Post 227

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

  • The co-President of the Club of Rome has a few ideas on how to deal with growing wealth inequality.
    • None of them good.
  • Core inflation in the UK seems to be stalling at a level of over 5%.
  • Macy’s is letting go a number of corporate employees.
    • Their sales have been falling for a long time, but up until the end of 2022 its Bloomingdale division was still growing.
      • Not anymore.
  • Wayfair is also letting go a number of employees.
    • They blame COVID for hiring too many people.
      • Uh, no.
  • Consumer confidence is growing in the US but still at a relatively low level.
  • More evidence that the growth in electric vehicles is slowing.

News

Global smartphone market share according to Statcounter:

  1. Apple: 29%
  2. Samsung: 24%
  3. Xiaomi: 12%

In an FT opinion piece by Sandrine Dixson-Decleve; co-president of the Club of Rome she recommends ways in which developed economies can deal with growing wealth inequality.

  • She rightly points to some stats (I’m not sure of her sources) that demonstrate how ridiculous things have become:
    • CEO pay as a multiple of that of the typical worker:
      • 1965: 21x
      • 2022: 344x
    • The wealth of billionaires has grown 109% over the last ten years.
    • PM: Note that even a 1% rate of growth for a billionaire is pretty good.
      • 1% = $10 million
  • She doesn’t say exactly how we got to this place.
  • Although she does say that “The concentration of immense wealth in the hands of a few can also bring disproportionate influence over governments, thereby entrenching even deeper divides.”
  • Agreed.
  • However, it still doesn’t explain how we got here, only how it’s perpetuated.
  • Like many, she has misdiagnosed the cause of this explosion of wealth inequality and thus is prescribing the wrong medicine.
  • The medicine she prescribes is simply increasing various forms of taxation:
    • Progressive tax rates must be higher.
      • Progressive tax rates simply means that the more you earn the more you will be owe? in taxes; not only in absolute terms, but also as a percentage of your income.
      • For instance, a non-progressive tax system might look like this:
        • Earnings:  $40,000
          • Tax rate 30%
            • Taxes paid: $12,000
        • Earnings: $80,000
          • Tax rate: 30%
            • Taxes paid: $24,000
        • So, a person making twice as much money pays twice as much in taxes
          • Despite the fact that that person is likely consuming the same amount of government services as the other person.
      • But with our progressive tax system, the percentage tax rate goes up the more you make and might look like this:
        • Earnings:  $40,000
          • Tax rate 30%
            • Taxes paid: $12,000
        • Earnings: $80,000
          • Tax rate: 50%
            • Taxes paid: $40,000
      • Note that we’ve tried this before.
        • Top marginal tax rates in the UK in the 1970s  were over 90% (see ‘here’ from Volterra)
        • It destroys the economy.
    • Wealth taxes:
      • Millionaires: 2% per year
      • Billionaires: 5% per year
      • There are a number of issues with wealth taxes.
      • Particularly on unrealized capital gains.
      • For instance, if the price of your house rises to $1 million you could then be subject to a wealth tax of 2% every year as you’re now a millionaire.
      • So, you need to come up with $20,000 per year more in taxes despite the fact that your income hasn’t increased.
      • And then if the price of your home falls below a million, you’re no longer a millionaire, but you won’t be getting back those annual $20,000 wealth taxes you paid to the government.
      • Another issue might be that if you are on a defined benefit pension plan (private or public) then the amount of your annual pension could put you in the millionaire category i.e. in addition to the taxes you are already paying on your income you can add a wealth tax.
    • Windfall taxes on corporations making high profits i.e. those benefiting from a bit of good luck.
      • Good article on windfall profits “here
        • Obviously, I’m a free market guy, but I have some sympathy with this view in light of what happened with COVID.
        • When companies were faced with “bad luck” with the government feeling it necessary to shut down the economy, taxpayers had to shell-out billions of dollars to help keep companies afloat.
          • But when companies then benefit from good luck they get to keep all of the profits.
          • Of course, companies have been conditioned into receiving taxpayer bailouts and thus don’t operate with nearly as strong balance sheets as they should and instead take on crazy amounts of debt that can quickly get them into trouble as soon as the wind changes.
          • I talk at length about this sort of thing in my book and I might tackle it a bit more in a future post.
  • Bottom line, in my opinion, is that while there are many crucial services the government provides, it has become far too large and it is detracting from the productive capacity of the economy.
    • Extracting even more real resources from the private sector will only make things worse.
    • What we need is a market system where rewards are truly representative of contributions to society in terms of a customer value proposition.
      • While a lot of this still goes on, increasingly companies/people are benefiting from central banks having artificially sent stock market and housing prices higher.
      • Take central banks out of the equation and a lot of the asset wealth that was unfairly obtained will dissipate.

UK Inflation Stalling at a Higher Level?

UK Inflation including housing Costs:

  • Sep: 6.3%
  • Oct: 4.7%
  • Nov: 4.2%
  • Dec: 4.2%

Goods:

  • Nov: 2.0%
  • Dec: 1.9%

Services:

  • Nov: 6.3%
  • Dec: 6.4%

UK Inflation Excluding Housing Costs (CPI)

  • Sep: 6.7%
  • Oct: 4.6%
  • Nov: 3.9%
  • Dec: 4.0%

Core inflation excluding food, energy, alcohol and tobacco:

  • Nov: 5.2%
  • Dec: 5.2%

Largest increases:

  • Alcohol and tobacco: 12.8%
  • Communication: 8.6%
  • Food: 8.0%
  • Health: 7.5%
  • Restaurants and hotels: 7.1%

Largest decliner:

  • Transport: -1.3%
  • Motor Fuel: -10.8%
  • Gas prices: -31%

So if you want to drink, smoke, eat, talk or you have health issues (related to the first three) you will be paying more, but it will be cheaper to get there.

More Layoffs 

The WSJ reports that Macy’s is letting go of 3.5% of its staff.

  • The cuts of 2,350 people are all from the corporate side of the business.
  • It’s also closing five stores.

Their latest results showed comparable sales down 7%.

  • Macy’s: -7.6%
  • Bloomingdales: -3.2%

Here is my post from last August:

Consumers Tapped-Out?

Credit card revenue at Macy’s fell 41% vs. last year.

  • They represent more than a third of Macy’s revenue (Citi Research).

And my post from November 2022 showing Macy’s sales falling, but Bloomingdale’s sales still growing:

Macy’s, which also owns Bloomingdale’s, announced sales that were down 3.9%

  • But sales at its high-end store Bloomingdale’s were up 5.3%.

PM: Bloomingdales is a luxury department store that started in the lower east side of Manhattan in 1872.

  • In 1886 they moved uptown to 59th Street and Lexington Avenue and over the decades became the spot where people came to be seen.
    • The main store is still at this location.
  • In 1961 they came up with the first designer shopping bags.  Since then, many have become collector’s items.

Sales of Macy’s and Bloomingdales were soaring in 2021 as the US was coming out of lockdowns.

  • Then sales of Macy’s started to contract, but higher end Bloomingdales was still growing.
  • That ended starting in 2023.
    • Now both brands are seeing sales decline.
  • Sales are now lower than pre-COVID.

4Q/21

  • Macy’s: +27.3%
  • Bloomingdales: +37.8%

1Q/22

  • Macy’s: +10.7%
  • Bloomingdales: +28.1%

2Q/22

  • Macy’s: -2.9%
  • Bloomingdales: +8.8%

3Q/22

  • Macy’s: -4.4%
  • Bloomingdales: +5.3%

4Q/22

  • Macy’s: -3.9%
  • Bloomingdales: +1.2%

1Q/23

  • Macy’s: -8.7%
  • Bloomingdales: -3.9%

2Q/23

  • Macy’s: -9.2%
  • Bloomingdales: -2.7%

3Q/23

  • Macy’s: -7.6%
  • Bloomingdales: -3.2%

Total sales of Macy’s/Bloomingdales:

  • 3Q/19: $5.2 billion
  • 3Q/23: $4.9 billion
    • Down 5.8%

Even Morer Layoffs

Wayfair announced that they are letting go 1,650 employees.

  • The company said that they went “overboard in hiring during a strong economic period.”
  • “Covid caused a dramatic surge in our business, and suddenly the newly leaned down team felt like a disadvantage. With annualized sales going from $9 billion to $18 billion almost overnight our desire to grow our team was rekindled.”
  •  PM: Note that it wasn’t COVID that caused a dramatic surge in their business but rather the government printing money and mailing out “stimulus” cheques to people.
    • This resulted in:
      • The highest inflation we’ve witnessed in forty years.
      • Misallocation of capital with many companies assuming the stimulus cheque spending would continue ad infinitum.
        • Companies always seem to extrapolate strong sales growth well into the future but assume weak sales will soon turn around.
      • Many companies are now suffering the post-stimulus cheque inspired spending hangover.

US: Growing Confidence

The University of Michigan Consumer Sentiment Index:

  • Feb 2020 – Pre-COVID: 101.0
  • Jun 2022 – Low: 50.0
  • Jan 2024: 78.8
    • Up 58% from the low.
    • Down 22% from pre-COVID

Electric Vehicle Growth Slowing

Ford announced that it is reducing production of its F-150 Lightning electric truck.

  • Sales of the F-150 Lightning grew 55% in 2023.
  • The company expects sales to continue growing in 2024.
  • But their growth expectations have come down.
  • The plant where the truck is built will go from two shifts to one with 1,400 employees being impacted who will either:
    • Be transferred to other Ford plants.
    • “Take advantage of the Special Retirement Incentive Program.”

Tell Me Where It Hertz

Hertz is a global car rental company and is based in Estero, Florida.

  • Estero is just south of Fort Myers and is apparently known for high-end shopping?
    • They own the following brands:
      • Hertz
      • Dollar Rent A Car
      • Firefly Car Rental
      • Thrifty Car Rental

A brief review of its long ‘history

  • 1918: Founded as Rent-a-Car by Walter Jacobs of Chicago.
    • 12 Model T Ford cars
  • 1923: Bought by John D. Hertz and renamed Hertz Drive-Ur-Self System.
    • PM: Good thing his last name wasn’t Crash.
  • 1925: Bought by General Motors
  • 1932: The first car rental office was opened at an airport (Chicago)
  • 1933: One way rental was first offered.
  • 1953: John Hertz repurchased the company from General Motors.
  • 1967: Became a subsidiary of RCA (Radio Corporation of America).
  • 1983: The first rental car company to offer cellular phones.
  • 1987: Came under the control of the Ford Motor Company.
  • 2005: Hertz was bought by private equity firms.
  • 2006: Hertz became a public company trading on the NY Stock Exchange.
  • 2012: Bought Dollar Thrifty Automotive.
  • 2020: Filed for bankruptcy protection.
  • 2021: Came out of bankruptcy protection and the stock was relisted on the Nasdaq.
    • And this is where it Hertz i.e. in your investment portfolio.
    • Since it relisted on the stock market, its share price is down 64%.

They recently announced that they are selling one third of their global fleet of electric vehicles or 20,000 cars.

  • Some of the proceeds from the sales will be used to purchase gas vehicles (ICE or internal combustion engine).

The company is taking this action to:

  • Better balance their supply of EVs with demand.
  • Reduce damage expenses associated with EVs.

If you are interested in buying a Hertz car you can do a search on their website ‘here’.

  • 2022 Tesla Model 3 with around 50,000 miles for $28,500.

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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