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.
