Notes, thoughts and observations - Compiled weekly
A combine notes because of time off an holidays
Big themes around the direction of the economy, the labor market and the Fed’s next move. As Keith Fitz Gerald notes: “Trying to anticipate the Fed is a fool’s errand.”
Inflation is close to target, but the Eurozone is clearly in the throes of deindustrialization. Regardless of monetary movements in other countries, US data and corporate results continue to surprise to the downside. Is something big coming, or is it simply a bump in the road?
Labor market headlines are often worse than reality. While we’ve reached a high point, since 2021, the rate is still historically low. The expansion is slowing but we aren’t seeing a crash like in 2008. On the flip side, startup layoffs are down 62% since January 2023 per Carta. It’s been steady since early 2022 and may be ending.
Darkest days for startups coming to a close?
The rest of the economy is going through the cycle. Weak companies continue to seek acquisition, or bankruptcy. Financial companies might be in a weakened position but in the near term the 2008 regulations are doing their job.
The biggest headwinds for the economy are the commercial real estate market that has a 20.1% vacancy rate, not seen since the 80s. No indication of how or when this will impact real estate, finance or local governments. Another headwind is the increasing damage from cyberattacks, which impact company bottom lines. However, it’s also an opportunity for companies like Micrsoft to benefit from increased security spending.
Notes, thoughts and observations - Compiled weekly
Sticky inflation numbers have everyone second guessing if multiple rate cuts are in store. A lot of smart folks think we could see one, but nothing more prior to the election. After November all bet’s are off and may depend on who wins the presidency.
The new and used car bubble continues to deflate. Ford ends it’s certified EV dealer program which signals that the novelty of EVs has worn off. Long term EVs are just another propulsion type, like hybrids. GM, on the other hand, is executing stock buy backs to make Wall Street happy. They have outright stated that they plan to capitalize on ICE vehicles.
Rental prices are stalling and some think this is a sign that inflation may stick around. Likewise homes for rent are seeing a similar trend.
Finally the long term impact of GL-1 drugs on non-pharma industries remains to be seen. However BCBS of Michigan plans to discontinue coverage and this along with generic availability may help drive drug costs down.
Notes, thoughts and observations - Compiled weekly
Growth is slowing around the globe and central banks in Canada, Australia and the Eurozone are signaling rate increases. At some point that will bleed over into the US.
Union pressure ramps up at Amazon as ALU partners with the Teamsters. Hands on labor is still in demand even though office work has been in recession for over a year.
EVs continue to drag down automotive sales and a used car price correction is underway.
The real estate market is still hot, but inventories are starting to recover to pre-pandemic levels. This will create downward pressure on prices but don’t expect a major correction. The real relief will come from more starter homes being built.
A different kind of M&A with Dollar Tree looking to divest some Family Dollar stores. In truth there is likely a lot of footprints overlap between the two and consolidation by shutting down underperforming stores is in order.
Finally, folks are starting to question the massive spend on AI related tech. Chamath Palihapitiya has been very vocal about the value proposition of AI chatbots. He further speculates that eventually shareholders will demand a return on their investment from massive spend.
Notes, thoughts and observations - Compiled weekly
Global pressure once again calls into question the possibility of a Fed rate cut. Either way the world is seeing the demographic decline play out in Japan and need to take heed of their own issues.
Canceling student debt might have mixed popularity, but it’s hard to ignore the economic impact of freeing prime age consumers from the shackles of debt payments. Will it have an impact, hard to say? Again, either way the real reform needs to focus on the cost of college.
Companies are still trying to figure out how to goose results to please Wall Street. Disney, once again under Bob Iger, is reducing head count and refocusing on major box office releases rather than streaming platform releases. Seems like a solid strategy, short term, but long-term Disney faces a lot of challenges.
Meanwhile DuPont is following in the footsteps of GE and others by planning to break up its business units into multiple stand-alone businesses. While it’s easy to imagine that DuPont wants to divest from slower growing business, the reality is likely that each business will focus on the metrics that Wall Street cares about to maximize stock prices.
Notes, thoughts and observations - Compiled weekly
Long term thinking is the only low stress way to invest in the market, and not worry about what the Fed will do. Don’t worry about meme stonks.
Digital media remains in a state of consolidation. Comcast will partner with Peacock, Netflix, and Apple TV to offer bundles. Meanwhile Disney and Warner Bros announced a joint streaming service combining Disney+, Hulu, and Max. Either way the consolidation is starting to make streaming look more like linear TV.
Red Lobster is rumored to be going bankrupt and Under Armour is on the ropes. Corporate debt is less of a concern as businesses adjust to higher interest rates. Consumers, on the other hand, are taking out more debt. But looking beneath the numbers and debt has less to do with consumer spending. Income and wages are far more important.
Labor market may be getting less tight
The labor market continues to struggle and we’re seeing layoffs outside of tech. We are also seeing an increase in unionization efforts which will make the southern US more expensive for manufacturing. Demand is high and with or without unions wages are likely to go up, and that will drive inflation.
Notes, thoughts and observations - Compiled weekly
Consolidation deals (M&A) in digital media are accelerating. Disney and Warner Bros are planning to bundle many services, while Sony and Apollo Group are planning to divest parts of Paramount group.
Automotive continues to realign. GM announced its dropping yet another vehicle from the lineup, leaving only the Corvette as the sole ICE car. Meanwhile Chinese car manufacturers continue to flood the EV market. While those vehicles won’t show up in the US, it could seriously impact EV exports.
Notes, thoughts and observations - Compiled weekly
Justice? Maybe not but at least a judge called B.S. on Adam Neumann’s plan to buy WeWork out of bankruptcy. He was told to pay off the $4b debt first, and ostensibly everyone he owed money to.
An article out of the Wall Street Journal (paywall) that confirms population decline. Record low birth rates aren’t new but mainstream acceptance that it will influence economics is. Again, I don’t think it’s a gloom and doom crisis, but it will change things.
A lot of news out of Artificial Intelligence this week. I highly recommend the latest edition of The Pragmatic Engineer newsletter for all the juicy details. Are LLMs hitting the “Napster” moment of licensing? Several lawsuits by IP holders seems to indicate.
Microsoft teased a new web-based version of CoPilot that builds on GitHub Codespaces and provides an intersection between CoPilot web and GitHub CoPilot. In the demo you can see the prompt engineer explain the concept and the LLM expands the idea and ultimately generates code.
This is a different approach than Devin or Magic.dev which aim for the moon shot of taking input and generating code without intervention. I won’t ignore that Microsoft has deep enough pockets to fund this project longer, I also think they are trying to gain market share early by producing tools that make developers more productive, rather than replace them.
Notes, thoughts and observations - Compiled weekly
I think we all learned an important lesson about stories from journalists who seek to sensationalize topics to generate clicks. The predicted Baltimore supply chain issues never materialized after shipping was shut down by the collapse of the Francis Scott Key Bridge.
Young workers have the lowest unemployment rate since the 60s and weekly wages are higher than in the past. Again, this contradicts the prevailing narrative that Gen Z is doing worse than previous generations. Look past the commentary at the data.
Median weekly earnings, inflation-adjusted, for young people are the highest they have ever been
Wall Street wasn’t happy with META’s spending on AI. They’d rather the money be returned to the shareholders. We heard a very similar critique with Amazon as Bezos directed online retail profits into building what would become Amazon Web Services. The future of consumer AI will be through service providers, and companies like Meta and Microsoft will play a part.
The idea of natural gas as a bridge fuel is gaining mainstream support with the likes of Jim Cramer admitting as much. I’m still cautious that it will quickly bridge us to nuclear power which is the only reliable base load source that is carbon friendly.
Finally, the economy seems to be roaring ahead despite predictions of current or pending recession. GPD grew steadily but inflation also. Shelter costs and pending trade tariffs will only make inflation stickier. I see daily commentary on how indicators point toward future recession, but I’m mindful that while these indicators have a high correlation the timing is never consistent.
Notes, thoughts and observations - Compiled weekly
Every one that has eye can see that the Fed isn’t cutting interest rates. Apparently the stock market just realized? Bottom line inflation isn’t over and adding tarrifs to steel imports will only add fuel to the fire. Property and insurance is also piliing on inflation pressure
But it isn’t all gloom and doom. Long term energy production will ensure that the US economy remains top dog in the world. We produced a staggering 12.9 million barrels per day in 2023. There is also a broad consensus that natural gas is the right bridge energy to remove the last of the coal fired plants. All of this will remain a tailwind for the US, especially energy intensive industries.
US energy security will fuel future economic growth
The labor market is robust but wage growth has cooled. Long term worker pay needs to stabilize with long term inflation. Inflation is squeezing margins but businesses should expect increasing worker demand for raises. Demographics, increased union support and reshoring will all drive wages.
Elon Musk creates a lot of buzz, but if you look at two of his companies his actual impact is pretty visible. SpaceX has spurred an entire industry of providing cheaper commercial access to space. While success if obvious, the associated cost have not fully worked out. A recent impact of space debris on a home in Florida could become more common and the insurance industry is taking notice. Ultimately who is responsible when a Star Link microsatellite deorbits into someone’s property?
Likewise Tesla has long been the leader in electric cars it he US. Musk’s stated goal was to accelerate the EV technology, and he suceeded. With increasing competition from domestic and foreign manufacturers the company has doubled down on self-driving software side of the business. Again the insurance industry is taking notice. In my opinion, the biggest threat to Musk’s vision is not the technology or the consumers but the regulatory and risk mitigation aspects.
Notes, thoughts and observations - Compiled weekly
Speculation continues on when the next Fed rate move will be, personally I don’t guess. But it’s possible that the source of an interest rate move may come from global forces rather than internal pressure. This hasn’t stopped top CEOs from sharing their opinion. Predict calamity long enough eventually it might become true
Work from home is still to blame for office vacancies, but I’m increasingly thinking that weak business fundamentals are a contributing factor. We are now higher than in 1986 and 1991. Global oil prices are also seeing weakness, though $80 per barrel is priced into the model and seasonal gasoline demand in the US is within historical trends.
It’s either a stock market bubble or a recession depending on which article you read. Someone pointed out the necessary recovery time for the NASDAQ 100 bought at the peak of the dot com bubble. Sure it took 16 years to recover, but if you held it until today, you’d still be up 276%. Also worth noting that the more diversified S&P 500 only took 7 years to recover.
Fear is ruling the day with folks buying gold from Costco and everyone penning articles about whether we are in a bubble and if it will pop. Sure semiconductors and tech may be VERY overpriced, fundamentals in other sectors could indicate we are on the cusp of a huge expansion in other market areas. Point being diversify and plan for the long-term are a better strategy.
Speaking of semiconductors, it looks like we might be on the verge of a second chip war around purpose-built AI processors. To date Nvidia has leveraged GPU designs but recent announcements by Intel, Meta and Alphabet may create a race to reduce training and inference processing costs. One thing is for certain: current AI processing costs are too high to be sustainable.
Another consideration for AI, EVs and chips is the impact of government incentives, tax breaks and spending programs. These act as fuel for expansion but when they expire it can often cause a rash of business failures. Look no further than the solar industry of the 2000s.
NOTE: Week 15 is a two week combination due to some well deserved time off.
Notes, thoughts and observations - Compiled weekly
Bill Gross is predicting that the yield curve needs to flatten, otherwise the long-term outlook for the economy is not positive. Infact everyone is perplexed by the continued inversion of the yield curve. As Howard Marks says “Being too far ahead of your time is indistinguishable from being wrong”
Fisker is on the road to bankruptcy as the company is delisted from the NYSE and its stock price is going to zero. The outlook for EV manufacturers is consolidation and clearly Tesla and BYD are the winners. Speaking of BYD, I can’t imagine a scenario where BYD is allowed to sell vehicles in the US based on security concerns. Given recent revelations of auto manufacturers selling driver data and the political wrangling around TikTok this isn’t going to happen.
Notes, thoughts and observations - Compiled weekly
I’m not sure why I note this every week, but the projected Fed rate cuts aren’t coming. By the Feds on definition, we have neither seen a decline in employment nor a decline in inflation. The latest PPI numbers support this. Yet somehow Wall Street is betting on rate cuts. At this point I’m just speculating on what type of tantrum the market will throw when reality is accepted.
Environmental concerns continue to top business headlines and new Federal emission regulations have everyone banking on a future sales benefit from more strict emission requirements. But sales data shows that consumers don’t want EVs. EV manufacturer Fisker is halting production and could be on the verge of bankruptcy. Meanwhile climate alarmism is once again pointing to ‘chartbusting’ extremes due to a 1.5-degree Celsius temperature increase. Bottom line is that climate alarmism didn’t work, and future efforts need to focus on mitigation strategies.
The world of semiconductors and machine learning continues to move at a brisk pace. Further investment in domestic semiconductors by the US will probably fuel an expansion and speculation similar to the solar industry under a similar Obama program. The trend around AI mergers and acquisitions continues with Apple acquiring DarwinAI and Microsoft scooping up Inflection AI. The overall trend is that Big Tech will be the big winners of AI.
Notes, thoughts and observations - Compiled weekly
The inflation figures weren’t great, but not shocking if you expect a long-term 3-4%.
US gasoline consumption is down but EVs aren’t the reason; Average fuel economy is up 42% since 2003. The US produces more oil than any country, ever. Crude oil production in the United States averaged a staggering 12.9 million barrels per day last year.
The Japanese economy appears on the mend after 25 years. Meanwhile strikes paralyze Germany as workers demand higher wages. While employment numbers for white collar workers are weak, blue collar and service workers are still in demand. I’d expect much more union activity everywhere.
3M is looking to follow GE’s lead and spin its health care business. And geopolitical risks are funneling money into the Indo-Pacific region.
Notes, thoughts and observations - Compiled weekly
Job growth in the US continues to be strong, even if it slightly missed expectations. The trades, transportation, construction and utilities all continue to see growth. White collar job losses in professional and business services might make headlines, but otherwise the employment picture is good.
Abroad we are seeing weakness and recession, but the prevailing opinion is that the US will nail a soft landing and avoid outright recession.
Globally energy prices, supply chain disruptions and civil unrest all pull economies in a negative direction. Eygpt is the latest nation to hike interest rates to combat inflation.
Residential real estate continues to be strong, but a recent survey confirmed that rental rates are either flat or declining slightly. This after skyrocketing prices in 2021 and 2022.
One key to the US economic strength is domestic energy production, which stands at an all-time high. In fact, the price is so cheap that production cuts seem likely. Long term this is good as the US will dictate its own energy supply for decades to come.
The stock market tests new highs and that’s not a bad thing. It’s easy to wring your hands about stocks being too expensive but as several articles point out: long term discipline can mitigate the impact of buying at the wrong time.
Not wrong
Finally, the cyber-attack that hit Change Healthcare might have been one of the worst in recent memory. While the victim reportedly paid the ransom, it’s likely that the recovery effort will take a long time. It’s bad, but keep in mind that Change’s parent unit, Optum Insight, only accounts for 12% of parent UnitedHealth’s overall earnings.
Notes, thoughts and observations - Compiled weekly
Rough times for gaming as budgets are slashed and employees let go. Both Sony and Electronic Arts announced major changes. Given the strength of PC and mobile gaming, you must wonder about the future of consoles.
Apple throws in the towel on self-driving cars. Does this signal capitulation that the technology is nowhere close to road ready? Another interesting point is why Apple is reassigning employees from the car division to AI. Is this a FOMO move or was Apple already working on its own AI for vehicles?
Regarding a US recession the data doesn’t indicate that. In fact, many believe there is no imminent danger despite some conflicting metrics. What is a risk is further bankruptcies, like for Macy’s who is closing 150 stores nationwide. The move is due to decadelong underperformance and investors looking for ROI. Things look dark for the retailer if the company can’t pull out of the dive.
The US economy’s statistical vital signs are, if not healthy, at least stable.
The guys on the All-In Podcast had a great discussion about the structure of Nvidia’s business and a breakdown of recent results (worth a watch/listen). A couple of big questions: Are these results based on a sustainable revenue model or are they simply due to a one time build out? Second who spends $22 billion? Big tech companies with lots of cash and not a lot of investment options. But at some point, investors will look for ROI and that could be bad for everyone involved.
Real estate and energy continue to hum along. Home sales are slightly down, but prices are not. It should be noted that long-term inflation accounts for most of the rise in home prices. Meanwhile energy prices remain low in the US because of the shale gas revolution. To quote: “We’ve found almost three Saudi Arabia between oil and natural gas.”
Finally, an interesting tertiary observation about the expansion of AI chips and data centers which generate a lot of heat. Folks are beginning to pay attention to the water usage, for cooling, that these data centers demand. It brings into question the location of data centers in drought-stricken areas, but it also opens the door for alternative cooling technology that Intel and other startups are working on.
Notes, thoughts and observations - Compiled weekly
This week I note that, as Blake Millard illustrates in his newsletter, a massive shift in resources will result from record numbers of retirees. Blake cites several reasons for a 2.7 million uptick but stops short of speculating the impact. Personally, I agree with the notion that an increase in retirees will lead to more conservative investment strategies that could take some wind out of the stock market’s sales. Then again, everyone Gen X and younger continue to plow money into the stock market via 401(k)s, so who knows?
Gavekal, via Mauldin Econ’s “Over My Shoulder” provides confirmation that CRE is a real risk for regional banking, but not for the broader economy. We don’t really know how big the problem is because of lack of price transparency. Either way the CRE crisis could be bad for borrowers who rely on loans from regional banks.
Nvidia reported earnings this week, but it couldn’t stop the obsession or comparisons between the stock and Cisco during the dot com bubble. The trend line is eerily similar, but the chip maker is different than the network hardware manufacturer. For starters Nvidia’s GPU chips are dominant in the market, though they could eventually be challenged in the next few years. There is truly no equivalent to Nvidia, and it would require a massive collapse in the AI industry to trigger the same sort of quick downfall.
Eerily similar, personally don’t think NVDA crashes unless massive bankruptcies by AI startups
Regarding globalization, China has two problems: rising labor costs and a shrinking workforce. But as Mauldin Econ notes productivity can bridge the gap, at least for a while. Compound this with financial troubles in the real estate sector and I think China will lose a lot of ground to other Asian nations, but still retain the lead. Long term the success of home-grown solutions will dictate China’s position in the global supply chain.
Finally, Walmart is at it again. After a failed attempt at creating its own streaming service, the retailer is trying to buy Vizio. If you recall Walmart abandoned its service in 2019 to focus on Vudu (purchased in 2010), only to sell it in 2020. So why does Walmart want to buy a TV company? Advertising, or at least that is the bet. I think this initiative is outside of Walmart’s core competencies.
Notes, thoughts and observations - Compiled weekly
Interesting employment trend as the remote work trend (WFH) creates economic benefits in the labor market as we see a 1% increase in the labor participation of mothers. A couple of reasons why I think this is significant. First it creates a way for parents and caregivers to efficiently work part time as they balance other responsibilities.
Second, and more critically, it allows full-time workers to provide part-time childcare for school-age children. By eliminating the commute, parents can drop kids off at school, attend events and generally support their children WITHOUT the need to take time off. This is a huge productivity boost and allows parents to stay fully in the workforce.
WFH is benificial to the participation rate of parents and caregivers
Meanwhile inflation remains sticky as the Shelter category continues to drive CPI. Despite interest rates, a shortage of available residential real estate still exists. All of this led me to think that the prospect of a Federal Reserve interest rate cut is wishful thinking.
Speaking of interest rates, there are a lot of hullabaloo about the so called “wall of maturity”, but if you look at the maturities, you’ll notice more of a ramp from 2025 through 2028. Still a risk, but also not everything at once. I would expect a protracted period of pain. This along with ongoing CRE risks will hang a heavy cloud over debt markets for quite some time.
Wrapping up with Artificial Intelligence we are seeing two important trends. First a repatriation of high-end chips due to global supply concerns (Taiwan) and technological advances (Extreme ultraviolet lithography) which are expected to leapfrog domestic chip production by Intel. Second Nvidia chip supply issues are causing companies like OpenAI to spend an enormous amount ($7-9B) on GPUs per year. Long term this will influence companies (Apple, Tesla, Samsung) to design their own purpose-built chips.
Notes, thoughts and observations - Compiled weekly
When it comes to the labor market it’s tough out there. It hasn’t stopped unionization efforts and reshoring and worker shortages have tipped the negotiation scales in the favor of labor.
The broader global trend of domestic onshoring continues as Sony and Toyota work to bring a second TSMC factory to Japan. Having learned from the pandemic supply chain issues and looming stand-off with China, industry is rightly trying to reduce the risk of future chip supply interruptions.
The stock market continues to befuddle, and it recently drew the comparison of the Magnificent 7 to the Tech Bubble 5. While conditions aren’t the same, questions arise about the future performance of these household names held by every 401k and mutual fund. The answer always lies in: watch what people do, not what they say. It may, indeed, be the economy stupid.
Finally, another doomer prediction from former fed DiMartino Booth who recently took to YouTube to talk about why spending, debt and interest rates are a problem. I don’t disagree with the sentiment, but phrases like “wall of maturity” and predictions of “big layoffs ahead” are intended to get clicks and views.
If you follow folks like DiMartino Booth and Peter Zeihan you are familiar with the somewhat hyperbolic delivery. It sells books and newsletters, but it is showmanship at best. Most of the predictions and conclusions are directionally accurate, and if someone weren’t shouting you probably would never pay attention.
Notes, thoughts and observations - Compiled weekly
Fall out from Biogen’s failed Alzheimer’s drug Aduhelm will hurt more than the company. The big loser is the reputation of the FDA.
Strategic thinkers are considering a potential collapse in global maritime shipping. To date shipping has remained operational, but mostly due to ‘ghost fleets’ via China, Russia and India. The great unknown is what happens to insured ships that are inevitably attacked.
Residential housing is not very affordable, but a recent trend in kids moving back in with parents possibly has multiple underlying reasons.
Meanwhile GM dealers are begging the manufacturer for hybrid vehicles instead of full EVs. Dealers claim that buyer are looking for a middle ground between ICE and EVs. Despite the feedback, GM CEO Mary Barra is doubling down on EV.
Evergrande finally goes out of business, or not. The Chinese company was ordered to liquidate by a Hong Kong court. What comes next will be either a bad situation for Chinese savings or for Hong Kong’s authority.
Consumers are running out of steam with nearly 30% of Americans behind on payments. “Buy now pay later” is soaring as wages fail to keep up with inflation for lower wage earners.
Layoffs continue with fresh announcements from Deutsche Bank and Zoom and job losses continue to bleed over from tech into other sectors. Despite a large number of layoffs, unemployment continues to remain at record low as the labor market is still in imbalance.
Notes, thoughts and observations - Compiled weekly
Companies are still cutting the fat, but it begs the question of whether this is all due to pandemic over hiring or does it indicate retail bracing for declining consumer spending?
Bankruptcies continue to occur, but companies are also closing money losing stores. Walmart closed 24 last year and retail pharmacies plan to close hundreds this year.
The national debt continues to grow, but the real concern is the increasing budget deficit which will exacerbate the issue.
Globalization continues to contract over security concerns leading to a short-term spike in shipping rates. Long term this will be a threat to global supply chains and particularly bad for European countries that heavily depend on contested shipping lanes.
Notes, thoughts and observations - Compiled weekly
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.
CRFB finds 77 percentage points of the current 98% (122%) debt/GDP ratio
Notes, thoughts and observations - Compiled weekly
Tech layoffs have taken the front page as three years of layoffs have far exceeded cuts demanded by simply over hiring. AI is often to blame, but the most likely candidate is the end of zero interest rate policy (ZIRP). Easy money will take time to unwind.
The stock market has already priced in rate cuts, but it is pure fantasy unless the domestic (US) economy takes a dive. Inflation has proven sticky, and analysts warn of a bumpy ride in the short term. However, an economic downturn might be near as coincident indicators point toward recession and consumer credit contracts. Nearly 30% Americans are behind on debt payments.
Meanwhile declining demand for oil indicate a global recession and slowing demand from China, and Middle East tensions. Likewise global shipping is under pressure and as it grows more difficult and dangerous, it also grows more expensive. Companies are looking to de-risk, and near shore nations like Mexico offer cheap manufacturing labor.
Red Sea Shipping Update, Maersk Pauses Transit Until Further Notice
Less surprising is the headline that America’s corporate offices are emptier than at any point in at least 4 decades. Remote work, accelerated by the pandemic, has led to a staggering 19.6% of office space in major U.S. cities wasn’t leased. Companies are increasingly interested in smaller, more flexible spaces.
Finally, Gartner recently identified an interesting disruption that you may not have considered. Analysts are predicting a Golden Age of “Silver Workers” due to the talent crunch. The increased experience and productivity of seasoned workers coupled with the democratizes skills via AI could maximize elder workers’ value. The combination of retirement shortfalls and declining worker demographics could make this prediction a reality.
Notes, thoughts and observations - Compiled weekly
Last update for the year. The labor market remains resilient but areas such as physical entertainment are struggling against an expanding landscape of digital entertainment. JOLTS data indicates employment decline in several sectors, but information remains unscathed.
A reminder that a lifetime guarantee is only as good as the company. Even though the classic indicator of recession remains in place many are starting to believe in economic soft landing. Call it a mild recession or not, the FED has signaled rate cuts are ahead.
Finally commercial real estate is still on everyone’s mind. In my local market of Charlotte, NC many uptown towers remain partially empty. Some predict it could be years before occupancy rates recover. Meanwhile many new businesses are increasingly likely to start remote which will impact everything from small offices to office supply and equipment purchases.
With that here are my last business notes of the year. Have a happy season and we will see you in 2024.
Notes, thoughts and observations - Compiled weekly
Where is the stock market going? If the yield curve and consumer spending is an indicator we could be headed for a recession. On the other hand, Black Friday card data says that spending may not be as weak as expected and the VIX indicates a new kind of bullishness not seen in a while. On thing is clear, sectors that performed well outperformed the S&P 500 by a significant amount.
Rent or buy? No not talking about a home, but rather machine learning cycles. Companies like Snowflake continue to grow amid high demand for Nvidia chips. Sometimes it makes sense to rent a server rather than rack your own hardware.
A couple of bright spots. First battery prices are expected to fall and newer technology will improve performance. Likewise, life extending technology like CRISPR gene editing is opening new possibilities in treatment. Finally, even though modular nuclear technology is a non-starter at the moment, the broader application of “hot rocks making steam” is still a benefit to reducing carbon output.
Notes, thoughts and observations - Compiled weekly
Wages are still going up for some and inflation continues to cool effects are sticky. Companies continue to cut costs and shut down money losing projects
Commercial real estate delinquencies are up but residential still looks OK.
Moody’s cuts United States credit outlook and precious metal are being pitched as a remedy to a calamity that may never materialize.
In the stock market retailers are seeing major drops in market value while shorts pile up on highflyers like TSLA and XOM. Meanwhile private equity that didn’t flee China is now stuck.
Finally, OpenAI is asking Microsoft for more money, Sam Altman stating “Training expenses are just huge.” Simultaneous Disney’s content well is running dry with consumers as “The Marvels” lowest opening for a Disney film in the MCU.'
Notes, thoughts and observations - Compiled weekly
This week we saw continued concern about the resiliency of consumer spend and the impact of growing debt on households. Credit card debt hit a record $1.08T and the largest increase since the NY Fed began tracking in 1999. Likewise household ability to cover a $400 emergency expense continues to decline.
Labor and recession talk still circulates but opinions are mixed on the implications. On the one hand “quits” are down to pre-COVID levels but we’re seeing a weird trend line in jobs due to shifting demographics. October numbers would have been 262,000 if the birth/death wasn’t negative. Likewise, where some see strength in the economy others are reporting slowdowns that will cause a future recession.
I guess it depends on whether you think we are in a recession, just came out of a recession, or are headed for the next recession. We are seeing layoffs and manufacturing is on the cusp of contraction. It may not be clear the casual observer as companies like Citigroup are disguising layoffs as special projects and others like BoFA have instituted hiring freezes to control labor costs.
Not all gloom and doom as several companies have announced that they will build their own proprietary large language models. Amazon announced Olympus and Titan despite also partnering with Anthropic. It’s clear that major companies are placing LOTS of bets with AI to leapfrog competition.
The percentage of loans in serious delinquency, 90+ days, is virtually flat across all categories save credit cards
Notes, thoughts and observations - Compiled weekly
A major theme over the past few weeks has been the unwinding of the cheap debt economy. Experts predict this will lead to increased bankruptcies, failed start-ups and zombie companies. WeWork made it official by filing for Chapter 11 this week, while many companies are looking at a “Maturity wall” in 2025 and will need to rollover five-year loans into higher interest rates.
Despite current exuberance for a soft landing, indicators of the dismal science point toward falling demand means softening consumer activity. Homeowners are locked into mortgages with the golden handcuffs of low interest rates. Automotive retailers also report a failing demand for EVs as the vehicles pile up on lots.
Though GDP expanded at an 4.9% annualized rate economist still think that there is trouble ahead. The yield curve remains inverted and an under investment in traditional fuel sources likely mean lower supply and higher prices in the future.
Large amount of money is going into energy efficiency
Notes, thoughts and observations - Compiled weekly
Asia is in real trouble. The YTD basis has the highest zombie prominence of any market which indicates a lot of potential business failures in the future. Meanwhile 67 % of all Chinese bonds are in default which could trigger another Asian debt crisis if the government does not intervene.
Everything is political, including designating a recession. Personally, I think we already had a mild recession and numbers will be retroactively revised. The numbers look different this time because of the unprecedented distortion caused by COVID era fiscal policies.
While the US corporate sector may not be in as bad a shape as Asia, our national budget situation is dire and on the verge of being out of control. This year the budget deficit was approximately the size of total income tax collected which is probably unsustainable. If the fight over house speaker is any indication, this is a very serious situation.
We wrap with an interesting chart about streaming in the US which seems to have hit a plateau. Companies are looking abroad for growth but it’s more likely that the rate of cord-cutting, and multiple streaming platforms will cool. At this phase I would expect more growth through consolidation of services.
If you didn’t think the recession designation was political, here’s your reality check
Notes, thoughts and observations - Compiled weekly
A mixed bag of news this week. Inflation remains on the radar, as do future fed hikes. The labor market remains strong but finance continues to shed jobs.
Services remain higher likely to due to higher wages
Notes, thoughts and observations - Compiled weekly
Commercial real estate seems to be stabilizing, while the housing market has gone cold. Meanwhile in China, Country Garden issues a dire warning and has missed loan payments. This could unlock a fresh hell of financial worries.
The speculative bubble in use cars continues to unwind and is shaking out weak companies like Shift Technologies who filed for Chapter 11 this week. Meanwhile Tesla continues to lower prices to both chase higher volumes and to also compete with BYD.
As soon as the Fed stopped raising rates everyone began speculating when rate cuts would begin. Some think higher for longer and others believe that history indicates cuts sooner. Either way a rate cut will be a temporary boost for borrowing. Long term, near-zero rates are gone, and the economy needs to adjust its risk-reward equation.
Profitability and debt reduction among companies is a high priority. Rising rates will ensure that weak and heavily indebted companies meet an end. Likewise high valued scaleups like Airtable need to mind the bottom line and show significant revenue to justify their valuations. All in all, the number of shutdown startups is rising as companies begin running out of money and are unable to raise.
Once-dominant Big Three are now facing fierce competition
A stark reminder of where the “big three” auto makers rank by market cap. If the future of automotive is electric, Tesla obviously has an early advantage. Toyota takes a slightly different track with hybrids. Maybe you’ve never heard of BYD, but the Chinese manufacturer has already seen success with exporting vehicles.
Notes, thoughts and observations - Compiled weekly
Everyone on Wall Street and in finance is worried about the fed rate and when cuts will begin. This largely ignores the real impact that high interest rates (i.e., borrowing cost) have on everyday people.
On one hand the cost for consumers to borrow and maintain their lifestyle amid rising prices is in serious jeopardy. The credit crunch is ongoing and should be a concern to everyone. It has largely propped up buying, as have government transfer payments. Those payments are coming to an end and student loans are coming due.
The flip side of higher interest rates is the inevitable downward pressure on home prices. It’s a matter of affordability for buyers and we are finally starting to see it. Commercial real estate is in a far worse situation, and I think the prediction of a bottom in mid 2024 is optimistic. It less about a bottom in commercial real estate and more about a long term underperformance.
Not surprisingly, the deterioration in household finances is fueling a rise in credit delinquency, particularly in automotive. As if that weren’t enough the big three US auto manufacturers are experiencing worker strikes and more alarming a decline in market cap. Most shocking both Ford and GM have less global market cap than Ferrari which produces a fraction of the number of vehicles.
Top 12 automakers worldwide, ranked by market cap
But notice something else, tucked in between Tesla and BYD is Toyota. Not only does Toyota have the reputation for building reliable internal combustion cars that are a great value, but Toyota has also sold vehicles in the hybrid space for years. The Prius is the bestselling hybrid car of all time first for sale outside of Japan 23 years ago. We should take notice when Toyota recently announced a long-term battery partnership with LG Energy Solution.
The last point for the week is a great example of how correlation does not imply causation. The spreadsheet did not in fact destroy the bookkeepers job, and it is not an analog of the AI revolution. I know that a lot of finance is done via spreadsheets, but no sizeable business is using Excel to track accounting auditing. There are purpose built systems for that and they are expensive for companies and lucrative for SaaS providers.
Notes, thoughts and observations - Compiled weekly
This week illustrated the disconnect between big business CEOs and everyone else. Whether it’s Moynihan’s recession denial or Dimon trotting out a classic Warren Buffet trope it’s clear than small and medium size business are seeing a completely different reality.
In the opposing corner we have big box retail on the decline and hard times hitting bottom lines indicating we’re already in recession. Meanwhile everyone is dealing with the painful unwinding of artificially low interest rates. The fed finally paused, but what does it mean?
A major force in small business is the push toward profitability. Most everyone knows money is about to get tight and small companies need to get lean. Meanwhile everyone is paying the price of the unprecedented decline in demand during COVID. Organizations like OPEC are still whip-saw trying to deal with fluctuating demand plus the lingering impact of Russian oil embargo.
Despite the gloom, at a high level the consumer debt to net worth ratio paints a different picture. Americans are still far better off as net worth climbs faster than debt and that’s good for everyone. On the flip side of high lending rates, the lack of new home construction will continue to prop up residential real estate prices. Supply and demand still alive and well.
Paints a very different picture, net worth is climbing
Notes, thoughts and observations - Compiled weekly
Labor market continues to be tight, in places. Recent wage reports paint a picture of an oversupply of people with college degrees and undersupply of people without.
Inflation remains sticky with everything from drought driving water transport prices to gas prices at $4. It’s also obvious, to everyone except the conference board, that we are IN a recession.
The federal deficit balloons and the solar industry feels the slump of not being proped up by government spending.
Tech IPOs returned with Arm, Instacart and Klaviyo; while the cable industry reaches new lows as CNN has worst ratings weekend on record.
Notes, thoughts and observations - Compiled weekly
First the bad news: Real Estate continues to trouble everyone, but a couple of things to point out. The number of delinquencies and foreclosures isn’t high which is good. Add to this more loans are locked in below 6%, far better than 2013. Over time this will shift as folks move.
Unfortunately inflation is sticking around. Concern about energy prices driving further inflation as it increases costs throughout the value chain. Likewise job losses are continuing to spill over into non-tech areas specifically finance ,both Citi and Truist.
But again on the brighter side worker shortages will buoy the labor market for years. 47% of Gen Zs were interested in pursuing a career in a trade. It might mean fewer office workers, but more plumbers, electricians, etc.
Finally a bit of good news as McDonald’s announced it was getting rid of self-serve soda machines citing less dining room traffic and more mobile orders. This is probably a godsend for service workers but also a rising trend in order ahead, customer prepayment merchant solutions. We saw this technology blossom during the pandemic and it’s confirmed to be a long term trend
Notes, thoughts and observations - Compiled weekly
More bad news for residential real estate; profitability in focus; national debt balloons; weird energy ideas in UK and sticky gas prices; platform consolidation; econ cycle nears end, what’s next;
The residential real estate market continues to suffer from perceived higher interest rates. Historically not above average, but relatively higher given the long low/no interest rates of recent memory. Housing supply continues to prop up prices which means home sales will certainly slow.
As fundraising and investment has become harder to find companies are now focused on improving profitability. AI companies are not alone, and the once hot tech sector is in the same boat raising prices and cutting costs. This will put pressure on SaaS contracts and employment and belt tightening continues.
The US debt continues to climb and will become prohibitive at some point due to higher interest rates. Meanwhile the UK mulls the idea of natural gas-powered heat pumps which is a weird idea given the Russian embargo and supply shortages. Oil supply tightening will continue to keep fuel prices high
Finally, streaming platforms continue to consolidate as Comcast looks for an exit on Hulu. It is worth noting that Comcast and Disney are still fighting over broadcasting contracts. And is the cycle nearly done? Whether you believe the economy was in recession the historical indicators say we’re nearing the end.
Notes, thoughts and observations - Compiled weekly
Real estate is in a weird place right now with apartments asking rents on the decline and vacancy rates near pre-pandemic levels. On the flip side residential housing inventory is at the lowest level in history. My suspicion is that forces are still distorting the market as the smallest generation in American history nears homebuying age.
Meanwhile credit availability is declining, and debt service payments are climbing along with interest rates. All these things will put pressure on consumers to continue spending, especially now that they’ve burned through pandemic savings and windfall.
I add EVs to the list of “too good to last” as buyers start to realize that Tesla cars are popular not because they are electric, but because they are technology platforms. In that regard Tesla is miles ahead of the competition and even the Ford CEO admits that investing deeply into electric vehicles might have been a mistake.
Finally, I close with thoughts of China and global recession. While you can ascribe any number of reasons to what China is experiencing the underlying cause is nothing unexpected. China is no longer the lowest cost manufacturer and on top of that the central government drastically overbuilt both industrial and residential assets. It will take years to unwind. The fall out, I fear, is an Asia driven global recession that hits everyone else in the next 12-24 months.
Notes, thoughts and observations - Compiled weekly
Housing affordability is at it’s lowest in a long time, and as such I think things are about to slow down dramatically in the residential real estate market.
Further a consumer credit crunch is starting to hit consumers as household savings are exhausted and interest rates continue to rise.
Meanwhile everyone has predicted China’s demise for a long time. Economic reality is setting in, and while it will take a long time for the country to muddle through not only the excesses, but the shifting demographic picture as well.
Notes, thoughts and observations - Compiled weekly
Combine weeks due to slow news and stuff to do.
Mortgage rates are at a 20 year high and there is no way it won’t negatively immpact the housing market. Meanwhile rents are in decline, but why? Whatever the reason many are concerned about over built multi-family construction and construction loans that will need to be converted to high interest loans.
Inflation numbers look better but under the covers energy continues to be a huge upward pressure on CPI.
The labor market continues to struggle as some workers strike for more money and others are getting pink slips. The average job seeker is spending between 3-6 months looking for a new job.
Notes, thoughts and observations - Compiled weekly
This week marked yet another rate hike by the Fed and predictable market hang wringing. More troubling is the designation that we might not be headed for a recession after all. Meanwhile the alarm bells are still sounding, but are they early or late?
The entire cargo and ground transportation sector is in contraction with freight rates down significantly. Strikes by the Teamsters didn’t help Yellow trucking which has all but confirmed they will shut down. Likewise, consumer demand for EVS has stalled with dealers reporting a record number still on the lot.
Meanwhile more companies walking away from half-vacant real estate and many market watchers calling a bubble in AI. The most impressive counter view is the value discount for energy stocks particularly oil.
Energy is still vastly underinvested due to ESG hang-over
Notes, thoughts and observations - Compiled weekly
Rolling together two weeks of notes and noticing big trends in real estate, the impact of rising rates and the labor force. Realtor.com reports a record low number of listed homes for sale, which will put upward pressure on prices but also benefits services, home improvement and rental property.
Inflation numbers came in and continue to trend downward, but the consensus is that the Fed will continue to hike rates until it hurts (or YOY inflation goes negative as history indicates). Higher rates won’t make Wall Street happy for long but will have a real impact on both corporate and private debt. The former will impact the earnings bottom line, and the latter in the form of lower consumer spending.
The question everyone is asking “Are we having a recession or not?”. It’s less of “if” than “when” as all eyes fix on the still inverted yield curve. The real question is hard landing or soft landing. A lot of conjecture and uncertainty.
Finally, what does Gen Z want? More precisely, as they enter the workforce, what do they want from the work relationship? Gen X historically wanted to come in, work and go home. Millennials demanded more of their employers. But has Gen Z been in the workforce long enough to know what they truly want?
Credit cards issued by commercial banks have interest rates soaring close to 21% as of May, which is a record in Fed data going back to early 1970s
Notes, thoughts and observations - Compiled weekly
On top of mind this week is the real risk posed by commercial real estate. While single-family delinquencies declined, multi-family increased. Single-family inventory is at the lowest level on record (going back to 2012) based on Redfin. On the commercial side some estimates have only top ~10% of office buildings in NYC are not distressed.
The labor market continues to be strong, and workers confident despite manufacturing layoffs picking up. The wave of tech layoffs has slowed but higher than last year. On the flip side, the US has 2.4 million excess retirees and it’s likely causing labor shortages. No shortage of Hel Wanted signs around my town.
Finally, the stock market continues to prove bears wrong, but something isn’t right. Top winners in the S&P 500 are the largest, most institutionally owned names. Only 27% of companies in the index are beating the benchmark. Meanwhile BRICS countries have a growing share of the world economy but they’re not going to rival the G7 anytime soon.
Tech layoffs have driven nearly 2/3 of the layoffs so far, but that may be changing
Notes, thoughts and observations - Compiled weekly
An interesting trend in household mobility due to an interest rate driven and still stalled real estate market. Contraditions abound between an inverted yield curve and a surging S&P 500. But the greatest contradiction is in the acceleration of fossil fuels as emerging economies ramp up energy needs.
Notes, thoughts and observations - Compiled weekly
Concerns abound and uncertainty is high, but one thing is certain we will not return to 2018 levels of any time soon. Banks are getting the double-whammy because of commercial real estate and continued deposit outflows. Spin it how you’d like, but this will bring more banking sector pain.
On the recession front, consumer credit continues to deteriorate, trucking is struggling and and consumer “revenge spending” is expected to peter out by fall. On the other hand the economy is way better than doomsters like to admit and the markets are placing bets on a quick recovery.
Either way fear, uncertainty and doubt abound. Sounds like a great time to shop for names that don’t show up on CNBC or Twitter. 😉
Households are still sitting on $1.2 trillion in excess savings.
Notes, thoughts and observations - Compiled weekly
Another weird week with sources debating a current recession vs other sources predicting the next recession. Not much to say aside from the next few years will be tumultous for the stock market.
Notes, thoughts and observations - Compiled weekly
Mixed recession opinions but I think we are starting to see more global signs as the American consumer remains strong, albeit pushing back against ever rising prices. On the flip side much concern about rising retail inventories and future price cuts that will impact on the bottom line.
On a more positive note, the potential for emerging battery technology extends well beyond electric vehicles. Renewable energy sources can leverage batteries to address the intermittency problem.
Notes, thoughts and observations - Compiled weekly
A lot of noise this week and not much meaningful signal. Home Depot missed on revenue which indicates consumer weakness. Contrary, private debt continues to climb despite rising insterest rates and the labor market remains sutbornly strong.
Notes, thoughts and observations - Compiled weekly
Weird… big data analytics company Palantir dumps $50 million gold investment and buys $1.62 billion treasuries. What do they know? Gold is typically a hedge against inflation. Treasuries, on the hand, move inverse to interest rates. Is this a prediction of interest rate cuts?
Meanwhile stress on regional banks continues but I’m more confident that it won’t spill into outright contagion. That said I expect more bankruptcies among weaker companies.
This remains one of the craziest chart pictures in my career… - Michael Green
Notes, thoughts and observations - Compiled weekly
Bankruptcy, fire sales and corporate debt.. all part of the cycle. Banking news buried a couple of important stories this week. Bed Bath and Beyond was the big news, but the current cycle is also taking down Jenny Craig. Meanwhile Darden is scooping up Ruth’s Chris Steak House that has struggled since the pandemic. 70 major bankruptcies so far and counting, but AI & ML threatening to disrupt more businesses.
Previous “peak search engine” equity rallies have not ended well
Notes, thoughts and observations - Compiled weekly
A couple of surprises this week. Primarily the better-than-expected corporate earnings reports which seem to point toward a realistic soft landing. What that looks like remains to be seen, but positive news is balanced against an all too expected bankruptcy by Bed Bath & Beyond and overall long-term anemia of the automotive industry.
Notes, thoughts and observations - Compiled weekly
The labor market looks weird with tech already well through massive layoffs, and job losses spilling over into other sectors with massive layoffs in already weak retail names.
While the energy industry works on renewables and synthetic fuels, bridge energy sources like natural gas are showing promise. While US based natural gas is beholden to regulation, developing regions in Mexico and South America are starting to pop up on the radar.
Rounding out the field we have somewhat of a pullback in real estate, but not the cataclysmic 2008 scenario some had predicted. Low inventory and higher mortgage rates will work against younger millennials.
Millennial homeownership rates badly trail other generations
Notes, thoughts and observations - Compiled weekly
A couple of takeaways for the week. First, we are seeing signs that the liquidity crisis may not be over, the huge draw down in deposits may still cause problems. Consumer debt is also a concern as it’s more difficult to get credit than one year ago.
Second, increasing number of economist speculating that we are in, or are entering a recession. Recessions are notoriously hard to identify until after the fact, and a lot of contributing factors that may make this one double difficult to spot. For example, the labor market is looking very peculiar with the prime-age employment recovering in record time.
Last, the hype cycle continues on both the end of oil and the end of the US dollar. In my opinion both are long term risks but can be mitigated. Beware of snake oil and fear mongering, it takes a long time to systemically change a global economy. Just as COVID was a challenge for the global supply chain, it did not end overnight.
Is long term demographic trend (boomers retiring) a contributing factor?
Notes, thoughts and observations - Compiled weekly
Are we going to see the first layoffless recession? Similar to stagflation, we could go into a recession while there is a worker shortage because due to an aging labor force due to a lack of immigration
We technically go into a recession but there are plenty of jobs - Kim Khan
Notes, thoughts and observations - Compiled weekly
Continued questions and fall out from the bank liquidity bailouts. The market is rattled and there is enough FUD in the system that between credit and consumer pull back there is no way we can avoid a contraction.
That said, I think we are well on our way through this cycle and as historically the designation of a recession comes AFTER the event. Bottom line we are further through this contraction than we think.
Notes, thoughts and observations - Compiled weekly
Fallout from SVB, Credit Suisse and First Republic and the liquidity crisis. This is far from over, and may result in bailouts.
As I wrote about in Dot-Com Bubble 2.0 we are now entering phase 2 of the downturn when the broader market will reel from tech excesses. I did not anticipate that small regional banks, which lend to small business, could be the catalyst.
My other eye is on energy prices with two things in play. First oil prices are declining which is indicative of a recession but conceals the underlying supply shortage. The second are expiring subsidies on green energy which could have an impact similar to solar back in the late 2000s.
Starting February 9, Twitter will no longer support free access to the Twitter API, both v2 and v1.1. Any app or site that relies on free API is doomed, long term. With data privacy on the rise and ad revenue declining across the board, I expect more services to begin charging for access.
The bubble repeated, for different underlying speculative reasons but effectively the same boom-bust cycle. What happens next to employment and the broad economy is likely a replay of the early 2000s.
@Prcwrites does a great job covering the technical aspects, I’d like to add some perspective from the employment.
Notes, thoughts and observations - Compiled weekly
Much of this week’s notes are from Mauldin Economic’s Global Macro Update interview with Felix Zulauf. It’s a lot of content and I tried to summarize, but I recommend you watch the original video and check my math.
