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.

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.

TOPICS

• Global Recession
• Domestic Recession
• Fed Rate
• Commercial Real Estate
• Labor Market
• Bankruptcy
• Finance
• Mergers and Acquisitions
• Cybersecurity

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.

TOPICS

• Fed Rate
• Commercial Real Estate
• Energy
• Stock Market Bubble
• Domestic Recession
• Consumer Credit Crunch
• Labor Market
• Automotive
• Domestic Semiconductor
• Deleverage Globalization
• AI and ML
• EV Battery Technology

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.

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.

TOPICS

• Labor Market
• Commercial Real Estate
• Stock Market
• Globalization
• Digital Media

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. 

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.

TOPICS

• Labor Market
• Inflation
• Consumer Credit
• Corporate Debt
• Commercial Real Estate
• Globalization
• AI