2024 Week 3

Populist political consequences and bipartisan, systemic big government spending are to blame. 77% of debt since 2000s attributed to legislation that passed with strong bipartisan support. 

Understatement of the year: Commercial real estate is in trouble. Empty office buildings are setting cities in a doom loop. Even CBS 60 minutes has picked up on the trend. 

Global shipping is under pressure.  reducing container transport by over 50%. Shipping rates will impact the supply chain for Europe, which is already weak or in recession. 

EVs don’t make a lot of economic sense right now and car buyers don’t want them. Only 6 Percent in the US want an EV for their Next Vehicle. Adoption rate is likely due to massive government subsidy programs.

TOPICS

• Labor Market
• Inflation
• National Debt
• Real Estate
• Globalization
• Environment

Labor Market

OBSERVATION - Layoffs in financial sector

• (CNBC)
  • Citigroup said it was cutting 10% of its workforce in a bid to help boost the embattled bank’s results and stock price.
  • In November, CNBC reported that managers and consultants involved in CEO Jane Fraser’s restructuring discussed job cuts of 10%.
  • The company has since executed several waves of layoffs, with another round of cuts set for Jan. 22, according to a source.

OBSERVATION - Still cutting the fat.

• (Brief.News)
  • Amazon and Google announce significant layoffs to improve efficiency and align resources.
  • Primarily impact Amazon’s subsidiaries, including Prime Video, MGM Studios, and Twitch, and Google’s divisions like augmented reality, Assistant programs, and hardware teams.
  • Google’s layoffs include around 1,000 positions in Voice Assistant, core engineering, and hardware teams such as Pixel, Nest, and Fitbit.
  • Scale of the layoffs is unknown but represents only a small portion of Alphabet’s total workforce.

Inflation

OBSERVATION - leveled off in 2023

• (GRDecter)
  • Probably nothing.
  • 

OPINION - Inflation influences elections; rapid reform can make things worse before better.

• (Brief.News)
  • Argentina’s annual inflation rate for 2023 hit 211.4%, exceeding Venezuela’s for the first time in years.
  • The increase in inflation was a result of shock measures implemented by right-wing President Javier Milei, including a 50% devaluation of the country’s currency.
  • Despite the high inflation, the monthly rate of 25.5% in December was slightly below the government’s forecast of 30%.
  • Milei plans to tackle hyperinflation with severe austerity measures and plans to dollarize the economy, but anticipates conditions could worsen before they improve.

National Debt

OBSERVATION - Bipartisan, systemic big government spending to blame.

• (John Mauldin)
  • “Absent any two of these sets of policies, the debt-to-GDP ratio would be near the FY 2001 level. Absent these tax cuts, spending increases, and recession responses, debt would be fully paid off.”
  • 
  • Bipartisan Debt
    • CRFB finds 77 percentage points of the current 98% (122%) debt/GDP ratio can be attributed to legislation that passed with strong bipartisan support.
  • 

OPINION - Populist political consequences

• (Over My Shoulder)
  • In 2001, the CBO estimated then-current policies would eliminate the national debt by the end of 2009. Instead, debt went from 32% of GDP to today’s 98%.
  • CRFB finds that of this 98%
    • 37 percentage points came from major tax cuts
    • 33 points from discretionary spending increases and Medicare expansion
    • 28 points from response measures to the Great Recession and COVID-19 pandemic
  • Had revenue and primary spending both remained at 2001 levels, the national debt would have been paid off by 2011.
  • Bottom Line: CRFB’s estimates don’t account for dynamic economic effects of tax and spending policies.

Real Estate

OBSERVATION - Understatement of the year: Commercial real estate is in trouble

• (danjmcnamara)
  • How empty office buildings are setting cities on a doom loop | 60 Minutes - CBS News
    • remote and hybrid work hardening from trend to new normal, office occupancy rates are at an all time low
    • Real estate professor Stijn Van Nieuwerburgh (Columbia Business School) calls it a “train wreck in slow motion.”
      • “And this is just the beginning. And the reason it’s just the beginning is because there’s a lot of office tenants that have not had to make an active space decision yet,”
    • Office building troubles bleed into the banking sector; mostly about these smaller and medium size, maybe regional banks
      • About 30% of all their loans are commercial real estate loans.
    • The “urban doom loop”
      • In the long run, property taxes on those buildings will also fall by 40%

Globalization

OBSERVATION - Shipping rates will impact supply chain for Europe, already weak or in recession.

• (Brief.News)
  • Ongoing Houthi rebel attacks in the Red Sea have disrupted global trade and shipping, reducing container transport by over 50%.
  • Efforts to address the attacks have so far been unsuccessful, leading to calls for the reopening of the Bab-el-Mandeb strait for safe passage.
  • Several shipping companies have suspended operations due to the situation, causing potential supply chain disruptions.

OPINION - Investors starting to pick up on the trend

• (Ed D’Agostino)
  • Global shipping is under pressure.
  • Houthis are disrupting shipping through the Suez Canal, a critical artery for ships traveling between the Middle East and Europe.
    • Around 30% of global container traffic flows through the Suez Canal.
  • As global shipping grows more difficult and dangerous, it also grows more expensive.
    • Shipping rates for the North Asia-Mediterranean route had more than tripled since early December.
    • 
  • Unfortunately, today’s level of global tension could be our new baseline. That is contributing to a realignment of global trade patterns.
    • Companies are looking to de-risk. And for US companies, that often means reshoring and nearshoring production.
    • Pandemic-era supply disruptions accelerated it,
    • China much more expensive in recent years.
    • 
  • Mexico now offers the second-cheapest manufacturing labor in the world.
    • Helps that you don’t need to move things made in Mexico via ship.
  • Earlier this year, Mexico became the top US trading partner. Canada comes in at number two.

Environment

OPINION - Might be seen as a partisan issue, but EVs don’t make a lot of economic sense right now and car buyers don’t want them.

• (Mike Shedlock)
  • Only 6 Percent in the US want an EV for their Next Vehicle
  • Four Key Trends
    1. Slowing EV momentum may be putting current decarbonization timelines in jeopardy.
    2. A significant number of consumers may be thinking about switching vehicle brands.
    3. Interest in connectivity features may not fully translate into revenue and profit.
    4. Younger consumers are interested in vehicle subscriptions, as a growing number of them question if they need to own a vehicle going forward.
  • 

OPINION - Adoption rate likely due to massive government subsidy programs.

• (Brief.News)
  • Renewable energy saw its fastest growth in 25 years in 2023, largely due to China’s solar energy expansion.
  • China is anticipated to surpass hydropower with wind and solar power this year, and outdo coal by 2025.
  • Despite this, the International Energy Agency (IEA) predicts renewable energy will not meet the United Nations’ tripling target due to insufficient clean energy funding in developing nations.

OBSERVATION - Dumping EVs

• (Seeking Alpha)
  • Hertz Global said it would cut its EV adoption losses by offloading a third of its global fleet to buy gasoline-powered cars.
  • That’ll put 20,000 EVs up for sale, including those from Tesla in response to weak take-up and elevated repair costs.
  • The decision adds to growing EV demand worries, which were already amplified by pullbacks on production targets.