Post 243

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 Easter everyone.  I hope you had a good Friday and are enjoying the usual Easter treats, even if you’re eggnostic.

Summary:

  • While uber luxury products still sell well, your run-of-the-mill luxury goods are experiencing a tougher environment.
    • Gucci sales are falling.
  • Home price increases in the US during COVID were the highest since the 1980s.
  • Walgreens: A short history.
    • And more evidence that US consumer budgets are increasingly stretched.
  • Former TV host Bob Barker’s home is for sale.
    • And yes, the price is right.
  • More layoffs amid “cautious” customers:
    • This time in the telecom industry.
  • Arrivescam:
    • Having a quick look at the Auditor General Report.
  • The pros and cons of population growth.
  • In Financial Ructions:
    • Raising capital requirements may encourage the very behaviour that gets some financials into trouble.
    • One person’s take on why the Japanese Yen has been much weaker than many had expected.

News

Run of the Mill Luxury: Soft

Kering is a Paris-based company that owns a number of luxury brands.

  • It got its start as a timber trading company back in 1962.
  • Over the years it had branched-out into:
    • Distribution in Africa
    • Furniture retailing
    • Retailing books and electronics.
  • It started investing in luxury in 1999 with an investment in Gucci.
  • In 2007 it bought the sports group Puma, but subsequently divested it.
  • Over the years it disposed of its non-luxury businesses.

Main brands owned:

  • Gucci: Italian leather goods.
    • Founded in Florence Italy in 1921 by Guccio Gucci.
  • Yves Saint Laurent: French fashion
    • Founded in 1961.
  • Boucheron: French jewellery
    • Founded 1858.
    • The UK royal family owns a number of Boucheron jewels
      • Including a tiara owned by Camilla that used to be the Queen Mother’s.
  • Alexander McQueen: UK fashion
    • Founded 1992.
    • PM: The movie McQueen is worth watching (99% on Rotten Tomatoes).
  • Bottega Veneta: Italian fashion
    • Founded 1966.
  • Balenciaga: Spanish fashion house
    • Founded 1919
  • Brioni: Italian fashion
    • Founded 1945
    • Clients included:
      • Clark Gable
      • Cary Grant
      • John Wayne
  • Dodo: Italian luxury charms (PM: could have come up with a better name).
    • Launched 1995
  • Creed: Anglo-French perfume
    • Founded as a tailor in London in 1760.

4Q/2023 Results

  • Comparable sales: -4%
    • Gucci: -4%
    • Yves Saint Laurent: -1%
    • Bottega Veneta: -2%

US Home Prices

Using data from the Fannie Mae Home Price Index.

The price change of an average home in the US:

  • 10-year average: 7.1% per annum
    • Highest since the mid-80s.
    • Even the housing frenzy of the early 2000s peaked at 6.8% in 2006.
  • 5-year average: 9.5% per annum
    • 9.8% per year for the five years ending in 2022
      • Highest since early 80s.
  • 1-year rate: 7.1%
    • The highest year-over-year rate was during early 2022: 19.2%
  • Peak to trough during the Great Financial Crisis:
    • House prices fell for 5.5 years.
    • Peak: 3Q/2006
    • Trough: 1Q/2012
      • Down 23%

Walgreens

Walgreens has over 8,600 stores in the US and is number two after CVS.

A look back ‘here’and ‘here’:

  • 1901: Founded in Chicago by Charles R. Walgreen Sr.
  • 1922: Walgreen employee Ivar Pop Coulson invented the malted milkshake.
    • Milkshake: ice cream and milk
    • Malted milkshake: ice cream, milk, and malted milk powder.
      • Malted milk powder is made by extracting sugars from barley, wheat, and milk.
      • Malted milk is the centre bit of:
        • Maltesers: UK
        • Whoppers: US
      • Apparently, the malted milk brings out the flavour of chocolate and vanilla ice cream.
        • But doesn’t work well with fruit-based ice cream.
  • 1920s: During prohibition it sold “prescription” whiskey.
    • PM: Good way to wash down those sleeping pills.
  • 1950: Opened its first self-service store:
    • You could walk around the store and pick out what you needed.
      • Instead of telling a clerk behind a counter what you wanted.
    • From my January 2024 post on UK grocery chain Sainsbury:
      • 1950: The shopping experience transitioned from one where an employee behind the counter picked all of the items for the customer to one where customers were free to wander down the aisles picking their own items.
      • The last counter service store only closed in 1982 in Peckham (south London).
  • 1968: The first major drug chain to use child resistant drug containers.
  • 1970s-80s: Opened a chain of pancake houses called Wag’s.
    • Sold in 1988.
    • Some of the locations are now IHOPs (International House of Pancakes).
  • 1982: Next day photo finishing:
    • PM: Remember those days.
  • 2006: Acquired the drug store chain Happy Harry’s.
    • PM: Strange name.  Maybe Harry was on drugs.
  • 2010: Acquired drug store chain Duane Reade (New York and New Jersey)
  • 2014: Merged with UK drug store chain Alliance Boots.
    • The company’s full name is now Walgreen Boots Alliance.
      • PM: Sounds like Walgreen is giving Alliance the boot.
      • PM: They certainly gave the boot to their share price:
        • Share price since the merger 10 years ago: Down 72%.
  • 2024: The combined group has more than 12,500 stores across the US, Europe and Latin America.

2Q/2024 Results:

  • Walgreens (US) comparable sales: +4.8%
    • Pharmacy: +8.7%
    • Retail: -4.3%
      • The retail sales decline reflected:
        • A challenging retail environment.
        • In particular, lower seasonal and general merchandise.
    • In the UK retail grew faster than pharmacy:
      • Pharmacy: +1.7%
      • Retail: +5.9%
        • Boots has been gaining market share from other retailers in the UK for three years.
        • Their stores in airports grew at a double-digit rate.
    • In line with increased air travel.

Bob Barker

  • Hosted game shows:
    • 1956-1975: Truth or Consequences
      • 3min clip from the show ‘here’: 1966.
    • 1972-2007: The Price is Right
    • Looks like he overlapped for a few years.
  • He trained as a pilot during the war.
  • And apparently was proficient at karate (WSJ)
    • And used to spar with Chuck Norris.
    • PM: Who knew?
  • PM: I always find it interesting how some people choose professions that are related to their name.
    • Barker started his career as a radio announcer.
  • His father was one quarter native Indian (Sioux).
    • Bob Parker one eighth.

The WSJ reports that Bob Barker’s 1929 five thousand square foot home in Hollywood Hills is for sale:

  • $3.0 million
  • As the article says, the price is right.

Telecom Layoffs

Swedish telecom equipment manufacturer Ericsson is letting go 1,200 employees ‘here’

They cited:

  • A challenging mobile networks market.
  • Falling volume.
  • Customers remain cautious.

Arrivescam

ArriveCan is an app that was developed for Canadians so that they could make customs and immigration declarations before arriving in the country.

  • You could also upload your COVID vaccination history.

From an Auditor General Report:

  • Financial records, and controls were so poor that they weren’t able to calculate a precise number in terms of the total cost.
    • Their best guess is $59.5 million.
  • The Canada Border Services Agency determined that it did not have the expertise required to develop the application.
    • PM: This despite the size of the federal government going through the roof.
      • In the 8 years up to the last fiscal year the number of federal public employees increased 274,219
      • Over that same time period, the number of public servants relative to the population has gone up over 25%

Report conclusion: “…it did not deliver the best value for taxpayer dollars spent.”

  • PM: Ya think?

Recommendations for the Canada Border Services Agency:

  • It “should maintain accurate financial records…”
    • PM: Good one.
  • Steps should be taken to “to ensure compliance with the requirements of the contracting policies.”
    • PM: Wow!
  • “Potential bidders” for a contract should not be “involved in developing or preparing any part of a request for proposal…”
    • PM: Stating the obvious alert.
  • PM: Not the most hard-hitting or insightful conclusions
    • But at least it’s a start.
      • I wonder if the report cost $60 million.
    • PM: The RCMP is now investigating.

Population Growth

From a Globe and Mail editorial:

  • They claim that a country with a low birth rate cannot “grow and prosper.”
    • This is wrong.
    • Yes, population growth can help in a number of ways:
      • An economy can spread a number of high fixed costs over more people e.g. the more people that use a highway and are taxed to build it, the lower the cost per person.
      • In-fill parts of the economy where job skills are lacking.
      • A higher population increases the chance of the next Einstein being born (or the next Hitler).
      • Greater diversity leads to better decision making and outcomes.
    • But productivity growth does not “require” population growth.
      • It requires savings and investment.
      • And this leads to increasing GDP per capita.
        • Even if GDP itself is falling.
      • What does require high population growth?
        • Ponzi-like government benefits schemes that pay people more than they contribute.
        • Home prices growing ever higher.
      • The burden of both is dumped on the backs of the next generation.

Financial Ructions

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

Capital Cushions: Not Enough

A letter to the FT by John Murray:

  • He points out that it isn’t due to a lack of capital that banks and insurance companies fail.
  • Rather:
    • Banks fail due to:
      • Poor lending standards
      • Not provisioning enough for bad loans
    • Insurance companies fail due to:
      • Poor underwriting
      • Under-reserving
  • In other words, it’s “operational risk” that sinks them.
  • He believes that regulators are “an idle bunch” and it’s much easier to simply increase capital requirements than to monitor and determine whether or not a company is pursuing a rate of growth that’s putting the business at risk.
  • PM: It could be that the higher levels of capital encourage the riskier behaviour.

Weak Yen

In an FT (Financial Times) Markets Insight piece, Rebecca Patterson (formerly Bridgewater) discusses why the Japanese Yen weakened this year instead of strengthened like many thought it would.

  • The gist is that it’s not necessarily what’s happening in Japan, but rather what’s going on in the US.
  • Many had expected the US economy to weaken.
    • PM: Record peace-time fiscal spending and debt accumulation forestalled that.
  • The hope expectation was that the Fed would cut rates sooner and more often.
  • However, with GDP stronger than expected, interest rates in the US have remained higher.
  • The Japanese Yen continues to be used for carry trades:
    • Borrowing Yen to fund investments in assets denominated in other currencies.
      • When the Yen is sold to execute those trades, it puts downward pressure on the Yen.
      • PM: Of course, the opposite would happen if/when those trades reverse.
  • PM: Unsurprisingly, a 0.1% hike in interest rates by the Bank of Japan is not making a difference.
  • The number of Yen to one US dollar:
    • Feb 2020 Pre-COVID: 110
    • Mar 2024: 151
      • Just based on the exchange rate, US goods are now 37% more expensive in Japanese Yen.
        • Much higher when factoring in inflation.

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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