Post 248

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

  • Big layoffs from Tesla.
    • The share price is down 64% from its high.
  • Procter and Gamble has not grown volume for eight straight quarters (2 years).
    • This is what happens when you constantly raise prices.
      • People simply can’t afford to buy as much as they used to.
  • Netflix: Diminishing the customer value proposition to drive sales higher.
    • They’re not alone.
  • The growth in the number of government employees in Canada is out of control.
  • The number of “people” who are delinquent on credit card payments in the US is more than three times the delinquency “rate.”
    • The wealthy who spend more and don’t miss payments skew the rate downward.
  • Monthly mortgage payments on the median priced US home have more than doubled since before COVID.
  • In Financial Ructions:
    • 10-year rates in the US have resumed the march upward.
      • But they’re still a long way from “normal.”
    • Despite higher than normal inflation in Japan, the BoJ keeps its key rate on the floor.
      • Thus the Yen continues to fall.
    • US stock markets are very expensive.

News

Letting Go

Tesla announced that it is letting go more than 10% of its global workforces:

  • Over 14,000 employees.

The share price of Tesla took off like a rocket ship during COVID.

  • Feb 2020: $45
  • Nov 2021 peak: $407
    • Up 804%
  • Apr 2024: $147
    • Down 64% from peak.
    • But still up 227% from Feb 2020

Procter & Gamble: Slowing Sales Growth

Procter & Gamble was founded in Cincinnati in 1837 and owns brands including the following:

  • Pampers
  • Bounce
  • Downy
  • Gain
  • Ivory Snow
  • Ivory Soap: introduced in 1879
  • Tide
  • Bounty
  • Charmin
  • Always
  • Gillette
  • Braun
  • Head & Shoulders
  • Cascade
  • Mr. Clean
  • Swiffer
  • Crest
  • Scope
  • Vicks
  • And more

Announced their 3Q/2024 results: 

  • Adjusted sales: +3%. 
    • Price: +3%. 
    • Volume: 0%. 

Adjusted sales by quarter:

  • 3Q/23: 7%
  • 4Q/23: 8%
  • 1Q/24: 6%
  • 2Q/24: 4%
  • 3Q/24: 3%

Price increases by quarter:

  • 1Q/22 (Sep 2021): +1%
  • 2Q/22: +3%
  • 3Q/22: +5%
  • 4Q/22: +8%
  • 1Q/23: +9%
  • 2Q/23: +10%
  • 3Q/23: +10%
  • 4Q/23: +7%
  • 1Q/24: +7%
  • 2Q/24: +4%
  • 3Q/24: +3%

Volume by quarter:

  • 1Q/22 (Sep 2021): +2%
  • 2Q/22: +3%
  • 3Q/22: +3%
  • 4Q/22: -1%
  • 1Q/23: -3%
  • 2Q/23: -6%
  • 3Q/23: -6%
  • 4Q/23: -1%
  • 1Q/24: -1%
  • 2Q/24: -1%
  • 3Q/24: 0%

PM: Note that volume was still growing when price increases were “reasonable”

  • The two quarters with the highest price rises were the same two quarters with biggest volume declines.

Netflix

Netflix announced their 1Q/2024 results:

Their strategy of cracking down on people sharing passwords seems to be working.

  • Sales growth by quarter: 
    • 1Q/2023: 3.7%
    • 2Q/2023: 2.7%
    • 3Q/2023: 7.8%
    • 4Q/2023: 12.5%
    • 1Q//2024: 14.8% (+18% on an adjusted basis)
    • Their forecast for 2Q/2024: 15.9%
  • Global streaming paid members:
    • 269.6 million: +16.0%
    • With over 2 people per household there are now half a billion watching Netflix.

PM: Of course, there is a limit to how much that crackdown can contribute to sales growth i.e. once no one is left sharing passwords there’s no one to crack down on.

  • Thus, those not paying up for the ad-free tier should get ready for more advertising:
    • “…in particular scaling ads to become a more meaningful contributor to our business in ‘25 and beyond.”
    • PM: This is typical of the mindset of so many companies these days.
      • Rather than remain focused on improving the customer value proposition to drive sales higher, so many companies look to “extract” from that value proposition i.e. in this case diminishing your viewing experience by forcing you to watch more ads which benefits their top line.
      • You see it in some sports apps that you already “pay” for and then they start forcing you to watch a couple of ads before the live stream kicks in.  What a joke. 
      • Or when you go to the movie theatre you have to sit through 10 min of ads and then 10 min of previews before the damn movie starts.
      • Other examples are things like “loyalty” programs for airlines.
        • They’ve learned from central banks by diminishing the value of the miles over time, by charging you ever higher numbers of miles per flight.
    • Not only does it cost more miles than it used to, but they also charge you money on top of it.
    • Of course, the danger for airlines is that with diminishing benefits their customers will become less loyal.
      • Like mainstream economists, they’ll probably tell you that “inflation” is required to encourage people to spend their air miles.
    • PM: Inflation is not required for an economy to grow, and deflation does not stop people from spending.
      • Much more in my book and we hope to start looking for a publisher at the end of this week.

They plan on showing more live events like the Mike Tyson/ Jake Paul boxing match this summer.

Their share of US TV streaming:

  • Apr 2023: 6.9%
  • Mar: 2024: 8.1%

Growing Government

You can take this handy dandy quiz from the Globe and Mail.

A couple of spoiler alerts below so take the quick first:

  • Growth of workforces since 2015
    • Federal government employees: +27% (100,000 people)
    • Private sector: +15%
    • Self-employed: +0.7%
  • Government workers as a percentage of the economy:
  1. France: 21.1%
  2. Canada: 20.7%
  3. UK: 16.9%
  4. US: 15.0%
  5. Germany: 11.1%

Delinquent

Delinquency rate on credit cards in the US (FRED)

  • Pre-COVID: 2.66%
  • 4Q/2023: 3.10%
    • Highest since early 2012.
  • PM: Note that credit card delinquency rate is the percentage of “dollar” value of credit cards that is delinquent.
    • PM: It is not the percentage of credit card holders that are delinquent.
    • So, if due to the wealth effect, more wealthy people are spending that much more on their credit cards, the overall delinquency rate can go down even if more people lower down the income spectrum are defaulting.
    • The number of “people” who had missed a payment over the last year as of Oct 2023 was 11.2%.

Charge-Off Rates on US Credit Cards:

  • From FRED
  • 1985-1990: 3.1%
  • 1990s: 4.2%
  • 2000s: 5.4%
  • 2010s: 4.3%
  • 2020s: 2.8%
  • Oct 2023: 4.1%
    • Highest level since 2012.

Bank of America

Net credit card charge-offs and charge-off rate:

  • 1Q/2023: $501 million (2.21%)
  • 2Q/2023: $610 million (2.60%)
  • 3Q/2023: $673 million (2.72%)
  • 4Q/2023: $777 million (3.07%)
  • 1Q/2024: $899 million (3.62%)

Of Interest

Higher than expected inflation is reducing the hopes odds of rate cuts this year.

  • US mortgage rates and 10-year rates are rising once again.
    • 30yr Fixed Rate Mortgage FRED, median home price Redfin and monthly payment with 20% down:
      • Pre-COVID:
        • Mortgage rate: 3.49%
        • Median home price: $294,032
        • Monthly mortgage payment: $1,055
      • Low Jan 2021:
        • Mortgage rate: 2.65%
        • Median home price: $330,788
        • Monthly mortgage payments: $1,066
      • Recent high Oct 2023:
        • Mortgage rate: 7.79%
        • Median home price: $413,554
        • Monthly mortgage payments: $2,379
      • Recent low Jan 18, 2024:
        • Mortgage rate: 6.60%
        • Median home price: $402,066
        • Monthly mortgage payments: $2,054
      • April 18, 2024:
        • Mortgage rate: 7.10%
        • Median home price: $420,357
        • Monthly mortgage payments: $2,260

Financial Ructions

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

Not Even Normal Yet For Longer?

  • 10yr rates:
    • Pre-COVID: 1.59%
    • Jul 2020: 0.55%
    • Recent high Oct 2023: 4.98%
    • Recent low Dec 2023: 3.79%
    • April 19, 2024: 4.59%
      • Note that this is still low by historical standards:
      • Average from 1962-2002:  7.43%

Japan Inflation

  • Feb: 2.8%
  • Mar: 2.7%

PM: These are historically high numbers for Japan.

  • Yet the BoJ key interest rate remains on the floor: 0%-0.1%
    • Thus, the weak Yen.
      • Jan 2012: 76.3
      • Jan 2020: 108.5
      • Apr 2024: 154.5
        • 42% move since COVID.

US Stock Markets: Expensive

Case Shiller PE Ratio

  • It’s currently higher (more expensive) than the peak of the roaring twenties bubble.
    • The current peak is the third highest in the history of the index:
      • Sep 1929: 32.6
      • Jan 1966: 24.1
      • Dec 1999: 44.2
      • Sep 2007: 27.3
      • Nov 2021: 38.6
      • Apr 2024: 34.7
    • On a price to sales basis the US is also extremely expensive relative to the past 22 years.
      • Median: 1.55
      • Today: 2.69
    • Dow Jones performance from peaks
      • 1929
        • Peak to trough: -89%
        • Ten years later: -64%
      • 1966:
        • Peak to trough: -37%
        • Ten years later: -4%
      • 1999:
        • Peak to trough: -38%
        • Ten years later: -9%
      • 2007:
        • Peak to trough: -57%
        • Ten years later: +62%
          • PM: Behold the magic of Quantitative Easing

DisclaimerNote 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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