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Tuesday, August 19, 2025

2025-08-19

**** denotes well-worth reading in full at source (even if excerpted extensively here)


Economic and Market Fare:




Executive Summary
Despite the second quarter GDP growth, the figures have some worrying trends that suggest that the US economy is heading into a period of noticeably slower growth which is likely thanks to the impact of tariffs on inflation, the tightening of the labor market and as a consequence shrinking consumer spending.

With the price increases occurring as a result of the new tariff policies, it will eat into real incomes, at a time when consumer spending is starting to look a bit shaky.  Monthly retail sales and personal spending have started to cool in the last couple of months, despite the increase in prices. It is evident that spending on balance has stagnated for the first six months of the year which rarely happens outside of a recession.



While the macro backdrop is giving mixed messages, other signals are decidedly bullish.

The technical evidence has been strong, as the U.S. stock market is acting like it normally does coming off a major low.

First, the breadth thrusts that triggered shortly after the April lows indicated a new uptrend was underway. Second, leadership was consistent with previous recoveries after large corrections, with tech and other offensive groups like financials leading. Third, long-term breadth readings began to reach levels that confirmed uptrends which were proven sustainable in previous cycles.

Of course, it is not perfect. Many stock groups are working through overbought readings while sentiment has improved as we find ourselves in a seasonally weak time of the year. ..........

While prices can swing on sentiment or idiosyncratic developments, stocks over time tend to follow the direction of earnings growth because a company’s ability to generate profit ultimately drives its value.

As we enter the final stages of the Q2 reporting season, with ~90% of companies having reported, EPS growth is tracking at +11-12% YoY whereas the expectation at the start of the quarter was +4%. This follows a similar pattern from Q1.

84% of companies have beat estimates, surprising positively by 9%.

These sterling results come at a time when many investors feared an outright contraction in earnings growth due to the tremendous storm clouds around trade policy, passage of the One Big Beautiful Bill Act, and the potential emergence of another inflation wave. .............


Weight of the Evidence tilts toward Opportunity despite macro concerns




The 4 Ratios That Tell the Market’s Real Story
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Robust Risk On Behavior
My goal is to develop robust investment frameworks.
That means we never take one of these ratios on its own as a reason to make a decision.
We want to weigh the evidence, look at them in aggregate, and see which way the scale is leaning.
Right now, these four ratios alongside this pop in Small Caps are all lined up in the same direction.
That doesn’t mean there won’t be volatility or negative headlines.
But it does mean the weight of evidence suggests it’s still a time to be more opportunistic than fearful.
Is that a surprise? No. We’re in the midst of a Bull Market.
But keeping a close eye on these ratios ensures we’ll know where to look when risk-seeking becomes the exception, not the rule.
Until then……the risk is not taking any.


The Three Americas and aspirational displacement

The US is operating with 3 broken gears that no longer connect. There are currently 3 Americas:

America 1 (The Speculative Class): The first America is the speculative class, and its engine is artificial intelligence. The Magnificent 7 are spending over $100 billion a quarter on data centers, which are these monumental projects of hope. They consume vast amounts of capital and electricity, a place where money and power are absorbed in a high-stakes gamble.

America 2 (The Real Economy): The second America is the real economy. With 75% of new jobs in healthcare and social assistance, our workforce is being absorbed by the essential but underfunded ‘maintenance economy’ of an aging population. While it props up the labor market, it fails to generate the type of wealth that fuels the stock market or long-term growth, as resources are poured into maintenance rather than creation.

America 3 (The Memes): The third America is the bridge between the other two, acting somewhat as a psychological gold sink for those who are priced out of a house and a future. The money spent here is largely speculative and doesn't build a sustainable future (is memecoin investing productive, I don’t know) but it gives people a sense of agency and hope within a system that otherwise offers them little.

It’s a very strange world. ........................



P.E. Fare:

Trump "democratizing" private equity fee income, one retail investor at a time.

President Trump has made the move to firmly hit private equity’s (PE) G-Spot: unfettered access to the $12 trillion 401(k) market. This past Thursday, Trump signed an executive order Democratizing Access to Alternative Assets for 401(K) Investors

The order directs the Secretary of Labor Lori Chavez-DeRemer to review and potentially remove the biggest obstacle PE has had in gaining access to 401(k) plans, most notably the plan manager being sued for not performing their fiduciary responsibilities by investing in PE. That’s what happened in 2015 when Intel employees sued the company for what they considered to be lousy returns from PE investments. .............



Bubble Fare:

********** Hussman: The Bubble Term

.......................... The word “bubble” gets tossed around quite a bit. Usually, it comes in the form of verbal arguments about whether prices have advanced to a point that’s “too high” in some sense.

We can do much better than that. A bubble is a mathematical object.

As I’ve observed before, bubbles are generated when investors drive valuations higher without simultaneously adjusting their expectations for future returns lower. That is, investors extrapolate past returns based on price behavior, even though the resulting expectations about future returns are inconsistent with the returns that would equate price with discounted cash flows. ...................................


.......... A reliable valuation gauge is nothing but shorthand for a proper discounted cash flow analysis. As I’ve detailed across decades of market commentaries, the valuation gauges we use are faithful to that requirement. So, valuations offer beautiful intuition about the growing gap between the future returns in investors heads, and the future returns that one would project based on discounted cash flows. ....................

That’s just arithmetic. The actual total return of the S&P 500 for any given holding period has three pieces: the annual growth in fundamentals F, the annualized change in valuations (Price/F) during the holding period, and the average dividend yield during that period.

Over the past 10, 20 and 30 years, nominal GDP, S&P 500 revenues, and corporate gross value added have grown by only about 4.5% annually. Suppose that growth continues. The current S&P 500 dividend yield is only about 1.2%. So if valuations can remain at current extremes forever, the expected return arithmetic says 4.5% + 1.2% = 5.7% nominal.

If valuations decline to some lower level, the effect is to reduce expected returns by (future V / current V)^(1/T)-1 where T is the number of years. For example, a decline in MarketCap/GVA from the current extreme of 3.7 to a level no lower than the 2000 peak of 2.5, would lower 10-year total returns by (2.5/3.7)^(1/10)-1 = -3.8%. The resulting 10-year nominal total return estimate then becomes 5.7%-3.8% = 1.9% annually, and even less if inflation is positive. That’s not a theory, it’s just arithmetic. The only issue is whether investors assume the bubble will be permanent. ......................

Now look at fiscal policy. As I’ve noted before – equilibrium again – anytime one sector runs a deficit (consumption and net investment over-and-above income), some other sector must run a surplus (income over-and-above consumption and net investment). That’s not a theory. It’s just an accounting identity. That accounting identity has played out in real time in ways that investors don’t seem to fully recognize.

Specifically, as government deficits exploded in recent years – particularly resulting from a combination of tax cuts and pandemic spending – corporate free cash flows also exploded. They had to. This wasn’t because of some new-era productivity boom. It was because of equilibrium. It’s just an accounting identity. But it creates a situation where perpetually extreme corporate earnings now rely on perpetually extreme government deficits. They are mirror images of each other. ...........

Although interest rates are no longer at zero, the massive corporate debt refinancing in 2020-2021 has delayed the impact of the “liftoff” from zero rates. The current bubble extreme rests at the very top of that house of cards. Put simply, investors now rely on an ever-expanding Bubble Term that was driven by “free money” monetary and fiscal policies that will not only have to persist – but will have to expand without limit in order to sustain that Bubble Term.



Quotes of the Week:

“The bull case remains a convincing one, with earnings growth solid, and a cooler tone on trade continuing to prevail, all the while dovish policy expectations help to provide a cushion against any worries that the economy may be softening,” said Michael Brown, senior research strategist at Pepperstone.

US Treasury Secretary Scott Bessent told Bloomberg TV that rates should likely be 150-175 basis points lower. “We could go into a series of rate cuts here, starting with a 50 basis-point rate cut in September,” he said.



Charts:
1: 
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(not just) for the ESG crowd:

Canada’s response to the extreme weather threat is being upended as the traditional epicentre of the blazes shifts as the climate warms



Ted Nordhaus wants us to stop talking about climate catastrophe. He calls Amazon collapse, crossing tipping points, and weather shocks exaggerations. He acknowledges that the world is headed toward 3°C of warming, but is confident that society will adapt.

That is techno-optimism at its most absurd—ignoring physiology, geography, and demographics. At ~3°C, the world crosses into extreme mortality events, recurrent food shocks, and mass displacement as “normal” features of the system. ...........



Yves here. This is a terrific talk in which James Galbraith, recapping his work in Entropy Economics, explains how the foundations of economics are fundamentally at odds with the operation and limits of our physical world. Trust me, either put it on for a listen or find the time to read the transcript. Galbraith offers a fresh and important view of where what presents itself as economic logic is dead wrong and how we might go about making better policy decisions. ............



A.I. Fare:


Meta is building “Prometheus” and “Hyperion”, Elon Musk’s xAI has “Colossus”, and OpenAI is developing “Stargate” — each a more than $100bn project to build the world’s most powerful supercomputer and usher in a new generation of artificial intelligence.

But each of those gargantuan ventures is just a fraction of the spending required to build the data centres needed to power the AI era: one of the biggest movements of capital in modern history. .............


The future of A.I. is more Facebook, not jobs in space



U.S. B.S.:




Geopolitical Fare:


................................................... The Deep State’s game plan is total control: what really matters is the opening to establish a NATO corridor all the way to the Caspian.

There’s no way Nightingale will let that happen, not to mention Bear and Dragon: it would mean a direct NATO threat not only to the International North South Transportation Corridor (INSTC), which unites three BRICS (Russia, Iran, India) and crosses the Caspian, but also the Chinese Silk Roads, whose corridors traverse Iran with possible branch outs to the Caucasus. ............

The most probable outcome is that the proxy war – and the SMO – will keep rollin’ on, but with the Deep State making extra bundles of euros by selling tons of weapons for NATO to dispatch to Kiev. But even without the promise of a new, serious, US-Russia security architecture, BRICS may still stand a chance to snatch a victory out of Goldfinger’s latest photo op.


Coercive bilateralism, strategic decoupling, and the erosion of multilateralism: a brave new world

............. Today, the global stage is dominated by three actors whose contrasting approaches define the future of international trade: a United States governed once again by that same unpredictable and aggressive style; a fractured European Union, led by leaders who resemble indecisive merchants lacking a clear strategic vision; and a methodical China, headed by a sober and calculating leader whose banner is multipolarity. These three powers, with their divergent paths, are reshaping the rules of global economic governance. ..............................

In this new order, trade policy is no longer dissociated from geopolitics. Markets are weapons; tariffs are instruments of the Cold War. And while the great powers clash, the rest of the world must choose a side… or risk being caught in the crossfire.



From Bosnia to Afghanistan, the neoliberal peace-building model has compounded conflicts and inequalities by eroding the core function of states and subordinating people’s needs to the interests of capital. But in Ukraine, the co-optation of the recovery process by private economic interests is being taken to a whole new level. .......................

................... The path we are now on is abysmal. We live in war economies. Part of the militaristic discourse is to claim that investments in weapons are not about waging wars but about ensuring peace. More weapons mean better defence, a sort of militarised insurance, we are told. This is nothing but gaslighting.

Cynthia Enloe, one of the most prominent feminist thinkers on militarism, has shown that it is a prerequisite to waging wars. Militarism is deployed to implicitly and explicitly foster societal support for and normalisation of war agendas. If we spend money on weapons instead of the public good, and if we allow our societies to be consumed by militarisation, while discounting peace as naïve and peace activists as dangerous, we will have war. .....................





........... Simply hilarious getting to watch the press squirm and spin. The sad fact is that the Western establishment is so infected with an intense hatred of Putin and Russia that they are incapable of actually listening to what Putin said.



My coalescing sense of the underwhelming Alaska Chats is that Russia has not materially varied from its longstanding terms.

Trump rolled into town with his "stealth" flyover, imagining he was the one giving an audience to Putin.

From start to finish it was perfectly evident to any discerning observer that it was just the opposite, and that Putin was there to repeat and to emphasize Russia's apparently inviolable terms.

........ I cannot understand how so many people seem to doubt the resolve of the Russians to continue fighting western forces for years to come pursuant to their clearly enunciated objectives.



Palestine is the moral question of our time because the abuse of the Palestinians is the most glaring, in-your-face symptom of the imperial disease. You can see the effects of so many of the empire’s abusive dynamics in how this thing is playing out, from racism to colonialism to militarism to war profiteering to mass media propaganda to empire-building to government corruption to suppression of free speech to ecocide to the heartless, mindless, soul-eating nature of the capitalist system under which we all live. 

But there’s more to it than that. The primary reason to place Palestine front and center as the moral issue of our time is because if we can’t sort out the morality of an active genocide backed by our own western governments, we’re not going to be able to sort out anything else. ............



............... I feel this so hard. Gaza doesn’t need our sadness, it needs out anger. It needs our rage. That’s the only appropriate response to a live-streamed genocide supported by your own government.

Sadness and grief are for natural disasters. Cancer diagnoses. Terrible accidents. This is not something that has passively happened to the people of Gaza, it’s something that’s been done to them by other people, and the people who are doing it have names and faces. It’s not a tragedy, it’s a crime. A crime that is still currently being perpetrated and urgently needs to be stopped, by any means necessary.

The correct response is rage. Rage toward the people who are responsible for this mass atrocity. The officials of the Israeli government and all their western allies. Their apologists and propagandists in the mainstream press. The war profiteers who are benefiting from an active genocide. Individual members of the IDF. The hasbarists who swarm social media and pollute our information ecosystem with manipulation and lies.

Celebrities and influencers who urge us to weep for Gaza are pushing us into passivity and defeatism by urging us to treat this like an unavoidable tragedy that has already happened instead of an unforgivable atrocity that is still underway. This is power-serving propaganda, and it deserves nothing but scorn. ...............





............... Snow Himbo asks on Twitter, “Given how horrifying reality is at present, what are some things you still have hope in?”

I still have hope in young people. Gen Z haven’t just been outperforming all of us on Gaza, they’ve been leading the charge. They’re simply a superior generation to the rest of us. This may be because they didn’t grown up marinating in the brainwashing of the mainstream media. It may also be because they’re the first generation in human history ever to have the ability to create their own culture without having culture imposed upon them by older generations; they’re learning about the world from streamers their own age discussing ideas while playing video games and TikTok personalities explaining politics while putting on makeup. The rest of us got our culture solely from our parents, teachers, Hollywood, and mass media propaganda. We were way more dumbed down, because knowledge was gate-kept from us.

I have hope in the expansion of consciousness. We’re growing so much more aware in so many ways, even as things apparently get darker and darker. Gaza is opening eyes at an unprecedented rate. ..........................



Science Fare:



COVID-19 can cause both acute and delayed neurological effects in children, ranging from headaches and fatigue to rare but severe brain disorders.



Tweet Vid of the Week:


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