Author: Scott Buchanan

Analysts’ Systematic Bias Makes Companies “Beating Estimates” Fairly Meaningless

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A corporate tale

Once upon a time I was enrolled in a project economics training workshop at a certain unnamed (but generally honest) S&P 500 company, taught by a finance guy from corporate. We got on the subject of making assumptions. The planner knew he was among fact-friendly engineers, not corporate toadies, so he unguardedly told us a story. He was part of a team of young up and coming managers who (as often happened at that stage in their career track) were thrown together in a planning role. They were tasked with coming up with a plan for the upcoming year for I think some large division of the company. They worked hard and put their most realistic assumptions into the plan, and found that, as a result of market shifts beyond our control, next year’s earnings were going to decline slightly.

When they presented this result to management, they were told, “No, go back and bring us a plan for how we are going to grow earnings by [say] 8% next year.” The quick-witted young planners got the message and went back and tweaked their assumptions until they got earnings to grow the required amount. They weren’t exactly lying, but they all knew their “plan” was not straight down the middle realistic. However, the managers were happy, and that was what mattered. Such is the corporate mindset. If analysts or planners want to succeed in their careers, they have to produce what is desired by the layers above.

Earnings “beats” are often pointless

According to FactSet, with the vast majority of S&P 500 companies having reported their first quarter (Q1 2023) earnings, 78% of them reported actual earnings per share (EPS) above the mean average of analysts’ estimates. So nearly 80% of companies “beat estimates”. Woo hoo! What a great quarter for earnings!

But… the actual S&P 500 earnings declined by  2.1% from the previous (actual) earnings. Hmm, maybe not such a great quarter after all. And this is on top of a decline in the previous quarter, as well. But nobody talks about that.

This is another example of the systematic bias in “earnings estimates”, which makes the quarterly hurrahs over “beating” estimates somewhat silly. We have complained about this earlier. Here is the problem: most published analysts are employed by investment banks or similar “sell-side” institutions which are always courting the favor of large companies, since they want the companies to do business with them. What sorts of earnings estimates do the corporate brass want to see?

Well, for earnings that are due to be reported a year or more in the future, they want to see high estimates, which would justify high stock prices now. And for earnings that are due to be reported in a few weeks, the managers want to see low estimates, which they can then (tah-dah!) “beat.” And so, we see a reliable pattern of analysts starting with unrealistically high estimates, and then ratcheting down, down, down in the year before the actual reporting date.

Bring on the charts

A recent article by Seeking Alpha author Lance Roberts illustrates some of these trends. I pulled a couple of his charts here. First, here is a plot showing the decline in Q1 2023 estimates over the past 18 months or so, as analysts do their usual dance:

The blue line in the figure below shows the percentage of S&P 500 companies which “beat” their final (lowered) estimates. If the estimates were fair and unbiased, we would expect this number to be around 50%. In fact, in the past decade it has been around 70%, and growing with time.

Earnings beats or misses do get headlines and contribute to near-term stock price moves, but from a fundamental point of view there is more sizzle than steak here.

How Ceramic Pans Work and How to Restore Their Non-Stick Coating

Scott Buchanan6 Comments

I really don’t like the time and effort wasted in cleaning crudded-up frying pans, so I appreciate non-stick coatings. I have a small diameter Gotham ceramic pan that works well, and I was thinking of getting a larger one for cooking bigger loads. As usual, I went to the internet for wisdom on preferred ceramic pans to buy.

However, in the course of trying to get a fix on how they work, I fell down a rabbit hole. It turns out that this subject is complex and controversial. I will try to summarize my understanding in a brief post, with the caveat that I am not sure of everything here.

First of all, the “ceramic” coating is not really ceramic. Typical ceramics are made from firing powders of inorganic materials like silicon/aluminum oxides (including clays) at extremely high temperatures to where the particles fuse together. For the ceramic coatings on pans, this is not the case. I looked pretty hard on line without success to pin down the actual process or composition of the pan coating. It seems to involve some sort of silicone or silica polymer, applied using a sol-gel process. (Silica is just silicon and oxygen – quartz and white sand are pure silica – while silicone is typically a Si-O-Si-O-Si polymer with two extra hydrocarbon side groups attached to each Si).

100% silicone, in the form of rubbery sheets or cupcake papers for cooking on or in, is known to give a non-stick cooking surface. The “ceramic” coating in pans appears to be a solid equivalent of silicone cookware. A key factor mentioned in why it is slick and why it loses its slickness is that (supposedly) a thin layer of silica or silicone comes off with each cooking episode, and that thin layer is what gives the non-stick effect. (I would not mind ingesting a little adventitious silica, but eating random silicone worries me a little – but I don’t know if all this is actually true).

See this link for further discussion of the safety of ceramic versus teflon coatings. Be aware that makers of teflon coatings often choose names for their coatings that include the words “stone” or “granite”, perhaps to make the unwary consumer believe that these are ceramic coatings. My teflon pans have usually started to flake (into my food!) after a couple years’ use. A happy exception is a newer electric skillet which has temperature control so it never gets above about 425 F (high temperature destroys teflon). We do keep it oiled in use. Its teflon coating is still good as new after two years.

There seems to be general agreement that ceramic pans start off super slick, that fried eggs slide right out, but that after some months of use, food starts sticking noticeably. It helps to use a little oil every time you cook, and to avoid using metal utensils or abrasive cleaning pads, and to avoid very high temperatures or the use of cooking sprays (which deposit something harmful to the ceramic coating) or olive oil (which can burn on). Some users say it is important to clean the pan well between uses, e.g., using salt as a mild abrasive.

Why Do Ceramic Pans Lose Their Non-Stickiness?

There seem to be two main schools of thought as to the deterioration of performance. One school points to the (alleged) continual loss of silica particles or (presumably oily) silicone from the surface; perhaps once this surface layer is depleted, it’s game over. Another camp points to the buildup of burned-on deposits, even very thin, nearly invisible deposits, that then become a locus of food sticking.

What Can Be Done to Restore a Ceramic Pan Coating?

It is common to read that you just have to be prepared throw the pan away every 1-2 years. However, this does not seem economical. Can these pans be salvaged?  One author claims that slickness can be restored by “seasoning” a ceramic pan, similar to how cast-iron pans are treated: after cleaning the pan, rub a very thin layer of a recommended oil (e.g. soybean oil, not olive oil) on the pan and then heat it to the smoke point. This should bond a polymerized oil layer to the surface. I have not tried this, but it might be worth a try.

A diametrically opposite approach is recommended by the maker of GreenPan ceramic pans. Here the theory is that if an offending film of cooked-on crud is removed, the native, clean ceramic layer beneath will once again be non-stick. A wet Magic Eraser type cleaning pad is recommended.

A similar remedy touted on the internet (e.g. here and here) is to rub with coarse salt (for long time, but not too hard) to get down to a pristine ceramic surface. Good results are claimed.

As a (retired) experimental scientist, I was itching to try something like this. At a family member’s house, I found an older ceramic pan that was not in really bad shape, but had lost its primal non-stick.

The BEFORE picture is above. There was a persistent brown film in parts of the pan, and cooked omelets (my test vehicle) did not simply slide out. I cleaned the pan with soap and water and a sponge, then went at it with a wetted Magic Eraser. I got the brown film off, though you could still see some pitting in the coating due to the use of metal utensils.

The AFTER picture is below. This is after cooking yet another omelet (with oil), and just wiping the pan with paper towel afterward. I can’t say that it was a night and day difference, but the Magic Eraser treatment definitely seemed to improve the performance. Score one for sustainability.

APPENDIX:  Finally Understanding What Make Ceramic Pan Coatings Non-Stick

As noted in the original article above, I was puzzled over how the ceramic coatings worked. The descriptions in articles I could find on-line talked of forming these coatings from sol-gel solutions, using ingredients such as tetraethoxysilane. Without going into details, my chemical intuition led me to believe that, yes, you could form a dense silica pan coating from that, but the final outer surface would have Si-OH groups, like quartz or glass or ordinary “enamel” ceramic pan coatings. This would not give the oily, silicone-like surface that is evident with the nonstick ceramic pan coatings.

My “Aha” moment came when examining a patent application ( United States Patent Application No. 20180170815) for making a GreenPan ceramic pan coating. Among the ingredients for making the coating is methyltrimethoxysilane (MTMS).  And THAT should give Si-CH3 groups on the outer surface, which is exactly the type of oil-like outer surface that silicone has.  (The -CH3 methyl group is a fairly nonpolar, “oily” hydrocarbon type group).

A restless itch has now been scratched. I think I now understand why fresh ceramic pan coating can have such fine non-stick properties, and perhaps why they might be vulnerable to losing their non-stick properties. With Teflon type pan coatings, it is plasticky, oily Teflon all the way down, so if you abrade off a hundred molecular layers, it should make no difference. But with the ceramic coatings, it is not clear to me whether the oily Si-CH3 groups are only in the topmost atomic layer; maybe if that gets abraded off, there is only the quartz-like Si-OH groups to be found; or maybe there is a substantial (in atomic terms) topmost layer rich in Si-CH3 groups. Anyway, it makes sense to keep using oil when cooking on ceramic pans, to keep a hydrocarbon-type surface coating going there, and to avoid using metal utensils that can scrape and scratch the coating.

Carl Icahn Under Siege: The Predator Becomes the Prey

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The term “investing legend” gets thrown around a lot, but in the case of Carl Icahn, it truly fits. He kicked off the modern era of corporate raiding by taking influential stakes in many companies and forcing changes to his personal advantage. In some cases (e.g., Trans World Airlines) this involved taking over and dismembering the firm, and selling off the pieces. He is considered by some measures to be the most successful “activist” investor ever. His personal wealth is (or was) on the order of $20 billion.

Icahn has rolled much of his personal holdings into a limited partnership called Icahn Enterprise L.P.  (IEP).  According to its blurb, “…Icahn Enterprises L.P., through its subsidiaries, operates in investment, energy, automotive, food packaging, real estate, home fashion, and pharma businesses in the United States and Internationally.” This partnership structure allows Icahn to cleverly avoid paying income taxes on the earnings from his enterprises. Another score for the old wolf.

This arrangement has also allowed us mere mortals to nibble on the crumbs from his table. IEP has paid a very large and growing dividend for more than ten years. Since 2019 it has paid $ 8.00 per year ($2.00 per quarter). This generous payout has made it popular among retail investors and has kept the price of IEP steady in the $50-$55 range for a number of years. This gives around a 15% yield.

It has always been understood that IEP does not actually generate enough cash to pay out $2.00 per quarter on every share, but since “Uncle Carl” owns some 82% of the shares and takes all his dividends in stock (again, to beat the taxman), it has all worked out. That is, until the past month, when IEP was the target of a “short attack” by the ominously-named Hindenburg Research. A short attack is when some outfit takes a short position in a stock, then publishes a report claiming all sorts of misrepresentation and malfeasance on the part of management, to scare the public into dumping the stock. The attacker pockets a tidy profit on their short position when the stock price tanks. Then on to the next victim.

Often, there is not much actual substance to a short attack, but in the case of IEP Hindenburg had something of a real case. Their claim is that the actual net asset value (NAV) of IEP is way, way below $50 / share, and even lower than the NAV officially reported by IEP. Hindenburg made lots and lots of other dire accusations, describing IEP’s operation as a giant Ponzi scheme. Ouch.  Also, it seems Icahn has actually lost his mojo in the past decade (he is 87), making several market bets that went sour and lost billions. Anyway, some of Icahn’s old victims are not sorry to see the former shark being mauled by tactics similar to those he once employed.

The IEP stock price quickly dropped from 50 to 30 when the short report came out, then rallied back to about 36 after Icahn gamely announced that the usual $2.00 dividend was still going to be paid (stock chart below). That is where I sold about half my IEP shares to de-risk my position (disclosure: I had bought a very small amount before the Hindenburg report).  The price then meandered around in the low 30’s for a couple of weeks, then started to slide down again.

Share price for Icahn Enterprises L.P. (IEP). Source: Seeking Alpha.

Icahn made numerous enemies in his career, including fellow corporate raider Bill Ackman. Icahn went very long on a company (Herbalife) that Ackman was heavily shorting, back in the day. One YouTube you can listen to a 2014 CNBC show where they had both called in, where they were hurling very personal insults at each other on the air.  Ackman recently piled onto the short thesis for IEP, tweeting that even after the recent fall in price, the shares were still overvalued by at least 50%. IEP shares promptly plunged another 14%, to under $20.  Icahn’s response: “Taking advice from Ackman concerning short selling is like taking advice from Napoleon or the German General Staff on how to invade Russia.”  Some things don’t change.

Why No Recession (Yet)

Scott Buchanan1 Comment

Where is that recession that pundits have been predicting for over a year now? The suspense is killing me. Despite savage hikes in interest rates that have led to a collapse in regional banks and in home buying, the economy just keeps chugging along, and inflation continues to run way above the targeted 2% level. What’s going on?

An article I just read on the Seeking Alpha applied finance website points to three interrelated factors. I will cite and credit the author (whose moniker is “Long-Short Manager”; he runs a couple of investment funds) for the content here, while noting that I agree with his points based on other reading. These points all relate to ongoing strong financial position of the (average) American consumer, who mainly drives the spending in our economy.

( 1 )  Reduced Debt Service

The article notes:

The graph above shows household debt payments as a percent of disposable personal income going back to 2000. Since peaking at 13% right before the financial crisis, it steadily improved to 2020, with a subsequent large drop due primarily to lowered mortgage rates (usually the largest debt obligation of a household). It is the lowest it has been this century.

(Although mortgage rates have jumped in the past year, most existing mortgages were taken out pre-2023, when interest rates had been pushed to near zero by the Fed.)

( 2 )  Robust Wage Growth

The next graph from the Atlanta Fed’s wage tracker (note that the methodology used by this tracker is fundamentally different from the Fed’s employment cost index …) shows that job hoppers on average are making about 3% more than core inflation (call that 5%) whereas the average stayer is making a half percent over core inflation. This is allowing people to catch up for the year that they got behind on inflation.

Likewise, the author notes that although job quits have come down in the past year, they remain well above re-COVID levels.

( 3 ) We Are Still Spending Down Gigantic Pandemic Stimulus Windfall

As we have noted earlier, the government/Fed combination dumped some $4 trillion into our collective pockets in 2020-2021. This includes enhanced unemployment benefits as well as direct stimulus payments, at a time when much of our normal spending (e.g., on travel, sports, commuting, etc.) was curtailed. We are still spending down these excess savings at a good clip, which seems to be a fundamental driver of the currently robust economy:

The last figure on the consumer shows how excess savings (defined as the extra savings consumers accumulated during the pandemic due to fiscal transfers and reduced spending due to lockdowns) has evolved – it should now be around 700 billion and ought to be fully depleted by the end of the year – leaving the consumer still with the lowest debt service ratios of the century and wages caught up with inflation. If you are wondering why we haven’t had a recession despite economists saying we will have it within 6 months for about 12 months now, these charts should tell you why. The tailwind from consumers has exceeded any headwinds from reduced investment due to higher rates. 

And there you have it.

Save $$$, Easily Change Your Car Cabin Air Filter Yourself

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I have done various maintenance and repairs on my cars over the decades. Usually, they turn out to be harder and more time-consuming than I thought. Changing the engine oil and oil filter has become genuinely harder since the oil filters have migrated deep up under the engine, where it is hard to access them without putting the car on a lift, and disposing of a milk jug of used oil has gotten more difficult.  I used to be able to easily change out a light bulb in the headlight, but the last car where that needed doing required you to take apart much of the front end of the car to get at the headlight. However, I recently found that changing the cabin air filters in my two vehicles (van and sedan) is so easy, I wish I had started doing it years ago.

Why Change the Cabin Air Filter?

The cabin air filter filters the air coming into the passenger section of the car. It knocks out road dust and pollen, and other bits of whatever that might get sucked into your air system as you are going down the road. So, it protects your and your family’s lungs as well as the components of the air handling system. Typical recommendations are to change out the filter about once a year or every 15,000-20,000 miles.

The photo below shows the cabin air filter I just pulled out of my van after maybe 2 years and 25,000 miles, next to a relatively clean filter. Obviously, I let this one go a bit too long: it is grey with dust/dirt, and partly blocked with plant debris.

I have not been quick to change out these filters because garages or dealers often charge something like $80-$100 for this. And until recently, I never considered doing it myself, because for some reason I thought it was a hard job. I had read of people having to contort in unnatural positions with heads inserted under dashboards as they disassemble layers of car to get at the filter.

It Is (Often) Super Easy to Change a Cabin Air Filter

It all depends on where the filter is located. For most models of cars, you can find guidelines on line, including YouTube videos. There are some models where you indeed may have to unscrew a cover plate somewhere below the dashboard to expose the filter. But in most cars, you remove the glove box to expose the filter. That may involve undoing come screws or a snap or strut, and squeezing the edge of the glove box inward. For my Hondas, all I had to do was empty the glovebox, (authoritatively) squeeze in the edges, and the glove box pivoted down, and behold, there was the filter in its little holder. Then slide out the holder, pull out the old filter and put in the new filter (purchased at AutoZone for $20 each), slide the holder back in place, and finally tilt the glovebox back up until it snapped in place.

Ten minutes max, easy-peasy. Obviously, this saved money, but it also felt empowering. I highly recommend trying it.

Leading Indicators Show Incoming Recession; Lagging Indicators Not So Much

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Here I will draw on a recent article Leads And Lags: Timing A Recession by Seeking Alpha author Eric Basmajian. His overall points are (1) that some indicators are associated with leading segments of the economy (which have historically turned down well before the rest), while others are more lagging, and (2) the leading indicators are strongly flashing recession. Direct quotes from his article are in italics.

Leading Economy, Cyclical Economy & Total Economy

When economic data is released, the information should be contextualized based on where the data point falls in the economic cycle sequence.

We can separate the economy into three buckets: the Leading Economy, the Cyclical Economy, and the Total Economy.

The Leading Economy is defined by the Conference Board Leading Index, which is a basket of ten leading economic variables such as building permits, new orders, and stock prices.

The Leading Index has turned negative before every recession, without exception.

Conference Board, Census Bureau, BLS, BEA, Federal Reserve

The Cyclical Economy represents the construction and manufacturing sectors. The Cyclical Economy is the driving force behind recessions, always turning negative before the Total Economy, and never giving a false signal; when the Cyclical Economy turns negative, the Total Economy turns negative several months later.

Conference Board, Census Bureau, BLS, BEA, Federal Reserve

The Total Economy is defined by the “Big-4” Coincident Indicators of economic activity. Nonfarm payrolls, real personal income less transfer payments, real personal consumption, and industrial production are four major economic indicators that the NBER uses as the core of their recession dating procedure.

Conference Board, Census Bureau, BLS, BEA, Federal Reserve

A sustained contraction in the “Big-4” Coincident Indicators is the definition of a recession.

The Total Economy starts showing contracting growth rates about four months into the recession.

Could This Time Be Different?

If we do finally get a recession, it will be probably the most long-expected recession ever. Pundits have been warning for over a year that the Fed’s well-telegraphed program of rate hikes will crater the economy, as the only way to tame inflation.

According to Basmajian, When the Leading Economy and Cyclical Economy are both lower than -1%, a recession, as dated by the NBER, occurred an average of 5 months later, with a range of a 4-month lag to a 14-month lead.

His Leading indicator went negative about 11 months ago (June, 2022). However, it looks like the economy is still humming along and employment remains robust. His Cyclic Economy is on track to go negative right about now, but that has an unusually long lag between Leading and Cyclical:

The Cyclical Economy will likely turn negative with April data and potentially below -1% by May data should the current downward slope remain.

That would push the lag between the Leading Economy and the Cyclical Economy to 11 months, the longest on record.

And the lag before we finally get a bona fide recession in the Total Economy may keep dragging out longer yet. There is even a possible Soft Landing scenario where the rate hikes manage to cool the economy down without causing a severe recession at all.

It seems to me that we collectively are still spending down our excess pandemic benefits, and no recession will come till we finish running through those monies.

Regulation and Delayed Updates: Why Services Inflation Will Likely Stay High

Scott Buchanan1 Comment

Apart from some possible geopolitical upset (and theater with the debt ceiling), the Big Issue for the larger economy, and for investing decisions, remains how fast inflation will decline – since that governs how soon the Fed can relent on keeping interest rates high. Those high interest rates are having all kinds of knock-on effects, including bank failures and suppressed home sales.

The investing market seems to be pricing in expectations of significant Fed rate cuts before the end of 2023, which in turn presupposes that inflation will have ratcheted downwards far enough by then to allow the Fed to declare victory. Goods inflation (= mainly stuff made in China) has declined nicely, but services (which comprise the majority of household spending) remains high. It is coming down, but too slowly to realistically hit the Fed’s 2% target this year.

In an article in the Seeking Alpha site title Services Inflation Is Stuck, the investment firm Blackrock notes some technical factors that will likely keep services inflation high for at least the remainder of this year. I will paste in their text in italics:

Core Services ex-Shelter inflation is a bit of a hodgepodge that includes things like medical care services, video and audio services, tuition, and insurance. It comprises roughly a quarter of the CPI basket and, importantly for the Fed, is very domestically oriented.

A key insight from this article is that nearly two-thirds of this key “Core Services ex-Shelter” component consists of:

(1) Service prices that are regulated (especially insurance), and

(2) Services with infrequent price resets (such as tuition and especially medical services):

There are technical factors that make it likely that these particular items will see ongoing, sticky inflation:

Impact of Regulated Prices

Regulated prices tend to be more discrete and more lagged in their changes due to bureaucratic delays and their negotiated nature. Some types of regulated prices, like postage or water and sewage fees, are easily recognizable as subject to government regulation. Somewhat less intuitive is the degree to which insurance in the United States is a regulated price. Insurance comprises the largest share of Core Services ex-Shelter basket and state-level insurance commissioners play important roles in negotiating auto, property, and casualty insurance price changes.

The underwriting costs of insurance have been surging globally – a combination of higher reinsurance premiums, inflated asset values, and more natural disasters. These rising costs have only just begun to flow through into consumer prices; auto insurance costs were an upside surprise within March’s CPI report.

Jumps in Medical and Education Prices Will Appear Later

Though the market has been fixated on the painstaking details of the month-over-month inflation prints, many of the sub-components of the CPI do not update monthly. Two of the more important items within the core services basket – medical care services and tuition – only update their prices annually. Coincidentally, updates for both of these categories take place in the autumn, and both are set to rise strongly.

Medical care services are the largest component (28%) of Core Services ex-Shelter, but have a complex and lagged computation and update only once a year in October. Medical services inflation has been negative since last October as a consequence of excess consumer demand for post-pandemic doctors’ visits, however, we expect this mechanical effect will abate later this year and thereafter lift core services inflation.

Tuition is another example of a service with intermittent price resets, given prices are set on the basis of the academic year. We expect the broad-based upward wage pressure in education to be passed through to higher education consumer prices later this year when students return to school.

And so…I expect “higher for longer” inflation and interest rates.

China To Squeeze West by Restricting Export of Essential Rare Earths

Scott Buchanan1 Comment

Rare earths are a set of 17 metals with properties which make them essential to a swathe of high-tech products. These products include lasers, LEDs, catalysts, batteries, medical devices, sensors, and above all, magnets. Rare earth magnets are used in electric motors and generators and vibrators, making them essential to electric cars, wind turbine generators, cell phones/tablets/computers, airplanes, phones, and all sorts of military devices. 

China happens to have large amounts of rare earth oxide ores for mining, relatively lax environmental standards, and a large, compliant workforce. The Chinese government has harnessed these resources to make the nation by far the largest producer of rare earths. Their massive, relatively low-cost production has suppressed production in other countries. This has been a conscious policy, to achieve global control over a vital raw material.

The first time China used this effective monopoly as a political weapon was in a maritime dispute with Japan in 2010. China cut off exports of rare earth metals to Japan for two years, crimping the Japanese electronics industry.  Other nations took note of this threat, and since then have been a number of half-hearted (in my opinion) efforts in various Western nations to develop some domestic capacity and to redesign motors to reduce dependence on rare earth materials.

 China’s share of rare earth ore mined is down to 60%, but they totally dominate processing the ore to metals, and subsequent fabrication of magnets from the metal.  Nearly all of the ore mined in the U.S. is shipped over to China for processing, mainly because of environmental regulations here.  

According to the Asia Times,

The PRC still dominates the entire vertical industry and can flood global markets with cheap material, as it has done before with steel and with solar panels. In 2022, it mined 58% of all rare earths elements, refined 89% of all raw ore, and manufactured 92% of rare earths-based components worldwide.

There is no other global industry so concentrated in the hands of the Chinese Communist Party, nor with such asymmetric downstream impact, as rare earths.

It seems the only way for the West to blunt the Chinese monopoly in rare earths is with large, long-term subsidies (since the Chinese can always undersell the rest of the world on a free market basis) and probably some pushing past environmental objections.

Alarmed by the rapid buildup of Chinese military forces (towards a possible invasion of Taiwan), the U.S. and its allies have begun restricting exports of the highest-power silicon chips to China. In retaliation, China has reportedly made plans to restrict exports of rare earths, starting in 2023. If they follow through, that move would crush fabrication of magnets and of magnet-dependent devices like motors and generators in other countries; the rest of the world would have to come crawling to China for all these items.

This move would in turn cause the rest of the world to accelerate its plans to produce rare earths outside China, but there would be several years of great disruption, and Chinese-made final devices like motors and generators would always have a huge price advantage, due to their cheaper raw material inputs.

I suspect there may be a high-stakes game of brinksmanship going on behind the scenes. The Chinese leadership presumably knows that they can only play this rare earth export ban card once, and the West does not really want to plow a lot of resources into producing large amounts of rare earths much more expensively than they can be bought from China. So maybe we will see some relaxation in chip export controls for China in exchange for them not pulling the final trigger on a rare earth export ban.

We live in interesting times.

Bitcoin’s Dramatic Comeback: Resurrection or Dead Cat Bounce?

Scott Buchanan1 Comment

In the past year, one cryptocurrency firm after another has gone bust, culminating in the grand implosion of the FTX exchange. The crypto vortex also contributed to some of the recent banking failures.

The prices of cryptocurrencies shot up in 2021, probably fueled by pandemic stimulus money sloshing around in the bank accounts of restless 20- and 30-somethings. All this came crashing back to earth in 2022, giving ample scope for skeptics to say, “I told you this was all foolishness.” Last rites were said, and crypto was left for dead.

But wait… in 2023, when no one was looking, the lid of the crypto coffin started to rattle, a bony hand reached out, and…crypto is back!!

Well, sort of. Here is a five-year chart of Bitcoin from Seeking Alpha, in U.S. dollars:

And here is the past six months:

We can see that Bitcoin took its final big leg down in November, 2022, with the FTX collapse. Its price stayed fairly plateaued down there (with heavy trading volume) until January. Since then, it has nearly doubled.

What has triggered this rise in 2023? Observers such as Michael Grothaus at Fast Company suggests some four factors:

( a ) A shift to “risk-on” with the prospect of the Fed easing off with interest rate hikes this year.

( b ) A flight to alternative assets in the wake of the turbulence in the banking sector. Also, since the total amount of bitcoin is programmed to never increase over a certain number, Bitcoin should be a hedge against inflation. (Many observers believe that the Fed will live with 3-4 % inflation indefinitely, to help inflate away the gigantic debt that the federal government incurred with pandemic relief).

( c ) Buying of Bitcoin by traders who were short, and now need to cover their positions.

( d ) The usual rise in Bitcoin values as a bitcoin “halving” event is on the horizon. (About every four years, with the next time scheduled for May 2024, the rewards for mining new bitcoins drops by 50%).

Will the rise in Bitcoin prices continue? Is this truly a resurrection from the dead, or just a “dead cat bounce”? [1] Nobody knows. But this latest, sustained rally seems to have helped it recover some luster of legitimacy as an asset class. Here is a list of some popular crypto exchanges that are still in operation.

My personal take: I hold a sliver of the Bitcoin fund GBTC, just to have some skin in the game. I have been too lazy to learn about and activate an actual crypto wallet. I think Bitcoin in particular is an intriguing entity. Many other cryptos at some level depend on some centralized administration, but Bitcoin embodies the ideal of a decentralized, power-to-the-people form of something like money.

[1] From Wikipedia: In finance, a dead cat bounce is a small, brief recovery in the price of a declining stock.  Derived from the idea that “even a dead cat will bounce if it falls from a great height”, the phrase is also popularly applied to any case where a subject experiences a brief resurgence during or following a severe decline. This may also be known as a “sucker rally”.

Job Market Still Red-Hot; Inflation and High Rates Not Going Away Soon

Scott BuchananLeave a comment

As noted earlier, the main driver in inflation since 2021 has not been supply chain issues, but ongoing wage increases in (mainly) the service industry, fueled by a tight labor market. Some headlines note recent decreases in job openings, etc., suggesting that the end of inflation is near. The point of this post is that measures of labor market tightness remain at very high levels, and so it will be a while yet before the Fed can claim victory over inflation and start meaningfully reducing interest rates.

Below I will post a set of charts (courtesy of Seeking Alpha article by Wolf Richter) which make the following point: most measure of labor tightness remain at least as high as they were in late 2019, just before the pandemic hit. It is true that things have loosened up in the past few months, but that just means the labor market has gone from white-hot to merely red-hot. Let the data speak:

We hold that the current  tightness of the labor market is largely a result of pandemic policies which incentivized a whole tranche of experienced workers to take early retirement and also put lots of cash in our pockets which we are spending generously on services .  Those workers are not coming back, but at some point in the next 1-2 years the excess Covid cash will run out and we may finally get the long-expected recession. But if the government rushes in with enhanced unemployment benefits to ease the recession pain, we would expect inflation to remain well above the nominal 2% target