Post 231

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 Emirates is an impressive airline.
    • And things are heating up for Boeing.
  • Over the years Americans have increasingly lost confidence in their government.
    • Meanwhile, the opposite is true in Germany.
  • The US is running record peacetime fiscal deficits outside of financial crises/pandemics.
    • Meanwhile, Switzerland which is at the top of the table in terms of confidence in their government, has a history of running a fiscal surplus i.e. they spend “less” than they collect in taxes.
  • It might be that Norway’s rapid adoption of electric vehicles is due in part to cheap electricity with which to charge the cars.
  • Uber sales growth continues to soar and the company is now making money.
  • Continued price increases by McDonald’s may be starting to hurt sales growth.
  • Caterpillar sales growth has slowed to 3% from over 20% last year.
  • Estee Lauder is having a hard time of it.
  • Some evidence that food prices are falling.
    • But higher minimum wages may be raising them at fast food joints in California.
  • The number of condo sales in the Greater Toronto Area is way down despite inventory levels going through the roof.
    • Yet prices have barely budged due to record immigration levels.
  • More evidence that “normal” interest rates are slowly turning the screws on those who assumed a forever-zero interest rate environment.
  • In Financial Ructions:
    • A bit of stuff on current stock market valuations.
    • Looks like a struggling European real estate company was syphoning off funds before filing for insolvency.

News

Emirates and Boeing

Emirates Airline is based out of Dubai.

  • 1985: Founded in the United Arab Emirates.
    • Fromer British Airways CEO Maurice Flanagan was named CEO.
  • 1992: They were the first airline to install video screens in all seats in all cabin classes.
  • 2016: It was named the world’s best airline.
    • The same year the airline suffered its only “hull” loss when a Boeing 777 crashed on landing.
      • Fortunately, all 300 people on board escaped before the plane burst into flames.
      • As far as I can tell, Emirates has never suffered a fatality.
  • 2020: Named the world’s largest international airline.
    • 15.8 million passengers that year.
  • You can book private suites on the plane.
  • The plane has a lounge in first-class.
  • Crazy first-class menu includes caviar and Dom Perignon
    • See menu ‘here
  • No airline in the world operates as many Boeing 777s.
    • 133
    • With 205 more on order.
  • Other airlines claim that Emirates Airline has an unfair advantage in that it doesn’t have to pay local taxes and that it receives subsidies.
    • See here for a rebuttal from president Tim Clark saying that they absolutely do not receive subsidies.
    • Not only that, but the airline has been profitable for 27 years and “unlike our accusers, we have never depended on government bailouts or protection from competition.”
    • The president takes a shot at the Big 3 US airlines saying they “are earning record profits, while seemingly content to remain on the lower ranks of global customer satisfaction surveys.”  Ouch.

In an interview with the Financial Times, Tim Clark also takes a shot at Boeing saying that he had seen a “progressive decline” at the company.

  • Including the company seemingly focusing more on its share price than on the quality of its planes.
  • Emirates has sent its own engineers to oversee Boeings production lines.
  • He said that this is the “last-chance saloon” for Boeing.

Meanwhile, the FT reports that the Federal Aviation Administration (FAA) has said that it will have more of its people “on the ground closely scrutinising and monitoring production and manufacturing activities” at Boeing.

  • Apparently, one thing the FAA is considering is whether or not a potential conflict of interest exists by allowing Boeing to do some of its own inspection and certification.
    • PM: Seems like a no-brainer.
  • An FAA spokesperson said that:
    • “the current system is not working because it’s not delivering safe aircraft.”
    • “if you don’t have that safety culture, I think it’s hard to make safe airplanes.”

And finally on this (at least for this post), thanks to ES for sending me this:

  • According to a posting on a Boeing employee forum by an unidentified individual, manufacturing quality problems concerning the Alaska Airlines 737-9, line number 8789, were unearthed on the Renton production line at the end of August 2023 and early September 2023 when an inspection discovered damaged or improperly installed rivets around the left-hand mid-exit door. Further investigations with Spirit AeroSystems—the supplier of the fuselage—revealed the pressure seal which plugs the gap between the door plug and the fuselage door frame was also damaged and needed to be replaced. To replace the pressure seal, the door plug had to be opened or removed, which would require the retaining bolts holding the panel in place to be removed.
  • In the post, the employee alleges that—presumably owing to pressure to keep the production line flowing at pace—the line workers repaired the rivets and pressure seal but did not log the fact that the door had been opened or removed in the manufacturing process system. Logging the door removal in the system—known as CMES (common manufacturing execution system)—would have automatically triggered a quality assurance inspection that would have slowed production, but which would also almost certainly have discovered the retaining bolts were either missing or loose.

Losing Confidence

According to a UN survey, the percentage of people who responded positively to whether or not they had confidence in their government.

Germany and the US going in opposite directions since 2006.

  • Switzerland: 84%
  • Finland: 78%
  • Sweden: 69%
  • Norway: 64%
  • Denmark: 64%
  • Germany: 61%
    • 2006: 32%
  • Canada: 51%
  • France: 43%
  • Japan: 43%
  • UK: 39%
  • Italy: 35%
  • US: 31%
    • 2006: 56%
  • Greece: 26%

In an opinion piece in the FT, Martin Wolf claims that UK citizens are rightly “dissatisfied” in part because they have been subjected to “fiscal austerity” over the last 16 years.

  • PM: Seriously?
    • Deficit spending by the UK government over the last 16 years:
      • 2007: -14.6 billion
      • 2008: -18.7 billion
      • 2009: -71.5 billion
      • 2010: -113 billion
      • 2011: -102 billion
      • 2012: -90.6 billion
      • 2013: -91.6 billion
      • 2014: -76.4 billion
      • 2015: -61.3 billion
      • 2016: -49.3 billion
      • 2017: -18.3 billion
      • 2018: -12.5 billion
      • 2019: +2.1 billion (surplus)
        • This must be the austerity he’s referring to.
      • 2020: -18.7 billion
      • 2021: -241 billion
      • 2022: -71.6 billion
      • 2023: -87.4 billion

So over 1.2 trillion in deficit spending (spending more than they collect in taxes), over the last sixteen years is considered austerity.

  • In the minds of many Keynesian economists, austerity simply means not being reckless enough with the public purse.
  • And that’s why some policymakers believe that by them taking on debt, we don’t have to.
    • You can’t make this stuff up.
      • Although many try.

Note above how little trust people have in their government in the UK or the US.

  • Now compare that with the number one country, Switzerland.
    • In 12 of the 14 years leading up to COVID, the Swiss government ran a budget surplus i.e. it spent less than it collected in taxes.
  • That vs. US which is near bottom of the “confidence in government” table,
    • But way up there in terms of fiscal deficits.
    • And is currently near record levels 6%+ for periods outside of war or financial crises/pandemics.

Norway

Further to my last post about over 80% of new car sales being electric vehicles.

  • In a letter to the FT, Phillip Hawley points out that:
    • Norway has abundant hydroelectricity.
    • Which means that the electricity costs for charging your electric vehicle are much lower.
      • The cost is four times higher in:
        • UK
        • Germany
        • Italy
    • However, depending on the source, consumer electricity prices by country vary quite a bit.
    • This one source shows electricity costs for household consumers in Norway being cheaper, but not by as much.  See ‘here
      • Half that of Germany and Italy.
      • Just a bit cheaper than France.
  • And see Globe and Mail piece ‘here’ from a year ago discussing rising electricity prices in Norway caused by:
    • Low water levels reducing power generation.
    • Norway exporting electricity to higher priced markets in the Eurozone caused in part by the Ukraine war.
  • PM: It’s never straightforward.

Uber Results

Uber Technologies 4Q/2023 Results

  • Trips: 2.6 billion
    • Up 24% from last year.
    • 9.4 billion trips for the year.
  • Bookings:
    • Mobility (people): +28%
    • Delivery Uber Eats etc): +19%
    • Freight: -17%
      • Decline in freight driven by:
        • Lower revenue per load
        • Lower volume
        • “Both a consequence of the challenging freight market cycle.”
  • They now have a partnership with 6,700 Domino’s locations in the US.
  • People can now order UberEats from two different stores with a single delivery fee.
  • The company had been losing money for years and turned things around during the 2Q of 2023.
    • Operating profit:
      • 2022: -$1.8 billion
      • 2023: +$1.1 billion

McDonald’s Sales Growth Slowing

McDonald’s 4Q/2023 Results

  • Total sales were up 6.0%.
    • Comparable store sales: +3.4%
  • Global comparable store sales by quarter:
    • 4Q/2022: 12%
    • 1Q/2023: 13%
    • 2Q/2023: 12%
    • 3Q/2023: 9%
    • 4Q/2023: 3.4%

The company again mentioned that “strategic menu price increases” were contributing to sales growth.

  • However, they also said that lower income consumers in the US are:
    • Trading down to cheaper menu items.
    • Or order fewer of them.
    • PM: I suspect it has something to do with those strategic menu price increases.

Caterpillar Sales Growth Slowing

Caterpillar 4Q/2023 Results:

  • Sales: +3%
    • By category:
      • Construction industries: -2.3%
        • Volume: -5%
      • Resource industries: -5.6%
        • Volume: -6%
      • Energy & Transportation: +12.4%
        • Volume: +12%
    • By region:
      • North America: +11%
      • Latin America: -6%
      • Europe, Africa, Middle East: -7%
      • Asia Pacific: -3%

Estee Lauder

Announced their latest results (2Q/2024):

  • Adjusted sales down 8%.
    • Skin Care: Down 10%
    • Makeup: Down 8%
    • Fragrance: Flat
    • Hair Care: Down 6%

Tyson Foods: Chicken Little

Tyson Foods is the second largest processor of chicken, beef and pork in the world.

  • Announced their 1Q/2024 results:
    • Sales up 0.4%.
      • Beef: +6.3%
        • Price: +10.5%
        • Volume: -4.1%
      • Pork: -0.1%
        • Price: -8.5%
        • Volume: +7.7%
      • Chicken: -5.4%
        • Price: -3.9%
        • Volume: -1.5%
      • Prepared Foods: 0%
        • Price: -2.3%
        • Volume: +2.5%
      • International: -4.9%
        • Price: -7.1%
        • Volume: +2.2%

Note that chicken sales have reversed strong growth trends from last year.

  • However, chicken is now far more profitable for Tyson than beef:
  • Profit:
    • Beef: Lost $206 million
    • Chicken: Made $177 million

Toronto Condo Sales Down

New condo sales in the Greater Toronto Area (urbannation.ca):

  • 2021: 30,619
  • 2022: 21,433
  • 2023: 12,716
    • Down 41% from 2022
    • Down 58% from 2021

 Unsold condo inventory is up 41%.

  • Equal to over 21 months of supply.
    • A “balanced” market is considered to be 10-12 months of supply.

2023 saw a three-year high in terms of condo completions: 20,165.

  • And 2024 is expected to hit a record of 26,934.

PM:

  • So, record supply.
  • Yet demand being crimped by:
    • Higher mortgage costs
    • Higher property taxes
  • You wouldn’t think that this is good for pricing, yet condo prices in the GTA are only off 2% from last year: Up in the suburbs.
    • You can thank the government for this with their ridiculous economic policy of trying to drive the economy forward with outlandish levels of immigration.
      • Makes housing unaffordable for younger people.
      • Drives down wages for lower paying jobs.
        • Good for companies
        • Bad for workers.
    • And not that it needs repeating, but I’ll do so anyway.
    • The issue is not immigration, but the outlandish “levels” of immigration.
    • New immigration minister Marc Miller has said immigration has “run a bit rampant for far too long.”
      • I assume that by saying it was “a bit” rampant, rather than simply “rampant”, he feels he’s being less critical of his own government’s policy.
      • It’s bad policy that has made immigration an issue.
      • No one was complaining about immigration five years ago.

Less is Now More

The minimum wage in California is $16 an hour.

  • In April that will rise to $20 an hour for workers in the fast-food industry (calmatters.org).
  • The WSJ reports that McDonald’s, Chipotle and others have said that they will need to raise prices to compensate for the higher labour costs.

All That Glitters Is Not Gold

The Globe and Mail reports that a group of real estate companies owned by Robert Clark has filed for creditor protection.

  • The firm buys mainly single-family homes in northern Ontario and then rents them out.
  • It owes $144 million.
  • Most of the lenders to the company are private individuals who lent anywhere from $65,000 to $600,000.
  • The article notes that many of these individuals have used their retirement savings.
    • One example they give is someone who lent $184,000 at an interest rate of 8%.
    • PM: Unfortunately, higher returns tend to come with higher risk.

Financial Ructions

Andrew Smithers provides the following chart showing two measures of stock market valuation (website ‘here’)Smithers Q and Cape.png

  • Note that these measures are little use in predicting shorter-term stock market returns i.e. just because stocks are expensive it doesn’t mean that they won’t continue to be or even become more expensive.
    • As Smithers says:§   “Value is of little guide to short-term market performance. If markets habitually rose when they were cheap and fell when they were expensive, they would never become mis-evaluated.”
    • He also has the following to say about the “Fed Model” i.e. comparing stock valuation to nominal bond yields:
      • “In Report No. 133 we showed that the observed positive correlation between dividend and earnings yields on shares and the yield on bonds applied only in the US from 1977 to 1997. It has not applied since. Furthermore, there was a marginally stronger negative correlation from 1948 to 1968 and no long-term relationship whatsoever. The bond yield myth is thus an egregious example of data mining.”

According to the FT, a letter filed by creditors accuses troubled real estate empire Signa Development of “unlawful transactions.”

  • These transactions took place before the company’s insolvency proceedings.
  • Namely, the transfer of €662 million out of Signa Development to related companies.
    • Including €300 million to companies related to the family trusts of company owner Rene Benko.
  • PM: This could be a Netflix Original.

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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