Post 254

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

  • Canada’s prime minister will do whatever he can to keep housing prices expensive, which serves to:
    • Keep younger people priced-out of the housing market.
    • Protect the unearned wealth of baby boomers.
    • PM: I go on a bit of a rant here.
  • The house featured in the movie Home Alone is for sale.
    • It ain’t cheap.
  • Many consumer related companies that sell discretionary items are experiencing steady declines in sales.
    • Best Buy
    • Foot Locker
    • Mattel
    • Kohl’s
  • Dell’s consumer division saw sales decline 15%.
  • Although The Gap may be turning things around.
  • In Financial Ructions:
    • Another example of how government economists make the inflation number look a lot lower than it really is.
    • The structural slowdown in US economic growth is not an accident.
      • It’s a result of decades of distorting the price discovery mechanism in order to drive asset prices higher.

News

Home Prices

  • As I have written many times over the years, driving home prices higher was a deliberate policy of central banks and governments.
  • They believe in the “wealth effect” which means that as stock markets and house prices rise people feel wealthier and will spend more money.
  • Why do governments want people to spend more money?
  • It’s because governments use GDP to determine whether or not the economy is in good shape.
    • GDP measures all final spending in the economy, about three quarters of which is done by consumers.
  • So, if people are spending more money, GDP rises, and it looks like the economy is in good shape.
  • But if GDP is rising simply because stocks are becoming more expensive, people (remove ‘and‘) then use those expensive stocks as collateral for more debt.
    • Or they fund (instead of ‘funding’) spending by continuously borrowing on the rising price of their house.
    • Then this is NOT a sign of a healthy economy.
  • Stock markets rising because of companies continuously re-investing in their business to improve productivity results in a “real” wealth effect i.e. society truly is wealthier.
  • But stock markets rising because central banks drove interest rates to zero (higher PE multiple), printed money to drive stocks higher through the portfolio effect (explained in my book), or printed money to buy stocks directly (Bank of Japan, Swiss National Bank) is simply a wealth transfer within society and is actually a net negative.
  • Even worse is driving house prices higher via zero interest rates and immigration levels far in excess of the country’s ability to increase its housing stock.
    • A house is not a productive asset and has no business increasing in price any faster than general inflation (there shouldn’t even be general inflation: more in my book).
    • Our house in Mississauga (suburb of Toronto) has increased in value around four times since we bought it 23 years ago, yet it is the same economic good i.e. it has not:
      • Become four times more productive.
      • Increased four times in size.
      • Relocated to an oceanfront view.
      • It is the same economic good that we purchased 23 years ago.
        • There are some exceptions where the price of a house can rise quickly if the surrounding environment changes, but as far as I can tell there is no new transit line going past our house.
    • If our house price increased merely from the usual inflation theft of around 2.2% over the last 23 years, it would be around 70% higher.
      • Instead, because of deliberate government policy it’s up 308%.
    • In order to buy the “same” house that we bought, a younger couple is forced to pay four times what we paid, or two and a half times inflation adjusted.
    • In an unhampered market system, your wealth is a symbol of the wealth that you have created i.e. for every dollar you have someone out there also has a dollar.
      • No one gains at the expense of someone else.
        • Unfortunately, much uber wealth that many billionaires have today has not been fairly earned and has indeed come at the expense of others.
    • But it’s not supposed to be this way and only is so because of central banks: again, more in my book.
      • The way things are supposed to work is that you create capital in one form or another and then exchange that for capital that others produce.
      • You gain by contributing and through fair exchange.
      • But what was our contribution to society from making money on our house?
        • Let me help you.  NOTHING.
        • Our gain has come at someone else’s expense.
        • Driving home prices higher is a transfer of wealth from the younger generation and immigrants to older generations.
  • OK, so now we get to our prime minister.
  • In an interview with the Globe and Mail’s City Space podcast he finally came out and effectively said what everyone knew to be true i.e. the government is doing whatever it can to keep home prices elevated.
  • Or in his words, “But housing needs to retain its value” as “It’s a huge part of people’s potential for retirement and future nest egg.”
    • And while he does acknowledge “that’s not necessarily always fair” the reason it’s not fair is because of policymakers like him who deliberately made this happen and are trying to maintain that unfairness.
    • The unfairness being that the retirement for baby boomers is being funded by the next generation and immigrants.
    • Don’t get me wrong, I don’t believe he is consciously transferring wealth from the next generation to us.
    • But he, like so many others, have willfully deluded themselves that they can create wealth by driving asset prices higher with no cost to anyone else.
      • As the old saying goes, if it seems too good to be true… i.e. you can’t conjure-up wealth out of nothing.
        • If you obtained wealth without “creating” it, then someone else is paying for it: full-stop.
        • And all of this has been a result of deliberate government policy both here and south of the border.

Home For Baby Boomers Alone

The WSJ reports that the Chicago house used in the movie Home Alone is for sale:

  • It was built in the 1920s
  • Five bedrooms
  • 5,700 square feet
  • Asking price: $5.25 million.
  • Picture ‘here

Home Alone was made in 1990.

Best Buy

1Q/2025 results

  • Comparable sales: down 6.1%
    • US sales down 6.3%
    • Led by falls in:
      • Appliances: -18.5%
      • Entertainment: -11.3%
      • Consumer electronics: -8.3%
      • Computing and mobile phones: -2.2%

Dell Technologies

1Q/2025 Results

  • Sales: +6%
    • By division:
    • Infrastructure Solutions: +22%
      • Servers and networking: +42%
      • Storage: 0%
    • Client Solutions: 0%
      • Commercial clients: +3%
      • Consumer: -15%

Gap Inc: Turning Around?

Has over 3500 stores in over 40 countries.

1Q/2024 Results

  • Comparable sales change with last year’s change in brackets:
    • Total:  +3% (-3%)
      • Old Navy: +3% (-1%)
      • Gap: +3% (+1%)
      • Canada Banana Republic: +1% (-8%)
      • Athleta: +5% (-13%)
  • It has gained market share for five straight quarters.

Foot Locker

1Q/2024 Results:

  • Comparable sales: -1.8%
  • By region:
    • North America: -2.5%
    • Europe, Middle East, Africa: +1.6%
    • Asia Pacific: -5.5%

Mattel

1Q/2024 Results (reported last month)

  • Adjusted sales: -1%
    • North America: +1%
      • Billings:
      • Dolls: -1%
      • Infant, Toddler and Preschool: -8%
      • Vehicles (Hot Wheels): +6%
      • Action figures etc.: +4%
    • International: -5%

From my post of January 2023:

Mattel is a toy company founded in 1945 by:

  • Ruth Handler
  • Elliott Handler
  • Harold “Matt” Matson
  • PM: Looks like the name came from a combination of the names Matt and Elliott and Ruth got left out in the cold.
    • Including Ruth’s name in the acronym could have resulted in Rumattel (Rumattel arthritis).
    • Excellent 14 min interview here with Ruth back in 1979. She seemed like quite the force.
      • When talking about how she came up with the idea for Barbie, I like her comment about a product needing a reason to be, otherwise you shouldn’t be in it.
      • It took three years from original concept.
  • Some history:
    • 1950: The Magic 8 Ball.
    • An average of 1 million are sold every year.
  • 1959: Barbie Dolls
  • 1960: Chatty Cathy
  • 1961: Ken introduced as a boyfriend to Barbie
  • 1965: Barbie astronaut goes to the moon four years before Neil Armstrong.
  • 1968: Hot Wheels

Back in 2014 Mattel lost the Walt Disney princess doll license after launching their own toy line called Ever After High, which included public-domain versions of princess dolls that overlapped with Disney’s characters.

  • One Mattel executive said that when they lost the Disney contract there was a corporate culture at Mattel that was fixated on numbers and driven by spreadsheets and checklists and how to grow through cost-cutting rather than asking themselves if they were making good toys.
  • The CEO said that walking into head office you wouldn’t think it was a toy company.  It felt like an insurance company in the Midwest.
    • PM: I wonder how insurance companies in the Midwest feel about that. Probably nodding their head in agreement.
    • PM: I’ve seen this many times over the years where a company becomes more focused on the numbers than the customer value proposition.  It may happen because successful businesses are founded by an entrepreneur who built the business from the ground-up and their success is a result of being best at a customer value proposition, whatever that may be.  Many years later, these businesses are often run by career executives who don’t know what it’s like to start a business and why it’s successful.  They are taught to run a business by numbers rather than worrying every single day about the customer.  Executives often shift investment from the product/business/customer value proposition and instead focus on the company share price by cutting costs (firing employees, reducing investment) and taking on debt to buy-back shares.  Looks good in the short-term from a financial perspective, but they’re slowly opening the door to competition by diminishing their own value proposition.
  • When Mattel lost the Disney contract it had ended a 70-year relationship that started with advertisements for Mattel toys on the “Mickey Mouse Club.”
  • Mattel Mickey Mouse Club ad here:
  • PM: A lot of ads were for toy guns and reminds me of that cowboy kid in Willy Wonka who is shooting his toy guns at the TV and complains that his Dad won’t let him have real guns.  To which his Dad replies “Not until your twelve son.”
  • Mattel recently won back the contract with Disney.

Lump Of Kohl

Kohl’s is the second largest department store chain in the US after Macy’s.

  • They have more than 1,100 stores in 49 states
  • Comparable sales by quarter:
    • 4Q/2021: +5.8% (net sales)
    • 1Q/2022: -5.2%
    • 2Q/2022: -7.7%
    • 3Q/2022: -6.9%
    • 4Q/2022: -6.6%
      • Note that net sales for 2022 were expected to grow 2-3%
    • 1Q/2023: -4.3%
    • 2Q/2023: -5.0%
    • 3Q/2023: -5.5%
    • 4Q/2023: -4.3%
      • Note that net sales for 2023 were expected to fall 2-4%
    • 1Q/2024: -4.4%
      • Note that net sales for this year are expected to be between -1% and +1%.
    • Net sales in the last quarter are down over 8% from two years ago.

Financial Ructions

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

Here’s something I didn’t know.  According to the New York Times, increases in the cost of home insurance in the US are not fully included in the official inflation calculation.

  • For CPI it only considers renters’ insurance.  Structure insurance is not included at all because the government considers most of the spending on your home as an investment.
  • For PCE, the government subtracts from the price increases the amount of claims those companies are expected to pay out.
    • PM: It seems like they’re implying that if you’re lucky enough to have your house burn down then you’re not impacted by rising insurance costs.
      • But of course, everyone else is.
  • According to Insurify, home insurance prices in the US are up 20% over the last two years.
    • And are expected to increase another 6% this year.
  • PM: This is another reason why consumers are saying that the economy is not as strong or as affordable as policymakers keep telling them it is.

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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