Post 222

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.

This will be my last post for 2023 as I’m taking a bit of time off until the New Year.  Thank you for all your feedback and participating in the first Pollitical Economy.  I hope you all have a very Merry Christmas or a great holiday season and I’ll see you in 2024.


  • I’m trying something new.  Just before the Financial Ructions section, I’m going to start adding some comments from some of my old Ivy Quarterly Reports that I used to write for our clients. 
  • The Exorcist was released 50 years ago.
  • People are cutting back on some discretionary items like sneakers.
    • But still lining up at Starbucks.
  • Core inflation in Canada has now risen two months in a row.
    • However, although prices are still rising faster in Britain, disinflation seems to be picking up.
    • And while there is some good news on inflation, grocery prices are still moving higher: Growthery Prices. 
  • Corporate bankruptcies in the US and Europe are on the rise. 
  • In Financial Ructions: 
    • Stock markets are far outpacing growth in the economy. 
  • Another chapter review from the Mystery of Banking. 


Lease Loophole

Under the stupidly named Inflation Reduction Act, there are $7,500 tax credits for electric vehicles.

  • I wonder if the US goes into deflation if they’ll change the name to the Inflation Expansion Act.

But the tax credits come with strict ‘rules’:

  • 40% of the battery’s critical minerals need to be “extracted or processed in the United States or a U.S. Free-trade agreement partner.” 
  • 50% of the battery’s components must be manufactured or assembled in North America. 
  • The percentages for both increase each year.

However, there is a loophole in that if you lease the vehicle instead of buying it, none of the rules apply and you get the full tax credit regardless of where the critical minerals or components come from.

  • It’s because leased vehicles are considered to be commercial vehicles and for some reason, commercial vehicles are not subject to the rules.

The Exorcist

The Exorcist movie was released 50 years ago in 1973.

  • I don’t like scary movies at the best of times, but that one really freaked me out.

The following tidbit is from IMDb

  • In the scene where Regan projectile vomits at Father Karras, the vomit was intended to hit Jason Miller in the chest, but the plastic tubing misfired, hitting him in the face. His reaction of shock and disgust while wiping away the vomit is genuine, and Miller admitted in interviews that he was very angered by this mistake.

But was it real vomit? That’s what I want to know.

  • They also mention that Linda Blair was later receiving death threats from some “religious zealots.”
    • Crazies abound.

According to The Numbers the Exorcist was the top grossing movie that year.

  1. The Exorcist: $193 million
  2. The Sting: $160 million
  3. American Graffiti: $115 million
  4. Paillon: $53 million
  5. The Way We Were: $50 million
  6. Magnum Force: $45 million
  7. Live and Let Die: $35 million
    • One of my favourite Bond films.
    • That’s why I stopped at 7.

Starbucking the Trend (I know, weak)

Starbucks has 38,038 stores:

  • North America: 17,810
  • International: 20,228

Their fourth quarter results:

  • Comparable store sales: +8%
    • North America: +8%
    • International: +5%
  • Transactions:
    • 3Q: +5%
    • 4Q: +3%
  • Prices:
    • 3Q: +5%
    • 4Q: +4%

Not Bucking The Trend

Nike latest three-month results:

  • Adjusted sales: Down 1%
  • Profitability was up due to:
    • “Strategic pricing actions.”
      • I wish they would just say “price increases.”
    • Lower ocean freight rates
  • Sales by region and category:
    • North America: Down 3%
      • Footwear: Down 5%
      • Apparel: Down 1%
      • Equipment: Up 20%.
    • Europe, Middle East & Africa:
      • Footwear: Up 1%
      • Apparel: Down 10%
      • Equipment: Up 18%
    • Greater China: Up 8%
      • Footwear: Up 3%
      • Apparel: Up 24%
      • Equipment: Up 36%
    • Asia Pacific and Latin America: Up 10%
      • Footwear: Up 15%
      • Apparel: Down 2%
      • Equipment: Up 15%
  • The company is expecting sales to weaken over the next six months.

Core Rising

Inflation in Canada:

  • May: 3.4%
  • Jun: 2.8%
  • Jul: 3.3%
  • Aug: 4.0%
  • Sep: 3.8%
  • Oct: 3.1%
  • Nov: 3.1%
    • Goods: +1.4%
    • Services:
  • Sep: +3.9%
  • Oct: +4.6%
  • Nov: +4.6%

Inflation excluding food and energy:

  • May: 4.0%
  • Jun: 3.5%
  • Jul: 3.4%
  • Aug: 3.6%
  • Sep: 3.2%
  • Oct:3.4%
  • Nov: 3.5%

The largest contributors to inflation:

  • Mortgage interest costs: +29.8%
  • Electricity: +8.2%
  • Rent: +7.4%
  • Food: 5.0%
    • Food purchased from stores: +4.7%

Falling were:

  • Energy: -5.7%
    • Gasoline: -7.7%
  • Household operations, furnishings and equipment: -1.5%

Britain Disinflating

  • Aug: 6.7%
  • Sep: 6.7%
    • Food prices were up 12.1%
  • Oct: 4.6%
  • Nov: 3.9%
    • Food: 9.2%
    • Alcohol and Tobacco: 10.2%
      • Why’s it always the good stuff?
    • Health: 7.7%
    • Restaurants and hotels: 7.6%
    • Clothing and footwear: 5.7%
    • Transport was down: -1.4%

Core inflation excluding food, energy alcohol and tobacco:

  • Aug: 6.2%
  • Sep: 6.1%
  • Oct: 5.7%
  • Nov: 5.1%

End of the Zombie Era?  We’ll See.

The FT reports that:

  • US corporate bankruptcies in the 12 months ending September: Up 30%
  • Bankruptcies in Germany are up 25% year-to-date.

Note that central banks have kept zombie companies alive for years with a policy of zero or negative interest rates which has served to severely hamper the world economy’s productive capacity.

  • It has also come at the expense of rising wealth inequality.
  • While some feel that the easy money era is finally over, I remain skeptical i.e. policymakers may once again cave into doing the wrong thing as their prime focus is symptoms such as asset prices or spending rather than fundamentals.

Ivy Quarterly

Ivy Quarterly, December 2012

Our view of the macroeconomic environment has been fairly consistent over the last four years: strong stock markets combined with anemic economic growth. We believe that the dichotomy between the two is due to Central banks which continue to interfere with the workings of capitalism; refusing to allow for price discovery and thus let prices clear. These actions, while well-meaning, have resulted in unintended consequences for many years now. We feel that this may be due to the short-term, tactical nature of the decision-making, which is focused on trying to maintain certain GDP levels, or employment rates, which may be out of sync with the underlying fundamentals of the economy. Perhaps central banks should be thinking longer-term and more strategically, and without influence from stock markets and politicians. In this way, they may be better able to impact the health of the economy, which in turn would eventually lead to stronger GDP and lower unemployment. Central bank actions over the last twenty years may have ultimately led to the very outcomes that they were trying to avoid.

Stock markets have been enjoying an extremely strong bull market for almost four years now with the S&P500 growing at 25% per annum. This significantly outpaces the strong bull market coming out of the tech bear market at the end of 2002. Of course, it hasn’t felt like a bull market due in part to the negative headlines over the last number of years and also due to the fact that economic fundamentals are not very strong. We believe that this rally is more a result of central banks interfering with capital markets and attempting to boost economic growth through the wealth effect of a rising stock market.

PM: Note that central banks continued to drive asset prices higher for years after I wrote this as they wanted to believe that their wealth effect economic doctrine would save the world.  It didn’t save the world, but it did save stock markets.  A small percentage of the population became extraordinarily wealthy while many others are now burdened with soul-destroying debt.

I included a quote in this quarterly from the great Austrian School economist F.A. Hayek.

 We are ready to accept almost any explanation of the present crisis of our civilization except one: that the present state of the world may be the result of genuine error on our own part and that the pursuit of some of our most cherished ideals has apparently produced results utterly different from those which we expected.

Financial Ructions

Stock Markets Leaving The Economy Behind

According to the WSJ:

  • The S&P 500 is up 23% this year.
    • The top seven stocks are up 75%
    • The other 493 stocks are up 12%
      • That’s still a very good return.
      • The average calendar year return for the index since 1928 is 8%.
      • Returns by calendar year over the last five years:
      • 2019: 29%
      • 2020: 16%
      • 2021: 27%
      • 2022: -19%
      • 2023: 21%
      • 5-year simple average: 15%
      • 5-year compounded average: 13.1%
      • Total return over that time period: 85%
      • Nominal GDP growth over that time-period: 32% (FRED)
      • Real GDP is up 11% (FRED)
  • Those top seven stocks now account for around 30% of the index.

The FT reports that EU countries have agreed to a debt reduction plan.

  • Debt reduction requirements:
    • Those with debt to GDP above 90%: 1% per year.
    • Debt between 60% and 90%: 0.5% per year.
  • This should be fun to track.


Triple C or lower rated debt yield (ICEBofA Fred):

  • US:
    • Pre-COVID: 11.9%
    • Mar 2020: 19.9%
    • Jul 2021: 6.6%
    • Dec 2023: 13.5%
  • Europe:
    • Dec 2023: 19.7%

Book Review

The Mystery of BankingMurray N. Rothbard (1983)

Chapter 15 – Central Banking In The United States III: The National Banking System

The US civil war ushered in a two-decade period of fiat money as redemption in specie (gold) was suspended.

  • The government started printing paper money called greenbacks.
  • The money supply increased over 30% per annum from 1860 to 1863.
  • From 1860 to the end of the war in 1865, inflation was 22.2% per annum.

The National Banking Act was passed in 1863.

  • Before this, state banks were required to redeem their banknotes in specie (gold).
  • But now country banks could hold reserves at larger reserve city banks and those would keep reserves at central reserve city banks.
  • Thus country banks could now pyramid loans on top of a small base of reserves at New York banks.
    • “…these reserves could consist of inflated greenbacks as well as specie.”
  • And every bank could only issue notes if it “deposited an equivalent in U.S. securities as collateral with the U.S. Treasury.
    • Which meant that banks could only issue banknotes if they bought U.S. government bonds.
      • The expansion of the money supply was now tied to the expansion of the government’s debt and of course, spending.

After the “Panic” of 1873, Congress eliminated all reserve requirements for bank notes and were only required for deposits.

  • Bank notes were tied to the banks’ holdings of government debt
  • Deposits were tied to reserves of gold and greenbacks.

The national banking system was meant to eliminate state banks and to help ensure that happened, in 1865 Congress placed a 10% tax on the bank notes of state banks.

  • State banks would then keep deposits at national banks with which they could buy national banknotes.
  • The pyramiding of loans through the banking system thus expanded leading to a number of financial panics.
    • 1873
    • 1884
    • 1893
    • 1907

One banker, who decried money having any connection to gold was Jay Cooke who called money redeemable in gold as “miserable hard coin theories” and “musty theories of a bygone age.”

  • Sounds like this is where Keynes got his inspiration for his description of a gold money standard as a “barbarous relic of the past.”

MR notes that bankers had for many years wanted to move towards a centralized banking system i.e. the formation of the Federal Reserve was not about restricting banks from growing through reckless lending or overissuing, but to be there to bail them out when they got into trouble for doing so.

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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