Post 238

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

Bad Idea

Wendy’s recently announced that they were going to follow in the footsteps of businesses like rideshare apps in that they would start charging more for burgers during peak hours.

  • They call it dynamic pricing: known as surge pricing with Uber.
    • Maybe they should call it “splurge” pricing.
  • Airlines also charge more during peak travel times.
  • However, due to backlash on social media, Wendy’s has backed down.
  • PM: I think Wendy’s is confusing the laws of supply and demand.
    • If there is not enough supply of a product or service to satisfy a surge in demand then prices necessarily go up.
    • Higher prices are the cue to suppliers to increase supply.
      • For industries where supply can’t be quickly increased prices can remain higher for some time.
    • For instance, with Uber, if there is greater demand during certain times, higher prices might be needed to entice more Uber drivers out of their homes or make it worthwhile for one that is further away to come and pick you up.
    • For airlines, they’re not going to buy a bunch more planes during peak holiday season so prices remain high during those periods.
    • However, I can’t see Wendy’s running short of burgers during lunch and dinner time.
    • Some have used movies as an example where certain days or times of the day it’s cheaper to go to the movies.
      • But they don’t raise prices on those packed Friday nights.
    • Similarly, restaurants will offer deals during slower times of the day or week in order to entice customers to help off-set some of the fixed costs.

Consolation Prize

The Wall Street Journal reports that top nominees at this year’s Oscars received gift bags valued at $178,000.

  • Much of the value is in offers such as:
    • Free stays at luxury hotels
    • Home remodelling
  • PM: Not a bad consolation prize for those that don’t win.
    • No wonder actors are always saying “It’s an honour just to be nominated.”

Boeing

  • Boeing had struck an earlier deal with the justice department following those two fatal crashes.
    • Two Boeing employees were accused of misleading the FAA with respect to how much training was required for the new 737 MAX.
    • This investigation could impact the terms of that previous settlement.
    • BTW, there’s a good documentary on the tragedy on Netflix called Downfall: The Case Against Boeing.
    • And a good book: Flying Blind: The 737 MAX Tragedy and the Fall of Boeing by Peter Robison.
      • It has a lot of good corporate history which helps to explain how after buying competitor McDonnell Douglas, the corporate culture of Boeing declined faster than a 737 MAX.

Normal For Longer?

The US Department of Justice has launched a criminal investigation of Boeing following the recent incident with the door plug blowout on an Alaska Airlines flight.

US 30-year fixed rate mortgage:

  • Feb 2020 Pre-COVID: 3.50%
  • Jan 2021 Low: 2.65%
  • Oct 2023 High: 7.79%
  • Mar 2024: 6.88%
  • The average rate since 1971: 7.73%
  • The average rate since the Great Financial Crisis of 2008/09: 4.31%
    • The Quantitative Easing era of printing money to drive asset prices higher.

Baggage

Airlines are increasing baggage fees to off-set rising costs.

Total baggage fees collected by US airlines (Bureau of Transportation Statistics).

  • 2012: $3.5 billion
  • 2022: $6.8 billion
    • American: $1.398 billion
    • United: $1.119 billion
    • Delta: $979 million
    • Spirit: $933 million
    • Frontier: $744 million

Note that when adjusting the 2012 number and putting it into 2022 dollars it comes out to $4.5 billion i.e. far lower than the $6.8 billion of that year.

  • So, airlines are increasing baggage fees far in excess of inflation.
  • Of course this doesn’t account for changes in the volume of travel.

The FT reports that most major airlines are now charging $40 for the first checked bag.

  • You can see baggage fees here by airline, but although it was updated this month it already looks out of date.
  • Going directly to their websites, fees for domestic flights: 
    • American Airlines:
      • 1st bag: US $40
      • 2nd bag: US$45
    • United Airlines:
      • 1st bag: US$40
      • 2nd bag: US$50
    • Air Canada:
      • 1st bag: CA$35-$42
      • 2nd bag: CA$50-$60
    • Southwest
      • 1st bag: FREE
      • 2nd bag: FREE
      • And that includes golf clubs and skis.
      • Their motto is bags fly free.

US Inflation

Consumer Price Index (CPI) Year-Over-Year change:

  • Jun: 3.0%
  • Jul: 3.2%
  • Aug: 3.7%
  • Sep: 3.7%
  • Oct: 3.2%
  • Nov: 3.1%
  • Dec: 3.4%
  • Jan: 3.1%
  • Feb: 3.2%
    • Energy: -1.9%
    • Food: +2.2%

CPI one-month change:

  • Oct: 0.1%
  • Nov: 0.2%
  • Dec: 0.2%
  • Jan: 0.3%
  • Feb: 0.4% (4.8% annualised)

Core inflation excluding food and energy:

  • Jul: 4.7%
  • Aug: 4.3%
  • Sep: 4.1%
  • Oct: 4.0%
  • Nov: 4.0%
  • Dec: 3.9%
  • Jan: 3.9%
  • Feb: 3.8%

Some big movers up:

  • Car insurance: +20.6%
  • Sporting events: +11%
  • Nonprescription drugs: +9.3%
  • Baby food and formula: +8.8%
  • Beef: +7.4%
  • Tobacco: +7.1%
  • Car repair: +6.7%
  • Hospital service: +6.1%
  • Rent: +5.8%

Some big movers down:

  • Health insurance: -19.7%
  • Eggs: -17%
  • Smartphones: -10.5%
  • Apples: -9.7%
  • Utility gas (piped) services: -8.8%
  • Televisions: -6.8%
  • Toys: -6.2%
  • Airline fares: -6.1%
  • Gasoline: -3.9%
  • Fish and Seafood: -3.9%
  • Coffee: -2.8%
  • Used cars and trucks: -1.8%
  • Dairy: -1.8%
  • Pork: -1.6%

Eurozone Stagnant

Economic growth in the Eurozone (the 20 countries using the Euro currency) during the 4Q/2023 was 0% (ECB).

For the full year 2023:

  • Exports: -0.7%
  • Imports: -1.3%
  • Food inflation: +10.9%
  • Energy: -2.0%
  • Compensation per employee: +5.3%
  • Labour productivity: -0.8%

The WSJ reports that according to Vanguard, early withdrawals from 401K’s (retirement accounts) are at record levels:

  • Pre-COVID average: 2%
  • 2022: 2.8%
  • 2023: 3.6%

Financial Repression

PM: Note that I keep saying “normal-for-longer” just to remind people that interest rates are not “high” by historical standards.

  • However, although many people are convinced that these interest rate levels are closer to the new norm, I’m not so sure.
  • At the first sign of trouble (declining asset prices) I would expect central banks to drive interest rates significantly lower and thus continue their productivity growth destroying monetary policy.
  • But it will protect the “asset” wealth of those who haven’t earned it.
  • However, not to worry as many claim they have the solution for the world’s gargantuan debt levels and it’s something called financial repression.
    • I.e. rapidly increase the money supply and lower/cap interest rates in order to:
      • Inflate away the value of your savings and wages.
      • Inflate away the value of the governments’ debt.
      • Feel better?

Financial Ructions

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

Super Size Me

In an op-ed piece in the FT, former head of the FDIC Sheila Bair worries about the concentration within the US banking system.

  • When banks get into trouble, the FDIC is obligated to sell those failed banks to the highest bidder.
  • However, it’s the largest banks that have the most firepower and are able to outbid smaller regional banks.
  • Number of banks in the US: 4,500
    • The top ten banks account for 60% of bank assets.
    • The top six have 50%.

Private Equity: Troubled Times

The FT reports that business has slowed considerably for private equity groups (Bain & Company 2024 Private Equity Report) as normal-for-longer interest rates turn the screws.

  • Deal value: -37%
  • Exit value: -44%
  • From their peak in 2021:
    • Deal value: -60%
    • Deal count: -35%
    • Exit value: -66%
    • Number of funds closing: -55%
  • The report says that even compared to the GFC the situation is unprecedented.
  • The value of unsold assets: $3.2 trillion
  • Valuations have not moved much because sellers are only disposing of their highest quality assets.

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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