Post 229

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 

  • A debt collector has its own debt problems.
  • Tesla sales and deliveries are slowing noticeably and expected to continue in 2024.
  • French luxury group saw its sales rebound in the US and in Wines and Spirits.
  • A quick look at French advertising company Publicis: sales are strong.
  • The fourth quarter saw some companies improve their top line i.e. either higher growth or sales not falling as quickly.
    • See Intel and 3M.
  • More companies are announcing layoffs.
  • A number of auto manufacturers have stopped installing AM radios.
    • In addition they are increasing sales by charging car owners more via subscription models.
      • That is, the charges will continue long after you’ve bought the car.
  • The Canadian economy is significantly underperforming.
    • This is due to out of control government spending.
    • We need to go back to the government attitude of the late 1990s and early 2000s when the liberal government at one point ran a balanced budget.
  • In Financial Ructions:
    • Global liquidity increased sharply last year and is expected to continue.
    • European property company Signa borrowed most of its money on an unsecured basis.
    • Final spending in the US continues to be strong.
      • Note that when the government pays its employees that is added to GDP.
        • Booming government hiring is helping to boost GDP.
    • A bit of a comparison between CPI and PCE.

News

Doctor, Heal Thyself

Intrum is a Swedish-based company.

  • They help other companies to monitor the debt situation of their customers to “avoid potential problems before they arise.”
  • They also offer debt collection services and are Europe’s largest debt collector.

With government assistance to individuals and corporations there were fewer debt problems for Intrum to solve.

  • Not only that, but they’re having increasing trouble collecting from the debt contracts that they do have.

The company recently announced that they are selling “a material portion of its investment portfolio” in order to … deal with its own debt problems.

Its share price performance:

  • Over the last year: Down 49%
  • Over the last five years: Down 72%

Tesla: Entering the Slow Lane

Tesla announced their 4/Q 2023 results.

  • Total group sales: Up 3%
  • Total auto sales: Up 1%
  • Note that total car deliveries were up 20%.
    • But falling prices reduce sales growth.
  • For the year as a whole (12 months):
    • Total group sales: Up 19%
    • Total auto sales: Up 15%
      • Total deliveries were up 38%.

They expect their sales volume in 2024 “may be notably lower than the growth rate achieved in 2023.”

  • They say that this is due in part to being in between two major growth waves.

But as we have seen, demand for electric vehicles in general has been waning.

LVMH

LVMH is a France-based luxury products group and employs 213,000 people globally.

Brands include:

  • Moet champagne
  • Hennessy cognac
  • Louis Vuitton
  • Fendi
  • Tiffany
  • Christian Dior
  • Givenchy
  • Stella McCartney
  • Guerlain
  • Bulgari
  • Hublot watches

Announced 4Q/23 results.

  • Sales by category
    • Wines & Spirits: +4%
      • This follows two quarters of declines.
      • The company pointed to the “unfavorable macro environment in the United States.”
    • Fashion & Leather: +9%
    • Perfumes & Cosmetics: +10%
    • Watches & Jewelry: +3%
    • Selective Retailing: +21%
  • Quarterly sales by region:
    • US: +8%
    • Japan: +20%
    • Asia: +15%
    • Europe: +5%

French Advertising Company

Publicis is a France-based advertising agency and is one of the largest in the world.

  • Others large advertising companies include:
    • WPP (UK)
    • Omnicom (US)
      • They own BBDO, which some say was the model for the TV series Mad Men.
      • Interpublic (US)

A little history on the business.

  • Publicis was founded in 1926 by 20-year-old Marcel Bleustein.
    • They note that his zodiac sign was Leo.
      • PM: Who cares?
  • The name Publicis comes from:
    • The French word for advertising: publicite
    • The number 6 (pronounced sees) from 1926 and also his favourite number.
  • He lost everything during World War II and joined the French resistance under the pseudonym Blanchet.
    • He later joined general De Gaulle in London.
  • He started again in 1946 and quickly signed up with brands such as:
    • Nestle
    • Colgate-Palmolive
    • Shell
  • In 1954 he added his French resistance pseudonym to his name becoming Marcel Bleustein-Blanchet.
  • In the 1950s he added US clients such as:
    • Marlboro
    • The Green Giant
  • The company benefited enormously from the mass consumerism that took off in this decade.
  • The 1960s sees new clients such as:
    • L’Oreal
    • Renault
  • 1978: Buys UK agency Mc Cormick
  • 2000: Acquires UK firm Saatchi & Saatchi.
    • Founded in 1967 by the Saatchi brothers.

A couple of his quotes:

  • “There is really no good advertising for bad products.”
  • “If you wait for things to change, they change without you.  At a certain point you must let go of your rationality and jump – and jump correctly, of course.  I did, whether by luck or instinct.”

Announced their 4Q/23 results:

  • Adjusted sales up 6.3%
    • North America: +6.0%
    • Europe: +4.3%
    • Asia: +4.0%

M&M&M: Turning a Corner?

3M was originally known as Minnesota Mining and Manufacturing Company.

  • They are an industrial company and also produce healthcare and consumer goods.
  • Some of their brands are:
    • Ace bandages
    • Post-it Notes
    • Scotchgard

Adjusted sales by quarter:

  • 1Q/23: -5.6%
  • 2Q/23: -2.5%
  • 3Q/23: -3.1%
  • 4Q/23: -1.4%
  • They expect growth in 2024 of 0% – 2.0%.
  • For 2023 they had expected adjusted sales to decline -3% to 0%.
    • The actual result was -3.2%, so just missed.

From my post last April:

MMM announced that they are laying off 6,000 employees.

  • This is in addition to the 2,500 layoffs they announced last January.

In total, the layoffs amount to around 10% of their workforce.

Intel

  • Intel designs and manufactures semiconductors.

It was founded in 1968 by Gordon Moore and Robert Noyce (and investor Arthur Rock).

  • Apparently the two decided against calling the company “Moore Noyce” because it sounded like More Noise.
    • PM: It’s a bit of a stretch, but maybe if the switched the names around…Knows More.

Sales growth by quarter:

  • 1Q/23: -36%
  • 2Q/23: -15%
  • 3Q/23: -8%
  • 4Q/23: +10%

According to research group Gartner, personal computer shipments rose in the last quarter for the first time in two years.

Salesforce Layoffs

The WSJ reports that Salesforce is letting go 1% of its workforce or 700 people.

  • Last year it let go 8,000 people or around 10% of its employees.

AM Radio

AM stands for amplitude modulation and AM radio started in 1906 (Radio Connection)

  • Radio broadcasting started in 1920.
  • By 1930, 40% of American households owned a radio.
    • 83% by 1940.
  • Broadcasting corporations:
    • 1926: NBC (National Broadcasting Company)
      • NBC Red: New York
      • NBC Blue: Detroit
    • 1927: CBS (Columbia Broadcasting System)
    • 1943: ABC (American Broadcasting Company)
      • This was formed from NBC Blue after the Supreme Court broke-up NBC.

The WSJ reports that the US Congress is being lobbied to force car manufacturers to continue including AM radio in their cars.

  • The AM Radio for Every Vehicle Act.
  • According to the National Association of Broadcasters:
    • 47 million Americans listen to the nearly 4,500 AM radio stations in the US.
  • Some manufacturers have already stopped including AM radio with some models including:
    • Tesla
    • Volvo
    • BMW
  • See article ‘here’ from Global News.
    • It points out that car manufacturers are trying to raise revenue by charging you for more things via a subscription model.
  • Car manufacturers want you to use their systems so they can charge you a subscription.
    • Apparently, this year some cars will not allow phone integration.
    • So, you won’t be able to connect to CarPlay

Description of CarPlay from Apple:

What is CarPlay?

CarPlay is a smarter and safer way to use your iPhone in the car, allowing you to stay focused on the road. When you connect your iPhone to CarPlay, you can get turn-by-turn directions, make calls, send and receive messages, listen to music, and more.

General motors expects to “drive significant revenue growth from subscriptions in the future.”

  • PM: It never ends.

In The Hot Seat

  • Apparently, BMW had planned to charge people a subscription of $18 per month for heated seats.
  • The company changed course saying that “user acceptance isn’t that high.”
    • PM: No kidding.  What’s next? $50 per month to use the brakes?
    • PM: They’re like a modern-day Master of the House from Les Miserables
      • Charge ‘em for the lice.
      • Extra for the mice
      • Two percent for looking in the mirror twice.
      • Sacha Baron Cohen as Master of the House ‘here

Canadian Economy: Underperforming

From a Globe and Mail opinion piece by Grady Munro and Jake Fuss (Fraser Institute).

  • Canadian government spending
  • 2014/2015: $256 billion
  • 2023/2024: $450billion.
    • Up 75%

Over the last five years, per capita (person) spending has increased at the fastest rate in history.

Yet GDP per capita growth between 2013 and 2022 has been the lowest since the 1930s (Statistics Canada).

They point to the success of the Chretien Liberal government from 1997 to 2007:

  • Reduced spending
  • Balanced the budget
  • Reduced taxes

The result:

  • Higher than OECD average GDP per capita growth
  • Employment growth is double that of the US.
  • Poverty rate declined from 7.8% to 4.9%

PM: Governments have all adopted the “deficits don’t matter” mantra as backed up by certain fallacious economic schools of thought.

  • This is digging a seriously deep hole from which it’s going to take Canadians years of digging before they can even start to see daylight.

Canada Making The Headlines

The WSJ reports on growing car thefts in Canada resulting from:

  • Relatively light penalties
  • Lax border security.
    • PM: Funny how that works.
  • It seems most of the stolen cars end up in Africa.
    • It’s home to 40% of the world’s used cars (United Nations).

Financial Ructions

Global Liquidity: Rising

An FT Market Insights piece by Michael Howell.

He says that despite the Fed’s QT last year, liquidity was easing in the US and increased 13%.

Draining liquidity was:

  • QT: Fed balance sheet:
    • Dec 2022: $8,551 billion
    • Dec 2023: $7,713 billion
      • Liquidity drain of $838 billion.
        • $70 billion per month.

Injecting liquidity was:

  • Reverse Repo:
    • Dec 2022: $2,554
    • Dec 2023: $1,018
      • Liquidity injection of $1,536 billion.
        • $128 billion per month.
  • Fed’s Bank Term Funding Program
    • Dec 2022: Zero
    • Dec 2023: $136 billion
      • Liquidity injection of $136 billion
        • $11 billion per month.
    • New loans from this program are scheduled to end on March 11 of this year: see ‘here.’

So just from these three programs there was a net injection of liquidity:

  • $69 billion per month.

He expects central banks globally to add around $5 trillion in liquidity into the system this year.

  • 10% higher than last year.
  • And he believes that this liquidity will help dampen the impact of the $50-60 billion in global debt that needs to be refinanced this year.

PM: We’ll see.

  • Regardless, liquidity is not capital.
    • Conjuring liquidity out of thin air simply redistributes capital within the system.
    • He rightly points out that if all goes according to plan then asset prices should rise.
    • But they will do so because of more money chasing less capital than would have been produced otherwise.
    • This is because the flood of liquidity distorts the price discovery mechanism.
      • Which leads to misallocated capital.
      • Which leads to declines in productivity growth.
      • Which is what we have been experiencing for years i.e. the fallacious central bank wealth effect economic doctrine.
        • Declining productivity growth is not “due” to “global secular stagnation.”
        • Global secular stagnation is due to central banks continuously distorting the most important price in global markets and that is the interest rate.
        • More in my book😊.

Oops.

Struggling European property company Signa Holding has €5.3 billion in debt.

  • Only €250 million or 4.7% is secured against tangible assets.
  • PM: This should be interesting.

US GDP

US GDP growth vs. the previous quarter at an annualised rate:

  • 3Q/23: 4.9%
  • 4Q/23: 3.3% (3.1% vs. 4Q/22).
    • Goods: 3.8%
    • Services: 2.4%

The increase in government spending reflected increases in compensation for state and local government employees.

  • PM: Note that when the government hires people the salary that the government pays them is considered government spending and thus increases GDP.
    • Therefor, the more people the government hires the higher GPD grows regardless of what those workers are doing.
  • Helps explain why government payrolls have been growing hand over fist over the last few years.
    • Note that there are a lot of very important services governments provide, but the size of government, like the size of the finance industry, is starting to have a negative impact on economic productivity.

Growth in Federal government expenditure by quarter:

4Q/22: 9.8%

1Q/23: 5.2%

2Q/23: 1.1%

3Q/23: 7.1%

4Q/23: 2.5%

Fed Inflation

The PCE or personal consumption expenditure index which is a measure of inflation.

4Q/23:

  • Up 2.6% from the previous year.
  • Up 1.7% from the previous quarter at an annualised rate.
    • Goods: -1.9%
    • Services: +3.5%

Core PCE:

4Q/23: 3.2%

Total savings was down 3.8%

Some of you may have noticed that each month there are two different inflation numbers that are released in the US: CPI and PCE.

  • The Bureau of Labor Statistics or BLS produces CPI (consumer price index).
  • The Bureau of Economic Analysis produces PCE (personal consumption expenditure).

Click ‘here’ for 29-page explanation, and gets quite complicated but here is a stab at some of the main differences between the two:

1.     

  • CPI only considers out-of-pocket expenditures
  • PCE includes both out-of-pocket and expenditures made on behalf of consumers i.e. not out of their own pocket.
    • Those spending on behalf of consumers would include:
      • Government
      • Non-profit organizations
      • The private sector

2.     

  • CPI only measures spending by urban consumers.
  • PCE measure spending by both urban and rural consumers.

3.     

  • CPI measures what consumers purchase from businesses.
  • PCE measures what businesses sell to consumers.

4.

  • CPI is a better short-term measure
  • PCE is a better long-term measure.

The Federal Reserve prefers to use PCE when determining monetary policy, but the report says that this does not mean the PCE is a better gauge of inflation.

  • The Fed prefers PCE because it:
    • Reduces substitution bias.
      • This happens because CPI keeps weights in the CPI basket fixed for two years.
      • So if consumers are switching from more expensive apples to less expensive oranges then the weight of the more expensive apples in the CPI should go down as people are buying fewer apples.
      • PM: Seems to me that by reducing the weight of apples CPI would then be understating inflation.  Yes, people are buying fewer of them but only because their price went up.
    • Captures a broader part of the economy.
    • Better reflects methodological changes (whatever that means).

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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