Post 232

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

News

Entrepreneurs

In an opinion piece in the Globe and Mail, Rob Csernyik discusses the challenges of being an entrepreneur.

  • His business failed after 15 months.
  • He believes that “most people can develop the aptitudes over time or certain skill sets to poise them for success.”
  • But that there are inequalities in entrepreneurship.
    • Mainly that some people have access to finances which enables them to run at a loss that much longer and hopefully eventually get to the point where they are profitable; he was not in that position.
  • PM: I’m not so sure.
    • Being an entrepreneur is tough business.
    • No amount of money can turn around a business model that is not delivering a customer value proposition that is good enough to turn a profit.
    • But he does make a point in being able to keep going even though you’re losing money.
    • There is someone on this Paulitical Economy™ distribution list who was losing money for eight years before his business became very successful.
    • Regardless, it’s a good article and worth a read.

Lower But Still High Normal

30-year fixed rate mortgages in the US (FRED):

  • 2020 Feb (pre-COVID): 3.5%
  • 2021 Jan (low): 2.7%
  • 2023 Oct (peak): 7.8%
  • 2024 Feb: 6.6%

Swiss Layoffs

Swiss based bank UBS let go 3,319 staff in the last three months of 2023.

  • The FT reports that this takes the total number of people let go by UBS in 2023 to over 16,000.
    • And that “tens of thousands more jobs are expected to go.”
    • PM: That’s a lot.
  • Note that a big part of UBS’s restructuring is due to its take-over of basket case Credit Suisse last year.

Disinflation Yes, But Prices Still High

PPI Energy Index (Output prices) are the prices that sellers of energy received i.e. others paid.

  • Good news:
    • In the European Union they’re down 27% from peak.
  • Bad news:
    • But still up 93% since 2021.

Semiconductors Still Falling

Infineon is a German semiconductor manufacturer.

1Q/2024 Results:

  • Sales: Down 6% vs. last year.
    • Down 11% vs. the previous quarter:
      • Automotive: Down 4%
      • Green Industrial Power: Down 16%
      • Power & Sensor Systems: Down 16%
        • Rising were:
          • Smartphones
        • Falling were:
          • Personal computers
          • Laptops
          • Consumer electronics
          • Roof-top solar systems     
      • Connected Secure Systems: Down 26%
    • The company expects sales to fall again in 2024: -2%.

In Denial?

The head of Canada’s central bank Tiff Macklem says that:

  • “Housing affordability is a significant problem in Canada – but not one that can be fixed by raising or lowering interest rates.”
    • PM: Yes it can.
  • “Housing supply has fallen short of housing demand for many years.”
  • The reasons he cites are:
    • Zoning restrictions
    • Delays and uncertainties in the approval process
    • Shortages of skilled workers.
  • PM: He conveniently omits the outlandish immigration levels.
    • Regardless, he’s right when he says that monetary policy can’t deal with the above issues.
    • But he’s wrong when he says housing affordability can’t be fixed by raising or lowering interest rates.
  • PM: First, on raising rates.
    • He says that while higher interest rates can impact the profitability of development projects,
    • They have a “much bigger” impact on demand.
    • PM: One would assume that by a much bigger impact on demand he means less of it.
      • All-else equal this should help to reduce housing prices.
      • So, raising interest rates “can” help with housing affordability by reducing demand and has done so in the past e.g. late 1970s and the late 1980s.
      • But raising interest rates will have much less of an effect when the population numbers are going through the roof.
  • PM: Second, on lowering interest rates.
    • Again, monetary policy indeed impacts affordability.
      • First improving it by reducing financing costs.
      • But ultimately making housing unaffordable by sending demand through the roof.

Makeup

L’Oreal originated in 1909 in France when Eugene Schueller developed a hair dye.

The company has numerous brands including:

  • Lancome
  • Kiehl’s
  • Biotherm
  • Maybelline
  • La Roche-Posay
  • Kerastase
  • Redken
  • Matrix

4Q/2023 Results:

  • Adjusted sales: +6.9%
  • By category:
    • Professional Products: +6.4%
    • Consumer Products: +7.7%
    • L’Oreal Luxe: +0.4%
    • Dermatological Beauty: +27.3%
  • By Region:
    • Europe: +11.6%
    • North America: +9.4%
    • North Asia: -6.2%
    • SAPMENA: +22.0%
      • Stands for South Asia Pacific, Middle East, North Africa, Sub-Saharan Africa.
      • PM: This is new one on me. “This is a new one to me”?
    • Latin America: +23.4%

Sales in North Asia continue to be impacted by travel retail as authorities crack down on the Daigous industry which is people buying goods and then bringing them back into China for resale.

  • According to daxueconsulting, around 15% of luxury goods in China are sold this way.

Starbucks

Starbucks has 38,587 stores globally.

Starbucks 1Q/2024 results:

  • Comparable store sales up 5%
    • Transactions: +3%
    • Price: 2%
  • Prices by region:
    • North America: +4%
    • International: -3%
      • China: -9%.

Sales have been impacted by customer boycotts related to the Israel/Gaza conflict.

Hermes

4Q/2023 Results

  • Adjusted sales: +17.5%.
  • Sales rose at double-digit rates across all regions and categories.

From my post May 2023:

Hermes is known for its high-priced handbags: Kelly and Birkin.

  • A basic Birkin bag costs $10,400 in the US.
  • Production is limited to 50,000 per year.
    • PM: Perhaps we should put Hermes in charge of the money supply.

Houses In Canada Out of Reach

In an opinion piece in the Globe and Mail, chief economist of Alberta Central Charles St-Arnaud tries to give some perspective with respect to how unaffordable Canadian housing is.

Based on data going back to 1980, in order for housing to be considered affordable:

  • House prices need to fall by 40%

Or

  • Average family income needs to rise by 66%

Or

  • Over the next ten years:
    • Incomes need to rise by 4% per year
    • While housing prices remain flat
  • Note that the numbers are more severe for crazy expensive cities like Toronto and Vancouver.
    • E.g. In Toronto house prices need to decline 50%.

Financial Ructions

Note: Financial Ructions is optional-to-read for those who are interested in taking a bit of a deeper dive…

But We Want You To Be Independent

According to an opinion piece in the FT by Harriet Baldwin (chair of the House of Commons Treasury select committee).

  • They have been told that QE and QT in the UK could result in a total of £130 billion of losses: paid for by the government (taxpayers).
    • PM: Note that the accounting is different in the US in that losses on the Fed’s balance sheet are classified as a deferred asset.
      • It’s not often you see an asset rising the more money you lose.
    • The Fed will maintain the losses on their balance sheet until they are once again “profitable”.
    • And the losses are in two forms.
      • Over $100 billion so far because they are receiving less interest income on their assets of Treasuries and Mortgage-Backed Securities than they are paying out to banks and financial institutions on:
        • Reverse Repo
        • Bank Reserves
      • Unrealised losses on the Fed’s balance sheet caused by rising interest rates.
        • According to the WSJ, those losses were $1.3 trillion as of December of last year.
    • I believe that the rationale for classifying these losses as deferred assets is that eventually interest rates will fall and the Fed will be paying out less than they take in and the value of their bonds and MBSs will rise.
      • Of course, if a company tried that type of accounting malarky they’d be arrested.
    • And here’s my issue with the Fed calling the net interest that it remits to the Treasury as profit.
      • The Fed prints money out of thin air.
      • It buys government debt with the money.
      • The government taxes the populace to pay the Fed interest on that debt.
      • After the Fed pays for all of its operating costs ($6 billion in 2022), it remits what’s left to the Treasury.
      • So how is this “profit?”
        • What did the Fed produce?
    • Nothing.
      • It increased the money supply which extracted capital from the rest of money already in existence and transferred that to the government.
      • It’s not profit, it’s a redistribution of wealth via hidden taxation.
      • It’s more capital being redistributed from the productive side of the economy to the non-productive side.
        • And lo and behold, productivity growth has been declining.
  • She then goes on to say that “It is well-established that QE was a necessary tool for helping the UK economy keep its head above water following the 2008 financial crash.”
    • PM: No.  It’s well-established that QE served to re-levitate asset prices by distorting the market’s price discovery mechanism at the “expense” of the economy.
      • Thus:
        • Lower productivity growth.
        • Absurd levels of debt on the backs of the next generation.
        • Higher wealth disparity.
        • A whole generation being priced-out of the housing market.
  • PM: Bottom line is that she wants the Bank of England (BoE) to reconsider their Quantitative Tightening i.e. selling assets from their balance sheet which puts pressure on the government’s budget.
  • But she wants us all to know of the “importance of the BoE’s independence from government.”
    • What a joke.

Money Supply

There has been a lot of “worry” about M2 declining.

  • While it is rare for M2 to fall, it has been rising since last October.
  • And is still through the roof compared to pre-COVID
    • Feb 2020: $15.45 trillion
    • Dec 2023: $20.865 trillion
      • Up 35% in almost four years.
      • The last time M2 grew this quickly over a four-year period was in the 1970s and early 1980s.
      • Meanwhile, the annual growth rates of M2 during COVID far exceeded anything we had ever seen.
      • 1960s: low to high single-digit growth.
      • It was only in 1971 that M2 started growing at a double-digit rate.
        • And it was no coincidence that 1971 was the year Nixon took the US off the gold standard.
        • M2 growth from 1971 to 1983 averaged around 10%.
          • Peaking at 13-14% in the late 1970s.
        • In late 2020 early 2021 M2 was growing at over 20%!!

Stocks For The Long-Run

China’s stock market performance from past peaks:

  • Apr 2001:
    • Up 29%
      • Or 1% per annum
  • Jul 2007:
    • Down 48%
  • Apr 2015:
    • Down 33%
  • Sep 2021:
    • Down 23%

Stocks For The Long-Run

New York Community Bancorp was founded in 1859.

  • It is the second largest multi-family portfolio lender in the US.
    • Around half of which is subject to rent regulation.
  • Last year it bought parts of the failed Signature Bank.

The company recently announced much higher than expected losses on its real estate loans.

  • Of course, as many companies do when they have bad news to report they first talk about how great things are. “Full year performance reflects significant achievements from two transformational acquisitions.”
    • And later tell us that they lost $260 million over the last three months.

In addition to troubled real estate assets their funding costs have risen significantly.

  • Cost of total interest-bearing deposits:
    • 2021: 0.34%
    • 2022: 1.93%
    • 2023: 3.62%
  • Cost of borrowed funds:
    • 2021: 1.81%
    • 2022: 2.62%
    • 2023: 4.14%

Share price performance:

  • 1-year: Down 50%
  • 5-years: Down 59%
  • 20-years: Down 84%
  • The share price is back to where it was in 1997.
    • Back in the Puff Daddy and Spice Girls days.

In The Shadows

Fed report on commercial bank loans to non-depository financial institutions (shadow banks).

  • Jan 2015: $0.315 trillion
  • Jan 2020: $0.576 trillion
  • Jan 2023: $0.894 trillion
  • Jan 2024: $1.002 trillion
    • Up 12.1% from last year.
    • Up 74% from pre-COVID

Note that some of these loans to hedge funds and private equity groups will then be used to lend to borrowers that don’t qualify for loans from banks.

  • The shadow banking system is not regulated to the same degree as the banks.

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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