Looking Backwards …
LB #1
This week saw producer price inflation come in hotter than expected, consumer price inflation come in pretty much as expected and the market running to new all- time highs because it didn’t care. Rate cuts are coming, and the market is going to dance, dance, dance. Gold and silver also went to all-time highs for seemingly different reasons as there seem to be plenty of people, like me, that think this economy is nothing more than a shell game. That doesn’t mean with all the stimulus that it is getting from the government that the market can’t go up, I simply believe that relative to hard assets it will underperform, which is what is happening. Speaking of happenings though, amidst all of this market chaos this week there is a more sinister item of note and where I want to begin this week.
The USS Harry S. Truman aircraft carrier is heading to the middle east, and in particular to the Red Sea. We have been discussing the Houthis controlling the Red Sea for some time and Ben and Jerry Joe’s Operation Prosperity Guardian being a flop, that is the name for the protection racket that the military is running in the middle east to maintain the safe patrol of the waterways. It has been failing and it turns out that the world’s trading partners are not liking it.
ZeroHedge reports “European allies, and groups like the Atlantic Council have been bitterly complaining about the ongoing ‘failures’ of the Pentagon-led mission thus far:
Six months after the Joe Biden administration launched Operation Prosperity Guardian to ensure freedom of navigation in the Red Sea, the biggest issue facing the White House is not the Houthi threat but the US failure to rally partners and allies behind its leadership…Head of the US Navy Fleet Forces Command Adm. Daryl Caudle has described of sailors preparing for the mission, “They know that they’re most likely going to be entering a weapon engagement zone.”
“For this group, this [deployment] is not with the mindset that they’re just going to go drill holes in the water somewhere — this is, ‘We’re going to be employed for combat.’”
Folks, economics and high finance are important, but there will soon be more and more young men and women being put in harm’s way and some will die protecting our way of life. As we approach Memorial Day or Decoration Day as it used to be called, it would behoove us to remember that there are people risking their lives on our behalf. I would also like to point out that the interest expense on the national debt has exceeded the amount we spend on the military for defense, and if I had my druthers I would much rather see our soldiers better equipped than pay interest to a bunch of bondholders. What is a druther anyway, but I digress and we have too much to talk about today for definitions.
Truman carrier sent to Middle East
LB#2
Stock markets did make an all time high this week and guess who’s back, back again. Meme stocks! That’s right, Roaring Kitty posted a twit or picture or whatever on social media of a man leaning forward in a chair and the rally was on. Game Stop and AMC rallied hard on Monday as Redditors, grandmas for Gamestop, and movie aficionados all jumped in to drive the shorted stocks to the moon. But the market has changed, AMC issued a bunch of new shares this week, and even Gamestop filed to do the same. The market simply rewarded the companies with increased funding for foolishness and by Friday the fun seemed over. Brian Swift writes for Barron’s “Videogame retailer GameStop GME -19.73% was down 22% at $21.53 just after the market opened, following a 30% plunge Thursday. The company said Friday morning that it is issuing more shares, allowing it to raise capital at this week’s higher prices. Coming into the session, the stock was 58% higher than a week ago and 166% higher than a month ago.
AMC shares were down 5% at $4.41 after tumbling 15% on Thursday. AMC also moved to capitalize on the sudden interest in its stock by issuing new shares earlier this week. AMC briefly topped $11 Tuesday. Coming into Friday’s session, the shares were up 59% over the past five days.”
LB #3
Elon Musk has moved a lot of his industries out of California to Texas, but it seems that he is taking his California policies with him. Once he bought Twitter, he famously didn’t pay rent and it seems being a deadbeat has followed him to Texas. Reuters had an article out this week about the number of companies that have performed work for SpaceX that haven’t gotten paid. “SpaceX is building launch facilities, office buildings and even a shopping center in rural Texas, as billionaire Elon Musk’s space venture rapidly expands its rocket and satellite business across the Lone Star state.
But a Reuters review of Texas property records shows that SpaceX and its contractors can be far slower to pay builders and suppliers than they are to break ground. Unpaid bills and finger-pointing among contractors, Reuters found, have led many construction-industry businesses to file liens against SpaceX properties in efforts to get compensated.
The result, several of those businesses told Reuters, is a reluctance to work on SpaceX-related projects again. “If they were to call me today, I’d tell them to f— off,” said Brian Rozelle, an owner of Hydroz Energy Services LLC.”
There are others “GC Steel & Accessories LLC, a family-owned company near Brownsville, has been waiting more than 18 months for payment after supplying steel bars and other materials for SpaceX rocket facilities.
According to lien records and Sylvia Garza, one of GC’s owners, the materials were to be used in storage sites for Raptors, a type of SpaceX engine, and a “blast wall,” a barrier used to protect sensitive areas from explosions. GC supplied the materials between August and October 2022 to another subcontractor, RGV Five Star Concrete LLC.
After repeated efforts to get paid, GC last December filed the first of five liens against SpaceX property, claiming a total of $99,591.25. “It’s a lot of money for our company,” Garza told Reuters. “We can’t reach anyone to pay.”
RGV Five Star Concrete, for its part, told Reuters it couldn’t pay GC because it, too, had gone unpaid by yet another contractor involved in the SpaceX project. “We didn’t have money to pay,” said Nancy Garcia, one of the concrete company’s owners.
Garcia declined to identify the other contractor. Reuters couldn’t determine whether SpaceX had paid any company for work or goods that included the materials GC supplied.
Garza said the lack of accountability has strained finances for GC, employer of a dozen workers. “I don’t care who has the money,” she said. “We never got paid.”
Fear and greed drive markets, but they also drive businesses. SpaceX comes to town with a lot of money and builds a bunch of stuff and businesses jump at the chance to get some of that gravy on their taters. What they fail to realize is that reputations matter. I hope these small businesses aren’t going to run out of cash flow before Musk gets forced to pay. He is running the exact same playbook that one of our presidential candidates ran in Atlantic City for years in the casino business. Use people’s greed of getting business to supersede the fear of not getting paid. It sounds like many of these businesses wish Musk would just go back to California with the other deadbeats. But wait, that’s all that will be left soon in that state because their policies are running out the productive.
Looking Forwards…
LF#1
Japan’s economy has long been a strange one. Their central bank has been the leader in debt to GDP % and running negative interest rates. Abenomics has been copied and we are starting to see the long-term effects of such a weird policy. The Japanese people live to a ripe old age and that and a lack of young people have provided their economy with bad demographics according to economists. What they mean is bad for economic growth. Economists believe that every family should have 6 kids and all grow up and borrow a bunch of money and contribute to economic output. Well, the Japanese are an older population, and they have some unique issues. One has been a lack of inflation for a very long time as measured by higher prices. The prices are starting to go higher as inflation as reached 3% in a country of savers. That is a lot. But, it does have effects that seem to be rippling through the country.
Megumi Fujikawa writes for the Wall Street Journal, “The Japanese economy contracted in the first quarter of 2024, extending a rough patch and signaling that inflation fueled by a weak yen is hurting consumer demand.
The economy’s overall performance contrasts with robust earnings reported recently by top Japanese exporters such as Toyota Motor and the stock market’s rise over the past year. The fall in the yen, which recently traded at a 34-year low against the dollar, helps exporters’ competitiveness and tends to lift their profits.
“Japan’s economy is in bad shape,” said Moody’s Analytics economist Stefan Angrick. “The biggest concern is private consumption,” which has contracted for four consecutive quarters, he said.”
The moral of the story is that high stock prices are not necessarily the barometer for measuring a good economy.
LF#2
As Jerome Powell and the Fed continue to talk about cutting rates but don’t actually do it, the strain on the economy grows. EV startups that were once the darlings of the market are facing reality and reality in business is cash flow. That is the harshest of all realities. Guess what, they ain’t got much. The harsh reality for many companies is that their business was raising cash not producing products and services at price points that consumers can afford. Tax credit farming, low interest rates, and funding round after funding round kept many businesses in operation far longer than most business cycles. This cycle is about over so it is put up or shut up time.
Michael Wayland writes for CNBC, “Executives of Rivian Automotive, Lucid Group and Nikola Corp. this week each detailed plans to reduce costs while attempting to grow operations and make their first profits. Those efforts have ranged from job cuts and production changes to supplier rearrangements and shifting priorities… Of those three automakers, Rivian is in the strongest cash position as EV adoption struggles. The company says it has enough cash to get through its big R2 launch in early 2026.
The slowdown, as well as the increased competition, has even impacted U.S. EV leader Tesla, which is in the midst of a global restructuring that includes laying off roughly 10% of its workforce.”
Adoption of EVs by those that want and can afford EVs has larger been achieved. In order to grow market share from here, the industry will likely have to do one of two things: get much much cheaper or have the government mandate EV vehicles en masse, and even then the government would likely have to give consumers money to buy them at a greater rate than they are doing now with tax credits. Never underestimate the stupidity of the government or the wisdom of capitalism. Expect capitalism to win this fight very soon.
LF#3
We move from one high flying boom to another. AI stocks started this latest bull market about a year ago when ChatGPT started gaining attention. It takes more than attention to pass my muster so I want to discuss AI a little bit today. It is a verifiable gold rush out there today with Nvidia stock up hundreds of percentage points and inching its way closer to the most valuable publicly traded company in America. There are second order effects and much like the gold rush, there will be plenty if not more money to be made selling picks and shovels to the miners than miners actually hitting Eureka. The latest market to explode is the market for electricity.
“In the past few months, though, utilities have left the rest of the market in the dust. These dullest of all stocks have suddenly become a bet on the single flashiest area of the market: artificial intelligence. AI requires a lot of computing power, and computers use a lot of electricity…
AI isn’t the only reason utilities have heated up so fast. The rapid increase in demand for electricity nationwide comes from three main sources, says Maria Pope, CEO of Portland General Electric, Oregon’s biggest utility. One is the revival of domestic manufacturing after decades of moving offshore. Another is the boom in semiconductor production, boosted by government support. But the expansion of data centers, “driven by the insatiable appetite of AI,” is the fastest-growing source of industrial demand, says Pope….
Jay Rhame, chief executive of Reaves Asset Management, which manages about $3 billion in utility stocks, thinks the only historical parallel is the boom in electricity generation that followed the widespread adoption of air conditioning in the 1960s and 1970s.” This comes from Jason Zweig in the Wall Street Journal.
I read that an AI search requires 10x more electricity than a Google search. In addition to utilities, copper is needed to build out the grid and copper stocks have been flying also. Copper futures closed at $5.05 a pound which is a new all time high. While gold and even silver which can be a hybrid between safe haven and industrial, copper is predominantly an industrial metal. All signs point toward a boom in demand…just like EVS did 3-4 years ago. Will AI actually produce profits to justify a search costing 10x more than a google search? We will continue to point out failed solar and wind projects along with the decline and eventual demise of the EV market. Are you starting to feel that warm breeze behind you? I am, and I believe that is smoke being blown up my kiester. I am starting to smell bullshit in this AI craze. AI might very well have a future, but I fear that many companies hype will not match their cash flow. In 3 years it will be AI companies rotting on the cash flow vine.
It always comes back to cash flow. The posh and privileged have now purchased their EVs and the rest of the market isn’t adopting and the industry is dying on the vine, and I am afraid those same chic searchers are the only ones that can afford to pay 10x for a google search. Most of the country is channeling their 1980s Wendy’s ad asking where’s the beef as beef prices become unaffordable for many families as we watch inflation decimate a nation.
Sincerely Yours,
C Thomas Printer
The Dow Jones finished trading at …..an all time high of 40,003
The 10-year Treasury bond is at …a 4.422%
The price of Brent Crude is … at $84.00 per barrel.
The price of gold is … at an all time high of $2,420/oz.
The price of silver is … at a 11 year high of $31.77oz.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.