Post 226

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

  • Burberry sales in the Americas are falling at an accelerating rate.
  • More commentators are realising that we are dealing with a housing crisis.
  • New car sales in the US are steadily recovering.
    • But the growth of electric vehicle sales is starting to slow.
  • The UK and Canada are expected to lead the way in terms of companies filing for bankruptcy protection in 2023 and 2024.
    • Up 20-35%.
  • Home sales in Canada are down, but prices are up year over year.
    • But still down almost 20% from the highs of early 2022.
  • Germany is in recession.
  • Falling birth rates in developed economies are unmasking the ponzi-like structure of government (taxpayer) funded programs that are an intergenerational transfer of wealth.
    • It seems that the only off-set policymakers can come up with is driving housing prices through the roof.
  • A bit from my Ivy Quarterly Report in 2013, which warned of the consequences of policymakers driving asset prices higher.
  • In Financial Ructions:
    • Citigroup is letting go 20,000 employees.
    • One thing that could help lower 30-year mortgage rates in the US.
  • Another chapter review from the Mystery of Banking.

News

Americas Souring On Burberry

Burberry is a luxury fashion company founded by Thomas Burberry in Basingstoke, England in 1856.  It originally used to design clothing that would protect people from the British weather.

  • In 1908 a guy wore Burberry weatherproof clothing called gabardine when flying 1,117 miles in a hot air balloon from England to Russia.
  • A raincoat designed by Burberry became popular with soldiers during the trench warfare of the First World War and became known as a trench coat.

They recently announced a sales update for the last three months:

  • Adjusted sales: -2%

Comparable store sales by region:

  • Asia Pacific: +3%
  • Europe, Middle East, India and Africa: -5%
  • Americas: -15%

The company expects its sales for 2024 to drop by a high single digit rate.

Here’s my post from July of 2023 showing that the declines in the Americas are accelerating:

They recently announced their latest three-month sales:

  • Comparable store sales were up 18%
  1. Mainland China: +46%
    • Re-opening after Covid lockdowns
  2. Japan: +44%
  3. Europe, Middle East, Africa: +17%
  4. Americas: -8%

Housing Crisis

In an opinion piece in the FT by John Burn-Murdoch, he talks about the housing crisis in the US and the UK.

  • PM: He should take a look at Canada.

A few things of note:

  • The percentage of those aged 18-34 years old in the UK and the US living independently rather than with their parents:
  1. 1980: around 40%
  2. Today: around 20%.
  • The percentage still living with their parents has risen significantly.
  • He has a long-term chart which shows that the average home price in the UK to average earnings has shot up alarmingly:
  1. 1960-1990: range of 4-5x
    • With the occasional blip up to 6x.
  2. PM: Note that in the late 90s house prices were around 4x earning before central banks started their fallacious wealth effect policies to drive the economy forward.
    • That set in motion a relentless housing price boom which has far outstripped average wages.
  3. Today’s housing price to average earnings: Over 9x
  • The number of years required to save (15% of disposable income) for a down payment on the average UK home:
  1. 1990s: 3 years
  2. Today: 13 years

PM: As I have said many times, it’s good that mainstream commentators are finally acknowledging that we have a housing crisis on our hands.

  • However, it’s always better to avert these crises rather than try to fix them.
  1. Everyone loved the wealth effect when it was driving stock markets higher and those who owned homes were making money for doing nothing (see my note below from my 2013 Ivy Quarterly Report).
  2. Policymakers tend to practice first order effect thinking when it comes to the economy i.e. whatever’s working today just go with that without considering the longer-term consequences.
  • It’s only when things get to the point where the math no longer works that so many policymakers reluctantly start dealing with the issue.
  • There is a way out of this situation, but it’s not an easy one.
    • More in my book.

US Car Sales Recovering

The WSJ reports that US car sales in 2023 hit their highest level since 2019 (Ward Intelligence)

  • 2019: 17.0 million
  • 2022: 13.8 million
  • 2023: 15.5 million
    • 9% lower than 2019.

Electric vehicle sales were up 48% in the first 11 months of the year, but growth is slowing.

Germany Bankruptcies Rising

The FT reports that company bankruptcies in Germany are now above pre-COVID levels.  Reasons are:

  • The end of government subsidies that kept many zombie companies afloat.
    • Note that central banks have been keeping zombies alive for fifteen years.
  • Rising interest rates.
  • Rising labour costs.
  • High energy costs.
  • A slowing economy.

Allianz forecast for bankruptcies by country for 2023 and 2024 compared with 2019.

                               2023             2024

–       UK               +29%           +35%

–       Canada         +21%           +28%

–       France          +11%           +11%

–       Japan            +4%             +10%

–       Germany:     -5%              +3%

–       US               -12%            +7%

–       China:          -45%            -42%

Canadian Home Sales: Price Over Volume

According to the Canadian Real Estate Organisation:

  • The average price of a home in Canada:
  1. Feb 2022 Peak: $816,646
  2. Jan 2023 Low: $612,768
  3. Dec 2023: $657,145
    • Year over year: +5.1%
    • From low: +7.2%
    • From high: -19.5%

For the month of December:

  • Number of homes sold: +3.7
  • New home listings: -5.1%

Total home sales for the year were down 11.1%.

PM: To buy the average home today assuming a fixed 5yr mortgage rate of 5.2% and a 25yr loan term:

  • 20% down payment: $131,429
  • Monthly mortgage payment: $3,118
  • Total interest paid over 25 years: $409,600
  • Total paid (home price plus interest expense): $1,066,745.
  1. But remember that to qualify for a mortgage at one of the big banks you need to prove that you could service mortgage payments at a rate 200 basis points above the posted rate.
  2. Monthly payments at 7.2% would be $3,747.
  3. Handy dandy mortgage stress test calculator ‘here

German Economy Weak

Change in GDP in Germany (National Statistical Office):

  • 2021: +3.2%
  • 2022: +1.8%
  • 2023: -0.3%

UK: Fewer Births Per Capita

According to UK Office For National Statistics:

  • The number of children per woman:
  1. 1964 Peak: 2.9
  2. 1970: 2.4
  3. 1980: 1.9
  4. 1990: 1.8
  5. 2000: 1.7
  6. 2010: 1.9
  7. 2021: 1.6

PM:

  • Policymakers often point to stats like this to justify outlandish levels of immigration.
  • They will point out that the “dependency ratio” is getting to worrisome levels.
    • Dependency ratio definition ‘here’ from Investopedia:
      • Dependents are:
        • Those under the age of 15.
        • Those aged 65 and over.
      • Add up the total number of “dependents” and divide that by the total number of people aged 15-64.
    • With birth rates going down, the fear is that there will eventually be fewer workers to tax in order to “support” a quickly aging population.
      • I.e. the next generation won’t be large enough to support our generation in our old age.
    • A couple of things:
      • Each generation should be self-sufficient i.e. on a net basis we should only be taking from society what we contribute.
        • So, on net, we should be saving and investing enough to fund ourselves and those of our generation who were not able to save enough for themselves.
    • It shouldn’t come at the expense of our kids.
    • Otherwise, it’s more like a Ponzi scheme.
    • Here is the definition from Investopedia:
      • A Ponzi scheme is a fraudulent investing scam which generates returns for earlier investors (PM: our generation) with money taken from later investors (PM: our kids). This is similar to a pyramid scheme in that both are based on using new investors’ (kids) funds to pay the earlier backers (us).
      • Policymakers will tell you that an increasing population is required for an economy to grow.
        • No it isn’t.
    • An economy can grow with zero population growth and even negative population growth through savings and investment.
    • Also, although you can grow total spending in an economy by increasing the population, it doesn’t mean that total spending per person is also rising.
      • In Canada, total spending is increasing while per person spending is falling.
      • This is because the government is focused on boosting total spending rather than productivity growth (the latter takes longer).
        • There are lots of great things associated with immigration, but boosting total spending in the economy is not one of them.
        • Of course a larger population has scale benefits for certain types of spending.
    • For instance, if you want to build an aircraft carrier, it’s a lot easier to obtain the funds by taxing 350 million people rather than 350 thousand.
      • And as pointed out a number of times, the very high levels of immigration in Canada that are far in excessive of the increase in the housing stock are helping to drive housing prices through the roof.
      • So not only is the next generation expected to help fund our retirement, but they’re also required to pay significantly more than we did for our homes.
      • This won’t end well.

Ivy Quarterly Report: March 2013

As we have consistently commented on over the last few years, we believe that stock market strength has had more to do with central banks printing money, rather than with strengthening economic fundamentals. We believe the recent quote from David Blanchflower, who served on the Bank of England Monetary Policy Committee from 2006 to 2009, supports this argument: “The reason that stocks have erased all their losses is entirely because of [Quantitative Easing programs] (QE). To argue that that’s independent of the actions of the Fed shows no understanding of what the Fed is doing and what they did.” We couldn’t agree more. What QE hasn’t done is fix the economy. Central banks are more focused on asset prices than economic fundamentals. We believe that the main reason for this is that focusing on economic fundamentals is a longer-term endeavour and may induce periods of slower economic growth or even contraction. However, by focusing on asset prices, central banks have a much more immediate impact on stock markets and there is a wealth effect that temporarily benefits the economy.

Aggressive expansion of the money supply could at some point lead to higher inflation, but there is no guarantee. However, our main concern with printing money is the negative impact it has on the ability of capitalism to function properly. Essentially, central banks are overruling the markets in terms of price discovery and dictating what levels of risk are appropriate for investors. We believe that not only is this extremely arrogant and distasteful, but very dangerous.

Financial Ructions

Financial Industry Layoffs

The FT reports that Citigroup will be letting go 10% of its workforce this year or 20,000 employees.

  • Citigroup also announced that they incurred a special assessment from the FDIC of $1.7 billion: earnings release ‘here.’
    • This helped to rebuild the funds used by the FDIC to bail-out the uninsured depositors of the failed banks SVB, Signature etc.

Spread Hopes

The spread between the 30-year mortgage rate in the US and US 10-year treasuries has been highest during high inflation periods or in the aftermath:

  • Average since 1971: 1.7%
  • Highest level was 1980: 4.9%
  • Most recent low in May 2021: 1.3%
  • Most recent high in Jun 2023: 3.0%
  • Dec 2023: 2.8%

Some are hopeful that the spread will continue to narrow to the long-term average and thus knock 1.1% off of the 30-year mortgage rate.

Book Review

The Mystery of BankingMurray N. Rothbard (1983)

Chapter 16 – Central Banking In the United States IV: The Federal Reserve System

MR starts off this chapter by saying that the Federal Reserve System was put in place to purposely create inflation in a “controlled” and “uniform” manner.

  • The Federal Reserve now had a monopoly on the printing of paper banknotes.
  • Commercial banks would have deposit accounts at the Fed and could buy Fed Issued paper notes by drawing down their account at the Fed.

On the establishment of the Fed, reserve requirements were cut significantly:

  • Before the Fed: 21.1%
  • Founding of the Fed in 2013: 11.6%
  • 1917: 9.8%

This reduction in reserve requirements helped the Fed double the money supply from its founding in 1913 to 1919.

The expansion of the money supply was in part related to whether a bank was a member of the Federal Reserve system.

  • Money supply increase by banks from 1914 to 1920
    • Nonmember banks: around 33%
    • Member banks: 250%

Before the founding of the Fed, reserves were required for both time deposits and demand deposits i.e. 21.1%.

  • But time deposit reserve requirements were cut post-Fed.
  • Pre-Fed: 21.1%
  • Fed founding: 5%
  • 1917: 3%

This resulted in banks proactively switching their clients from demand deposits to time deposits so they wouldn’t have to hold as many reserves.

  • However, time deposits could be redeemed on 30 days notice.
    • Not only that, but banks were generally not able to invoke the 30-day rule and during the bank runs of the early 1930s banks were required to redeem time deposits on demand.
  • The growth of deposits:
    • Demand Deposits:
      • 1914: $9.7 billion
      • 1929: $22.8 billion
        • +135%
    • Time Deposits:
      • 1914: $4.6 billion
      • 1929: $19.7 billion
        • +328%
  • Deposit growth during the booming 1920s:
    • Demand deposits: +36.5%
    • Time deposits: 75.9%
  • MR makes the case that the Roaring Twenties was largely funded by credit expansion through time deposits.
  • He also points out the three years during the 20s when time deposits increased the most were the three years in which the Fed conducted large open market operations.
    • 1222
    • 1925
    • 1927

The rapid money supply of the 1920s did not result in wholesale price inflation due to the high levels of saving, investment and productivity i.e. the amount of stuff was increasing at a rate that off-set the increase in the money supply, at least in terms of prices.

  • As prices were not rising, monetary policy was kept far too accommodative which resulted in an “unhealthy boom” in capital investments as well as soaring stock markets and real estate prices.
  • The end of the monetary expansion served to burst the bubble and caused a recession.
  • However, due to “massive interference” first from President Hoover and then President Roosevelt, the recession became a depression that lasted until the US entered World War II in 1941.
    • I guess you could say Japan ended the US Great Depression.

MR makes the case that the head of the Federal Reserve Bank of New York, Benjamin Strong, was one of the key architects of the 1920s inflationary policies (rapid increase in the money supply).

  • Strong, it seems, engaged in inflationary policies in order to help Great Britain “escape the consequences of its own disastrous inflationary program.”
  • Before World War I the world was on the classical gold standard, but this was abandoned during the war in favour of hyperinflationary policies.
  • Once the war ended, Britain went back to a different type of gold standard, but did so at the pre-war rate of $4.86 i.e. it was based on an exchange rate with the US dollar rather than gold itself.
    • See this interesting ‘piece’ on the subject.
      • More than half of the money in circulation in the UK before the war was actual gold.
      • The piece makes the case that adopting a “dollar” standard rather than a true gold standard gave the governor of the Bank of England, Montague Norman, enormous power and independence from market and political pressures, particularly when in discussions with other central banks.
      • “In the terms of modern social science, it is hard to imagine a more independent central banker than Montagu Norman under the new gold standard.”
    • However, the pound was now worth much less than $4.86 because so many pounds had been printed during the war.
      • At one point the pound was only worth $3.40.
  • In 1922 the UK convinced other European countries to adopt a “gold exchange” standard rather than the classical gold standard.
    • The currencies of those European countries would be backed by reserves of the pound sterling rather than gold.
      • The pound sterling could then be redeemed in gold.
    • As MR puts it, “In that way, other countries would pyramid their currencies on top of pounds, and pounds themselves were being inflated through the 1920s.  Britain could then print pounds without worrying about the accumulated sterling balances being redeemed in gold.”
  • Due to fixing the pound at an overpriced value vs. the US dollar, UK exports suffered, hurting the economy.
  • Britain could have dealt with this through deflating the money supply and thus allowing prices to fall in order to be more competitive.
    • Instead, Britain inflated.  However, this created the risk that gold would flow from the UK to the US.
    • MR says that in order to prevent the gold flow westward, Montagu Norman made a number of trips to the US and developed a close relationship with Benjamin Strong and convinced him to inflate in the US to help out Britain.
  • Over the years people have wondered why it was that Benjamin Strong was so compliant in inflating the US economy to help out the UK.
    • MR believes that it simply comes down to Strong being part of the JP Morgan empire.
      • And JP Morgan was the “fiscal agent for the Bank of England and for the British government.”
      • Inflating was in the interest of the bankers.

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.

Submit your email to get notifications about new Paulitical Economy™ posts and updates: