Thursday Night Links

• The proposal I have outlined is – for now – a carefully estimated thought experiment drawn from existing data, not an empirical report on costs from the front lines of a hundred-gigatonne-a-year sequestration megaproject. It is not unreasonable for readers to regard some of my numbers as a little rough around the edges. But even if energy costs are off by a factor of two, the conclusion seems inescapable: one promising, comparably cheap, and relatively easy pathway to reversing global warming and returning to the cooler, more stable world of the second millennium is by deploying Earth’s natural sequestration process at industrial scale, using technology we already have, at a cost that might feasibly clock in at less than one percent of the world’s GDP. [Works in Progress] 
• Their political hero’s trade adviser kept attacking what the county’s business guru called their “golden goose,” and no one knew how to quell the clash between two of the most beloved brands in Spartanburg. Around here, it’s like watching Santa Claus kick the Easter Bunny. Or Uncle Sam stomp an apple pie, nay, strudel. “This is Trump country,” said Eddie Tallon, a retired Republican lawmaker in South Carolina’s conservative Upstate, “but we love BMW.” In the days since White House aide Peter Navarro publicly bashed the German carmaker credited with resuscitating the local economy, GOP leaders here have faced an awkward dilemma: How do they defend the foreign firms propelling South Carolina’s growth against a ruthlessly America First president? [The Washington Post]
• Republican Sen. Rand Paul left a lunch meeting with U.S. Trade Representative Jamieson Greer this week feeling thoroughly unimpressed — not only with the administration’s strategy, but also with his own colleagues. “Most of it was Republican senators congratulating him, wishing him well as the industrial czar and pleading for exemptions to the tariffs for their people,” Paul told NOTUS afterward. “It reminded me of a meeting on industrial policy in the Soviet Union, where you have to be nice to the czar because if you’re nice to the czar, they’ll bequeath upon you exceptions to the iron fist,” he said. [NOTUS]
• "We are pleased to report the best quarter in ICE’s history, highlighted by record revenues, record operating income and earnings per share growth. Amidst a backdrop of continued geopolitical and macroeconomic uncertainty, our first quarter performance reflects the quality of our all-weather business model and the value of our markets, technology and data services. Looking to the balance of the year and beyond, ICE's diverse platform is well positioned to serve our customers, generate growth and create value for our stockholders." [Intercontinental Exchange, Inc.]
• I live in Washington and have friends who are heavily involved in the horse world in Middleburg and Upperville, as well as in Baltimore County, and I agree you see plenty of Subarus amongst the truly old old money wasp folks, and Volkwagon station wagons. I also spend a lot of time in Thomasville, Georgia, the quail hunting capital of the country, and amongst my friends- all boarding school educated old money folks, with historic in town houses, and plantations in the country, almost all have a Subaru Outback. How else can you maneuver the dirt and gravel drives in the country? Anyone who drives a Mercedes or BMW suv is identified as a yuppie, with no place in the country. [Salt Water New England]
• In this paper, I provide a descriptive analysis of religious worship attendance using geodata from smartphones for over 2 million Americans in 2019. I establish several key findings. First, 73% of people step into a religious place of worship at least once during the year on the primary day of worship (e.g. Sundays for most Christian churches). However, only 5% of Americans attend services “weekly”, far fewer than the ~22% who report to do so in surveys. The number of occasional vs. frequent attenders varies substantially by religion. I estimate that approximately 45M Americans attend worship services in a typical week of the year, but with large changes around Holidays (e.g. Easter). [Devin Pope] 
• When considering the effects of bank regulation on community banks, we should ask ourselves why so much financial activity has moved out of the regulated banking system. For example, the shift of mortgage lending to nonbanks has undercut an important line of business for community banks. It is clear this shift out of the banking system is to some degree driven by regulation—and in particular by outdated capital requirements on some exposures that are well in excess of the latest evidence on the actual risk of those exposures. [Treasury Secretary Scott Bessent]

Tuesday Night Links

• Few of today’s populists bemoan the declining reliance on agriculture jobs, but the phenomenon is the same as what’s seen in manufacturing. In both cases, people can produce more than in the past with less workers. Blame technology, not trade—and don’t fall for the populist nostalgia trap. It also turns out that those service jobs were not lower paying jobs, and that manufacturing jobs, in general, didn’t reliably provide higher income. (Even when they did pay more, they didn’t pay much more.) [Cato Institute]
• If you’re going to try and mount an intellectual defense of Trump’s tariff policies — instead of just screaming out memes, pointing fingers, and trying to distract people by talking about immigration instead — this is basically how you have to do it. Nothing good is coming of Trump’s tariffs right now, so if you’re going to defend them, you basically have to argue that they represent short term pain for long term gain. In this case, the long-term “gain” is economic self-sufficiency and a bonanza of factory jobs. Formally speaking, you can’t prove that this is wrong, except by waiting a bunch of years and then observing that reindustrialization didn’t happen. There are no hard and fast economic laws of the Universe; we have a lot of theories, but economies are complex beasts, and the past is an imperfect guide to the future. I can’t completely rule out the possibility that Trump’s tariffs will cause a vast crop of steel factories and shoe factories and semiconductor factories to spring up from the American topsoil like mushrooms after the rain. And yet when we look at what’s actually happening to American manufacturing in real time, it doesn’t look anything at all like the beginning of the reindustrialization that Cass imagines. [Noah Smith]
• Economists that seriously study the issue generally find that falling manufacturing employment doesn’t have much to do with corporate management, and surprisingly, it doesn’t even have that much to do with trade (although a few dissent on this latter point). Instead, 80% - 90% of the decline can be traced to higher manufacturing productivity combined with stagnant demand, the same thing that reduced employment in agriculture in a previous generation. This is why the decline in manufacturing employment dates all the way back to WWII: greater manufacturing efficiency generally translates to lower manufacturing employment, because there is some upper limit on the number of cars and light bulbs we want to consume. We take the dividends from more efficient manufacturing and redeploy it to deliver services, especially in education and health care. [MD&A]
  
• When you invest in a company, you are really buying two assets: Their current business, and the unique knowledge they have about adjacent businesses, which they can monetize by investing the firm’s capital. […] One reason successful investors emphasize the quality of the management team, particularly among growth companies and companies in fast changing markets, is that their ability to allocate capital and win in other fields is crucial to the outcome of an investment. A DCF of an existing business is inadequate to analyze the outcome in a fast changing field where yesterday’s assets are becoming obsolete, but the leading players have a huge head start on building the more durable assets of tomorrow. [MD&A]
• Zell realized that his replacement cost framework would apply to all long-lived capital investments, not just real estate. In the mid-1980s, his firm bought a fleet of railcars, which were then trading at half of replacement cost, following a construction boom a few years before. Same model, same bet, same result. In 1992 he flipped his railcar fleet to GE for a huge profit. This is not to say that Zell’s fortune can be entirely attributed to simply buying quality assets trading at a discount to replacement cost. Zell was a savvy operator and a talented dealmaker who boosted his returns through leverage and clever structuring. But at the same time, throughout his career, this was Zell’s big shtick: “to look for opportunities in places where others were ignoring the rules of supply and demand”. [MD&A]
• I would conclude that successful startups end up getting into venture investing because their early success and the economics of their industry creates a unique set of incentives whereby it just so happens they will sometimes achieve the best outcome by investing in companies that build complements. It cannot be overlooked also that early success allows a startup to raise a lot of cash, which makes it easier to get into a venture strategy. It certainly does not imply that most startups would be more successful if they started a venture capital arm. Indeed, this strategy mostly compounds the advantages of startups that are very successful in the first place, but we would not expect it to turn a struggling startup into a market leader. [MD&A]

PrairieSky Q1 2025

PrairieSky Royalty announced earnings (financials, MD&A, presentation) for the first quarter of 2025. Some highlights:

Oil royalty production volumes averaged a record 13,502 barrels per day, a 3% increase over Q1 2024.

Funds from operations totaled $85.8 million or $0.36 per share, an increase of 3% over Q1 2024 primarily due to increased oil royalty revenue with higher oil royalty production volumes combined with narrowed oil price differentials.
 
Realized oil pricing averaged $83.16 per barrel, an increase of 8% over Q1 2024, as the 7% decrease in average WTI crude oil benchmark pricing was more than offset by narrowed light and heavy oil price differentials and a weaker Canadian dollar relative to the US dollar. 

Purchased and cancelled 3,415,900 common shares under the Company's normal course issuer bid ("NCIB") for $90.0 million.

Completed acquisitions of both producing and non-producing royalty interests for $63.6 million. 

PrairieSky generated cash from operations of $65.5 million, they spent $46 million on acquisitions, $66 million on share repurchase, $43 million on dividends, and borrowed $90 million on their bank loan. (They took net debt from $110 million the prior quarter to $195 million.) Interest rate on the loan is floating, currently 5.9%.

The market capitalization is $4 billion so the CFO/EV yield is 6.6%.

Monday Morning Links

• When market veterans gather, the talk often turns to memorable crashes: Where they were in 2020, 2011, 2008, 1998, or for the older among them, 1987. Last week should join that list. Where were you when investors fled America? [WSJ]
• A future Trump impeachment seemed all but guaranteed by last Wednesday morning. It seems only slightly less likely now. It may even be desirable to restore America’s standing with creditors and trade partners. As sacrilegious as the comparison will seem, Mr. Trump faced a problem Abraham Lincoln and Franklin Roosevelt solved by dying once their greatest achievements were in the bag. Mr. Trump’s great achievement was his 2024 re-election, a rebuke to the injustices and insults meted out to him and his fans since 2016, some of which were even real. However, no consensus or even significant coalition exists for trying to force into existence a new American “golden age” with tariffs, which anyway is like asking a chicken to give birth to a lioness. He invented this mission out of his own confused intuition. [Holman W. Jenkins, Jr.]
  
• Time for a call. 81 days: that is how long Trump’s golden age lasted. Deportations now paused for agricultural and hotel workers. Musk’s chainsaw slashing of the federal bureaucracy replaced by departmental “scalpel”. And as of this morning, surrender in the tariff war. Trump and Musk didn’t even last as long as the 100 Days reformers, who failed to reboot Qing China. Somewhat longer-lasting than the wilting lettuce, Truss, that ran the UK into the ground in three weeks. The exemptions for iPhones and other electronics make a joke of the tariffs on China. It’s the second climb-down since Wednesday. This is before a single gesture of conciliation from China. And the week isn’t over yet. So, lessons... Trump’s mandate was an illusion. Trump, to use his own favorite expression, did not have the cards. In less than three months his approval has dropped to eight points underwater. Musk’s numbers are much worse. And this last week has displayed with fluorescent clarity: the numbers for Trump’s debt renegotiation do not work with 30-year bonds above 5%. A little reminder: China has barely played its cards yet. Tesla and Apple plants are still open. If China was behind some of last week’s sales of Treasuries, it exercised some tact. The latest unilateral trade concessions will be spun as another brilliant move by the deal artist, Trump. But Xi still has not called, despite White House pleas. So the only conclusion can be this: the Trump economic reforms are over; the dollar’s reserve currency status is already in question; and the grind you hear is of tectonic plates in motion. I don’t think China planned for 2025 to be the year. A patient approach — coordinated industrial investment and an ever-expanding trade links — was working fine. Ray Dalio notes that previous imperial transitions — from British to American, for instance — took decades. And some sectors, such as finance and culture, lag even more. With Trump, Musk and Vance as the triumvirate, China will never face opponents as easy to read, so easily tricked, so prone to make mistakes, and liable to fight among themselves. China could not contend with American soft power. Against Musk the Techbro, Vance the Hillbilly and Trump the Chud, the contest for global opinion is way easier. [Nick Denton]

Friday Night Links

• My biggest uncertainty is whether I’m right about the necessity of manufacturing as the foundation of an economy. A lot of conservatives were similarly dead wrong in the 1800s about agriculture, with a lot of political capital invested in hare-brained schemes like silver-based inflation. Recall William Jennings Bryan’s “Cross of Gold” speech in which he compared the plight of farmers paying back mortgages in gold-backed dollars to the sufferings of Christ. Bryan and his farmer supporters wanted to devalue the currency to relieve the debt load of a sector destined to fail as science increased crop yields and sank crop prices. Many a prominent American family were impoverished by trying to hold onto the family farm for too long, romanticizing the Jeffersonian ideal of the politically independent gentleman farmer as the foundation of the republic. The crushing economics of cheaper food and consolidation meant that there was no possible political intervention to save the family farm, as now fewer than 1% of Americans grow all our food. [The Tom File]
  
• The Republican majorities in both houses of Congress have been irresponsible in relinquishing their authority on tariffs to the executive branch. It amounts to an insult to history, and even to themselves. They are a coequal branch of government, and it is their job to protect their own standing. Instead, as Jonathan Martin notes in Politico, they have reduced themselves to “doing color commentary up in the booth.” Gosh, I hope the president is right. They spoke gently of their reservations, acting like “a parent praising a toddler about what a big boy he is in hopes he won’t melt down and ruin dinner.” They should stop this. It’s embarrassing to witness. [Peggy Noonan]
• USMCA is now a privileged tax status for corps. Everyone else paying a 10% tribute to the US helps Mexico labor cost advantage vs competitors. This situation has shown that even with someone willing to be as extreme as Trump clearly is, USMCA, as an agreement and an economic bloc, held together. At least for now. It seems clear that the path of least resistance forward for companies with overseas operations is to go to Mexico. It’s the one country with cheap labor, generally tariff free, where you can have relative certainty over the next four years and is a clear advantage over holding off all plans/growth until Donnie leaves the stage. Why is the Mexico bull story not stronger now than a month ago? [@invertedfragility]
• When not plotting with Q, Trump mostly dedicated himself to golf trips and petty feuds and vendettas waged against thousands of random media, business and political figures he believed had crossed him at some point or another during the latter half of the twentieth century. It was honestly an okay arrangement. He left the actual task of governance to a kind of Kushner-Mnuchin duumvirate caretaker regime which kept the economy and stock market humming along by simply leaving things be. This is probably what allowed a number of tech and Wall Street titans to convince themselves that a second Trump term would be fine because 'nothing ever happens,' etc. [Drew Pavlou]
• Remarkably, quality control is so variable that generic manufacturers, as a matter of course, grade their finished products and decide post-hoc upon the market into which they will be sold. Literally, the same drug from the same plant will be destined to an end-market differently from one day to the next based on final manufacturing test results. The product a market receives is directly proportional to the strength of that market's regulators. Africa, India, and developing world nations are at the bottom. China, Latin America, and Eastern Europe are next up in quality. Western Europe is third. United States and Canada (owing to US proximity more than actual Canadian regulatory muscle) at the top. But, make no mistake, like the best house in a bad neighborhood, the FDA is failing miserably. US consumers are merely getting the best of the worst when it comes to Indian and Chinese produced generics. [@pdxsag]
• Look at Kentucky’s economy: Our biggest foreign direct investor is Japan, and the president has launched a very aggressive tariff on Japan. I mean, the biggest Toyota plant in the world anywhere is in Georgetown, Kentucky, and so to act like our economy isn’t global and there aren’t repercussions on the ground, that there aren’t manufacturing jobs that are already supported by foreign direct investors, that’s just not reality. [Andy Beshear]

Monday Morning Links

• If Trump goes through with his tariffs and isolationism, this will have many effects, but probably not the one effect that he intends, namely, bringing back manufacturing jobs. Tariff policy has been changing on a weekly basis, and all of the tariffs could well be rescinded after Trump leaves office. No one is going to start building factories in the US when they don’t know what policies will be in place when the factory is ready to operate. [Nathan Cofnas]
• On the other hand, if we make improvident choices, the bright horizon I’ve described will not materialize. And let me put it very plainly. If we Republicans choose Donald Trump as our nominee, the prospects for a safe and prosperous future are greatly diminished. Let me explain why I say that. First on the economy. If Donald Trump’s plans were ever implemented, the country would sink into prolonged recession. A few examples. His proposed 35 percent tariff-like penalties would instigate a trade war and that would raise prices for consumers, kill our export jobs and lead entrepreneurs and businesses of all stripes to flee America. [Mitt Romney]
• The measure won’t pass the House, and the White House may dismiss the Senate vote as more criticism from the usual GOP dissenters. But that could change as economic events evolve. Iowa Sen. Chuck Grassley on Thursday introduced a bill with Democratic Sen. Maria Cantwell of Washington that would claw back Article I’s trade authority by requiring Congress to approve tariffs within 60 days. Tee that up for a floor vote, please. Congress could do the country a favor if it becomes jealous of its powers—or at least afraid of the political consequences that will accompany higher prices and slower economic growth. [WSJ]
• By employing this statute, Mr. Trump claimed a unilateral power to tax and regulate commerce—powers the Constitution vests in Congress under Article I, Section 8. The Supreme Court has signaled skepticism toward such executive improvisation. In West Virginia v. EPA (2022) the Court struck down the Obama Environmental Protection Agency’s Clean Power Plan, ruling that the agency couldn’t overhaul the energy sector without explicit congressional approval. [WSJ]
• Mr. Trump justifies his tariffs by declaring a national emergency under the 1977 International Emergency Economic Powers Act. No previous President has used that law to impose tariffs. Mr. Trump is stretching his authority much as Joe Biden did with his student-loan forgiveness. Congress has circumscribed the President’s power to impose tariffs, allowing it on imports that threaten national security (Section 232) or in response to “large and serious” balance-of-payments deficits (Section 122), a surge of imports that harms U.S. industry (201), and discriminatory trade practices (301). None of these trade provisions empowers Mr. Trump to impose tariffs on all imports from all countries based on an arbitrary formula. [WSJ]

Some thoughts on tariffs

What is Trump even trying to accomplish with the tariffs? You hear two purposes articulated by his administration and followers. First, that the tariffs are an aggressive, brash opening position in a negotiation that is intended to bring down other countries' tariffs and trade barriers. Second, that the tariffs are in place - "permanently" - to bring manufacturing back to America and to generate revenue.

Those two purposes are contradictory! The first would be a push for freer trade, in line with Ricardian comparative advantage. The second is the inverse of the first. It would reflect a belief that we are losing when Vietnam makes stuffed animals for us less expensively than we can make them ourselves. But anyway, the purpose, logically has to be one or the other, it cannot be both. 

I suppose it could also be the case that Trump is trying to achieve contradictory purposes without realizing it - that would be even worse. But it seems like the best hypothesis is that he has a longstanding dislike of trade per se and wants to have these large tariffs in place "permanently." 

The theory of Cornucopianism helps us to understand the transition away from manufacturing that the United States has made.

Herman Kahn writes about this in The Next 200 Years. As a country or civilization gets wealthier, the focus of economic activity shifts from primary (extractive) to secondary (construction and manufacturing) to tertiary (services) and then to quaternary (post-industrial) activities. 

And as you get richer, the theory of comparative advantage predicts that you would hire people who are not as rich to do physical tasks for you. Such as sewing fabric together. (Labor in Vietnam is even cheaper than in China.) 

You can buy an OCBD shirt made in the U.S. but it is expensive ($255) because people have higher and better uses for their time than making shirts. It's a flex, a status symbol, for your button-down to be made here instead of buying an shirt that's "globally sourced" for only $40.

For a country that has been supposedly "deindustrialized," the United States still produces a huge amount of manufactured goods. We do not make stuffed animals, we make jet engines. Essentially all of the commercial aircraft in the air right now throughout the world - probably 10,000 or more - are using American jet engines or British ones. China still cannot make them. 

Russia is truly deindustrialized. It produces virtually no complex goods for export and, unlike the U.S. does not export any impressive services either. Nobody is buying GPUs or analog semiconductors from Russia. (Imagine creating this chaos with tariffs to punish Vietnam for making us cheap shoes when we have a semiconductor ecosystem like this.)

The sad thing about the tariffs is that even if Trump set about them with the best of intentions and even if they could work in theory, they are not going to work in practice. Molson Hart has a great thread about why Trump's plan is not going to work from the level of an entrepreneur and factory owner. 

But Trump's plan is also not going to work politically.

Instead of attempting to legislate a durable trade policy, Trump tried to dictate, as one man, a clumsy and absurd system to govern the foreign trade of a $28 trillion economy. The problem is that the more arbitrarily and capriciously he acts, the less likely the tariffs are to be "permanent," and so the less likely that anyone would want to make a major investment in manufacturing a product in America that is currently manufactured overseas. 

Trump has blown 2026 (and likely 2028) for the GOP by causing a market crash and recession. The obvious conclusion by anyone with the capital to actually build a factory will be that these tariffs will not be in place long enough for the investment to be paid back.

In fact, Trump might be (and should be) put on a leash much sooner than 2026 or 2028. Senators Grassley and Cantwell introduced a bill (S 1272) that would cause any tariff imposed by the President to sunset after sixty days unless approved by Congress - it already has seven Republicans cosponsoring. So either Congress will get rid of the tariffs now or when Democrats win in 2026 or when a Democrat is elected in 2028. 

It looks like I was wrong to be optimistic about Trump in November. Notice that nothing on that list of things to be optimistic about pertained to tariffs or trade. It was a blind spot in not appreciating that Trump simply cannot grasp the concept of comparative advantage. Romney was correct all along - Trump does not have temperament of a stable, thoughtful leader.