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WHAT YOU NEED TO KNOW!

THE ZOMBIE RUSSELL 2000

This graphic, via Visual Capitalist's Dorothy Neufeld, shows the share of companies with negative earnings in U.S. markets, based on data from Apollo.

For mid-cap companies, seen in the Russell Midcap Index, the share of companies with negative earnings stands at 14%, given their higher debt loads. Over the last decade, mid-cap stocks have lagged behind large-caps, largely due to the outperformance of big tech. However, earnings growth across mid-cap stocks has typically risen at a faster pace since many are developing breakthrough technologies.

Additionally, monetary easing and Trump’s proposed corporate tax cuts could have an outsized effect on small and mid-cap companies due to lower borrowing costs. While small-cap stocks have been on an impressive run this year, the share of unprofitable companies is considerably high, at 42% of firms in the Russell 2000—up from 14% two decades ago. Like mid-cap stocks, they have underperformed large-caps since 2014, but increasing investor risk appetite may drive an upswing looking ahead.

RESEARCH

2024 HANGOVER: ELECTION GAMESMANSHIP & THE WEALTH EFFECT

• Labor (False Employment Rates) & Inflation (Substitution, Hedonics, Imputation et al) have camouflaged the fact that the US Economy in real terms is in Stagnation heading quickly towards Stagflation. 
• A weakening economy, slowing rates of earnings increase, falsing PE's foretell of a weakening Wealth Effect.
• A weakening Wealth Effect will have a major impact on Credit Growth with potentially major consequences.

US MEGA-BANKS SEND LEGAL THREAT TO THE FED & BANKS' REGULATORS

• Federal banking regulators had originally planned to increase JPMorgan Chase’s capital requirement by 25 percent as part of Basel III. (Endgame)
• But instead of 25 percent, when the Fed released its new capital requirements for the megabanks on August 28, the Fed raised JPMorgan Chase’s capital requirement by just 7.89 percent from the 2023 level, taking it from a total capital requirement of 11.4 in 2023 to just 12.3 in 2024. Had the 25 percent increase been imposed, JPMorgan Chase’s capital requirement would have totaled 14.25.
• The strategy may be to send a permanent message to the other federal banking regulators and any future Fed Chair that you might find your agency hauled into federal court by a Big Law firm if you don’t do the bidding of the Wall Street megabanks. Scalia is one of the lawyers representing multiple plaintiffs in the newly filed lawsuit.

DEVELOPMENTS TO WATCH

WATCH TRUMP'S TREASURY FOR HOW THE DEBT CEILING MIGHT PLAY OUT

• The Debt Ceiling’s Dual Impact - The 2025 debt ceiling crisis is a double-edged sword. While it creates risks of market instability and economic uncertainty, the liquidity injection from the TGA could temporarily fuel asset price gains. These dynamics, coupled with Quantitative Tightening and potential credit rating changes, make the debt ceiling standoff one of the most critical financial developments of the year.
• The Treasury General Account (TGA) - With the debt ceiling limiting additional borrowing, the Treasury Department must rely on the Treasury General Account (TGA) to meet its obligations. The TGA, which contained $735 billion as of December 25, 2024, will act as a temporary lifeline.
• The Fed's QT - is currently reducing bank reserves by $60 billion per month. Over the next six months, QT could remove $360 billion of liquidity, leaving a net liquidity increase of approximately $375 billion. This dynamic will play a critical role in shaping market trends in the first half of 2025.
• $375 billion is still a very meaningful amount of Liquidity, averaging $62.5 billion a month between now and June.

GLOBAL ECONOMIC REPORTING

CHICAGO PMI

• The Chicago Business Barometer, also known as the Chicago PMI, dropped further to 36.9 in December 2024, compared to November's 40.2 and missing market forecasts of 42.5.
• The latest data indicated that Chicago's economic activity contracted for the 13th consecutive month, recording its steepest decline since May.
• New orders fell 13.5 points to the second lowest since May 2020, with more than half of respondents reporting fewer new orders for the first time since June 2020.

ISM MANUFACTURING

• ISM Manufacturing Prices in the United States increased to 52.50 points in December from 50.30 points in November of 2024. 

In this week's "Current Market Perspectives", we focus on the signals that Sentiment, Fundamentals and various market Segments (Credit, Bond and Equity) are currently giving us.

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2024 HANGOVER: ELECTION GAMESMANSHIP & THE WEALTH EFFECT

I have written extensively throughout 2024 how US Labor Market Reporting by the Biden Administration’s Bureau of Labor Statistics (BLS) was being blatantly being manipulated for election purposes. Rather than insert my many proofs, (outlined in ongoing our weekly newsletter), here are a couple of confirmation articles:

US EMPLOYMENT DISRUPTIVE DISTORTIONS

Example 1 – ZeroHedge’s Tyler Durden

Just a few months later we got evidence that one should never believe any so-called "data" coming out of Biden's administration, when in late August, just as we had warned, the Bureau of Labor Statistics revised down the number of jobs in the past year by 818,000 - one of the biggest downward revisions to key economic data in history - and admitted that nearly every other job had been faked, and instead of a 230K average monthly jobs increase, the US had been generating on average just 130K jobs.

Example 2 - Former Wall Street money manager and financial analyst Ed Dowd of phinancetechnologies.com

Former Wall Street money manager and financial analyst Ed Dowd of phinancetechnologies.com reports more data on how the Biden Administration propped up a failing economy during the 2024 election year. 

Dowd contends “crisis level spending” was being administered, along with some big time “fraud.” 

Dowd says, “We had 10% deficit to GDP during the Great Financial Crisis (2008 – 2009) when we actually had a crisis.  We had 8% deficit to GDP during this election year.  You have to ask yourself, what was the crisis?" 

"The crisis was to get the Biden Administration (and Kamala) re-elected. So, they went on binge spending. They borrowed from the future to try to ensure they won.  

They did it two ways: They hired massive amounts of government personnel to float the economy, and they also did illegal immigration. 

We are thinking it was 10 million to 15 million illegal immigrants that came in the last four years. The majority of the illegal immigrants came in the last two years. That stimulated the economy and raised the velocity of money as those people were given money. 

All the NGO’s that facilitated the illegal immigration also got money, and that stimulated the economy. This deficit added $2 trillion, and that was unproductive assets. So, we borrowed from the future to create more government jobs and imported unprecedented amounts of illegal immigrants that don’t add to the economy. 

That’s what we have, and President Trump’s policies are going to reverse all that sugar juice. There are going to be mass deportations and reduced government spending. 

That short term juice is going away, and it was not sustainable anyway. The bond markets are revolting, and that could not have gone on much longer.”

But it was not just massive money printing and debt creation that hid how bad the real economy was, it was very crooked data. Dowd says,

“We also had bureaucratic incompetence or fraud or whatever you want to call it. They were padding the non-farm payroll numbers to the tune of 1.25 million jobs...

If you look at the chart, which we don’t have here, it’s insane. 

It’s one of the biggest misses between reality and estimates we have ever seen. 

It’s a seven-sigma event. It’s 1.25 million jobs. It’s already started downward revisions...

The 3rd quarter GDP of 3% will be revised down, and when we get . . . the data in February, there will be more GDP economic revisions down. . . . The capital markets made bad decisions on this data. The Fed made bad decisions on this data, and corporations made bad decisions on this data. The price tag is coming due in 2025. Not only that, but we have a slowing economy across the globe...

The amount of foreign assets in our stock market has never been higher, and this is all going to reverse. The price will be paid in 2025. . . . What’s coming is coming. It’s how low do we go, and when do the animal spirits kick in? So, there is pain coming, and it’s up to the Trump Administration to get all their policies enacted. Then we have a hope and a prayer coming out the other side that we will be way better off. 

THE BOTTOM LINE is there is pain coming regardless. The question is how fast can we restart with Trump’s policies?”

Bidenomics continued to show the US economy was spectacular and growing at a red hot pace, even though the only thing that was coming out of the Biden BLS month after month was completely fake data about jobs (as we warned in March 29, 2024 "Philadelphia Fed Admits US Payrolls Overstated By At Least 800,000"). 

THE WEALTH v CREDIT DISTORTION

The Wealth Effect is now the primary driver of Credit Growth. If the Wealth Effect (Equities) was to weaken then Credit would be expected to deteriorate badly as it did during the GFC (Red Circle)!

WHAT THIS SUGGESTS

• Labor (False Employment Rates) & Inflation (Substitution, Hedonics, Imputation et al) have camouflaged the fact that the US Economy in real terms is in Stagnation heading quickly towards Stagflation.
• A weakening economy, slowing rates of earnings increase, falsing PE's foretell of a weakening Wealth Effect.
• A weakening Wealth Effect will have a major impact on Credit Growth with potentially major consequences.

US MEGA-BANKS SEND LEGAL THREAT TO THE FED & REGULATORS

 As Reported by Pam Martens and Russ Martens

12/31/24

Wall Street’s Lobby Firm Hired Eugene Scalia of Gibson Dunn to Sue the Fed for Jamie Dimon

THE BANK POLICY INSTITUTE

The Bank Policy Institute calls itself “a nonpartisan public policy, research and advocacy group…” In fact, it’s a registered lobbyist for the megabanks on Wall Street. The Chairman of its Board of Directors is Jamie Dimon, the Chair and CEO of JPMorgan Chase, the largest bank in the United States. The rest of its Board consists exclusively of the top executives of large banks, including Goldman Sachs, Citigroup, Bank of America and Wells Fargo.

According to media reports, this past January the Bank Policy Institute hired Eugene Scalia of the Big Law firm Gibson, Dunn & Crutcher to push back against the Fed’s plan for higher capital levels at the megabanks. JPMorgan Chase, in particular, was slated for a large capital increase and Jamie Dimon was not at all happy about that.

JP MORGAN & CEO JAMIE DIMON

So when the Bank Policy Institute decides to sue the Fed, one of the key regulators of the Wall Street megabanks, you can be certain that Jamie Dimon has a dog in this fight. (Plaintiffs in the lawsuit against the Fed, which was filed on Christmas Eve, include other bank-funded groups as well.)

Dimon sits atop not just the largest bank in the U.S. but also the bank designated as the riskiest bank in the U.S. by its regulators. And despite its unprecedented criminal history, the U.S. Department of Justice continues to nonchalantly toss it deferred-prosecution agreements for its criminal acts.

Dimon is the only Wall Street megabank CEO to have remained in that post since the financial crisis of 2008 – notwithstanding his bank losing $6.2 billion gambling with depositors’ money in derivatives in London; despite five felony counts to which it admitted guilt; despite over $40 billion in fines and restitution for looting the public and rigging trading; despite years of providing banking services to two of the most notorious criminals of this century – Bernie Madoff and Jeffrey Epstein – and despite endless bailouts from the Federal Reserve to prop it up.

THE ISSUE

Dimon is most likely opposed to the rule change because:

• Higher capital requirements could restrict the bank’s ability to prop up its share price with multi-billion-dollar stock buybacks each year,
• Increase its dividend to appease its shareholders that this multi-felon bank is on the right course and
• Lavish multi-million dollar bonuses on Dimon.

EUGENE SCALIA

Scalia is the son of the late Supreme Court Justice Antonin Scalia, who didn’t see anything wrong with accepting lots of free vacations from private interests while he sat on the high court. Eugene Scalia is also the lawyer who previously wielded a hatchet to gut key elements of the Dodd-Frank financial reform legislation of 2010. That legislation was intended to rein in the reckless risk-taking of the Wall Street megabanks that had produced the worst economic collapse in 2008 since the Great Depression of the 1930s. Mother Jones News Editor, Patrick Caldwell, wrote the following about Eugene Scalia in 2014:

“Ambrose Bierce once quipped that a lawyer is one skilled in the circumvention of the law. By that definition, Eugene Scalia is a lawyer of extraordinary skill. In less than five years, the 50-year-old son of Supreme Court Justice Antonin Scalia has become a one-man scourge to the reformers who won a hard-fought battle to pass the 2010 Dodd-Frank Act to rein in the out-of-control financial sector. So far, he’s prevailed in three of the six suits he’s filed against the law, single-handedly slowing its rollout to a snail’s pace. As of May, a little more than half of the nearly four-year-old law’s rules had been finalized and another 25 percent hadn’t even been drafted. Much of that breathing room for Wall Street is thanks to Scalia, who has deployed a hyperliteral, almost absurdist series of procedural challenges to unnerve the bureaucrats charged with giving the legislation teeth.

“Scalia has ‘created this sense that we’re paralyzed, because if we write a rule we’re just going to be reversed,’ says Lisa Donner, executive director of the watchdog group Americans for Financial Reform. The threat of more suits, she says, has ‘cast a real chill’ over Wall Street regulators, particularly at the Securities and Exchange Commission (SEC).”

BASEL III (ENDGAME)

The battle between Dimon and the Fed officially began on July 27, 2023 when the Federal Reserve, FDIC and Office of the Comptroller of the Currency (OCC) – JPMorgan Chase’s bank regulators — released a proposal to require higher capital levels at banks with $100 billion or more in assets. The proposed capital rule is formally known as the Basel III (or Basel Endgame) rule.

The three federal bank regulators provided a very generous public comment period of 120 days on the proposal. The large banks had to only begin transitioning to the new rules on July 1, 2025, with full compliance not due for a ridiculously long five years – on July 1, 2028.

Whatever Scalia was doing behind the scenes appears to have worked out well for Dimon. We know that federal banking regulators had originally planned to increase JPMorgan Chase’s capital requirement by 25 percent because Dimon stated that fact in his April letter to shareholders, writing that if the capital rules proposed by the FDIC, Office of the Comptroller of the Currency and the Federal Reserve are implemented, they “would increase our firm’s required capital by 25%.”

But instead of 25 percent, when the Fed released its new capital requirements for the megabanks on August 28, the Fed raised JPMorgan Chase’s capital requirement by just 7.89 percent from the 2023 level, taking it from a total capital requirement of 11.4 in 2023 to just 12.3 in 2024. Had the 25 percent increase been imposed, JPMorgan Chase’s capital requirement would have totaled 14.25.

BANK SYSTEMIC RISK MONITOR & SCORE

The U.S. Treasury’s Office of Financial Research, which was created under the Dodd-Frank financial reform legislation of 2010 to provide federal regulators with up-to-date research on threats to financial stability, has created a “Bank Systemic Risk Monitor” that provides an overall score to show the systemic risk a particular bank represents to U.S. financial stability. JPMorgan Chase’s score for last year was 857, which is 23 percent higher than the next riskiest bank on the list, Citigroup, which has a systemic risk score of 697. (Citigroup is the bank that blew itself up in the financial crash of 2008 and received over $2.5 trillion in secret revolving loans from the Fed, December 2007 through July of 2010, according to the eventual audit released by the Government Accountability Office.)

Equally noteworthy, JPMorgan Chase’s score is twice that of Deutsche Bank USA (DB USA), which has a systemic risk score of 422. And yet, when the Fed released its capital increases on August 28, it raised Deutsche Bank USA’s capital requirement from 13.8 in 2023 to 18.4 currently – an increase of a whopping 33 percent versus an increase of 7.89 percent for JPMorgan Chase.

So if Dimon got everything he wanted with the help of Scalia, why is the Bank Policy Institute, of which Dimon serves as Chairman, moving ahead with a lawsuit against the Fed?

According to Senator Elizabeth Warren at a Senate Banking hearing on March 7 with Fed Chairman Jerome Powell, it was Powell that led the efforts inside the Fed to weaken the capital rule after getting pressure from the megabanks. Warren told Powell this:

“You are the leader of the Fed and when the heat was on last year, you talked a lot about getting tougher on the banks. But now the giant banks are unhappy about that and you’ve gone weak-kneed on this. The American people need a leader at the Fed who has the courage to stand up to these banks and protect our financial system.”

THE HIDDEN MESSAGE

Dimon’s and Scalia’s strategy may be to send a permanent message to the other federal banking regulators and any future Fed Chair that you might find your agency hauled into federal court by a Big Law firm if you don’t do the bidding of the Wall Street megabanks. Scalia is one of the lawyers representing multiple plaintiffs in the newly filed lawsuit.

What is particularly outrageous about all this is that a similar bank front group called the Clearing House Association had the audacity to battle in court – all the way to the U.S. Supreme Court (which declined to hear the case) — to prevent the Fed from releasing the names of the megabanks and the trillions of dollars in emergency revolving loans these banks had received from the Fed for two and a half years, following the banks blowing up Wall Street and the U.S. economy from 2008 to 2010. The megabanks were “owners” of the Clearing House Association according to its legal filing and it brazenly demanded secrecy from the courts on this unprecedented money spigot from the Fed to the banks. It failed in that effort.

Now these same banks want us to believe that their mission in filing this lawsuit is to force “transparency” from the Fed to enhance the public interest.

The new court filing by the Bank Policy Institute states that “The Clearing House Association [is] one of the Bank Policy Institute’s predecessors….”

DEVELOPMENTS TO WATCH

WATCH TRUMP'S TREASURY FOR HOW THE DEBT CEILING MIGHT PLAY OUT



Debt Ceiling 2025: How It Impacts Liquidity and Financial Markets

As of January 1, 2025, the U.S. debt ceiling is back in effect, reinstated at the current level of outstanding government debt. Without congressional action to raise the borrowing limit, the U.S. Treasury faces significant challenges in funding government operations. What does this mean for the economy, financial markets, and liquidity in the months ahead?

What Happens Now That the Debt Ceiling Is Reinstated?

With the debt ceiling now limiting additional borrowing, the Treasury Department must rely on the Treasury General Account (TGA) to meet its obligations. The TGA, which contained $735 billion as of December 25, 2024, will act as a temporary lifeline. However, this strategy raises critical questions:

• How long can the Treasury sustain operations without borrowing?
• What impact will the TGA rundown have on liquidity in financial markets?

Risks of the Debt Ceiling Standoff

The standoff over the debt ceiling poses several significant risks to the U.S. economy and financial markets:

1. Stock Market Volatility: Prolonged uncertainty could undermine confidence in the new administration’s economic policy agenda, leading to market volatility and potential selloffs.
2. Credit Rating Downgrade: The 2025 debt ceiling standoff could result in a further downgrade of the U.S. government’s credit rating, as seen in past debt crises. A downgrade would erode investor confidence and increase long-term borrowing costs.
3. Economic Uncertainty: The inability to borrow could force the government to delay non-essential payments, impacting economic stability and investor sentiment.

Could the Debt Ceiling Crisis Drive Liquidity Injection?

Despite these risks, the Treasury’s reliance on the TGA could inject significant liquidity into financial markets:

• Treasury Liquidity Injection: As the Treasury spends down the TGA, $735 billion could flow into bank reserves, increasing financial market liquidity. Historically, increased liquidity has supported higher asset prices.
• Impact on Financial Markets: Greater liquidity could result in rising stock prices and lower bond yields, partially offsetting the negative effects of political uncertainty.

Quantitative Tightening as a Dampener

While the TGA rundown adds liquidity, the Federal Reserve’s ongoing Quantitative Tightening (QT) offsets some of this effect. The Fed is currently reducing bank reserves by $60 billion per month. Over the next six months, QT could remove $360 billion of liquidity, leaving a net liquidity increase of approximately $375 billion. This dynamic will play a critical role in shaping market trends in the first half of 2025.

Historical Parallels: Flight to Safety

Past debt ceiling standoffs, such as those in 2011, 2013, and 2023, triggered a “flight to safety,” with investors flocking to U.S. Treasury bonds. This demand drove bond prices higher and yields lower. If a similar trend occurs during the 2025 debt ceiling standoff, falling yields could provide an additional boost to asset prices.

The Replenishment Risk

Once Congress eventually raises the debt ceiling—as it always has—the Treasury will likely begin replenishing the TGA. This process could drain liquidity from financial markets, creating downward pressure on asset prices in the second half of 2025. Combined with ongoing QT, this contraction could spark significant market volatility.

The Debt Ceiling’s Dual Impact

The 2025 debt ceiling crisis is a double-edged sword. While it creates risks of market instability and economic uncertainty, the liquidity injection from the TGA could temporarily fuel asset price gains. These dynamics, coupled with Quantitative Tightening and potential credit rating changes, make the debt ceiling standoff one of the most critical financial developments of the year.

GLOBAL ECONOMIC INDICATORS:

What This Week's Key Global Economic Releases Tell Us

US

CHICAGO PMI

The Chicago Business Barometer, also known as the Chicago PMI, dropped further to 36.9 in December 2024, compared to November's 40.2 and missing market forecasts of 42.5.

• The latest data indicated that Chicago's economic activity contracted for the 13th consecutive month, recording its steepest decline since May.
• New orders fell 13.5 points to the second lowest since May 2020, with more than half of respondents reporting fewer new orders for the first time since June 2020.

ISM MANUFACTURING

The ISM Manufacturing PMI rose by 0.9 points from the previous month to 49.3 in December of 2024, ahead of market expectations of 48.4.

• The result reflected the softest pace of contraction in the US manufacturing sector since the 50.3 recorded in March, which was the sole period of expansion in the industry since September of 2022.
• The gauge measuring new orders was at 52.5, reflecting the strongest level of demand for new goods in 11 months, suggesting that lower output for manufacturers may be close to bottoming despite the prolonged period of restrictive interest rates by the Fed.
• ISM Manufacturing Prices in the United States increased to 52.50 points in December from 50.30 points in November of 2024. ISM Manufacturing Prices in the United States averaged 60.40 points from 2003 until 2024, reaching an all time high of 92.10 points in June of 2021 and a record low of 17.10 points in December of 2008.

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