Post 239

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.

Happy St. Patrick’s Day everyone.  My tradition is to go to the pub for a couple of pints and then come home and watch Darby O’Gill and the Little People: made in 1959 and starring a very young Sean Connery.

  • One minute clip of Connery singing in the movie ‘here



Ticked Off

Some TikTok stats ‘here

  • Monthly active users: 1 billion
  • 141 countries
  • 39 languages
  • Most content creators are 18-24 years old.

Monthly global active users by social media platform:

  1. Facebook: 2.9 billion
  2. You Tube: 2.2 billion
  3. Instagram (owned by Meta/Facebook): 1.4 billion
  4. TikTok: 1 billion
  5. Snapchat: 500 million

The WSJ reports that the US House of Representatives has approved a bill to ban TikTok in the US or force its Chinese owner, Bytedance, to sell it.

  • The Chinese communist party has spoken out against the US government bullying of TikTok.
  • And has said it would oppose any forced sale of TikTok.
  • One of the issues with the US government is TikTok’s valuable artificial intelligence algorithms.
    • While they efficiently give recommendations based on users’ behaviour.
    • Some fear that information may be shared by TikTok with the Chinese government.
      • The company denies this happens.
    • Or that the Chinese government can influence opinions in the US through the algorithm.
  • On the other hand:
    • Some are concerned that it is another attempt by the US government to control what people can and cannot see and another barrier to freedom of expression.
    • While others are concerned about the impact on the many creators/artists who currently use TikTok to earn a living.
  • TikTok is not in China but the app from which TikTok originated, Douyin, is.
    • Differences between the two ‘here
      • Two of the differences:
  • Typical age of users:
    • Douyin: 18-45 years old
    • TikTok: 33-55 years old
      • Content:
    • Douyin: more educational
    • TikTok: more art form
    • China blocks most US social media apps.
  • The bill still needs to go to the Senate where it is uncertain whether or not it will be passed.

Wendy’s: The Trend Is Not Your Friend

4Q/2023 Results

  • Same store sales: +1.3%
  • US same store sales by quarter:
  • 1Q/2023: 7.2%
  • 2Q/2023: 4.9%
  • 3Q/2023: 2.2%
  • 4Q/2023: 1.3%

PM: For the record, I love Wendy’s.

McDonald’s “Strategic” Price Hikes Are Starting To Bite

Keeping with the burger theme, the WSJ reports on a McDonald’s update at a recent conference:

  • Lower-income consumers have pretty much spent their COVID savings.
  • More consumers are choosing to eat at home.
  • Some of their international markets are slowing.

PM: For the record, I love McDonald’s too.

Inflation: Still Not Dead Yet

The Producer Price Index or PPI measures the change in price that producers receive for their goods.  You can think of it like a wholesale price that eventually gets passed on to consumers through retail prices.

US PPI Index month-over-month change (BLS):

  • Sep: +0.2%
  • Oct: -0.4%
  • Nov: +0.1%
  • Dec: -0.1%
  • Jan: +0.3%
  • Feb: +0.6%

Canadian Housing

In an opinion piece in the Globe and Mail, former central banker Mark Carney points to two major concerns for younger people:

  • Housing affordability (PM: or lack thereof)
  • Climate change

I’ll take on the housing affordability issue.

  • He cites CMHC (Canada Housing and Mortgage Corporation) and they say that around 6 million homes need to be built in Canada by 2030.
  • According to statcan, there were 16.4 million dwellings in Canada in 2021.
    • And while the number has certainly increased since then, that would be an increase of 37% in the number of total homes.
  • He then discusses three recommendations to get that gargantuan number of dwellings built (a fourth is more climate related):
  1. Build up: more skyscrapers etc. in urban areas.
    • He rightly points out that it wouldn’t require new infrastructure as it’s already in place.
    • But it’s not much good for a young family that wants a backyard which their kids can play in and for family barbecues etc.
  2. Homes should be built to more energy-efficient in order to reduce operating costs:
    • Heating and cooling bills
  3. He points out that in Sweden more than four fifths of detached homes are put together via components that are factory-made.
    • Not a bad idea although it might reduce jobs in the housing industry.

PM: He conveniently neglects to mention the two main causes of Canada’s housing affordability crisis:

  • Record low interest rates for a record period of time.
    • For which he was partly responsible during his central bank career.
    • Again, based on the fallacious “wealth effect” economic theory.
    • No wealth is “created” when policymakers drive asset prices higher via low or negative interest rates.
    • It’s a redistribution of wealth.
    • And has terrible consequences for the economy’s productive capacity.
  • Record levels of immigration into Canada.
    • As discussed many times, Canada had immigration for many years which has made this country one of the greatest in the world.
    • But it was never out of control and/or responsible for pricing a whole generation out of the housing market.
    • The issue is not immigration but really bad policy.

PM: So we do need to find ways of building more houses more quickly so we can deal with the policy mistakes of the last fifteen years.

  • First would be a drastic reduction in the cost of government in building new homes which in places like Toronto and Vancouver can be up to as much as one third of the cost.
  • Perhaps building more “up” has he says.

PM: However, in order to make housing more affordable longer term Canada needs to stop making policy mistakes.

  • The first mistake of ridiculously low interest rates has temporarily been fixed.
    • Normal for longer.
    • In fact I’m changing this to “normal for now.”
  • The second mistake of completely out of control immigration has to be fixed immediately.
    • Some measures have been taken but not enough.
    • Policymakers foolishly claim that those who don’t want out of control immigration must be racist.
      • However, it’s their policies that are causing any increase in racism; to the extent that there is any increase.

Oil Prices

  • March 15, 2023: $67.61
  • Recent high Sep 2023: $93.68
  • Recent low Dec 2023: $68.61
  • March 15, 2024: $81.03
    • Up 20% from last year.

US Gasoline Prices (Y-Charts):

  • March 2023: $3.41
  • Recent high Aug2023: $3.83
  • Recent low Dec 2023: $3.02
  • March 15, 2024: $3.36

Fast Fashion

Inditex, based in Spain, is a global fashion group that owns the following brands:

  • Zara
  • Massimo Dutti
  • Pull&Bear
  • Bershka
  • Oysho
  • Stradivarius

Their first Zara store opened in 1975.

They have 5,692 stores around the world.

  • Around a fifth of them are in Spain.

2023 Results

  • Adjusted sales: +10.4%
    • Zara and Zara Home: 10%
      • Accounts for 72% of Inditex’s total sales.
    • Pull&Bear: 10%
    • Massimo Dutti: 15%
    • Bershka: 10%
    • Stradivarius: 13%
    • Oysho: 19%

Stupid World Cup

Adidas 4Q/2023 Results

  • Adjusted sales: -2%
  • Footwear: +8%
    • Apparel: -13%
      • They mention that sales look worse than they really are because sales the previous year were abnormally high due to the FIFA World Cup.
    • Accessories: -1%
      • Again, they say that last year’s sales were high because of the World Cup.
        • Funny, when I look at last year’s 4Q/2022 results press release there’s no mention of these categories benefitting from the World Cup.

Shopping More Often But Buying Less Each Time

Dollar Tree is a discount retailer and it has its origins in Virginia in 1953

  • 1989: The first branded Dollar Tree store was in South Carolina.
  • 1995: Dollar Tree was listed on the stock exchange.
    • Over the following 29-year period its share price increased 10,741%.
      • 18% per year.
  • 2010: Bought Dollar Giant in Canada
    • Now have more than 244 stores
      • PM: I’m not sure why they say “more than 244 stores.”
        • Is it 245?  Why not just say the exact number?
  • 2014: Bought Family Dollar

They have over 16,000 stores in total.

4Q/2023 Results:

Same-store sales growth by brand:

  • Dollar Tree: +6.3%
    • Traffic: +7.1%
    • Average ticket: -0.7%
  • Family Dollar: -1.2%
    • Traffic: +0.7%
    • Average ticket: -2.0%
  • Average ticket is the amount spent on average by each customer that comes in the store.

Profitability increased due to things like lower freight costs.

  • Despite:
    • Product cost inflation.
    • Increasing shrink (theft).
      • They expect this headwind to continue.
    • Markdowns

Financial Ructions

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

CPP Investments invests the money that we all put into the Canada Pension Plan.

  • It has $590 billion in assets.
  • It recently sold a couple of properties incurring significant losses.
  • According to Forbes,
    • CPPIB sold its 29% stake in a Manhattan office property at 360 Park Avenue South for $1.
      • Yes, one dollar.
    • From their 3Q/2022 report:
      • “Committed US$83.6 million as part of a tri-party venture with Boston Properties and GIC to acquire 360 Park Avenue South, a 20-storey office building in Manhattan.”
    • PM: So, let’s do the math.
      • Purchase price: $83.6 million
      • Sale price: $1
      • Equals: A couple of portfolio managers worrying about their career path.

But wait, there’s more.

They also sold their 45% stake in a Santa Monica Business Park and in this case, they got $38 million which is certainly a lot more than $1.

  • The only problem is that they originally paid $147 million.

From an announcement in 2018:

  • “As part of the joint venture, CPPIB will invest US$147.4 million for a 45% ownership in the Business Park.”

A representative from the fund said:

  • “Selling is an integral part of our investment process.”
  • “We exit when the asset has maximized its value (PM: ??) and we are able to redeploy proceeds into higher and better returns in other assets, sectors and markets, including office buildings.”

PM: OK, it’s easy to poke fun and point out investment mistakes: I certainly have made my fair share of investments that didn’t work out.

  • And it makes a lot of sense to cut your losses, so I commend them for that.
  • I think deals like this are more of a reflection of how quickly the commercial real estate market has turned south rather than the investment capabilities of those at the CPPIB.
  • It also suggests that the value of a lot of commercial real estate loans on a lot of lenders’ books are worth a lot less than their balance sheets say they are.
  • Which reminds me what Alex J. Pollock says:
    • The collateral for the loan on a building is “not” the building, but the building’s price.

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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