Post 256

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,

And Happy Canada Day! I’m back from my European trip heavier and more irritable than ever.

I should be posting a bit more frequently from now on.

Cheers.

Paul.

This is Graz, Austria.

Summary

  • Mortgage growth in the US has slowed significantly.
  • Canada’s housing crisis: a mini rant.
  • Nike sales growth has fallen significantly over the last year.
  • The ageing US population will add to the US debt pile.
  • In Financial Ructions:
    • The US stock market is very expensive.
    • Almost a quarter of US government revenue is going to interest expense on the gargantuan debt pile.
    • Another establishment hack lets Americans know that they’re too stupid to know how great the economy is.

News

US Mortgage Growth (FRED)

Annual growth in US mortgages by decade:

1950-1960: 10.3%

1960-1970: 8.6%

1970-1980: 11.9%

  • Was averaging over 15% in the late 70s.

1980-1990: 10.3%

1990-2000: 5.7%

2000-2010: 8.5%

  • Was averaging around 14% in 2005/2006

2010-2020: 1.2%

  • From 2007 to 2013 total mortgages fell 9.6%

2020-2024: 5.8%

  • Annual growth rate in mortgages has now fallen to 2.9%.
    • Lowest since 2015.

Housing

In an opinion piece in the Globe and Mail, Ian McGugan rightly points out that “The better that housing does as an investment, the worse it does at providing affordable shelter.”

  • He says that this is “…a fact of life that rarely gets said out loud.”
  • And that in order to guarantee affordable housing, real estate should only be a “mediocre investment.”
    • PM: No.
      • Housing should not be an investment that delivers you a return on your money.
      • It should solely be a store of value for your savings.
      • You buy a home with a mortgage and slowly pay off that mortgage over time and build equity in your home.
      • It’s a sort of forced saving.
      • And central banks can’t take that away from you as so far they haven’t figured out how to print houses.
  • He then says that if house prices continue to rise then falling interest rates can help for a while.
    • PM: No they don’t.
      • Lower interest rates increase demand and drive housing prices higher.
      • So your lower interest expense is offset by a higher house price.
  • He then says that policymakers should make the case for a long period of flat home prices.
    • And that as earnings rise for younger people that in 5-10 years housing will be more affordable.
    • PM: Hardly.
      • Let’s look at Toronto with data from National Bank (see my post from last month below)
        • Median home price: $1,194,708
        • Median income: $96,031
        • Income needed for a mortgage: $254,803
        • If the median income went up 5% per annum by year 10 it would be $156,424.
    • $100,000 short of what would be required.
      • I know Toronto is an extreme case but it’s also the largest city in the country affecting a lot of people.
      • And even if it did enable the median income to afford a median home, why should a young couple who are ready to start a family now have to wait for ten years.
  • PM: He is like many people who are finally starting to understand that driving housing prices higher has made them unaffordable.
    • But also like many people, he doesn’t like the idea of house prices falling, although he has spoken to people who would like to see prices fall 25% to make them more affordable.
      • But then start rising again after that.
  • Finally, he asks “So what can we do?”
    • He says that a lot more homes should be built.
      • PM: There is no way that we can build the number of houses that are required to stop house prices from rising, never mind to bring them down.
      • PM: He completely ignores the demand side with outrageous levels of immigration that have been used to deliberately drive housing prices higher.
    • Perhaps he’s afraid of being labelled a racist as per our immigration minister saying he’s tired of hearing people blaming immigrants for high house prices.
    • No, we’re not blaming immigrants, we’re blaming him and our government’s immigration policy.
    • And their fallacious wealth effect policies which they believe create real wealth.
      • They don’t.  They simply redistribute wealth within society and create class conflict.

From my post on May 13, 2024

Canada’s Housing Unaffordability Crisis

  • According to a report from National Bank, the median house price, the median income and income needed to purchase the median home by city:
 Median HouseMedian IncomeIncome neededMortgage Payment
Toronto$1,194,708$96,031$254,803$7,029
Vancouver$1,285,117$88,114$274,085$7,561
Montreal$523,407$80,804$132,249$3,080
Calgary$596,306$93,383$149,740$3,509
  • PM: This is not an accident.  It’s a result of policy.
    • Zero interest rates for many years.
    • Outlandish levels of immigration
    • Outlandish increase in government fees and taxes on building new homes.
      • Up to around 1/3 of the cost in Toronto and Vancouver.

Nike

Brief history from Wiki

  • 1964: Founded in Oregon by Phil Knight and Bill Bowerman as Blue Ribbon Sports.
    • Knight was a runner and took care of the business end of things.
    • Bowerman was a track coach and designed the shoes.
      • One he made with a waffle iron which became known as the Moon Shoe.
        • In 2019 a pair sold at an auction for over $400,000.
      • Apparently, he suffered severe nerve damage in his legs from inhaling fumes from glue and solvents when designing the shoes.
      • He coached Steve Prefontaine who had set a number of distance records in the early 1970s.
        • Tragically he was killed in a car crash at the age of 24: He had a few to drink.
      • There’s a biographical film about Bowerman and Prefontaine called Without Limits starring the late Donald Sutherland.
  • 1971: Nike founder Phil Knight paid a graphic-designer $35 for the swoosh logo.
    • One of his employees came up with the name Nike (in a dream).
      • Nike was the Greek goddess of victory.
      • There are two opinions as to where the Adidas name came from:
        • From the founder’s name Adolf Dassler (middle name Bobby).
        • From “All Day I Dream About Sports”
    • Phil Knight wanted to call the company Dimension Six.
  • 1980: Nike had 50% US market share.
  • Logos:
  • 1971-1978
  • 1978-1995
  • 1995-Present

1985: The first Air Jordan was released.

4Q/2024 Results

  • Adjusted sales growth: 0%
    • North America: -1%
      • Footwear: -6%
      • Apparel: +4%
    • Europe: +1%
    • Greater China: +7%
    • Asia Pacific and Latin America: +4%
  • Converse sales: -17%
  • Adjusted sales growth by quarter:
    • 2Q/2023: 27%
    • 3Q/2023: 19%
    • 4Q/2023: 8%
    • 1Q/2024: 2%
    • 2Q/2024: 0%
    • 3Q/2024: 0%
    • 4Q/2024: 1%
  • Adjusted sales in North America (42% of their sales are in North America)
    • 2Q.2023: +31%
    • 3Q/2023: +27%
    • 4Q/2023: +5%
    • 1Q/2024: -1%
    • 2Q/2024: -3%
    • 3Q/2024: +3%
    • 4Q/2024: -1%

Mass Delusion

An opinion piece in the WSJ by William A. Galston.

  • He discusses the runaway budget deficits in the US that are adding to the US debt pile.
  • As the US population ages it will put increasing pressure on Social Security and Medicare.
    • Social Security costs alone are expected to rise by $1 trillion over the next ten years.
      • PM: As a reminder, at the current pace, Social Security will be insolvent by 2034/35.
  • Percentage of Americans over the age of 65:
    • 1960: 9%
    • Today: 18%
    • 2054: 23%
      • PM:
        • Older Americans are a powerful voting block and of course would not agree to cut their own benefits.
        • The alternative is more funding i.e. higher taxes, but the younger people who are working would not vote for that.
        • As I have discussed in the past, the solution is a combination of:
    • Slightly reduced benefits
    • Slightly higher funding
    • Slightly higher retirement age
    • The goal should ultimately be that each generation funds itself rather than relying on the next generation to allow us to live beyond our means.
  • PM: There is no easy way out of this mess and it is a direct result of politicians on both sides of the aisle refusing to deal with the issue because it doesn’t buy you votes.
  • Like most governments in most countries, they simply kick the can down the road and either hope something will appear out of left field to solve the problem (it won’t) or that by the time all hell breaks loose that it will be someone else’s problem.
    • The problem will fall on the shoulders of the citizens and largely on those of the next generation.
      • At least until they control the vote.
    • He quotes Wilkins Micawber from Dickens’s David Copperfield to explain the attitude of politicians:
      • “something will turn up.”
    • I think a more appropriate quote from that same character would be:
    • “Annual income 20 pounds, annual expenditure 19 [pounds] 19 [shillings] and six [pence], result happiness. Annual income 20 pounds, annual expenditure 20 pounds ought and six, result misery. ‘
    • There is no avoiding the inconvenient truth that if someone is living beyond their means then someone else is paying for it.

Financial Ructions

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

Financialization Of The US Economy

US Market Cap to GDP by Decade (FRED):

1975-1979: 41%

1980-1989: 49%

1990-1999: 95%

  • Peaked at 153% in 1999

2000-2009: 123%

2010-2019: 138%

2024: 193% (gurufocus)

Translation: the US stock market is very expensive.

US Debt Nation

Government finances for fiscal 2023 (Fiscaldata):

  • Revenue: $4.44 trillion
  • Spending: $6.13 trillion
  • Deficit: $1.70 trillion
  • Federal debt held by the public:
    • 2007: $5.1 trillion
    • 2015: $13.7 trillion
    • 2019: $17.2 trillion
    • 2024: $27.5 trillion
  • Current annualised interest expense on government debt: $1.06 trillion.
    • 23.9% of government revenue.

Wake Up People

  • In a WSJ opinion piece, former Fed Vice Chairman Alan Blinder yet again lets people know how stupid they are because they don’t believe the economy is in good shape.
    • As proof of peoples’ stupidity, he points to the following from a Harris poll:
      • 49% of Americans believe unemployment is at a 50-year high.
      • 72% think inflation is increasing.
      • 56% think the US is in a recession.
      • He then says that not one of these is “remotely true.”
    • PM: On the first one it does seem strange with unemployment being so low.
      • But it might speak to the nature of employment and the fact that on net, all of the jobs created over the last year were part-time
      • And also, a lot of people have to work more than one job.
        • According to the BLS jobs created over the last year:
          • Foreign born: +637,000
          • Native born: -299,000
          • In fact the number of native born workers is lower than pre-pandemic.
        • Also over the last year:
          • Government jobs: +233,000
          • Private industry: -469,000
      • For the last twelve months the number of jobs created was 339,000
      • But part-time jobs increased by 1.518 million.
        • So full-time jobs fell by 1.179 million
      • And finally on the jobs thing, multiple job holders increased by 634,000
        • People are struggling with soaring prices and are having to work harder to make ends meet.
    • On 72% of people believing that inflation is still rising this is likely due to people not fully understanding what inflation is.
      • Yes, there is disinflation but what people are concerned about is that prices are still rising and are significantly higher than they were pre-pandemic.
      • And that the US is suffering from a housing affordability crisis: purchase and rent.
        • See here (Harvard) on rents soaring during 2021 and 2022.  Yes, rent “increases” have declined sharply but “rents” haven’t.
          • The number of “cost-burdened” renters (30%+ of income spent on rent and utilities) in the US is at an all-time high of 50%.
          • And of course this doesn’t include all of the people who would like to rent an apartment but can’t afford to.
      • And as I have discussed many times, the official inflation numbers understate the true rise in costs.
      • Yet Blinder thinks that people should be happy that prices are no longer rising as quickly as they once were.
    • And on the last one, saying that it is not “remotely true” that we are in a recession, well he doesn’t know.
      • Many of you may remember that in June of 2008, Ben Bernanke stated that the US economy was still growing and no cause for concern.
      • Yet, the start of the recession was subsequently dated back to December 2007.
      • So, Bernanke was wrong (about a lot of things) and Blinder may be wrong on this also.
        • He may be right, but we won’t know for a while.
    • Regardless, this sort of arrogance and disregard for what hardworking people are saying is distasteful and many in government, academia and the press are guilty of it.

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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