Post 247

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.

Hello everyone.  Posts over the next month or so will be less frequent as I focus on the final edits for my book.

Summary

  • Air travel is growing rapidly.
    • But still far below the trend growth pre-COVID.
  • More evidence of consumers pulling back on discretionary items.
    • This time Roots Canada.
  • China, we have a problem.
  • Office properties: prices plummeting.
  • Shoppers trading down.
  • Despite US government spending driving GDP higher.
    • More evidence that the private sector is weak.
  • In Financial Ructions:
    • A speech from the Bank of Canada.
      • Rightly points out Canada’s abysmal performance on productivity.
      • Wrongly points out what has been driving inflation.
        • Spoiler alert.  It’s them.
    • Helping the IMF understand what drove inflation during the 1960s.
      • Take a guess.
    • Talk is cheap.

News

Air Travel

  • According to the International Air Transport Association (IATA).
  • Global air travel in February vs. last year was up 21.5%.
    • Domestic: +15.0%
    • International: +26.3%
  • Growth by region:
    • Fastest was Asia Pacific: +37.8%
    • Slowest was North America: +8.9%
  • 4.7 billion people are expected to fly in 2024.
    • 4.543 billion in 2019
    • Annualised growth rate of just under 1%
    • For the 15 years prior to COVID, passenger traffic was growing at an annual rate of 5.6%.
    • If that growth rate had been uninterrupted by COVID, 2024 traffic would be: 6.0 billion.
      • 27% higher than what is currently expected.

Roots

Roots Canada makes and sells apparel, footwear and leather bags and was founded in Toronto in 1973.

  • Stores:
    • North America: 120
    • International: 110
  • They started by making something called negative-heel shoes in which the sole of the shoe is thicker at the toe than the heel.
    • It’s supposed to promote heel down first walking which is supposed to be good for you.
    • But there is not much evidence that it is helpful.
      • See 1975 New York Times article here
  • 4Q/2023 Results:
    • Adjusted sales: -4.9%

China Debt

Fitch rates China’s debt at A+.

  • But has cut its outlook on China’s long-term foreign-currency issuer default rating to negative.
  • The report cites:
    • Increasing risks to China’s public finance outlook.
    • Wide fiscal deficits.
      • 2023: 5.5%
      • 2024: 7.1%!
    • Rising government debt.

Office Property Implosion

According to the WSJ.

  • The AT&T tower in St Louis is the city’s largest office tower: 44 floors.
    • PM: It was originally meant to have 45 floors but that’s another story.
    • Price:
      • 2006: $205 million
      • 2022: $4.1 million
      • 2024: $3.5 million

Dollar Stores

Dollarama is a Canadian discount retailer with over 1,450 stores.

  • 1992: The company was founded with all products being the same price.
  • 2009: Started offering higher price points
  • 2012: Additional price points: $2.50 and $3.00
  • 2016: Additional price points: $3.50 and $4.00
  • 2022: Additional price point: $5.00

4Q/2024 Results:

  • Comparable store sales: +8.7%
    • Number of transactions: +11.2%
    • Size of transactions: -2.2%
  • The company is seeing “higher than historical demand for consumables.”

US Business Activity Falling?

Commercial and industrial loans in the US have been falling for over a year.

  • Jan 2023: $2,812.1
  • Mar 2024: $2,745.7
    • -2.4%

Financial Ructions

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

Productivity Growth

A speech by the deputy governor of the Bank of Canada Carolyn Rogers.

PM: We’ll start with her good points and then where she goes astray.

  • She discusses why Canada is falling behind other developed nations in terms of productivity growth i.e. the amount of stuff produced per hour worked.
    • Productivity growth fell six quarters in a row.
    • Productivity has not grown in seven years.
    • Productivity in Canada as a percentage of that in the US:
      • 1984: 88%
      • 2022: 71%
      • She points out that it’s been a problem for a long time.
        • But has gotten worse over the last ten years.
    • She points out that in January alone the size of Canada’s working age population grew by 125,000 people.
      • Highest monthly increase on record!
      • Often people are not doing the jobs that they were trained for.
        • Like doctors who were trained in other countries driving for Uber.
        • PM: This is what results from focusing on driving the population higher for its own sake.
          • For the record, I love Uber.
    • She believes that because Canada has more small firms that are unable to take advantage of economies of scale, that investment suffers.
      • PM: I’m not sure if this has changed over the years, but it would have to in order to explain Canada’s deteriorating performance.
    • But her biggest concern is competition, or rather a lack of it in Canada.
      • PM: The Canadian economy has a number of industries that are effectively oligopolies (a small number of players resulting in limited competition):
        • Banking
        • Telecom
        • Rails
        • Grocery
      • She rightly says that a lack of competition discourages the investment that would lead to higher productivity.
    • Finally, she says that business uncertainty with respect to government policy/regulation inhibits investment.

PM: A lot of good stuff there and encouraging that the Bank of Canada is talking about this stuff.

  • Of course it’s unlikely that the government will listen, but at least it’s a start.

PM: Now let’s look at her comments that reveal how central banks view the world and why we’re currently in this unholy mess which will not be fixed without considerable pain.

  • First, she says that it was the pandemic that “sparked the biggest global inflationary episode in decades.”
    • PM No, it was the “response” of central banks to the pandemic that caused the inflation i.e. printing trillions of dollars.
    • PM: According to the New York Fed, global supply chain pressures did increase in 2021, but that was because US consumers were spending record amounts due to stimulus cheques handed out by the government with central banks buying the government’s debt to fund it.
      • Think about it for a minute.
      • Global supply chains are clogged up making it difficult to get products into the country.
      • So, what do policymakers do?
      • They literally create trillions of dollars out of thin air and hand it out to people to buy those products that are in short supply.
      • Exactly what did they think “would” happen to those prices.
    • From my July 2, 2023 post:
      • Loaded container imports for the port of Los Angeles
        • 2019: 4.7 million
        • 2020: 4.8 million
        • 2021: 5.5 million (up 15% from 2020)
          • 2021 was the year inflation took off.
      • And of course, the money supply (M2) went through the roof increasing 41% from December 2019 to December 2021.
  • Second, she says that the BoC is focused on restoring price stability.
    • Well, if price spikes were due to global supply chains and not zero interest rates and printing money, then there would be nothing for the BoC to do i.e. higher interest rates would not open up supply chains.
      • But there “is” a lot for them to do i.e. unwind the monetary tidal wave they unleashed on the economy.
    • Note that global supply chain pressures hit a record low late last year.
  • Third, she says “we know” that demographics (ageing population) will put upward pressure on prices.
    • PM: There is no reason for an ageing population to cause inflation.
      • As long, that is, as those people are spending their savings which are representative of real resources.
      • People exchanging real resources with each other would not lead to inflation: In fact, it can’t.
      • What does lead to inflation is governments increasing the money supply to help fund the spending of an ageing population.
      • So again, it’s the response of central banks that results in inflation.
  • Fourth, she says that productivity growth is a way to “inoculate the economy against inflation.”
    • This is perhaps her worst offence.
    • What she is essentially saying, is that if companies invest more and become more productive then it will help mask the fact that central banks are increasing the money supply.
    • In an unhampered competitive free market, productivity growth should lead to lower prices for consumers i.e. the beneficiaries of all that investment and ingenuity should be the consumer.
      • So even if wages don’t rise, consumers become wealthier each year as their stable wages buy more and more stuff.
      • Indeed, this was the case for the last 30 years of the nineteenth century in the US.
      • However, prices don’t fall with productivity growth because governments increase the money supply at an even faster rate.
  • Fifth, she believes that if an economy is more productive then it can have more growth before it leads to inflation.
    • No, growth does not lead to inflation.
    • If an economy is producing more stuff and people are exchanging that stuff with each other through a constant medium of exchange, then it literally would be impossible for there to be a period of a sustained increase in the prices of all goods.
      • Prices can only increase in a growing economy if the money supply is growing even faster than the amount of stuff being produced.
        • Which has been the case for decades!!!

It’s All About the Money

In a paper by the IMF (International Monetary Fund) discussing age and inflation, they say that economists were puzzled by a sudden increase in inflation in the 1960s as there was no “justifying change in activity.”

  • PM: Uh, yeh.  There was.
  • Money supply (M1) growth:
    • 1959: -0.1%
    • 1960: 2.0%
    • 1961: 2.4%
    • 1962: 3.0%
    • 1963: 3.8%
    • 1964: 4.3%
    • 1965: 4.6%
    • 1966: 3.9%
    • 1967: 7.0%
    • 1968: 6.0%
    • 1969: 3.8%
    • 1970: 6.7%
  • Average growth rate in the 1950s was 2.2%.
  • M2 growth rate:
    • 1950s: 3.4%
    • 1960s: 6.7%

Physician, Heal Thyself

An article in the FT quoting Martin Gruenberg, Chair of the Federal Deposit Insurance Corporation (FDIC).

  • He says the decision by Swiss authorities to allow UBS to take over troubled bank Credit Suisse was “unhelpful.”
    • Instead, Credit Suisse should have gone under.
  • The Financial Stability Board identifies what it considers to be banks that are “too big to fail.”
    • They are known as G-SIBs or Global Systemically Important Banks.
      • Globally there are 29.
      • In the US there are 8:
        • JP Morgan
        • Citigroup
        • Bank of America
        • Goldman Sachs
        • Morgan Stanley
        • Bank of New York Mellon
        • State Street
        • Wells Fargo
      • Policymakers believe that the failure of a G-SIB would cause a financial crisis and so they must be immediately bailed-out with taxpayer dollars to protect stock markets and the wealth of the uber wealthy maintain higher levels of capital.
        • But back to Credit Suisse.
    • The Chair of the FDIC in the US says that Credit Suisse should have been put into resolution.
      • And that the living wills of banks are much better than they were 10-12 years ago.
      • He then says that if JP Morgan failed that he would put it into resolution.
      • PM: Yeh right.  I’ll believe that when I see it.
        • It’s always easy for policymakers to pontificate about all of the hard decisions they would make when they don’t have to make them.
        • It reminds me of US policymakers chastising Japanese policymakers for bailing out their banks during their own banking crisis in the early 90s.
        • Of course, as soon as the US faced the same situation 18 years later they refused to take their own medicine.
        • Spoiler alert: If JP Morgan gets into trouble it will be deja vu all over again.

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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