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
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
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
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
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
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
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.
