Post 221

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.

Summary

  • Some mixed results for fast fashion retailers.
  • More evidence that Europe may already be in recession.
  • Canadians are setting new debt records.
    • And bankruptcies are rising.
  • Discount stores are continuing to benefit from shoppers trading down for essentials.
  • Activity in Canadian real estate is down and home prices seem to be in a holding pattern.
  • The UK economy is slowing.
  • Americans have cut back on buying furniture and gardening equipment.
    • But they’re still going out to eat and drink.
  • People are finally starting to accept that nuclear energy could be the answer to environmental concerns.
    • It accounts for almost two thirds of France’s electricity generation.
  • A suggestion for dealing with Canada’s housing crisis.
  • In Financial Ructions:
    • More people are hoping that central banks will be more flexible with their 2% inflation target i.e. higher.
      • This is a bad idea.  As is a 2% inflation target.
    • Longer-term interest rates are falling from normal levels.
    • Falling Reverse Repo is overwhelming the Fed’s QT.

News

Ok, so one of my daughters is giving me the gears for pointing out that some of your favourite Christmas movies have low Tomatometer scores.

  • Too bad.
  • But seriously, I don’t want to dissuade anyone from participating in future polls, so I’ll try and be a little more sensitive next time.

Fast Fashion

Inditex, based in Spain, is a global fashion group that owns the following brands and number of stores:

  • Zara: 1,827
  • Zara Home: 410
  • Massimo Dutti: 545
  • Pull&Bear: 789
  • Bershka: 856
  • Oysho: 448
  • Stradivarius: 847

Total stores: 5,722

Their first Zara store opened in 1975.

  • Around a fifth of them are in Spain.

Employees number 165,000

Inditex latest 9-month results:

  • Adjusted sales up 14.9%

Cool video ‘here’ of a store tour in Dubai.  The most interesting part is the beginning where you see views of the city.

From my post in September:

Zara is opening a large store in Rotterdam which will be 9,000 square meters.

  • Or 97,000 square feet.
    • For perspective, the average size of a Costco store is 146,000 square feet.
  • They’re increasing the size of their stores to accommodate an increasing number of product lines such as:
    • Cosmetics
    • Footwear
    • Sports clothing

Sales over the last five weeks were up 14%.

Not So Fast Fashion

Swedish-based fast fashion retailer H&M has 4,375 stores around the world.

  • H&M also owns:
    • COS
    • Monki
    • Weekday
    • & Other Stories
    • Arket

Announced their latest 3-month results:

  • Adjusted sales down 4%.

Netflix: What People Are Watching

Netflix has started releasing a twice yearly report called What We Watched: A Netflix Engagement Report

The top shows in terms of the number of hours watched in the first six months of 2023:

  1. The Night Agent: Season 1: 812.1 million
  2. Ginny & Georgia: Season 2: 665.1 million
  3. The Glory: Season1: 622.8 million
  4. Wednesday: Season 1: 507.7 million
  5. Queen Charlotte: A Bridgerton Story: 503 million

Non-English shows accounted for 30% of their viewership.

Netflix also publishes a weekly Global Top 10.  Here are the top English films with number of views:

  1. Leave the World Behind: 41.7 million
  2. Family Switch: 18.6 million
  3. Leo: 14.2 million
  4. The Super Mario Bros. Movie: 13.2 million
  5. Catering Christmas: 8.7 million

Europe Slowing

Industrial production is falling in Europe (Eurostat)

  • Euro Area (20 countries using the Euro currency):
    • Down 6.6%
      • Production of capital goods: Down 9.7%
  • European Union (27 countries allowing free movement of goods):
    • Down 5.5%
      • Production of capital goods: Down 8.0%

However, the FT reports that Ireland accounted for almost all of the decline.

  • The country’s low corporate tax rate of 12.5% attracts a lot of multinational companies whose transfer pricing can cause big swings in the numbers:
    • Ireland’s change in annual production by month:
      • August: Down 27.5%
      • September: Down 26.9%
      • October: Down 34.0%
  • Still, 17 of the 27 countries were in contraction.

Some of the larger countries:

  • Germany: Down 3.9%
  • France: Up 1.8%
  • Italy: Down 1.1%

A New Record

Canada’s household debt service ratio by quarter (Statcan):

  • 3Q/22: 14.3%
  • 4Q/22: 14.5%
  • 1Q/23: 14.9%
  • 2Q/23: 15.1%
  • 3Q/23: 15.2%
    • According to the Globe & Mail, it’s the highest number going back to 1990.

Mortgage interest paid:

  • 3Q 2022: $65,624 billion
  • 3Q 2023: $95,872 billion
    • Up 46% in one year.
    • Good for banks, I guess.

Doing Something Right In Yukon

According to the Office of the Superintendent of Bankruptcy:

  • Total insolvencies in Canada:
    • September: 10,930
    • October: 11,585
      • Up: 6.0%
      • Up 27.1% from last year.
        • Consumers: +25.8%
        • Businesses: +63%
    • Solvencies in Yukon were down 25%!
      • Only 3 this October vs. 4 last year.
        • And Yukon takes that to the bank.

Yukon always reminds me of when my nephew was going to the University of Connecticut.

  • It’s known as UConn.
  • My Mum always called it the University of UConn.

Canadians Trading Down

Dollarama is a Canadian discount retailer with over 1,450 stores.

  • 1992: The company was founded with all products being the same price.
  • 2009: Started offering higher price points
  • 2012: Additional price points: $2.50 and $3.00
  • 2016: Additional price points: $3.50 and $4.00
  • 2022: Additional price point: $5.00

Their latest 3-month results

  • Comparable sales up 11.1%
    • It has grown at a double-digit rate for six quarters (18 months) in a row.

The Globe and Mail reports that people are buying more consumables (food and household products) than usual.

Canadian Real Estate

The Canadian Real Estate Association (CREA) monthly report for November:

  • The average price for a home in Canada in November: $646,134.
    • Monthly change: Down 1.1%
      • Third monthly decline in a row.
      • Despite a shrinking supply of homes for sale:
        • Newly listed properties: Down 1.8%.
    • Yearly price change: Up 0.7%
    • Change from Feb 2022 peak: Down 12.3%

UK not OK

Monthly growth in UK GDP:

  • September: +0.2%
  • October: -0.3%
    • Services: -0.15%
    • Production: -0.10%
    • Construction: -0.03%

Oil

OPEC or Organization of Petroleum Exporting Countries was founded in 1960.

OPEC+ was coddled together in 2016, when OPEC started cooperating with other countries to help manage the global oil price.  A few of the + countries in order of millions of barrels of daily production:

  • Russia: 10.1
  • Kazakhstan: 1.8
  • Mexico: 1.7

The United States is the world’s largest producer of oil at 11.2 million barrels per day.

With recent oil production cuts by OPEC+ countries, their share of global oil production has fallen to 51%

Let’s Eat

Advanced sales growth estimates for US Retail and Food services in November (census.gov):

Note that these numbers are not adjusted for inflation.

Growth from last year: +4.1%

  • Food services and drinking places: +11.3%

Growth from the previous month:

  • October: -0.2%
  • November: +0.3%

Largest movers in the first 11months of the year:

  • Growing:
    • Food services and drinking places: +11.5%
    • Health and personal care stores: +8.6%
    • Nonstore retailers: +8.3%
  • Falling:
    • Gasoline stations: -11.7%
    • Furniture and home furnishings: -5.5%
    • Building materials & garden equipment: -2.8%

Nuclear

According to the World Nuclear Association the US accounts for around 30% of the world’s nuclear electricity.

  • Nuclear power as a percentage of a country’s electricity generation:
    • France 62.5%
    • Switzerland: 36.4%
    • US: 18%
    • UK: 14.2%
    • Canada: 13.6%
      • 76,000 jobs in 2019
    • China: 5.0%

Costco

Costco 3-month results:

Adjusted comparable sales growth: +3.9%

  • US: 2.6%
  • Canada: 8.2%
  • Other International: +7.1%

Total warehouses: 871

  • US and Puerto Rico: 600
  • Canada: 108
  • Mexico: 40
  • Japan: 33
  • UK: 29
  • Korea: 18
  • Australia: 15
  • Taiwan: 14
  • China: 5
  • Spain: 4
  • France: 2
  • Iceland: 1
  • New Zealand: 1
  • Sweden: 1

Canadian Housing and Immigration

In a Globe and Mail opinion piece Ian McGugan discusses Canada’s declining GDP per capita and it is trailing other G7 countries.

  • He also suggests that the Canadian government should change its super-charged immigration policy to help deal with the country’s housing crisis (my words).
    • Specifically, he recommends that the government match immigration numbers with the country’s ability to increase the housing stock.
    • Seems sensible to me.  But we need to first have a few years where immigration is lower than the increase in the housing stock.

Financial Ructions

Of Interest

Central banks stayed put on their key interest rates this week:

  • US Federal Reserve: 5.25-5.50%
  • European Central Bank: 4.00%
  • Bank of England: 5.25%

Normal Interest Rates Are Taking Their Toll

In a Globe and Mail opinion piece by John Ruffolo, he suggests that the Bank of Canada should reconsider targeting 2% inflation.

  • Of course, he doesn’t think that it should be lower.
  • He worries that in trying to get theft inflation down to 2% that central banks might keep interest rates too high for too long and cause a recession.
    • He’s right to worry.
  • However, like many people, although he agrees that interest rates can’t be too low, he believes so only because if those rates are already zero and a recession hits, then the central banks won’t be able to lower interest rates to stimulate the economy.
  • Again, this is standard thinking for many with the belief that central banks know at what level to peg the interest rate.
    • They don’t.  All they know what to do is raise them when inflation is high and lower them when it’s not.
    • The natural rate cannot be determined by any one entity, but only by the vast number of risk/reward investment decisions by those with skin in the game.
    • Instead, by distorting interest rates based on a rate of growth the central banks think the economy should be experiencing, it serves to distort the price discovery mechanism of markets, which in turn leads to declining productivity growth.
    • As well, the asymmetry on this with a downward bias has resulted in monumental debt balances and obscene wealth inequality.
  • He says that the cost of housing and its impact on the younger generation is a good example of the “unintended” consequences of ultra low interest rates.
    • First, raising the inflation rate so the central bank can lower interest rates will only help perpetuate housing unaffordability for younger people.
    • Second, I believe those consequences were “intended” as it was part of the wealth effect policy of central banks i.e. drive asset prices higher enriching those with assets in order to get them to spend more money with the benefits trickling down to everyone else as we all sail off into the sunset singing kumbaya.
      • Unsurprisingly, that last part didn’t happen.
  • He finishes off by quoting a Bank of England deputy governor who said that “one cannot permanently enrich a country simply by dolling out more banknotes.  If you want real effects, you have to change real things.”
    • First of all, not only can you not get permanent enrichment for a country by printing money, you can’t get any enrichment at all and in fact it eventually serves to impoverish a country.
      • What it does do is “permanently enrich” certain members of society at the expense of others.
    • Second, Ruffolo appears to contradict himself by including this quote.  His opinion piece asks for more flexibility with the inflation target i.e. higher, yet finishes off with cautioning against inflation.
  • Don’t get me wrong, maintaining interest rates at “normal” levels will be painful for some people and that is not good.
    • On the other hand, many businesses only survived because they could stay afloat by rolling over cheap debt i.e. live to destroy more capital.
      • A return to creative destruction would be good for the economy.
    • Productivity destroying policies by central banks and governments have left many people feeling that they had no choice but to take on monumental levels of debt if they wanted to get on with their lives i.e. buy a home in which to raise a family.
    • But it makes no sense to return to interest rates that are so harmful for the economy and make the situation even worse.

Interest Rates Falling From Normal Levels

10-Year US Treasury Bond Yields (FRED):

  • Dec 2019: 1.92%
  • Jul 2020: 0.55%
  • Oct 2023: 4.98%
  • Dec 2023: 3.92%

30-Year Fixed Rate Mortgage (FRED)

  • Dec 2019: 3.74%
  • Jan 2021: 2.65%
  • Oct 2023: 7.79%
  • Dec 2023: 6.95%

Growth Industry

According to the Investment Company Institute

Total number of Funds and assets in that US:

  • 1990:
    • Funds: 3,078 Funds
    • Assets: $1.1 trillion
      • 10-year growth: 690%
      • Per annum growth: 23%
  • 2000:
    • Funds: 8,134
    • Assets: $7.0 trillion
      • 10-year growth: 554%
        • Per annum growth: 21%
  • 2010:
    • Funds:  7,540
    • Assets: $11.8 trillion
      • 10-year growth: 70%
      • Per annum growth: 6%
  • 2020:
    • Funds: 7,627
    • Assets: $23.8 trillion
      • 10-year growth: 101%
      • Per annum growth: 7%

The FT reports growth of passive funds in the US:

  • 2012: $2.6 trillion
  • 2022: $10.9 trillion
    • 10-year growth: 319%
    • Per annum growth: 15%

Liquidity

The Fed’s Reverse Repo account: a falling number adds liquidity to the system:

  • Feb 2021: zero
  • Dec 2022 (peak): $2,554 billion
  • Dec 2023: $683 billion.
    • Down 73%.
    • $1.9 trillion of liquidity coming into the market in one year.
      • When money is sitting in reverse repo it’s not available to the banking system on which it can pyramid loans.
    • Some feel that the draining of the reverse repo account is helping to fund the massive treasury issuance by the Biden administration as well as support asset prices.
      • And with the recent slowdown in treasury issuance, more is going into stocks.
    • RRP drawdown by month:
      • Jun: $221 billion
      • Jul: $213 billion
      • Aug: $170 billion
      • Sep: $94 billion
      • Oct: $420 billion
      • Nov: $250 billion
      • To Dec 15: $205 billion
    • If the current pace of RRP drawdown continues, $250 per month, the reverse repo account could be fully drained by February or March.

Fed’s balance sheet

Dec 2022: $8,551 billion

Dec 2023: $7,740 billion

  • $811 billion of liquidity drained from the market.

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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