Post 225

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.


  • Pepsi and Carrefour revisited.
  • More evidence of essentials doing well and non-essentials suffering.
  • A short Xerox history lesson.
    • Don’t copy Xerox.
  • UK employment company Hays is seeing significant weakness in hiring.
    • Particularly in permanent positions.
  • The declines in US inflation (disinflation) may be stalling.
    • Core inflation has been stuck at around the 4% level for four months in a row.
  • Prices of smartphones and major appliances are down sharply.
    • Driving is getting more expensive:
      • Auto insurance up over 20%
      • Auto repair and maintenance up over 7%
    • But it’s getting cheaper to fly: airline tickets down over 9%.
  • Electric vehicle used car prices are down almost 30% in the US.
  • Social security payments in the US were inflation-adjusted higher by 3.2%.
    • Last year the increase was 8.3%.
  • US warehouse vacancy rates are rising.
  • In Financial Ructions:
    • A few comments on an MMT interview.
    • House and car insurance costs are going through the roof.


He Said She Said

Further to my recent post about French food retailer Carrefour removing some PepsiCo products from their shelves due to rapidly rising prices.

  • The WSJ reports that Pepsi claims that it was they who decided to stop providing Carrefour with Pepsi products because the two companies couldn’t agree terms on a new contract.

Groceries Up, Clothing Down

Sainsbury is a large UK food retailer:

  • Over 600 supermarkets
  • Over 800 convenience stores
  • 152,000 employees.

Sainsbury was founded in 1869 by John James Sainsbury and his wife Mary Anne: history ‘here

  • It opened on London’s Drury Lane (the theatre district).
  • The only items they sold were eggs, milk and butter.
  • In 1916 one of their stores suffered hits by a Zeppelin
    • Zeppelin hits go back a long way.
  • 1950: The shopping experience transitioned from one where an employee behind the counter picked all of the items for the customer to one where customers were free to wander down the aisles picking their own items.
    • The last counter service store only closed in 1982 in Peckham (south London).
    • PM: I tried to see if there was a YouTube video of that last counter service store in Peckham, but when I did a search I found: “Peckham shop owner seen choking woman accused of stealing.”
  • 1991: Stores started opening on a Sunday.

Sainsbury ad ‘here’ with John Cleese.

Dads in sweaters dancing ‘here

Announced adjusted sales for the last six weeks to January 6, 2024 (Christmas sales):

  • Grocery: +8.6%
  • General merchandise: -0.9%
  • Clothing: -6.0%
    • Clothing sales have fallen for six of the last seven quarters.

The company noted that the merchandise market was “weak and highly promotional.”

Copy That Again

Thanks to JH for commenting on my recent post about Xerox.  His notes here:

  • In 1979, my first full-time job was in sales with Xerox (from the word xerography, dry writing) 
  • An incredibly innovative company, besides copiers they invented, graphic icons, spin wheels for printers, floppy discs, the telecopier aka the FAX machine, the mouse etc.
  • Many of these ideas were stolen by Apple when they hired Xerox engineers.
  • Their big setback happened around 1980-81 when they refused to admit that other manufacturers like Savin, Ricoh and Minolta using “wet toner” technology could put a dent in their market share.
    • After all “wet toner is so messy”.
  • Plus these manufacturers sold their boxes through office supply stores which made it easier for consumers to access.
  • I guess you can say Xerox had a Kodak moment.  Or was it the other way around.
  • What kept them in business was that they owned the large machine market which serviced schools, print shops and high-volume corporate accounts.

Not Making Hay

Hays is a UK based global job recruitment firm and employs around 13,000 people.

They recently posted their latest three-month results 2Q/24 as of December 31, 2023.

  • Adjusted fees were down 10%
    • Down 15% in December
  • By region:
    • Germany: 0%
    • UK and Ireland: -17%
    • Australia and New Zealand: -20%
    • Rest of World: -11%
  • By type:
    • Temporary: -5%
    • Permanent: -17%
      • Fee price: Up 8%
      • Volume: Down 25%

The company reduced its number of employees by 12% over the year:

  • Over 1,100 employees.
  • “Overall market conditions became increasingly challenging through the quarter, including a clear slowdown in most markets in December, notably in our Permanent businesses as client and candidate decision-making slowed.”

Job vacancies in the UK remain elevated vs. pre-COVID, but have fallen 20 straight months since March 2022: ONS

  • Feb 2020: 826,000
  • Mar 2022: 1,302,000
  • Nov 2023: 949,000

Freight Prices: Temporary Blip?

The Drewry World Container Index (price per 40-foot containers)

  • Jan 2023: 2,079
  • Oct 2023 (low): 1,342
    • Down: 35%
  • Jan 2024: 3,072
    • From last year: Up 48%
    • From 2023 low: Up 129%

Rates from Shanghai to Rotterdam year over year change: Up 133%.

  • Rotterdam do Shanghai: Down 17%.

They expect rates from East to West to continue rising due to tensions in the Middle East (Red Sea/Suez).

US Inflation: Not Dead Yet

Inflation in the US (US Bureau of Labor Statistics):

  • Sep: +3.7%
  • Oct: +3.2%
  • Nov: +3.1%
  • Dec: +3.4%
    • Food: +2.7%
      • Food at home: +1.3%
      • Beef: +8.7%
      • Eggs: -23.8%
      • Lettuce: -16.7% (lettuce hope this continues)
      • Food away from home: +5.2%
    • Energy: -2.0%

Core inflation excluding food and energy:

  • Sep: + 4.1%
  • Oct: +4.0%
  • Nov: +4.0%
  • Dec: +3.9%

Some key product movers up:

  • Cigarettes: +7.8%
  • Pet food: +5.1%
  • Medicinal drugs: +4.8%
  • Beer away from home (medicinal?): 4.8%

Some key product movers down:

  • Smartphones: -14.4%
  • Major appliances: -10.3%
  • Televisions: -10.3%
  • College text books: -4.9%
  • Toys: -4.5%
  • Sporting goods: -2.5%

Some key services:

  • Services less energy: +5.3%
    • Shelter: 6.2%
    • Medical care services: -0.5%
      • Hospital services: +5.5%
    • Transportation services: +9.7%
      • Car insurance: +20.3%
      • Car maintenance/repair: +7.1%
      • Airline fare: -9.4%

Dodge and GMC in Fine Company

According to the FT, electric vehicle resale prices have dropped significantly more than that for the overall used car market:

  • US: down 28% (carguru)
  • UK: around a fifth (carguru/HSBC)

They note the used price of a Tesla Model X:

  • Dec 2022: $75,798
  • Dec 2023: $48,511
    • Down 36%.

According to carguru, the average price of a used car in the US for the overall market:

  • Jan 2020 (pre-COVID): $21,888
  • Aug 2022 (peak): $31,636
    • Up 45%
  • Jan 2024: $28,214
    • Down 11% from peak
    • Up 29% from pre-COVID
  • Used cars with the biggest year-over-year price declines:
    • Polestar: -31.5%
    • Tesla: -30.4%
    • Wagoneer: -16.1%
    • Alfa Romeo: -14.7%
    • Fiat: -12.3%
  • Those with the biggest price increases:
    • Rolls Royce: +3.9%
    • Ferrari: +1.8%
    • GMC: 1.7%
    • Dodge: 1.3%

Social Security

The WSJ reports that around 14% of those receiving Social Security over the age of 65 years of age have no other source of income (AARP).

  • The cost of living adjustment (COLA) for 2024 is 3.2%
  • Social security monthly benefit:
    • 2023: $1,848
    • 2024: $1,907
      • $22,884 per year
        • $30,512 in Canadian dollars.

Space To Let

According to the WSJ via Cushman & Wakefield:

  • US warehouse vacancy rate:
    • 4Q-2022: 3.1%
    • 3Q-2023: 4.6%
    • 4Q-2023: 5.2%

Financial Ructions

An FT interview with MMT economist Stephanie Kelton.

  • She says that post GFC central banks were unable to create inflation despite zero interest rates and quantitative easing.
    • PM: As I have said before, in the US at least, the Fed didn’t want inflation resulting from the trillions of dollars it was printing as it would have then required them to raise interest rates which is the last thing they wanted to do.
      • Quantitative easing was directed at inflating asset prices through the portfolio effect.
      • To help ensure that the trillions in excess reserves that were created through QE were not used by the commercial banking system to pyramid loans, the Fed started paying interest on excess reserves.
  • Like other MMT proponents, she claims that raising interest rates is inflationary because higher money market rates put more cash into the pockets of people who have savings.
    • She claims that this increases the spending power of those who are wealthier.
    • PM: True, but it’s also true that wealthier people have a lower propensity to “consume” and definitely would not be causing the crazy food inflation we’ve been experiencing.
      • Regardless, interest rates at these levels are not a “subsidy” to the rich as she puts it but are simply interest rates that are closer to natural levels that result in the most productive asset allocation and over time the strongest economy.
      • And as I’ve also said many times in the past, the problem is not today’s “normal” rates, but the zero percent rates of the last 15yrs.
  • She says that there is no relationship between government deficits and inflation, but I would argue that it depends on what it is the government is spending the money on.
    • She uses Japan as an example that has had deficits for years and no inflation.
    • True.  But what government deficits do lead to is lower productivity growth.
      • As pointed out in previous posts, Japan’s GDP per capita has fallen far behind that of the US.
      • Prior to 1990 Japan ran much smaller deficits and in fact often ran a budget surplus.
    • I have shown this table before highlighting how prior to 1990 Japan was rapidly gaining on the US in terms of GDP per capita but then started regressing.  Note also how the US has slowed.
 Japan GDP/Capita30yr Growth RateUS GDP/Capita30yr Growth RateGDP Spread
1960$6,261 $19,135 $12,874

I agree with her that housing shortages are a really bad thing, but I’m not sure what her recommendation is for solving the problem.

  • Getting the government out of the way in terms of onerous taxes and fees would be a good start.

She revisits the whole “there can be no net private investment without government deficit spending.”  Here is what I posted on that back in June of 2023:

PM: This misleading graph was posted by Stephanie Kelton who is one of the leading proponents of Modern Monetary Theory (MMT) who believe that government deficits don’t matter for countries that issue their own currency because they can just print as much money as they need.  They epitomise the something from nothing crowd, which is pure fantasy.

Regardless in the chart above, the black represents surplus investment in the private sector while the red is government deficit spending and, in her tweet, she says that the “black ink” in the private sector is only made possible by the red ink in the government sector.  This is very misleading as she’s making it sound as though black ink or “net investment” in the private sector is a good thing and only possible if the government is willing to spend more than it collects in taxes.

It’s misleading because “net investment” in the private sector is not a good thing and it’s not investment.  In fact, the lower the “net investment” number the greater the productive capacity of the economy and ideally net investment should be zero.  For example, if you make a $10,000 loan to General Motors you have an asset of $10,000, but General Motors now has a matching liability of $10,000.  So, in the private sector your asset is off-set by the liability of General Motors with net investment in the private sector being zero i.e. there is no surplus.  So, in the private sector you can have trillions of dollars of investment taking place, but as long as no one is lending money to the government then private sector net investment is off-set by private sector liabilities and thus private sector surplus is zero.  And that’s good.

When there is surplus in the private sector it simply means that the private sector is lending to the government.  So, if you lend $10,000 to the government you have an asset of $10,000, but there is no corresponding liability in the private sector.  Instead, the liability is in the government sector and represented by its deficit spending.  That’s why private sector surplus matches government deficit spending.  So, it’s not government deficit spending that makes private sector surplus possible, but the private sector surplus that makes deficit spending possible.

And importantly, private sector surplus is “not” investment.  The “vast” majority of government spending is consumption and not investment.  So, the more the private sector lends to the government i.e. the greater the private sector surplus or net investment, the more consumption is happening in the economy at the expense of investment.  And because most government spending is consumption rather than investment, the government cannot produce any capital with which to pay you back your loan.  Instead, the government “obtains” the required capital for the loan repayment in three ways:

  • Borrowing more money to pay you back your loan.
  • Taxing you more
  • Printing money and extracting capital from your savings i.e. the value of the dollars you lent to the government will purchase a lot less stuff once the government pays you back.

And this is another reason why productivity growth has been grinding lower for decades.

Auto and Home Insurance Costs Soaring

According to AM Best, property and casualty insurance companies had underwriting losses of $32 billion in the first nine months of 2023.

  • The combined ratio in the insurance industry is calculated by adding up a company’s total expenses and claims for the year and dividing that by the total number of premiums collected.
  • A number greater than 100 means that the company is paying out more in expenses and claims than it is collecting in premiums and it’s called an underwriting loss.
  • For the property and casualty industry in the first nine months of last year the combined ratio was 103.4.
  • But as discussed in one of my posts last year, insurance companies can still make money even if they are losing money on an underwriting basis.
    • Insurance companies receive the premiums long before they need to pay-out insurance claims.
    • The companies can invest that money and earn a return before claims are paid.
    • Although insurance companies can also suffer losses on their investments.
      • For instance, in the 3Q of 2023 Allstate had a fixed income portfolio of $46.8 billion from which it earned $567 million.
      • Although they did have unrealized capital losses of $3.2 billion due to higher interest rates lowering the value of their bond investments.

In addition, if one year was beset by a number of catastrophes, which are unlikely to happen every year then the underlying profitability of the industry or company may be significantly better than what has been reported.

  • For instance, here is the combined ration for Allstate for the first nine months of each year:
    • 2021: 92.4
      • Adjusted for catastrophe losses: 90.5
    • 2022: 105.8
      • Adjusted for catastrophe losses: 98.6
    • 2023: 109.8
      • Adjusted for catastrophe losses: 94.3
    • Of course, catastrophe losses still impact profitability and Allstate seems to be having them quite frequently of late.
    • And note that the company does not strip out catastrophe losses when deciding whether or not they need to increase the cost of insurance for policyholders.
  • Actions that Allstate has taken lately in response to higher car insurance losses and “elevated” catastrophe losses:
    • Continue to raise auto and home insurance prices
    • Restrict growth in “profit-challenged” states.
  • As of November 2023 auto insurance rates were up 19.2% vs. the prior year (US Bureau of Labor)

Here is my post from August 2023:

Home Insurance: Price Going Up

In the US the national average cost of home insurance on a $250,000 home (Bankrate):

  • $1,428
    • Or $119 per month.
    • Up 20% from last year.

The skyrocketing cost of insurance is forcing some homeowners to forego insuring their homes.

  • 12% of homeowners in the US don’t have home insurance (Insurance Information Institute).

Financial Industry Layoffs

Blackrock employs 20,000 but is saying goodbye to 600 of them or 3% of their workforce.

  • However, as the reallocate across the organisation they expect employee numbers to increase this year.

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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