Post 219

A snapshot of what’s going on in the world’s economy.  Financial Ructions and book reviews can be a bit more technical so feel free to skip them.  See disclaimer at the end of this note.


  • Follow-up to the first Pollitical Economy.
  • More tech layoffs.
  • More evidence that consumers are cutting back on discretionary purchases.
  • US job numbers were again strong with Healthcare and Government hiring leading the way.
  • More on the intergenerational wealth transfer from our kids to us and what to do about it, at least from my perspective.
  • Journalists are being killed at an alarming rate.
  • Some potential good news on beer for those of us living in Ontario.
  • In Financial Ructions:
    • Financial conditions are easing taking pressure off central banks to lower rates.
    • Commercial real estate under water
    • Debt downgrades
    • Canada office vacancy rates
    • Bank capital buffers

The First Pollitical Economy

  • Thanks to those who responded to the first Pollitical Economy (I’ve discovered some new Christmas movies to watch). 
    • But I’d like to hear from more of you.
    • Please email me your favourite Christmas movie(s) (up to three).
    • Results will be posted on an anonymous basis in the next post.



The Hollywood sign on Mount Lee was erected 100 years ago in 1923.

  • It was originally supposed to be a temporary ad for a real estate development company called Hollywoodland.
  • The word “land” was only removed from the sign in 1949.
  • Apparently a number of storms damaged the sign over the years and at one point it spelled HuLLYW OD.
  • The original wooden structure was replaced by a steel structure in 1978.


Tech Layoffs

LinkedIn announced that it is letting go 668 employees.

  • 3% of its global workforce.

This follows layoffs earlier this year.


  • Here is my post from May:


LinkedIn, owned by Microsoft, is letting go 716 (3.6%) of its 20,000 employees globally.

  • It cited:
    • Slowing revenue growth
      • Revenue was up 8% in the first quarter
    • Changing customer behaviour

Pandemic Puppies

The FT reports that pet owners in America spent $137 billion on their pets in 2022 (American Pet Products Association).

  • Up 41% since 2019.



Discretionary Spending Down

Last month Home Depot reported their latest three-month results:

  • Comparable store sales were down 3.5%.
  • The company said that:
    • Customers continue to focus on smaller projects.
    • There is still pressure on “certain big-ticket, discretionary items.”

High-End Furniture Experience

RH, formerly known as Restoration Hardware, is a luxury furniture retailer.

  • Sofas can cost well over $10,000.
  • The retail stores are called “Design Galleries.”
    • They are meant to be “architecturally impressive” and be a “multi-level expression of the RH brand.”
    • One of their most recent Design Galleries is in the UK and it’s a 17th-century 73-acre estate.
    • They’re opening one in the luxury area of Paris.
      • It “will be a six-floor jewel-box connected by a dramatic, ornate scissor stair and a central glass elevator that will whisk you up to the fifth floor and rooftop Champagne & Caviar Bar, where you can take in views of the Eiffel Tower while enjoying our innovative menu featuring the finest Petrossian Caviars.”
      • Or you can slum-it on their second-floor dining room with an “onyx-carved bar, floors, walls and tables.”
    • They also opened a Gallery in Indianapolis which is on a 151-acre estate.
    • They have a “hospitality experience” in 14 of them which includes restaurants and wine bars.
    • We’ve been in the one in West Palm Beach and the food was really good.
      • We didn’t buy anything.
    • Their goal is to move beyond just selling high-end furniture to build an “ecosystem of Products, Places, Services and Spaces that establishes the RH brand as a global thought leader, taste and place maker.”
    • They are opening RH Guesthouses offering “privacy and luxury in the $200 billion North American hotel industry.”
    • In addition, they are launching RH Residences: “fully furnished luxury homes, condominiums and apartments.”
    • They have two luxury private jets: RH1 and RH2
    • And one luxury yacht, RH3, that can be chartered.

They say that “For the past 23 years we’ve heard others tell us what can’t be done, and for the past 23 years we’ve failed…to listen.”

  • I like it.  And while there’s a risk they may be biting off more than they can chew they certainly know what they stand for in terms of luxury.

Latest 3-month results:

  • Adjusted sales down 13.6%.
  • Adjusted operating margin (operating profit as a percentage of sales);
    • 3Q/2022: 20.8%
    • 3Q/2023: 7.3%
  • The CEO is partly blaming the sales slowdown on the “war in the Middle East.”
    • Seriously?  I hope they’re not as delusional about their business model as they are about what’s impacting their sales.
  • Slow home sales have impacted sales of new furniture.
    • They expect this situation to continue until “interest rates and/or home prices fall meaningfully.”
    • They also said that the home furnishings market is increasingly promotional i.e. bigger discounts (I hope my wife Cynne doesn’t read this post).

My post from September 2022

  • Restoration Hardware CEO said that “People keep saying, are we going to be in a recession?  We’re in a recession.  Anybody who thinks we’re not in a recession is crazy.”

My post from July 2022

  • Restoration Hardware expects sales to fall 2-5% due to a fall in luxury home sales caused by rising mortgage rates.

Quarterly press release:

Annual Report

Reported US Job Growth Still Strong

The US added 199,000 jobs in November.

  • Unemployment rate:
    • October: 3.9%
    • November: 3.7%
    • Average hourly earnings: up 4% to $34.10.
      • Nonsupervisory employees: $29.30
  • Job gains were in:
    • Health care
    • Government
      • I’m sensing a trend here.
      • The average monthly increase in government jobs over the last 12 months is 55,000.
      • In case you were wondering, this is not good for the economy.
    • Manufacturing:
      • Workers returning from strikes.
  • Job losses:
    • Retail trade: down 38,000

Job gains for September were again revised lower.

  • First reported: 336,000
  • First revision down of 39,000 to: 297,000
  • Second revision down of 35,000 to: 262,000
    • 22% lower than the original announcement
  • Eight of the last nine monthly jobs reports have been revised lower.


China Turns a Corner on Exports: Just.

Exports from China:

  • June: -12.4%
  • July: -14.5%
  • August: -8.8%
  • September: -6.2%
  • October: -6.4%
  • November: +0.5%

Imports into China:

  • June: -6.8%
  • July: -12.4%
  • August: -7.3%
  • September: -6.2%
  • October: +3%
  • November: -0.6%



The FT reports that the Chinese Communist party’s Politburo said at a recent meeting that it was “necessary to… strengthen economic propaganda and public opinion guidance.”

  • PM: That propaganda seems to have a greater effect on “hopeful” western investors than it does on the local population as hedge funds etc. seem constantly willing to suspend disbelief in the hope that stock prices will forever rise.


Intergenerational Wealth Transfer

In a Globe and Mail opinion piece, Paul Kershaw of UBC talks about how government policy has benefited the older generation at the expense of the younger generation.

  • He’s right but he fails to mention the main policies responsible for this i.e. that drove asset prices higher:
    • Central bank:
      • Interest rates driven to zero to drive asset prices higher based on the fallacious wealth effect economic doctrine.
    • Government:
      • Immigration levels far in excess of the country’s ability to increase the housing stock.
      • Rapidly increasing government fees and taxes on new home building such that in some areas they account for 1/3 of the cost of a new home.
  • While the wealth transfer is completely unfair, rather than address the main problems he calls for even more government involvement i.e. how can they raise taxes even further to redistribute to those who haven’t benefited from the wealth transfer bonanza.
    • So his answer to a wealth transfer caused by government policy is even more government policies.
      • Bad idea.


  • Interest rates need to remain at “natural” rates.
  • Immigration needs to fall significantly over the next five years.
  • Fees and taxes need to be “drastically” reduced.
  • I would also add that there may need to be policies in place, or rather removed, that would encourage greater competition in the Canadian home building landscape.
    • Foreign owned companies are not allowed to purchase land for housing development.
      • See article ‘here’ from DJB.
  • These “simple” steps (jokes) would reverse the wealth transfer and only then should the government step in with taxpayer dollars to help those who are truly hurt by it.


Alarming Numbers

The Globe and Mail reports that an increasing number of journalists are being killed (International Federation of Journalists)

  • 2021: 47
  • 2022: 67
  • 2023: 94




Moving Out of the Dark Ages

The Globe and Mail reports that Ontario could soon see beer sold in convenience stores.

  • Can’t wait.

Beer can be sold in grocery stores, but not in formats of 12 or 24 beers.


Here is one of my posts on beer from last April:

Beer: Can’t Weight

Friday was the 90th anniversary (1933) of the re-legalisation of beer in America.

  • Beer was allowed to be brewed to 3.2% alcohol by weight.


  • For years Canadians mocked weaker American beers, but if beer in the US was using a “by weight” measure for the alcohol they weren’t as weak as appeared on the surface.  I believe Canadian beer has always been measured by volume as well as American beer today.
  • Alcohol weighs less than water and so if you want to get the weight equivalent of a 5% volume alcohol beer, multiply the number by 0.8, which would give you 4%.
  • Minnesota still only allows beer that’s sold in grocery stores to have no more than 3.2% alcohol by weight (4% by volume).
    • It’s known as three-two beer.
  • In Indiana, beer can be sold in convenience stores, but it can’t be chilled.


Financial Ructions

Any Excuse

Apparently, on reforming fiscal rules for the European Union, Germany is in disagreement with France and Italy: Quelle surprise.

  • The FT reports that one “solution” being considered is to say that the high interest expenses on the debt expected over 2025 to 2027 is a “mitigating” factor.
  • As discussed many times, today’s rates are not high but rather closer to normal.
    • The low rates of the last fifteen years are what should have been considered “mitigating” and governments should have adjusted their budgets accordingly i.e. lowered spending.  Fat chance.


Financial Conditions Tug Of War

According to Goldman Sachs, the dramatic fall in yields in November in anticipation of the Fed cutting rates next year, resulted in one of the most dramatic easing of financial conditions ever.

  • Ironically, as Mohamed El-Erian and others have said, this makes the case for the Fed to cut rates that much more difficult and if it continues it could result in another hike.
  • The market had also priced in rate cuts for 2023, but instead we got rate hikes.
  • However, with inflation currently trending in the right direction, maybe the markets will be right this time.
  • But be careful what you wish for as if the Fed is cutting rates, it could be due to severe economic weakness.
    • Or perhaps the Fed reverts to the old economic productivity-destroying playbook of protecting asset prices.
    • We’ll soon find out.


Can’t Be Good

According to MSCI Research, around half of commercial real estate in London is now worth less than what it was paid for.

  • Around 20% in New York.

Sellers are unwilling to sell and crystallise losses and buyers are unwilling to buy unless they get a great deal i.e. a price that reflects the current reality.

  • The result is that deals are down in Europe and the US by 50%.

Philip Moore who is head of European real estate debt at Ares said that:

  • “You are seeing the slow dawning of the fact that what we had over the past 10 years with a low interest rate environment was more of a blip than the norm.”
    • I’d call thirteen years more than a blip, particularly when you add in the near zero rates from 2002 to 2004, which really set all of this on its way.
  • Regardless, it is interesting to see more market players comment on the fact that the lower for longer era may be done.
  • However, again, I’m not so sure, despite the fact that I hope that it is as the only way to fix this mess is to allow for interest rates to evolve naturally through the price discovery mechanism rather than by central banks printing money and buying longer-dated bonds to drive those yields down and effectively monetise the government’s debt.



According to the WSJ, China’s communist party is out slamming Moody’s after it recently changed its credit rating on China to “negative.”

  • The party has used words like:
    • Flawed
    • Entirely unwarranted.
  • Oops, sorry, that was Jane Yellen when Fitch downgraded the US earlier this year.
  • Words from the communist party:
    • Disappointing
    • Flawed
    • Unnecessary


Canadian Office Vacancies

The office vacancy rate in Canada for 3Q 2023: 18.2% (CBRE).

  • 16.4% last year.

Vacancy rates in the suburbs are increasing.

  • Now 17.4%
  • Some cities actually saw declining vacancy rates:
  • Now 18.9%
    • Toronto: down 0.10% (10 basis points)
    • Calgary: down 0.60% (60 basis points)
    • Contributing to the decline were office to residential conversions.
      • 20 buildings were removed from inventory this year either due to:
        • Residential conversions
        • Buildings being demolished.
        • Good way to get that vacancy rate down.
        • Reminds me of how some economists get excited when a hurricane hits because they believe the destruction and subsequent rebuilding is good for the economy.
  • Vacancy rate by the quality of the property:
    • Downtown Class B: 23.6%
    • Suburban Class A: 18.2%
    • Suburban Class B: 17.7%
    • Downtown Class A: 16.3%
      • Vacancy rates for the best downtown Class A office properties, declined a bit.
      • Note that the total office vacancy rate also fell during the third quarter last year.,Downtown%20meanwhile%2C%20held%20steady.

Bank Capital Buffers

A required financial/economic ruction softening capital cushion for Canadian banks will remain in place at 3.5%.

  • It’s called the domestic stability buffer (DSB) and it’s calculated as a percentage of risk-weighted assets.
  • The Office of the Superintendent of Financial Institutions (OSFI) says the DSB is like a “rainy-day fund.”
    • Dec 2019: 2.25%
    • Mar 2020: 1.00%
      • Response to COVID
    • Jun 2021: 2.50%
    • Dec: 2022: 3.00%
    • Jun: 2023: 3.5%
      • The DSB level is set based on trends in:
        • Household indebtedness i.e. high.
        • Asset imbalances i.e. high prices that could fall.
        • Corporate debt i.e. high.
  • The upper limit of the range used to be 2.5%.
    • In December 2022 it was increased to 4%.

In addition, banks are expected to have a common equity tier 1 capital (CET1) ratio of at least 11.5%.

  • CET1 ratios for Canadian banks:
    • Royal Bank: 14.5%
    • TD Bank: 14.4%
    • Bank of Nova Scotia: 13.0%
    • Bank of Montreal: 12.5%
    • CIBC: 12.4%


Source: Bank websites

Disclaimer: Note that Paulitical Economy™ should not be considered as investment advice, and I have not verified all of the sources of information.  It is meant for general interest purposes only.  Please consult an advisor if you plan on putting any of your hard-earned capital to work during these turbulent times.

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