The Fed is already insolvent. Here’s how we think this plays out

On Tuesday, September 15, 1992, the two most powerful financial officials in the British government held an urgent meeting that night to review their plan for when the markets opened the next morning.

The tone of the meeting must have felt frantic… even desperate… because the value of the British pound had been falling for weeks.

Investors and speculators were rapidly losing confidence in the UK government, mostly due to the ridiculous “Exchange Rate Mechanism” (ERM) which essentially pegged most European currencies to the German Deutschemark.

Rational investors viewed the ERM as an almost comical impossibility.

Germany’s economy was light years ahead of everyone else. Germany had vastly higher productivity, far greater savings, low inflation, high growth, and much more responsible monetary policy.

So, to even pretend that a country like Italy or even Britain could fix its exchange rate to the Deutschemark, i.e. to essentially mirror Germany’s economic performance– was a total joke.

Britain joined the Exchange Rate Mechanism in October 1990. Prime Minister Margaret Thatcher had spent years trying to keep Britain out of the ERM, viewing it as giving up national sovereignty.

But Thatcher was about to retire. And the new batch of leaders insisted that pegging Britain’s economy to Germany was the way forward.

Their experiment didn’t even last two years. By the summer of 1992, inflation in Britain was more than 3x German’s. Plus, Britain had a major budget deficit.

Financial speculators correctly recognized, given the massive disconnect between the British and German economies, that Britain would not be able to maintain its fixed exchange rate with the Deutschemark.

So, traders began short selling the British pound, i.e. betting that the value of the pound would fall because the British government would devalue its currency.

The sell-off reached a crisis on September 15th, when the head of Germany’s central bank suggested to the Wall Street Journal that weaker countries (like Britain) would have to devalue their currencies.

That’s what led the British Chancellor of the Exchequer and head of the Bank of England– the two most powerful policymakers in British government finance– to meet that evening.

They knew that the German central bank’s comments would encourage even more traders to dump the British pound. So, the two men pledged to do ‘whatever it takes’ to defend the pound and defeat the speculators.

It didn’t work.

The following morning on September 16th, the Bank of England did everything it could. They raised interest rates, they bought back pounds, they bought government bonds, they made all sorts of outlandish promises.

But speculators didn’t believe any of it. They could see the numbers, and they knew that the Bank of England simply didn’t have the financial resources to maintain such an unrealistic exchange rate.

One of those speculators was George Soros, who famously bet $10 billion against the British pound… far exceeding the Bank of England’s financial resources.

By the end of that day, the British central bank had exhausted its capital and was essentially bankrupt. The British government had to bail them out to the tune of 3 billion pounds, and then announce that they were formally leaving the ERM– proving the speculators right.

This is an important story to understand, because it’s likely that something similar may happen to the Federal Reserve and US dollar over the next several years.

The Federal Reserve is already insolvent.

According to its most recent annual financial statements, the Fed has just $51 billion in equity, versus a whopping $948 billion in mark-to-market losses. This means the Fed is insolvent by roughly $900 billion.

This is a big problem. Remember that the Fed is still a bank, i.e. it has financial obligations, liabilities, and depositors that it needs to pay.

For example, commercial banks like JP Morgan and Bank of America have deposited a total of $3.4 trillion of their customers’ money, i.e. YOUR money, with the Fed. And the Treasury Department holds another $700 billion deposit at the Fed.

The Fed owes money to foreign governments. They owe trillions of dollars from repurchase agreements to banks and businesses across the global financial system.

So, yeah, the insolvency of the Federal Reserve is a pretty big deal. Yet, at least for now, no one is saying a word about it.

But just like the Bank of England in 1992, sooner or later, someone is finally going to say something… and do something… about the Fed’s insolvency.

There’s a good chance that means betting against the dollar… just like speculators bet against the pound three decades ago. And that would ultimately reduce the value of the dollar, increase inflation, and trigger a new ‘Bretton Woods’ agreement in which the US dollar is no longer the world’s reserve currency.

George Soros became known as “The Man Who Broke the Bank of England”. (Though given his malign proclivity to fund progressive activists, he is known by several other names in my household, none of them reverent.)

Within the next several years there could be some Chinese or Russian financier who becomes known as “The Man Who Broke the Fed”.

This isn’t sensational. The Fed is already insolvent by $900+ billion, according to its own financial statements. Social Security is insolvent. The US government is insolvent by tens of trillions… and they further anticipate the national debt to grow by $20 trillion over the next decade.

These are facts, not fantasies.

And this is why it makes so much sense to hedge these risks by owning real assets which are scarce, valuable, and uncorrelated to the US dollar.

Gold is a great example. And as we’ve argued before, even though it’s already near its all-time high, we believe it can go much higher from here.

More on that soon.

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Russia Blasts As ‘Fake News’ Fresh Pentagon Charge Of Anti-Satellite Weapon In Space

Russia Blasts As ‘Fake News’ Fresh Pentagon Charge Of Anti-Satellite Weapon In Space

At a moment nuclear tensions are soaring due to Russia launching tactical nuclear military drills in its southern district near Ukraine this week, Washington and Moscow are trading barbs over allegations of banned weapons in space. Kremlin spokesman Dmitry Peskov asserted on Wednesday that there’s been no violation of international law after the Pentagon again charged that Russia launched a satellite carrying a counterspace weapon. Another top Russian official decried this as “fake news”.

US Department of Defense spokesman Maj. Gen. Pat Ryder on Tuesday in a briefing said that on May 16 Russia “launched a satellite into low Earth orbit that we that we assess is likely a counter space weapon presumably capable of attacking other satellites in low Earth orbit.” This was in apparent reference to the launch of a Soyuz rocket from the Plesetsk launch site, which Russia has previously affirmed was carrying a spacecraft of some type.

A Soyuz rocket launching in Russia’s far east, via Reuters/handout.

“Russia deployed this new counter space weapon into the same orbit as a U.S. government satellite,” Ryder continued. “And so assessments further indicate characteristics resembling previously deployed counter space payloads from 2019 and 2022.”

Peskov’s response Wednesday was as follows: “I cannot comment on this in any way. Here, we act absolutely in accordance with international law, we do not violate anything.”

Importantly, he said that Russia has repeated reached out in hopes of advancing talks with the US to prohibit certain types of weapons in space, but this was rejected. “We have repeatedly advocated for a ban on the launch of any weapons into space. Unfortunately, these initiatives of ours were rejected, including by the United States,” Peskov said.

Separately, Russian Deputy Foreign Minister Sergei Ryabkov has flatly rejected the Pentagon’s charge. “I don’t think we should respond to any fake news from Washington,” he said as quoted by Interfax.

“The Americans can say whatever they want but our policy does not change from this,” said Ryabkov. He stressed that Moscow had “always consistently opposed the deployment of strike weapons in low-Earth orbit.”

Currently allegations are also flying in major Western media outlets alleging that Russia has for years been pursuing a robust space weapons program. For example, days ago The Wall Street Journal detailed a secretive launch that happened some two years ago, based on US officials revealing the info:

Russia launched a satellite into space in February 2022 that is designed to test components for a potential antisatellite weapon that would carry a nuclear device, U.S. officials said. 

The satellite that was launched doesn’t carry a nuclear weapon. But U.S. officials say it is linked to a continuing Russian nuclear antisatellite program that has been a growing worry for the Biden administration, Congress and experts outside the government in recent months. The weapon, if deployed, would give Moscow the ability to destroy hundreds of satellites in low Earth orbit with a nuclear blast.

The satellite in question, known as Cosmos-2553, was launched on Feb. 5, 2022, and is still traveling around the Earth in an unusual orbit. It has been secretly operating as a research and development platform for nonnuclear components of the new weapon system, which Russia has yet to deploy, other officials said. 

Putin’s rebuttal of recent US allegations was issued back in February:

Revelation of that launch is said to have in part driven the recent frenzy of Congressional statements raising the alarm over Russian malign activities in space. However, others cited in the same WSJ report have said that Russia’s program has yet to advance very far.

Meanwhile President Putin himself has tried to bat down the allegations as well, saying recently, “Our position is clear and transparent: We have always been categorically against, and are now against, the placement of nuclear weapons in space.”

Tyler Durden
Wed, 05/22/2024 – 11:05

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Global Bond Market On Verge Of Selloff As Commodities Reawaken

Global Bond Market On Verge Of Selloff As Commodities Reawaken

Authored by Simon White, Bloomberg macro strategist,

Aggregate bond indices are up in most countries on an annual basis. But the broadening commodity rally threatens to feed into global inflation and kickstart another bond selloff.

A year ago almost all aggregate (corporate + government) bond indices were on the back foot. But throw in a dash of optimism, a soupçon of disinflation and a helping of less hawkish central banks and almost all indices are up over the last year. Thailand and Israel’s indices are the only two real exceptions; the rest are higher by anywhere from 2% to over 10% in Poland and Hungary’s cases.

Commodities are on the march though. Indices such as Bloomberg’s Commodity index are close to breaking out of their 12-month ranges, while Bloomberg’s Spot Commodity Index, which does not include the cost of rolling future positions has already broken out.

Non-exchange traded commodities, such as burlap, wool tops, tallow and rubber – as captured by the CRB Industrials Index – have also started rising. The CRB Industrials leads global median CPI – the median of almost 50 countries’ headline CPI indices – by around six months. The rise in commodities points to the end of the global disinflation trend.

The commodity rally looks set to persist. Excess liquidity remains buoyant and is supportive for risk assets. Further, the rally is broadening. The majority of exchange-traded commodities have risen over the last three months, with only a few laggards such as sugar and cotton.

The fragile recovery in global bonds after their rout in 2021/22 – ultimately triggered by a commodity shock – may be on the verge of playing out again.

Tyler Durden
Wed, 05/22/2024 – 10:45

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WTI Rallies After Crude Inventory Build, Another Large SPR Addition

WTI Rallies After Crude Inventory Build, Another Large SPR Addition

Oil prices edges lower again this morning (for the third straight day) after API reported crude and gasoline builds overnight in the US, and on the other side of the Atlantic, Genscape data showed expanded inventories in Europe’s oil trading hub.

Additionally, Bloomberg reports that signs of physical market weakness have been signaled by multiple market gauges.

Brent’s prompt spread remains close to flipping into a bearish contango structure for the first time since January – an indication of plentiful supply relative to demand.

Meanwhile the Brent DFL – a measure of Dated Brent relative to futures – also recently turned negative.

Will the official data provide any support for crude prices?

API

  • Crude +2.49mm (-3.1mm exp)

  • Cushing +1.77mm

  • Gasoline +2.09mm

  • Distillates -320k

DOE

  • Crude +1.825mm (-3.1mm exp)

  • Cushing +1.325mm

  • Gasoline -945k

  • Distillates +379k

The official data confirmed a crude inventory build (vs an expected draw) and stocks at the Cushing Hub also rose. Gasoline and Distillates inventories were mixed…

Source: Bloomberg

While the Biden administration drained its gasoline reserve, it added to the SPR once again last week (+993k barrels – the most since Dec 2023)…

Source: Bloomberg

US Crude production continued to chug along near record highs at 13.1mm b/d…

Source: Bloomberg

WTI was trading around $77.60 ahead of the official data and rallied up to $78 shortly after…

OPEC and its allies, led by Russia, will hold a crucial meeting to review production policy next weekend. A coalition of nations in the broader OPEC+ grouping are cutting 2.2 million barrels per day, which has supported oil prices this year.

The group is likely to extend those production cuts as prices soften, according to analysts.

Tyler Durden
Wed, 05/22/2024 – 10:36

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“Vindictive Prosecution”: Judge To Hear Motions To Dismiss In Trump Documents Case

“Vindictive Prosecution”: Judge To Hear Motions To Dismiss In Trump Documents Case

Authored by Jacob Burg and Janice Hisle via The Epoch Times (emphasis ours),

After the prosecution and defense rested their cases in former President Donald Trump’s trial in Manhattan, his attorneys and those of co-defendant Walt Nauta will appear in southeast Florida on May 22 to argue for the dismissal of his classified documents case.

Former President Donald Trump aide Walt Nauta visits Versailles restaurant with Mr. Trump in Miami, Fla., on June 13, 2023. (Alex Brandon/AP Photo)

U.S. District Judge Aileen Cannon will preside over back-to-back hearings that consider multiple motions to dismiss the case.

Mr. Nauta’s attorneys will argue that the case should be dismissed based on selective and vindictive prosecution.

Judge Cannon will then hear arguments from all defendants to dismiss the case on insufficient pleading.

President Trump will be absent for both hearings in Fort Pierce, Florida, after Judge Cannon granted his “motion for leave to be excused” on May 14.

The defendants have filed multiple motions to dismiss the case, including one citing the Presidential Records Act and another invoking “unconstitutional vagueness” that Judge Cannon heard during a March 14 hearing.

President Trump also filed a May 21 motion to dismiss, alleging prosecutorial misconduct when the FBI seized 15 boxes of documents during the Mar-a-Lago raid.

Judge Cannon postponed the trial indefinitely to consider additional motions to dismiss, including “indictment based on unlawful appointment and funding of Special Counsel” on June 21.

There are also partial evidentiary hearings scheduled for June 24–26 and a “defense reciprocal discovery” hearing on July 10.

As a result of these pre-trial issues, Judge Cannon has indefinitely postponed the trial for this case, which experts say may not occur before the November election.

The Justice Department charged Mr. Nauta with multiple counts, including: “participating in a conspiracy to obstruct justice,” after President Trump tasked him with moving some of the boxes containing classified documents at the former president’s Mar-a-Lago resort and residence in Palm Beach, Florida.

Nauta’s Motion

Mr. Nauta’s attorney, Stanley Woodward, Jr., argues that the Justice Department’s Special Counsel’s Office decision to prosecute the valet was “both selective and vindictive.”

Mr. Woodward wrote that the legal standard for “selective prosecution” is that a prosecution “has a discriminatory effect” and that it was motivated by a “discriminatory purpose.”

He also describes vindictive prosecution as when a prosecutor’s charging decision was “motivated by a desire to punish [the defendant] for doing something that the law plainly allowed him to do” while treating the defendant with “genuine animus.”

Since others at the resort had moved the boxes “in the same or similar time, manner, and place as Mr. Nauta,” it would be discriminatory to charge him and no one else with this crime, Mr. Woodward argued in the motion to dismiss.

The Special Counsel’s Office rejected this argument and said it rests Mr. Nauta’s comparison to two other employees of President Trump “but whose conduct was not remotely similar to his own.” Therefore, it fails to prove that Mr. Nauta was selected for prosecution over those individuals for “improper reasons,” prosecutors say.

As for vindictive prosecution, Mr. Woodward argued that Mr. Nauta was only prosecuted after he declined the Special Counsel’s Office’s request that he give “full cooperation in the investigation.”

Mr. Woodward believes the indictment was “vindictive” because it appears that prosecutors targeted Mr. Nauta after he chose to invoke his Fifth Amendment rights and declined to testify in front of a grand jury.

The Justice Department called this a “novel and unsupported claim” and wrote that if the court accepted it, that would imply that any defendant asked to provide “full cooperation” would be immune from charges by simply “declining the offer.”

‘Shotgun Pleading’ Motion

The second hearing will feature the defense’s motion to dismiss the indictment on insufficient pleading.

Attorneys can argue insufficient pleading in cases where two or more offenses are joined in the same count, the same offense is charged in more than one count, such as “double jeopardy,” there is a lack of specificity, or the prosecution fails to state an offense clearly.

Defendants write that an indictment must contain a “plain, concise, and definite written statement of the essential facts constituting the offense charged.”

They argue that the indictment “fails to comprehensibly set forth … distinct violations of federal criminal law.”

Former President Donald Trump sits in the courtroom at Manhattan Criminal Court with attorney Todd Blanche on May 21, 2024 in New York City. (Michael M. Santiago/Getty Images)

According to the defendants, the indictment is based on a “shotgun pleading,” defined by the Florida Bar as a case with “multiple counts that incorporate the allegations of every preceding one” as one example.

Another involves failing to separate each claim into a different count or when multiple claims are levied at multiple defendants without specifying which defendant is responsible for which claim, which is also known as “duplicity.”

The defendants claim the indictment consists of a “miasma of largely political complaints about how [President Trump] disposed of paperwork from his administration during his term of office.”

The defendants also argue that there are 32 counts only charging President Trump, but then the same are “employed against Nauta in counts 33–37 and 39–41.”

This creates the perception of a “shotgun pleading,” they argue, specifically “duplicity.”

The defendants also list a number of additions to the original indictment they believe would needlessly confuse a jury, including repeat references to “uncharged offense allegations,” such as how Mar-a-Lago employees allegedly stored the documents and who the Justice Department accused of hearing about the documents after President Trump took them from the White House in 2021.

“The vague, prejudicial shotgun-allegation format of the indictment, which veers from one uncharged aspersion of bureaucratic complaint to another … merits dismissal,” the defendants’ counsel wrote in the motion.

In response, the Justice Department said the indictment contains a “detailed, clear, and thorough recitation of the factual allegations” and makes clear “what crimes [Mr. Nauta] is charged with committing; how, when, and where he committed them; and with whom.”

Phill Kline, a former district attorney and Kansas Attorney General, told The Epoch Times that it’s a “high legal bar to obtain such a dismissal” regarding the defense’s motions.

Mr. Kline added that as both sides argue their positions at the hearing, it will be important to look for “inconsistencies in the Department of Justice’s decisions” and whether their reasoning is consistent with the facts.

Catherine Yang contributed to this report.

Tyler Durden
Wed, 05/22/2024 – 10:15

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Existing Home Sales Unexpectedly Tumble As Homebuyer Confidence Hits Record Low

Existing Home Sales Unexpectedly Tumble As Homebuyer Confidence Hits Record Low

After (unexpectedly) tumbling in March, existing home sales were expected to rise modestly (+0.8% MoM) in April. Analysts were wrong as March’s data was revised marginally up from -4.3% MoM to -3.7% MoM and April printed -1.9% MoM (a big miss). That left existing home sales down 1.9% YoY…

Source: Bloomberg

That pushed the existing home sales SAAR back near COVID lockdown lows…

Source: Bloomberg

This really should not come as a surprise because, while homeBUILDERS remain optimistic that things will pick up, homeBUYERS are the least enthusiastic they have ever been about buying a home… going back almost 50 years…

Source: Bloomberg

And with mortgage rates still above 7%, we don’t see things picking up meaningfully anytime soon…

Source: Bloomberg

…and then there’s this…

Source: Bloomberg

Sales declined in all four regions, including a 2.6% decrease in the West and a 1.6% drop in the South

The median selling price increased 5.7% from a year ago to $407,600 – the highest for any April in data back to 1999.

Unlike in the new-home market, where rising inventories and the prevalence of incentives by builders have pushed prices down on an annual basis, the home-resale market is experiencing rising year-over-year price growth.

“Home prices reaching a record high for the month of April is very good news for homeowners,” NAR Chief Economist Lawrence Yun said in a statement.

“However, the pace of price increases should taper off since more housing inventory is becoming available.”

About 68% of the homes sold were on the market for less than a month, up from 60% in March, while more than a quarter sold above the list price.

Tyler Durden
Wed, 05/22/2024 – 10:09

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AI Data Centers And EVs Create Incredible Opportunities

AI Data Centers And EVs Create Incredible Opportunities

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

Some winners from the artificial intelligence (AI) and electric vehicles (EV) boom are easy to spot. For instance, shares of Nvidia, Microsoft, Tesla, and other companies have posted significant gains, anticipating a surge in future revenue and profits.

The development of AI data centers and the continued growth of EVs will benefit industries and companies that are not yet as closely followed. As a result, the stock prices of some companies in these industries may have some catching up with those mentioned above.

This article focuses on the potential beneficiaries of the significant investment necessary to upgrade, expand, and run the nation’s power grid to accommodate AI data centers and the continued growth of EVs. We follow up with Parts Two and Three to drill down to the industries and companies that may benefit most from the coming changes to the power grid. 

To help appreciate the power grid expansion needed to run AI data centers, consider the following comment from Lal Karsanbhai, CEO of Emerson Electric.

AI data center racks consume significantly more power than traditional data centers with a search on ChatGPT consuming 6 to 10 times the power of a traditional search on Google.

A Lesson From Levi Strauss

Before revealing the lesser-appreciated beneficiaries of the AI and EV booms, we share the genius of Levi Strauss. Born in 1829, Levi Strauss opened a branch of his family’s dry goods business in San Francisco during the gold rush. Gold miners were flocking to the region and stocking up on goods. They needed items like pickaxes, food, and clothing to help them in their quest to make fortunes.

In 1873, Levi invented a more durable brand of pants for miners, made of denim and using metal rivets. Today, these pants go by the name of blue jeans. Levi smartly realized that handsome returns could be had by supplying the miners. Therefore, one needn’t risk their fortunes or life and limb to profit from a game of chance like gold mining.

Levi profited dearly from the gold rush. But, unlike most gold miners, his profits were consistent and lasting. His ingenuity still pays big dividends to his descendants.

Let’s uncover the next Levi Strauss of the AI/EV rush. These not-so-obvious companies serve as critical lynchpins to maximize AI and EVs’ value via the power grid.

Status of the Power Grid

We start with a brief summary of the power grid from the EIA.

Electricity generated at power plants moves through a complex network of electricity substations, power lines, and distribution transformers before it reaches customers. In the United States, the power system consists of more than 7,300 power plants, nearly 160,000 miles of high-voltage power lines, and millions of low-voltage power lines and distribution transformers, which connect 145 million customers.

Local electricity grids are interconnected to form larger networks for reliability and commercial purposes. At the highest level, the United States power system in the Lower 48 states is made up of three main interconnections, which operate largely independently from each other with limited transfers of power between them.

The EIA estimates the US generated 4,178 billion kilowatt-hours (kWH) of electricity in 2023. Fossil fuels account for 60% of the total, with natural gas and coal being the two largest. Nuclear and renewable sources account for most of the remaining 40%.

In the future, not only will the power grid need to be modernized and expanded to supply more power, but the political and public pressure to make it environmentally cleaner will likely be more powerful. The EIA expects global power-generating capacity to increase by 30% to 76% by 2050.

Given the size of the US economy and the number of US-domiciled companies leading the global AI and EV industries, a good portion of the increased global power needs will likely occur on US soil.  

Starting From Behind

As many of you can attest, the power grid increasingly exhibits outages due to extreme temperatures. The problem is multifaceted. As renewable energy resources become a larger share of the electric generation resource base, the system grows inherently more sensitive to extreme weather events. Traditional resources that are ill-prepared for new extremes are also showing vulnerabilities. Consequently, expanding the power grid requires utility companies to also invest in significant upgrades. For example, among these upgrades are new federal regulations requiring additional cold weather preparations for electric generators.

Per the WSJ

A report last year by the American Society of Civil Engineers found that 70% of transmission and distribution lines are well into the second half of their expected 50-year lifespans. Utilities across the country are ramping up spending on line maintenance and upgrades. Still, the ASCE report anticipates that by 2029, the US will face a gap of about $200 billion in funding to strengthen the grid and meet renewable energy goals.

The article estimates that the investment shortfall could accumulate to $338 billion by 2039. That estimate will, unfortunately, prove to be too low. The article was written in February 2022, before the massive energy demands for AI data centers were fully appreciated.

The bottom line is that utility companies, other power distributors, and municipalities must invest hundreds of billions of dollars over the next decade to modernize and expand our power grids.

The Impact of EVs and AI Data Centers on the Power Grid

EVs

Assuming the acceptance growth rate of EVs continues, the electricity demand will increase substantially. The EIA estimates that US EV sales could surpass 3.5 million in 2025. That number could rise to over 8 million by 2030. Furthermore, if improvements to EV batteries to boost the driving range per charge and the number of charging stations increase rapidly, the EIA 2030 estimate could fall well short of reality.

On a side note, as we wrote in Is Toyota The Next Tesla, solid-state batteries, expected to be produced by Toyota as early as 2027, could be a game changer that dramatically boosts demand for EVs.

For context, EV sales increased from 1 million in 2022 to 1.6 million in 2023 (per MarketWatch). Edmunds estimates there are about 3.3 million EVs in the US, accounting for only 1% of the total vehicles. 

Estimates suggest that if EVs were to replace a significant portion of internal combustion engine vehicles, electricity demand could increase by 20% to 40% over the next few decades. Based on the quote below, that may be a gross underestimation.  

PG&E expects system demand to increase up to 70% over the next two decades as more EVs are added.” – Utility Dive

Not only is more electricity needed, but the power grid must also be upgraded to account for the timing of EV-related energy demands. EV charging, mainly if done simultaneously during peak hours, like early evenings, can lead to higher than current peak loads.

AI Data Centers

AI data centers alone are expected to add about 323 terawatt hours of electricity demand in the US by 2030, according to Wells Fargo. The forecast power demand from AI alone is seven times greater than New York City’s current annual electricity consumption of 48 terawatt hours. Goldman Sachs projects that data centers will represent 8% of total US electricity consumption by the end of the decade. – CNBC

From the same article comes the following quote from Robert Blue, CEO of Dominion Energy

“Economic growth, electrification, accelerating data center expansion are driving the most significant demand growth in our company’s history, and they show no signs of abating,”

Dominion Energy projects that demand from data centers in Virginia will more than double by 2030. Northern Virginia hosts the largest number of data centers in the country.

While researching this article, we came across many forecasts and comments like the ones above. The bottom line is that AI data center growth will be explosive. Consequently, the power demand will grow substantially.

Summary

AI and EVs can potentially increase the nation’s productivity growth, which would go a long way toward boosting economic growth. However, with the potential benefits come significant investments. Some companies have already made massive investments in those industries. Others, like those involving the power grid, are just getting started.

We will follow this article with two more focusing on the industries and some stocks best situated to benefit from the modernization and expansion of the power grid and those that can help the utilities meet environmental goals.

Tyler Durden
Wed, 05/22/2024 – 09:45

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BuzzFeed Surges After Vivek Ramaswamy Buys 7.7% Stake In The Cat Slideshow Tabloid

BuzzFeed Surges After Vivek Ramaswamy Buys 7.7% Stake In The Cat Slideshow Tabloid

Shares of BuzzFeed, a notorious slideshow clickbait farm and propaganda disseminator – which recently fired its entire “news” division – soared early Wednesday after multi-millionaire and former US presidential candidate Vivek Ramaswamy reported a stake in the online media company and asked for talks with the board.

Ramaswamy, who ended his candidacy in January and threw his support behind Donald Trump, has taken a 7.7% stake in BuzzFeed, worth about $6.81 million. The tiny purchase makes Ramaswamy the fourth largest shareholder in BuzzFeed, trailing Comcast, NEA Management and Hearst Communications, all of whom invested in the nearly insolvent company at a time when its valuation was orders of magnitude higher.

In a filing with the Securities and Exchange Commission, Ramaswamy said he seeks to “engage in a dialogue with board or management about numerous operational and strategic opportunities to maximize shareholder value, including a shift in the company’s strategy.”

The stock surged as much as 55% to $3.94 in premarket trading in New York; it was the biggest one-day gain since February.

BuzzFeed, best known for publishing the salacious and fake Trump dossier, but has since refocused on its core competency of online quizzes, lists of “bests,” and AI-written tabloid articles on pop culture, has imploded in recent years due to cutbacks in internet advertising. Last year, the company eliminated its news division amid broader layoffs, and has long been on the verge of collapse.

Ramaswamy founded pharmaceutical company Roivant in 2014, and co-founded Strive Asset Management in 2022. He stepped away from the asset management firm last year to focus on his presidential run and has said he isn’t returning; instead it now appears he is hoping to become a media baron. Ramaswamy’s position in BuzzFeed marks his latest move since ending his political campaign.

 

Tyler Durden
Wed, 05/22/2024 – 09:25

via ZeroHedge News https://ift.tt/NHZTbyv Tyler Durden

It’s Eerily Calm Out There Before Nvidia Earnings

It’s Eerily Calm Out There Before Nvidia Earnings

By Michael Msika, Bloomberg Markets Live reporter and strategist

Falling volumes, crushed volatilities and record highs, equity markets seem to price nothing but a rosy outlook. While much has gone right for investors this year, some risks can’t be ignored and deserve attention.

It seems no one wants to be short in this market. Bears are falling like dominoes and positioning is increasing, leaving the market very much one-sided ahead of the Fed minutes and European PMI data, along with the results of the world’s most important stock Nvidia.

Goldman Sachs’ proprietary risk appetite indicator hit its highest level since 2021, which is indicative of lower returns in the medium term, according to strategists including Andrea Ferrario. Volatility structure suggests markets are pricing less risk of a sustained drawdown from here but are worried about temporary spikes in volatility – with high market concentration, idiosyncratic events can also matter, such as Nvidia’s results, they add.

Looking at the volatility curve, very short dated implied volatilities are now trading at the sub-10 point level, a significant decline at the front end. This suggests market is pricing nothing but calm over the coming days.

“As equity vol approaches post-Covid lows, investors may be wondering how far we are from a return to 2017‘s record low vol regime,” say Bank of America derivatives strategists including Vittoria Volta. “Structurally higher idiosyncratic risk today vs 2017, a market arguably at risk of disappointment by the pace of ECB cuts anticipated for the second half of the year, coupled with spillover from US megacap tech fragility, could keep EU stock vol supported through the summer.”

The strategists note that Euro Stoxx 50 skew is flat versus post-Covid history but not quite at 2017 extremes, term structure is steep but not ‘2017 steep’. Meanwhile, 3-month realized index correlation is at 2017 record-low but single stock realized vol is still relatively far. Finally, volatility tends to be supported into the fall during low vol years, they say.

Index future positioning ahead of these events has continued to increase, especially on US equities, as exposure to Europe was already hovering at extreme levels and was slightly trimmed, according to Citigroup data. Separately, Goldman’s derivatives desk points out that single stock put/call skew suggests positioning is 9.5 out of 10, while Deutsche Bank strategists estimate CTAs’ exposure to global stocks are in the 91st percentile. CTA, also known as trend followers, are future funds chasing momentum and can flip positions fast, which can spur volatility episodes.

“Bullish positioning levels continue to rise for the S&P and Nasdaq,” say Citi quantitative strategists including Chris Montagu. “Last week’s activity was led by increased new risk flows. This leaves the S&P extended and almost exclusively one-sided.”

Nvidia’s results are going to be interesting and likely have an impact on the overall market. Expectations are high after a nearly 550% surge in share price and earnings forecasts since the start of 2023. The stock has accounted for about a quarter of the S&P 500’s 11% returns this year and boosted sentiment for tech globally. Tech is the second best performing sector in Europe and has the largest weight in the euro-area benchmark Euro Stoxx index at 15%.

“We note the Stoxx 600 has been flirting around short-term overbought territory of late with five sectors — banks, telecoms, personal care, staples and energy — currently screening that way,” says Carl Dooley, head of EMEA trading at TD Rowen. “That, combined with a lighter volume tape to start the week contributing to what feels like a buyer’s pause.”

Tyler Durden
Wed, 05/22/2024 – 08:30

via ZeroHedge News https://ift.tt/fuQ4EDV Tyler Durden

Target Shares Tumble After Retailer Reports ‘Caution’ About Weak Consumer

Target Shares Tumble After Retailer Reports ‘Caution’ About Weak Consumer

Target’s shares slumped in premarket trading in New York after the retailer’s comparable sales missed Wall Street’s consensus estimates for the quarter that ended May 4. This comes as Goldman analysts have warned about faltering low-income consumers in the era of failed Bidenomics. 

Comparable sales—those from stores or digital channels operating for at least 12 months—declined 3.7% in the quarter and were mostly in line with what analysts tracked by Bloomberg estimated. This was the fourth consecutive quarter of declines. However, digital sales offset brick-and-mortar comparable-store declines and lower foot traffic. 

Here’s a snapshot of the quarter (courtesy of Bloomberg):

  • Comparable sales -3.7%, estimate -3.68%

  • Comp digital sales +1.4% vs. -3.4% y/y, estimate -0.73%

  • Sales $24.14 billion, -3.2% y/y, estimate $24.13 billion

  • Gross margin 27.7% vs. 26.3% y/y, estimate 27.4%

  • Ebit $1.33 billion, -1.9% y/y

  • Ebitda $2.04 billion, +1.2% y/y, estimate $1.97 billion

  • Customer transactions -1.9% vs. +0.9% y/y

  • Average transaction amount -1.9% vs. -0.9% y/y, estimate -1.9%

  • Total stores 1,963, +0.5% y/y, estimate 1,966

  • Operating margin 5.3% vs. 5.2% y/y, estimate 5.34%

  • SG&A expense $5.17 billion, +2.8% y/y, estimate $5.07 billion

  • Store comparable sales -4.8% vs. +0.7% y/y, estimate -4.65%

  • Stores originated sales 81.7% vs. 82.5% y/y, estimate 81% 

  • Adjusted EPS $2.03 vs. $2.05 y/y, estimate $2.05

  • Operating income $1.30 billion, -2.4% y/y, estimate $1.3 billion

Here’s Goldman trading desk take on the earnings report: 

Surprising operating margin miss: We think expectations were for comp sales to be -3.5% and they did a -3.7%. That is not the end of the world but everyone we heard from unanimously expected an operating margin beat, both bulls and bears. Instead, it was a miss. While small in magnitude to EPS, it will have shares down, as the bull case was built on operating margin upside with a sales inflection. It is not a total thesis changer, but certainly a step back in a tougher macro.

Details:  1Q EPS of $2.03 vs Consensus $2.06 on in-line sales and in-line comp sales.  Gross margins did beat pretty handily, with SG&A a miss and driving the modest operating margin downside. Guides 2Q EPS largely in-line with a $2.15 (mid) vs Consensus $2.20 on comps of 0 to +2% vs Consensus +1.5%. Reaffirming the FY guide.

The retailer reaffirmed guidance for the full year: 

  • Still sees adjusted EPS of $8.60 to $9.60, estimated at $9.44

  •  Still sees comparable sales flat to up 2%, estimate +0.9%

Target Chief Executive Brian Cornell told reporters that high prices are hurting the wallets of customers. 

“We remain cautious in our near-term growth outlook,” Christina Hennington, the company’s chief growth officer, said. 

Hennington said discretionary spending would be under pressure in the coming months, adding demand for appliances and home products languishes. However, she noted apparel demand is improving.  

To mitigate further sales declines, Target is following Walmart’s lead by lowering prices for cash-strapped consumers. The company said earlier this week that it would reduce prices on thousands of products this summer. 

It’s not just Target and Walmart slashing prices. McDonald’s recently entertained the idea of returning $5 meal deals again because low-income people are broke. 

Covering the faltering consumer theme have been Goldman analysts: 

Target is also facing a boycott over its LGBTQ-themed products. Execs have decided to remove some of these controversial products from some stores next month. 

Target’s shares slid nearly 8% in premarket trading. 

If premarket losses hold into the cash session and settle later today, then this would be the largest daily decline in two years. 

Wall Street was “underwhelmed”…

Vital Knowledge

“This isn’t a ‘bad’ report, and it really shouldn’t be called anything other than ‘in-line,’ but vs. Walmart last week, Target clearly lagged behind expectations,” analyst Adam Crisafulli writes

Walmart’s results demonstrate how it is using its “enormous scale and huge grocery franchise to drive traffic and capture [market] share at a time when consumers are feeling increased stress,” he says

RBC (outperform, PT $191)

“1Q results were generally in-line with consensus, but as feared, fell short of heightened investor expectations,” analyst Steven Shemesh writes

Thinks buyside was looking for 1Q comp. decline of around 3.5% vs Target’s reported comp. decline of 3.7%, and EPS of $2.03 was “well below” buyside expectations of $2.15+ due to sales deleveraging, continued investments in pay/benefits and higher marketing spend

“We’ll look for additional detail on the call, but at first glance – consensus is likely to remain unchanged, though buyside expectations will likely drift lower, putting pressure on shares,” according to Shemesh

“Shorter-term investor positioning could start to fade given ongoing pressure on comp. sales and Target being “seemingly in the latter innings of the margin recapture story”

Bloomberg Intelligence

“Reiteration of full-year same-store sales and adjusted EPS guidance suggests it will need to see growth accelerate as the year progresses, which may be tough given low discretionary spending,” analyst Jennifer Bartashus writes

Bartashus is encouraged by improving margins, but recently announced price cuts could add pressure, while “persistently weak in-store visits are a concern”

Morgan Stanley (overweight)

“One could argue the EPS bull case for 2024 of 6%+ EBIT margins and significant EPS upside may be less likely,” which may explain the premarket stock decline, analyst Simeon Gutman writes

1Q comparable sales expectations were appropriately “subdued” but investors still expected “meaningful EPS upside” in the quarter driven by gross margin, but higher SG&A offset the gross margin upside and resulted in below-consensus EBIT dollars

The reason for the SG&A miss is unclear, and more details on that, as well as management’s tone around the 2Q sales trajectory will be helpful in “framing the overall story”

Gutman would have thought the flat to +2% 2Q comp. growth forecast would have been good enough to push shares higher today, given Target’s recent pullback in response to slowing consumer spending

And finally, Goldman’s Kate McShane commented on earnings and price action in premarket trading: 

The stock is currently down ~7% in the pre-market. On the call, we are interested in the cadence of SSS throughout 1Q; QTD trends by category; the relative impact of the gross margin drivers, including markdowns, mix, and shrink; the view of inflation; details on its inventory position; and the company’s promotional outlook. target of $194, based on our risk-reward framework with downside/base/upside relative P/E multiples of 80%/85%/90%.

McShane’s team laid out their valuation for the retail following the report: 

  • We are Buy rated on TGT with a 12-month price target of $194, based on our risk-reward framework with downside/base/upside relative P/E multiples of 80%/85%/90%.

Also, they outlined four downside risks:

  1. Traffic and sales trends decelerate due to weakness in consumer spending;
  2. Inflationary pressures related to product costs, freight/transportation, and/or wages;
  3. The competitive environment forces TGT to compete more aggressively on price;
  4. Margins come under pressure from omni-channel, supply chain investments, and mix shift.

Consumers pulling back on discretionary spending is an ominous sign.

Tyler Durden
Wed, 05/22/2024 – 08:15

via ZeroHedge News https://ift.tt/yH8go9T Tyler Durden