposals in his piece, with the former promoting them before the public and the latter before Zelensky.
Trump considers China to be the US’ systemic rival so he doesn’t want it to play any role in the peace process, yet Zelensky just dispatched his top diplomat to Beijing regardless, which is intended to gain negotiating leverage with the US regardless of whatever November’s outcome may be. That trip is obviously at variance with American interests, which suggests that he’s once again “goingrogue” a bit by behaving somewhat independently of his patrons.
Zelensky knows that his maximalist goal of reconquering all of Ukraine’s lost territory is unrealistic no matter what he says for the purpose of keeping morale high. He therefore wants to retake as much as he can before the US either becomes too fatigued with its latest “forever war” or is forced by circumstances into “Pivoting (back) to Asia” before it’s ready. By publicly displaying interest in China’s mediation, he hopes to either keep the US supporting him for longer or to reach a better peace deal with China’s help.
It’s a gamble, but he hopes that the next US President might either become so nervous about him flirting with China that they decide to give him more of what he’s been demanding and remove their restrictions or that China can convince Russia to scale back some of its maximalist demands for peace if they won’t. Nobody can confidently predict how far he’ll go in this regard nor exactly how serious he is, but it’s undeniable that Zelensky is changing tack to an extent, which is remarkable development in this conflict.
Stumbling Out Of The Gate: Harris Starts Race Down 9 Points, Even Worse Than Biden
Democrats’ enjoyment of the Kamala Harris campaign’s “new car smell” may prove short-lived, as a brand new poll shows the vice president trailing former President Trump by a whopping 11 points among likely voters — matching up even worse than President Biden, who trailed by 10.
TheForbes/HarrisX survey was conducted July 19-21 — that’s after the Republican convention but before Biden was forced to withdraw from the race.
“Kamala Harris starts her 2024 battle behind Trump, who is enjoying a strong post-convention bump,” said HarrisX chief pollster Dritan Nesho.
“If the polls don’t start to close and show better traction for her, Biden’s decision to step aside for Harris may be a case of ‘too similar, too late.’ That said, Vice President Harris alleviates concerns among the democratic base and is better able to sway undecided independents and suburban women, showing some promise.”
In an ominous note for the Harris campaign, aside from her worse margin against Trump, in her head-to-head matchup, fewer voters were undecided than they were in a Biden-Trump scenario. Among likely voters, Trump led Biden 49%-39% with 12% undecided. However, versus Harris, Trump led 51%-40%, with 9% undecided.
.@JasonMillerinDC: Not only is President Trump defeating Kamala Harris in battleground states like Pennsylvania — where he’s ahead by 6 — or Arizona — where he’s ahead by 8.
Even today, new polling shows President Trump continues to lead Kamala in NEW HAMPSHIRE.
“Democrats are jumping out of the frying pan into the fire,” Trump campaign senior advisor Jason Miller told Fox News. “They may have gotten rid of one problem with Joe Biden, but they’ve inherited a whole new problem with Kamala Harris.”
Continuing a well-established trend, Harris’s job-approval rating is as bad as Biden’s: both scored a dismal 38% approval. She did a little better than Biden among younger voters, with 42% of those between age 18 and 34 approving of her performance, compared to 36% for Biden.
So far, there are few single-state polls gauging a Trump-Harris contest, and none that were taken since she became the presumptive nominee. While the numbers are bound to change after Americans are subjected to a Harris-friendly media blitz, they still give some insight into where she’s starting from:
An Atlanta-Journal Constitution poll has Trump winning Georgia by 4.6% over Harris, compared to 3.5% over Biden.
In a result that shows Democrats clearly on the defensive on the 2024 chessboard, a New Hampshire Journal poll has Trump up 0.9% in Granite State — where the GOP hasn’t won in 24 years.
Conversely, Harris is polling worse than Biden in Nevada, losing to Trump by 10%.
The results are sure to grind the gears of the many Democratic mega-donors who favored a “mini-primary” to select Biden’s replacement atop the 2024 ticket, rather than simply coronating Harris, a demonstrably terrible candidate who didn’t even make it to the Iowa caucuses in 2020.
We noted last Friday that over the previous few years, a handful of “Mega-Capitalization” (mega-market capitalization) stocks have dominated market returns and driven the bull market. In that article, we questioned whether the dominance of just a handful of stocks can continue to drive the bull market. Furthermore, the breadth of the bull market rally has remained a vital concern of the bulls. We discussed that issue in detail in “Bad Breadth Keeps Getting Worse,”
“While the market is making all-time highs as momentum continues, its breadth is narrowing. The number of stocks trading above their respective 50-DMA continues to decline as the market advances, along with the MACD signal. Furthermore, the NYSE Advance-Decline line and the Relative Strength Index (RSI) have reversed, adding to the negative divergences from a rising market. While this does not mean the market is about to crash, it does suggest that the current rally is weaker than the index suggests.“
Since the beginning of this year, the “bad breadth” issue has been a concern for the current bull market rally. Such is because, historically speaking, periods of narrow market advances typically precede short-term corrections and bear markets. As Bob Farrell once noted:
“Markets are strongest when broad, and weakest when narrow.”
However, as the Federal Reserve prepares to cut rates for the first time since 2020, there seems to be a change afoot. Following the most recent Consumer Price Index (CPI) report, there was an evident rotation from the previous market leaders to the laggards. More importantly, the breadth of the market has improved markedly, with the NYSE Advance-Decline hitting all-time highs. Furthermore, the previous negative divergences in the Relative Strength Index (RSI) and the number of stocks above their 50-DMA also reversed higher.
What does that mean?
“The market action as of late has been refreshing and could be the sign of a maturing bull market, where a wide range of stocks are contributing to the rally, providing more support for stock indexes at record levels.” – Yahoo Finance
Historically, improving breadth suggests that the bull market’s health is improving. However, while breadth has undoubtedly improved, with the bulls encouraged by the prospect of Federal Reserve rate cuts, is the recent broadening of the market sustainable? Maybe. However, as Sentiment Trader recently noted:
“After more than a month of meaningful divergences between indexes and individual stocks, those were largely resolved in a historic shift late last week. While a new high in cumulative breadth has been a positive long-term sign, returns were more questionable in the shorter term when the S&P 500 had far outpaced market-wide breadth.”
In this particular case, we agree. There are risks to this current rally in small-cap stocks worth understanding.
Risks To The Russell
With the Fed cutting rates and the prospect of a pro-growth, tax-cut, and tariff-friendly President, it is unsurprising to see narratives about why the market rally will broaden with Small and Mid-capitalization companies taking leadership.
However, while such could be the case, many problems still plague these companies. As we noted in this past weekend’s Bull Bear Report:
First, nearly 40% of the Russell 2000 is unprofitable.
“However, some issues also plague smaller capitalization companies that remain. The first, as noted by Goldman Sachs, remains a fundamental one.
“I’m surprised how easy it is to find someone who wants to call the top in tech and slide those chips into small cap. Aside from the prosect of short-term pain trades, I don’t get the fundamental argument for sustained outperformance of an index where 1-in-3 companies will be unprofitable this year.”
As shown in the chart by Apollo below, in the 1990s, 15% of companies in the Russell 2000 had negative 12-month trailing EPS. Today, that share is 40%.”
Besides the apparent fact that retail investors are chasing a rising slate of unprofitable companies, these companies are also heavily leveraged and dependent on debt issuance to stay afloat (a.k.a. zombies.) These companies are susceptible to actual changes in the underlying economy.
With a slowing economy, these companies depend highly on the consumer to generate revenues. As consumption decreases, so does their profitability, which will weigh on share performance. Such was a point made by Simon White via Bloomberg last week:
“The yield curve based on inflation expectations has flattened significantly and is now more inverted than it ever has been – and it will remain under pressure in the event of a Trump presidential victory. This “expectations curve” shows that consumers are anticipating much tighter financial conditions than inferred by the market via the nominal yield curve, presenting a risk to consumption, broader economic growth and equity valuations and returns.“
Furthermore, the companies in the Russell 2000 (a good proxy for small- and mid-capitalization companies) do not have the financial capital to execute large-scale buybacks to support asset prices and offset slowing earnings growth by reducing share count. As we noted previously,since 2000, corporations have been the sole net buyers of equities, which has created a substantial outperformance over time by large capitalization stocks.
However, while the rally’s breadth has improved, those headwinds may substantially challenge the bull market’s sustainability.
Breadth Has Improved, But Is it Enough?
A market rally needs buyers to be sustainable.
If the current rotation were occurring from a deeply oversold condition following a broader market correction, I would be a stronger believer in its sustainability. However, as we have noted previously, investors (both retail and professional) are exceptionally bullish.
Furthermore, with that bullish sentiment, investors are fully allocated to equities. The chart below shows the average equity allocation of both retail and professional investors. Historically, readings above 80 are associated with near-market peaks. The current reading is 87, which is in more rarefied air.
Given the more aggressive equity allocation levels, which also translates into low cash levels, the ability to take on more exposure to continue to boost the market higher is somewhat questionable.
Lastly, while the market sentiment is bullish, we are beginning to see some early cracks in the credit market. Historically, when credit spreads start to widen, such has preceded a rise in market volatility. As shown, the yield spread on junk bonds is rising again. While early, such increases between CCC-rated and B-rated corporate bonds have been an early warning sign of market stress.
Yes, the market could continue to rotate massively from large-cap to small and mid-capitalization companies. However, given the current levels of bullish sentiment and allocations against a backdrop of weakening economic data and widening spreads, this suggests the current rotation may be nothing more than a significant short-covering rally. Furthermore, the current technical overbought and extended conditions also suggest sustainability remains questionable.
With investors already heavily allocated to equities, the question remains: “Who is left to buy?”
Furthermore, the risk remains with a broader market correction heading into the election. Such would likely impact large and small-cap companies.
As Yahoo suggests, could this be the start of the real bull market?
Of course, markets can always do the unexpected. If the rotation continues and the economic backdrop improves markedly, supporting earnings growth, we will modify our portfolios accordingly.
It is possible.
However, we will remain in our portfolio management process’s “show me” phase until the market convinces us differently.
Porsche Slides On Profit Warning As Snarled Supply Chain Risks “Production Shutdowns”
Shares of the German sportscar maker Porsche slid on Tuesday after the company slashed its full-year revenue forecast. The automaker warned that a snarled supply chain involving aluminum parts from a supplier could limit or even halt production of specific models.
Porsche now forecasts a return on sales between 14% and 15% for the year, down from its previous estimate of around 15% to 17%. The company faces a slowdown in sales in the Chinese market, driving global deliveries down 7% in the first half of the year. The company has been struggling with soft demand for its electric vehicles.
Porsche said in a statement that an unnamed European supplier declared force majeure, which means the delivery of aluminum alloy parts will be disrupted and may cause production lines of certain models to be halted.
“These are expected to last several weeks and may possibly lead to production shutdowns of one or more vehicle series. It is to be expected that the resulting delays in the production and delivery of vehicles will not be fully compensated for in the further course of the financial year,” the company wrote in a statement.
Bernstein analysts led by Stephen Reitman told clients that supplier disruption could cause a production loss of at least 10,000-17,400 vehicles in the second half of 2024.
“Whether self-inflicted or genuinely outside its control, these have significantly tarnished what had been an extremely successful IPO in September 2022,” Reitman told clients, adding, “Porsche will certainly be closely questioned over its cluster risk management that has left it so vulnerable to one critical supplier.”
Shares of Porsche in Frankfurt plunged nearly 8% today, the largest intraday decline since shares began trading in Sept. 2022. Year-to-date, shares are down around 14%. Volkswagen, the majority owner of Porsche, also fell a little more than 2%.
“While the root cause of yesterday’s announcement may be outside of Porsche’s control, we believe that the cut to FY24 guidance will likely lead to increasing investor questions around Porsche’s operations and supply chain,” Goldman’s George Galliers told clients this AM.
Galliers continued:
“This incident follows challenges with the Cayenne launch in 2023 and on-going supply chain constraints with respect to carbon fiber. We believe that many investors expect Porsche as a company to operationally deliver the quality and reliability which is associated with its cars. We expect some investors to also question the extent to which the lower volumes for FY24 may also reflect softer demand, given Porsche’s sales development in China. The company continues to state that globally demand remains strong as, correspondingly, do order books.”
The analyst expects Porsche to report “solid numbers” tomorrow: “EBIT of €1.71bn (cons €1.64bn), corresponding to a 16.4% margin (cons 16.0%).”
He maintains a “Buy” rating on Porsche, with a target of 109 euro 12mo and a 50% upside.
“Madness is rare in individuals; but in groups, parties, nations, and ages it is the rule.”
– Friedrich Nietzsche
They fooled themselves. The censorship meant to keep regular people in the dark instead blinded the pseudo-elite censors and their friends.
The shock – both feigned and real – over Joe Biden’s long-obvious dementia cements our 2022 diagnosis of the ruling class’s dysinformation disorder. Yes, some knew and hid the truth, as the brilliant Timur Kuran explains. But many journalists and Democratic power brokers appear to have been truly clueless. Otherwise, they would have changed course long ago.
The refrain that Joe is “sharp as a tack” was just the latest in two decades’ worth of increasingly preposterous propaganda.
Iraqi WMD
Russian collusion
51 intel officers
Everything Covid
SARS2 emerged in a wet market
Lockdown
Mask your toddlers
Jab the healthy
Horse dewormer
Ukraine is winning – escalate!
The border’s secure
This propaganda is believed most deeply and fervently in Washington, D.C., New York, and Hollywood. Those who think they know the most turn out to know the least. So what? Lots of people are wrong lots of the time.
Well, it turns out self-delusion at scale is no trifling matter. With Covid, it produced the biggest set of policy debacles since the Great Depression and has now brought us closer to nuclear conflict than any time since October 1962.
A Dangerous Info Gap
In June of 2020, we warned of growing censorship spurred by the Internet’s very openness:
The democratization of knowledge, expertise, and opinion is a fundamental and mostly welcome shift. Over time, it should allow us to learn faster and better stumble our way toward the truth. Ideally, preference cascades that expose falsehoods and improve the world won’t take decades to emerge.
But not everyone is happy with this new transparency. Information threatens the totalitarian mindset and its programs. As the internet breaks down the old barriers which hid private truths, the central goal of authoritarians is to erect new structures to maintain public lies.
In May of 2022, we speculated about the self-delusional effects of censorship:
Which brings us to ‘dysinformation’ as a disorder. At some point, the tactic becomes a strategy and then turns to addiction. The power of propaganda and censorship is seductive. Along the way, you mislead your followers over an epistemic cliff, and you lose touch with reality yourself.
And in May of 2023, we said the gap between pseudo-elite opinion and reality had grown into a dangerous chasm:
The online world supercharges all these top-down tactics. We now have demonization and indoctrination at scale. And yet, the infoweb allows for a bottom-up insurgency as well.
In other words, the Internet makes narrative control far more effective or ineffective – depending on the audience. Unprecedented volumes of polished publicity flowing at tik-tok speed from legacy know-nothings etch messages on millions of lazy brains. Herds of online trolls defame anyone who strays from the plot.
Meanwhile, however, alternative exafloods of data and truly expert content, evading gatekeepers for the first time on thousands of decentralized channels, enlighten billions of savvy info consumers, who parse and argue and think critically for themselves…
When the incompetence of the ruling class is exposed and the people lose confidence, the ruling class must construct ever more elaborate and maximal stories to retain and project power.
The gap between narrative and reality grows into a chasm. Each side thinks the other is mad, as in batty and deranged. No doubt, each side has its loons. But – and here’s a crucial difference – only one side insists on a free flow of data and open discussion. The other side believes more information is a threat to “our democracy” and demands data lockdowns.
Last week, the Supreme Court greenlit more of these data lockdowns. In a 6-3 decision, it allowed government agencies to continue pressuring online platforms to suppress disfavored views and speakers. With the three moderate Republicans joining the three Democrats, the Court reversed a preliminary injunction, issued on July 4, 2023, blocking government-sponsored social media censorship. (We wrote about the case a year ago in the Wall Street Journal – Covid Censorship Proved to Be Deadly.)
Writing for the majority, Justice Amy Coney Barrett said the plaintiffs, including Stanford medical professor Jay Bhattacharya, lacked standing. They hadn’t shown the specific harms needed to meet the high bar of an injunction, remanding the case to Judge Terry Doughty of the 5th Circuit District Court.
Justice Samuel Alito, joined by Clarence Thomas and Neil Gorsuch, issued a sharp and persuasive dissent, arguing the plaintiffs had indeed shown, even before trial, both standing and a pattern of egregious First Amendment violations by the government-social media collective.
In one sense, the Supreme Court’s opinion in Murthy was narrow – ruling only on the technical matter of “standing,” not reaching the merits of the evidence or First Amendment law.
In other ways, however, Justice Barrett’s majority opinion was devastatingly broad. The majority appears to have established a much higher threshold to sue government censors.
In First Amendment jurisprudence, one factor affecting standing is “traceability.” In this case, can the plaintiffs point to specific government actions that yield specific censorial behavior? Could the plaintiffs show how the government pressured the social media companies to suppress information?
To most of us, the thousands of pages of emails documenting White House, FBI, and CDC coercion and collaboration with Facebook and Twitter showed clear government censorship and harms to individuals. Barrett, however, invented a new, higher standard. It’s not enough to show the government ordered Facebook to take down content opposing lockdowns or supporting school reopenings, and that the social media firms then throttled or suspended doctors advocating those views. Barrett’s new traceability framework seems to insist that a specific government employee writes to a specific private actor calling for the specific censorship of a specifically named person. It’s kind of like insisting on a notarized confession letter of a bank robber while ignoring the bank video showing him entering the building and the million dollars in his suitcase.
Justice Alito showed a much deeper understanding of both the factual record and the novel web of institutional censorship. Barrett, he warned, had offered a roadmap for more data lockdowns. A savvy government censor can easily avoid naming specific victims of censorship and merely suggest to online platforms, wink and nod, they remove this or that viewpoint or even subtly call out individuals with less than explicit targeting. If government can effect the removal of viewpoints without demanding the banishment of a specific person, moreover, how is any individual ever to show harm, gain standing, and bring a case?
As Alito put it:
The Court…permits the successful campaign of coercion in this case to stand as an attractive model for future officials who want to control what the people say, hear, and think.
That is regrettable. What the officials did in this case was more subtle than the ham-handed censorship found to be unconstitutional in Vullo, but it was no less coercive. And because of the perpetrators’ high positions, it was even more dangerous. It was blatantly unconstitutional, and the country may come to regret the Court’s failure to say so. Officials who read today’s decision together with Vullo will get the message. If a coercive campaign is carried out with enough sophistication, it may get by. That is not a message this Court should send.
Columbia law professor Philip Hamburger identified another major problem with Barrett’s opinion – insisting plaintiffs prove government “coercion” of third parties.
The First Amendment, however, says nothing about coercion. On the contrary, it distinguishes between “abridging” the freedom of speech and “prohibiting” the free exercise of religion. As I have explained in great detail, the amendment thereby makes clear that the Constitution’s standard for a speech violation is abridging, that is, reducing, the freedom of speech, not coercion. A mere reduction of the freedom violates the First Amendment.
The court in Murthy, however, didn’t recognize the significance of the word “abridging.” This matters in part for the standing question. It’s much more difficult to show that the plaintiffs’ injuries are traceable to government coercion than to show that they are traceable to government abridging of the freedom of speech. More substantively, if the court had recognized the First Amendment’s word “abridging,” it would have clarified to the government that it can’t use evasions to get away with censorship.
Under the new Barrett rules, they’ve invented the perfect First Amendment-evading censorship machine.
The Crisis of Credulity
One reason so many hoaxes have gained traction over the last decade is a crisis of credulity among conservative intellectuals and GOP party leaders. Most of them bought hook, line, and sinker the Russian collusion fraud and most of the Covid narrative and policies. If more conservative D.C. think tanks, op-ed pages, and party leaders had not gone along with these swindles, they would have had far more difficulty gaining widespread purchase.
The Supreme Court itself is a victim of the censorship it now downplays. From Justice Barrett’s opinion, one can see that the majority does not understand the new media dynamics of the Internet. It doesn’t grasp the sophisticated, interwoven array of public, private, and non-profit players working to suppress information. In other words, it doesn’t grasp the ‘complex’ in the Censorship Industrial Complex.
Nor does the majority understand the direction and magnitude of the many Covid policy disasters. Justice Barrett simply assumes the government was informing and the plaintiff dissident scientists were misinforming. Because they are so deeply insulated in the D.C. infowarp, Barrett and her majority colleagues can’t see the most potent and prolific sources of misinformation are the government and pseudo-elite institutions who often work hand in glove with government.
During Covid, for example, the FDA, NIH, CDC, and dozens of medical societies were the primary and most authoritative sources of misinformation. In the same way, in the weeks before the 2020 election, five former CIA directors and 46 of their intel colleagues, who received approval for their bogus “Russian information operation” letter from the existing CIA director, were the primary and most authoritative sources of misinformation.
The First Amendment should apply whether the information is true or not. Yet in the Murthy case, it surely would have helped if the justices had understood (1) the hyper-destructive effects of the censors’ misguided propaganda and (2) the true insights of the censored scientists, which if followed would likely have delivered far better results. Understanding the size of the policy mistakes and the real sources of misinformation might have led the majority to dig deeper into the facts and the novel mechanism that threatens free speech. Instead, the narrative that shaped the failed Covid response – fear, lockdown, mask, jab, listen to Fauci – still has a hold on Justice Barrett.
How many more elaborate hoaxes will our leadership class promote and fall for? Could the Biden implosion finally lead to an epistemic reckoning?
The good news is this preposterous episode may help reorient our information landscape, at least for a while.
The UK is poised to miss its ambitious target to decarbonize its power sector by 2030 even as it is boosting solar and wind developments, analysts say.
The new UK government of the Labour Party, in office for just over two weeks, has pledged to have the UK power grid decarbonized by 2030 and “to make Britain a clean energy superpower with zero carbon electricity by 2030,” Energy Secretary Ed Miliband said earlier this month.
As part of its efforts to boost clean energy, the UK government lifted the de facto ban on onshore wind, which has been in place in England since 2015.
The government has committed to doubling onshore wind energy by 2030, quadrupling offshore wind, and trebling solar power by the end of the decade.
While Britain has made progress in recent years in decarbonizing the grid and boosting the share of renewables in the power mix to a record high, it still uses a lot of natural gas for electricity generation, home heating, and boilers.
The bold current plans of the Labour government are not on track to make the power system decarbonized by 2030, Cornwall Insight said in an analysis reported by the Financial Times.
Currently, wind and solar account for a combined 34% of the UK’s power output. Under Labour’s plans, the combined share of wind and solar is set to rise to 44%. This, according to Cornwall Insight, will be well below the estimated 67% of wind and solar power necessary to have a decarbonized grid.
“Without significant intervention, we risk falling far short of decarbonisation goals,” Tom Edwards, principal modeler at Cornwall Insight, told FT.
Last week, following the King’s Speech in which the new government sets its priorities, Kate Mulvany, Principal Consultant at Cornwall Insight, said that Labour faces “significant challenges in reaching their 2030 power decarbonization targets, as financial constraints, supply chain challenges, and intense global competition for limited resources pose hurdles.”
Also last week, the UK’s Climate Change Committee (CCC) said that its latest assessments shows that the UK is off track for net zero as only a third of the emissions reductions required to achieve the country’s 2030 target are currently covered by credible plans.
