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A bit more on commercial real estate. The 350 California building in San Francisco's financia district was appraised at $300MM in 2019. After the pandemic and work from home, the owner took it off the market in 2021 when bids peaked at $180MM. Last month they had to sell for about $60MM. We're finally getting to near the bottom of the market.
350 California
The IMF issued $650 billion worth of SDRs on August 23, 2021. Each country received an allocation proportional to its IMF quota.
Prior allocations:
SDR 161.2 billion was allocated on August 28, 2009.
SDR 12.1 billion was allocated in yearly installments in 1979–81.
SDR 9.3 billion was allocated in yearly installments in 1970–72 - the first SDR issue.
There is no mechanism for the IMF to issue additional SDRs to only one member, rather than all.
October 2021 the G-20 nations pledged to collectively donate (recycle) $100 billion of SDR to vulnerable nations, but so far not one single SDR has been offered.
Since that date it's become clear a lot of these "vulnerable nations" owe their debts to China which has made, what I would call the G-19, uninterested in their earlier pledge seeing this is debt China will need to forgive.
As the central bank of the United States economy, the Fed is far more robust than you're imagining.
santafe, Thanks. What worries me is the mountain of Derivatives piled on top of all the underlying assets. That's what turned the 2008 mortgage problems into a mega collapse, requiring unprecedented bailouts of everything, including the European counterparty holders to the various Derivatives bets. The cleanup tab was reportedly $16 Trillion. The amount of Derivatives back then was estimated to be over 1 Quadrillion dollars (yikes), and estimates today are even higher, and they are apparently even more concentrated in fewer hands.
In addition to the recent regional bank crisis, commercial / office real estate problems, debt/GDP near 130 (gulp), there is the corporate 'leveraged loan' phenomenon, another ticking time bomb (with Derivatives piled on top).
The Fed's balance sheet is still near $9 trillion, leaving them close to being tapped out should another 2008 type mega bailout be required. As I understand it, their solution would be for the IMF to issue trillions in SDRs/Special Drawing Rights to supplement the Fed's liquidity, which would basically amount to a 'bailout' of the tapped out Federal Reserve.
Let's hope this doesn't happen anytime soon, but your reluctance to own stocks right now makes sense. Hopefully in the period ahead all we get is a recession and nothing more dire.
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The SPX is close to testing Tuesday's high of 4,231. This is the highest level since August of 2022.
Republicans who are all about trimming deficit spending without raising a penny of taxes on the uber wealthy are now complaining in the Senate about the mere 3% raise in military spending. Collins called it "woefully inadequate" and Graham hilariously said we were going to "neuter" the military. He apparently has fantasies we don't understand..:).
On Wednesday "House Speaker Kevin McCarthy said he wants to create a commission to look into major cuts to Medicare and Social Security because President Joe Biden refused to allow any cuts to the programs during negotiations over raising the debt ceiling."
The House speaker said President Biden ‘walled off’ potential cuts to the programs during debt ceiling negotiations.
“We only got to look at 11% of the budget to find these cuts. We have to look at the entire budget including Medicare and Social Security,” McCarthy said during an appearance on Fox News.
When Fox News anchor Harris Faulkner asked McCarthy why Republicans didn’t see the entire budget during debt ceiling talks, McCarthy replied, “The president walled off all the others.”
McCarthy said: “The majority driver of the budget is mandatory spending. It’s Medicare, Social Security, interest on the debt.”
He told Faulkner Congress is not done cutting spending out of the budget: “You know what, I’m going to make some people uncomfortable by doing that, but I’m not going to give up on cutting programs for retired Americans. … This is the first step. I’m going to announce a commission coming forward from the speaker, from bipartisan on both sides of the aisle,” to look for possible further major budget cuts.
It’s unclear who would be on the committee, or how it would be different from the House Budget Committee, which exercises oversight of the annual federal budget. A McCarthy spokesperson did not return a request for comment from the American Independent Foundation regarding the committee’s makeup.
Democrats are already slamming the proposal.
“The Speaker is once again making it clear that Republicans cannot be trusted to protect these lifesaving programs and that’s why voters will relegate them back to the minority next year,” Viet Shelton, a spokesperson for the Democratic Congressional Campaign Committee, which works to elect Democrats to the House, told the American Independent Foundation.
McCarthy and House Republicans had been refusing to raise the debt ceiling without any cuts in federal spending, claiming the national debt is out of control and needs to be reined in.
Republican lawmakers, however, played a large role in the debt, voting to pass massive tax reduction bills and multiple COVID-19 packages with money hand-outs that added $7.8 trillion in debt, more than 27% of the total Federal debt during former President Donald Trump’s tenure, according to a report from ProPublica.
With greatly reduced tax revenues from income taxes it's especially tempting to raid the pot of tax revenues paid into the Social Security and Medicare funds.
In his State of the Union address, Biden asked Republicans to agree that they would not force cuts to Social Security and Medicaid in exchange for raising the debt ceiling:
Bank problems caused by commercial property loans will depend heavily on the bank's lending practices.
Traditional bank lending will offer a loan up to 75% of the value of a property, more often only 65%. In this situation when a building loses significant value, and the building owner is out of equity and stops loan payments, the bank is rarely underwater by very much. Real bad news for the property owner though.
Smaller regional banks became far more aggressive with "mezzanine loans" which are sort of like a second mortgage with higher interest rates and are frequently used when commercial properties are being built. These bank portfolios may be blandly called commercial property loans but they're obviously more likely to suffer major losses.
Banks heavily involved in this business model locally in Los Angeles are First Republic Bank, which has already failed and City National Bank which I assume would have also failed by now had they not sold themselves to Royal Bank of Canada in 2015.
Almost every major commercial or multi-family project I thought was too risky was festooned with the "Blue Ladder" logos of City National Bank.
It's likely bank specific and really depends on their portfolio. Same is true for insurance companies who've done a lot of commercial lending. The key for banks at this point is to do more high yield lending but many/most have tightened lending policies. I don't see this issue or the student loan issue or continuing high rates as a crisis but the combination of issues will surely slow the economy. Between student loans and revolving debt, Americans now have almost exactly $3T in debt for "stuff" many probably wish they hadn't bought.
santafe, Just curious how serious you see the commercial / office space problems affecting the banking sector later this year? Seems fairly ominous, but perhaps the risk has been overblown? Thanks for any insights :o)
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With the economy slowing that makes sense. I suspect it will slow down more over the summer as the resumption of student loan payments begin.
Rt trades in PANW 4 Puts, AMR 2 Puts and YPF 20 Puts.
Unofficial Fed mouthpiece at the WSJ (Nick Timiraos) is saying the Fed will skip a rate rise in June, though may hike later -
>>> Fed Prepares to Skip June Rate Rise but Hike Later
Officials would slow increases to assess more data on the economy and bank lending
Two Federal Reserve officials framed a potential decision to forgo a rate increase as a chance to assess more economic information, then possibly raise rates later this summer.
WSJ
by Nick Timiraos
May 31, 2023
https://www.wsj.com/news/author/nick-timiraos
Federal Reserve officials signaled they are increasingly likely to hold interest rates steady at their June meeting before preparing to raise them again later this summer..
(full article requires WSJ subscription)
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Litigation nightmares are only in round one for 3M. The bell is about to ring for round two; PFAS, trails begin next week in South Carolina.
Coastal Town Brings Mass Litigation—and an ‘Existential Threat’—to Chemical Giants
Compounds used in firefighting foam seeped into the groundwater in Stuart, Fla. Now it’s at the forefront of thousands of suits against the makers
STUART, Fla.—In 2016, city leaders gathered to discuss some alarming news about their coastal town.
An aide to a local congressman had told them that the drinking water in Stuart, a community of about 18,000, contained levels of chemicals that exceeded new federal guidelines.
Most of the officials present at the meeting at city hall had never heard of the chemicals or knew why they were a problem. Stuart had twice won a state award for having the best-tasting water around. The water manager paced the room in disbelief, according to Mike Mortell, Stuart’s city attorney, who retreated to his office to scour the internet for any information he could find.
Seven years later, the small city of retirees and tourists 40 miles north of Palm Beach is at the forefront of one of the nation’s biggest environmental legal battles, over a class of chemicals known as PFAS. The fight pits hundreds of municipalities and about a dozen states against corporate giant 3M and other companies that made or sold the chemicals or firefighting foam containing them.
Cities from Philadelphia to San Diego allege that for decades companies supplied the foam despite knowing it was toxic and would eventually taint water supplies. The foam was good at putting out fires, the cities say, but created a different risk: People could get sick from drinking the local water.
Stuart’s lawsuit is now one of more than 4,000 against 3M and other companies. Stuart is one of 300 cities seeking to recover the cost of filtering the chemicals out of water. Many other lawsuits allege personal injuries from exposure to the foam.
Stuart, which bills itself as the Sailfish Capital of the World, has been chosen by plaintiff and defense attorneys as the first case to go to trial. Jury selection is set to begin June 5 in federal court in Charleston, S.C., where the cases have been consolidated.
3M and the other companies have said in legal filings that the chemicals haven’t been shown to cause health problems at the levels being discovered in drinking water.
“As the science and technology of PFAS, societal and regulatory expectations, and our expectations of ourselves have evolved, so has how we manage PFAS,” 3M said. “We will continue to fulfill our PFAS remediation commitments and address litigation by defending ourselves in court or through negotiated resolutions, all as appropriate.”
The company said that “PFAS are safely made and used in many modern products” but that it would no longer manufacture the chemicals by the end of 2025 because of increased regulations focused on reducing their presence in the environment.
Leading up to the Stuart trial, 3M has argued in court filings that the city is seeking “wildly inflated damages.”
Presiding Judge Richard Gergel said at a hearing that the case could represent “an existential threat” for the companies if the trial doesn’t go their way. Industry analysts have estimated the potential liability from firefighting-foam cases at more than $15 billion for 3M alone. The company didn’t comment on that estimate.
PFAS are man-made chemicals and were once renowned for their ability to resist heat, water, grease and stains. In recent years, hundreds of the compounds have been used to produce a wide range of goods, from nonstick pans to semiconductors. For years, Stuart’s firefighters used foam containing the chemicals in training exercises at the city’s two fire stations.
The chemicals accumulate in people, and industries from clothing to cosmetics and fast food are eliminating them from their products amid mounting evidence linking PFAS to cancers and other serious health problems. Some states are moving to ban the chemicals entirely.
In March, the Environmental Protection Agency proposed the first-ever federal limits on six PFAS chemicals that are showing up in drinking water. The regulation, if adopted, could require water utilities that collectively serve up to 90 million people to install costly filtering systems, the agency said.
In November, the EPA described PFAS chemicals as “an urgent public health and environmental issue facing communities across the United States.” In many cases, the presence of PFAS in drinking water has been traced to industrial discharges and landfills—and firefighting foam.
As the trial approaches, the sides are presenting vastly different accounts of the chemicals’ risks and who should pay for cleaning them up.
“If you ask the plaintiffs’ counsel, they would say, ‘This is like one of the greatest environmental tragedies in the history of man,’” the judge said during a hearing. “And the defense lawyers said: ‘I’ll drink it by the bottle, and it won’t hurt us.’”
At the edge of a field behind Stuart’s ocean blue and teal firehouse sits a large plastic vat draped in a tarp. A sign reads “Danger Hazardous Chemicals,” a warning about the 150 gallons of foam the city has yet to dispose of.
From about 1990 through early 2016, Stuart firefighters trained nearly once a week with what is called aqueous film-forming foam, which included PFAS in its ingredients. In hundreds of training sessions, crews sprayed the foam on a field, blanketing the ground as they would for a fuel-driven fire or a large fuel spill, said Fire Chief Vincent Felicione.
Afterward, he said, they hosed the foam down to keep it from blowing into yards, and watched as it sank into the ground.
In 2013, the EPA began requiring water systems of a certain size to test for PFAS. Subsequent testing revealed that all 26 of Stuart’s municipal wells had detectable levels of the chemicals. The city took the three wells that had the highest levels offline and notified residents about the situation.
Like hundreds of other cities, Stuart officials said they didn’t initially know how PFAS had gotten into the water. The area, with its Old Florida bungalows and boat slips along the St. Lucie River, had dealt with other water issues before. But those stemmed from agricultural runoff that caused toxic algae to cloud the river and its tributaries.
An environmental consulting firm found the highest levels of the chemicals near the main firehouse and a second firehouse where training with the foam also took place, and concluded they would continue to leach into the drinking water supply for years.
The chemicals were also discovered in private wells at a trailer park near a retirement community called Leisure Village. Florida’s Department of Environmental Protection began hauling in bottled water for residents, mostly immigrants from Honduras, Mexico or Guatemala.
Seeking a longer-term solution, Stuart allocated funds to build a new filtration system at the water treatment plant. It also hired a lawyer to look into getting the chemical companies to foot the bill.
The town, the seat of a heavily Republican county, was hardly a hotbed of environmental activism. It had rarely filed lawsuits, said Mayor Troy McDonald. But in early 2018, the city commission voted to sue 3M and other companies that sold it firefighting foam.
The city is suing for roughly $115 million. That includes $3 million spent to build the filtration system, another $2 million to expand it, plus $80 million to operate the system for the next 40 years and $30 million to clean up contaminated soil.
Chemical companies were already facing litigation. In 2017, DuPont had agreed to pay $670 million to settle 3,600 claims by West Virginia and Ohio residents alleging that cancer and other ills they contracted resulted from one particular PFAS chemical, called PFOA, in their water. The contamination was traced to a nearby plant that made Teflon.
A year later, 3M agreed to pay $850 million to settle a suit by the state of Minnesota alleging that groundwater was polluted by PFAS, dumped in landfills.
The companies didn’t admit wrongdoing in the settlements. But the suits unearthed a trove of internal health studies and communications about the chemicals.
Starting in the 1970s, animal studies by 3M scientists found that a type of PFAS the company had long produced, PFOS, caused effects in mice, rats and rhesus monkeys, from tremors to death, according to company memos. By the late 1970s, 3M officials realized the chemical was toxic and in the blood of the general population, according to an internal company timeline.
In a 1998 memo, a 3M scientist said a safe level for that chemical in human blood was 1.05 parts per billion, which was 1/30th the average level of it found in the general population’s blood supply at the time.
That year, a 3M official referred to PFOS in a memo as “insidiously toxic.”
DIS is getting ready to make a move up.
Businesses are playing financial games with their accounting numbers. It can't go on for long. Good article from the WSJ that explains what's happening.
Business Is Slowing. So Companies Are Juicing Profits
Reallocate costs. Unwind charges. Delay depreciation. Companies are using nontraditional ways to boost the bottom line
Business slowed last year for Google’s parent, Alphabet. The tech giant still beat earnings expectations in this year’s first quarter, in part because it said that its computer servers would last longer than expected.
The shift reduced its depreciation expense by nearly $1 billion and helped push per-share earnings ahead of analysts’ estimates.
Google isn’t alone in boosting its earnings in surprising ways. When business slows, companies often try to make their numbers look better. That appears to be happening now, from tech giants to used-car dealers.
A spokeswoman for Google declined to comment.
More companies are beating analysts’ expectations and by bigger amounts. Businesses’ nontraditional earnings metrics are beating reported earnings by a lot more than last year, and a measure of the likelihood of earnings manipulation is at its highest level in about 40 years.
Companies have long engaged in earnings management, by which executives use the flexibility in accounting rules to improve reported earnings per share.
The moves, many of which are allowed under accounting rules, nonetheless have detractors. In a letter to investors earlier this year, Warren Buffett called the practice “one of the shames of capitalism.”
One way companies are trying to make their results look better is to provide numbers that don’t adhere to accounting standards—what are often referred to as pro forma measures—alongside the official data.
A report published Thursday by research firm Calcbench compared the net income based on accounting standards for 200 randomly selected companies in the S&P 500 with their adjusted net income, which can include or exclude items that would normally be counted. The adjusted numbers were higher by $1.1 billion on average last year, an increase of more than 130% over a similar sample from the year prior.
Another measure used to predict the likelihood of earnings flattery is the Beneish M-score, named for its creator, Indiana University accounting professor Messod Beneish. Recently, academics found the aggregate score of a sample of nearly 2,000 companies was at its highest level in more than 40 years, the most recent data shows. Historically, the aggregate score peaks ahead of a downturn.
First-quarter earnings exceeded expectations by an unusually large amount. Of the 485 companies on the S&P 500’s roster that had reported first-quarter earnings as of May 26, 77% surpassed analysts’ expectations, according to data provider Refinitiv. Since 1994, 66% of companies beat expectations in an average quarter.
The magnitude of the overperformance also stands out. Companies in aggregate are reporting earnings 6.9% above expectations, compared to a long-term average of 4.1%, according to Refinitiv. Some of that outperformance was the result of changes in the way the numbers were calculated.
The heightened use of the measures comes as regulators are scrutinizing nontraditional calculations and earnings manipulation. The Securities and Exchange Commission as recently as December warned companies that pro forma measures that replace traditional accounting methods with individually tailored disclosure could violate its rules.
The SEC has also said companies must reconcile how they get to the pro forma figures from the reported ones. In December, the regulator expanded the guidance with more details on what constitutes a possible violation.
Google came into 2023 on a cold streak, having missed analysts’ consensus for earnings in every quarter of last year as the slowing economy dragged on its core advertising business.
In April, the company broke the trend. Despite a continued slowdown in the company’s ad sales, Alphabet reported earnings per share of $1.17, beating analysts’ expectations of $1.08 a share. Google’s shares have risen some 18% since its earnings report.
The company’s filings noted two material changes in its accounting that helped boost the bottom line.
First, the company revised its estimates on the useful life of its server infrastructure, saying it would last up to six years instead of four. The change, the second such extension in two years, added 6 cents a share of earnings, according to the company. The change mirrored similar moves by competitors.
Separately, the company said it was shifting its stock-compensation awards for employees from January to March, resulting in the company recognizing less expense in the first quarter relative to the rest of the year.
The company’s filings didn’t disclose the precise impact of the move on first-quarter earnings but mentioned it several times as a material offset to expenses. In a filing, the company said the move was due to a previously announced change to employee evaluations.
Some accounting professors questioned the treatment. “It’s highly suspect,” said Melissa Lewis-Western, an accounting professor at Brigham Young University. “Actual performance hasn’t changed, you’re just changing the allocation of the cost.”
Online used-car seller Carvana was coming off a dismal year in 2022, in which its shares lost 97%.
Analysts expected the company to post a loss of $2.03 a share for this year’s first quarter. Ten days before the quarter ended, Carvana executives said they expected adjusted gross profit per car sold to come in between $4,100 and $4,400 for the quarter.
Carvana surprised Wall Street by losing only $1.51 a share, which sent the company’s shares soaring. Driving the beat was a better-than-forecast adjusted gross profit per car sold of nearly $4,800.
One reason Carvana’s earnings jumped was because it unwound $51 million in charges it made in the previous quarter. The company took the charges because it had expected to sell cars in its inventory for less than it had once expected but was then able to sell them for more as used car prices appreciated.
Unwinding the allowances boosted earnings by 48 cents a share, nearly all of the company’s beat of analysts’ expectations.
A spokesman for Carvana said the allowance’s potential impact was widely communicated to the market before the earnings release.
The company’s shares are up roughly 80% since it reported earnings.
The market may get a boost when the Senate passes the debt ceiling bill but there are still serious financial issues to manage the rest of this year. I've decided to stay in fixed income for the remainder of the year or until rates are no longer attractive. The taxes are higher but I'm still making a nice income without much concern about the debt nonsense or the upcoming student loan crisis. Here are some rough numbers:
It seems clear that student loan payments will begin again in September. That's $1.75T over 45 million borrowers or an average of ~$39,000 per borrower. In case anyone wants to do the math, @ 6%, that's $8.75B in interest per month. To that number you can add in revolving credit which FRED reports is up from a low of $971B in April of 2021 to $1.24T in March 2023. That's an increase of 28%.
Americans have discretionary purchased themselves into deep debt hole from which they'll have to begin to work themselves out. And all of this is happening while business is slowing. See my next post.
Sold 10 Covered Calls for JD at a strike 0f 40 expiration September and premium of 1.62.
OKTA did move, over 18%, but downward.
This morning I saw I got 10 Puts put to me in JD at 55 each. I will have to sell a few calls to make this one pay off, like most others.
Does any one trust them???
The arcana of these parliamentary rules:
The House Rules Committee earlier cleared the way for the bipartisan deal to come before the full chamber by one vote, Rep. Thomas Massie (R-Ky.), a libertarian-minded conservative who sometimes sides with the Freedom Caucus, voted to move the measure out of committee.
A 241-187 House floor vote to approve a rule for floor debate, clearing the way for a vote on final passage Wednesday evening, almost didn't pass .
When Rep. Mike D. Rogers (R-Ala.), presiding over the vote, asked whether all lawmakers had voted, Republicans were short of 218 votes needed to approve the rule.
House Minority Leader Hakeem Jeffries (D-N.Y.) then flashed a green card to dozens of Democrats waiting in the well who then provided 52 additional votes to the 190 Republican votes to pass the procedural hurdle. The minority party does not normally vote on procedural measures.
Democratic support for the initial parliamentary vote came with a price. Discussed during the day via texts, the Democratic leader won a private pledge for concessions from McCarthy on legislation considered this summer or fall.
House Freedom Caucus members voted against the rule on Wednesday and indicated they will also oppose final passage of the deal.
That position got a stern rebuke Wednesday from key GOP negotiators Graves and Rep. Patrick T. McHenry (N.C.), who said the Freedom Caucus members made a “tactical flaw” in shooting down the agreement before it even existed. “They were a group of people who started saying things that were absolutely inaccurate about this deal, started bad-mouthing it and defining it before it was done,” Graves said.
The centrist, bipartisan Problem Solvers Caucus endorsed the measure Wednesday morning, which could deliver as many as 64 votes. “In divided government, you have to actually work together to find a solution that can make it across the finish line,” Rep. Josh Gottheimer (D-N.J.), a co-chair of the group, said in a statement.
GOP leadership aides say they believe the bill will receive the support of “a majority of the majority” in the final vote, satisfying an informal Republican guideline against passing legislation mostly on the strength of Democratic support.
"House Democrats are going to make sure the country doesn’t default. Period. Full stop,” Minority Leader Hakeem Jeffries (D-N.Y.) told reporters after a party caucus meeting.
Sen. Susan Collins (R-Maine), however, whined to reporters that she was worried about the automatic 1 percent cuts to the military budget that could kick in if Congress fails to pass individual spending bills by Sept. 30.
The deal will also pare back $20 billion of the $80 billion approved last year for an expansion of the IRS.
Kevin McCarthy told Fox News yesterday the compromise will greatly increase the labor participation rate among children.
"We might have a child that has no job, no dependents but sitting on the couch, we’re going to encourage that person to get a job and have to go to work, which gives them worth and value."
?McCarthy: We might have a child that has no job, no dependents but sitting on the couch, we’re going to encourage that person to get a job and have to go to work, which gives them worth and value. pic.twitter.com/HwUrHKXihb
— Acyn (@Acyn) May 30, 2023
Wall Street does not trust DC. That last 15 minutes was ugly. I'll be watching the vote tonight. Don't ask, it's a sickness..:)
Okta options imply 11.1% move in share price post-earnings
THE FLY 2:04 PM ET 5/31/2023
Symbol Last Price Change
OKTA 90.78down +0.67 (+0.7435%)
QUOTES AS OF 03:43:02 PM ET 05/31/2023
Pre-earnings options volume in Okta(OKTA) is 3.6x normal with calls leading puts 7:5. Implied volatility suggests the market is anticipating a move near 11.1%, or $10.11, after results are released. Median move over the past eight quarters is 10.7%.
An example of where the rt trades get you: 1000 shares of BTI were purchased at $38 per share. Average cost after about 8 trades is $ 22. Of course there are also very handsome dividends here to collect for those holding the shares.
Chinese-made covid vaccinations have 50% effectiveness or less. 65 million new covid infections per day in China is a self inflicted problem.
They test for covid where my 92 year old Mom lives, and having been vaccinated she has tested positive twice without any symptoms, so Moderna is doing its job.
Heavily over-indebted in all sectors of their economy, China has a reported inflation rate of 0.7% but is likely experiencing deflation as their factory output continues to sink for the second straight month.
Unemployment in China among those under age 25 is now over 20% with Xi Jinping telling young people "they should learn to eat bitterness" harking back to the Cultural Revolution of his youth suggesting young graduates should not consider themselves above moving to the countryside and taking up manual labor.
By contrast inflation is 4.9% in the US, compared with 6% in the EU and a horrifying 10% in the UK.
Services Inflation, which makes up most of the remaining inflation in the United States averaged 4.44% from 1950 to 2023 a 0.91% annual rise relative to a 3.53% average for all inflation. This is actually a good thing as incomes rise relative to prices. So a 2% inflation target should expect service inflation closer to 3%.
I suspect further moderation in services inflation will come primarily from efficiency as production per worker rises in the service sector.
Sold Put Options in O, AAPL and AMR. Round trip trade in PODD Call.
Case Shiller Core Logic all home price index came out yesterday and the rise in prices from February was confirmed for March. Other less rigorous data I have for April and May also confirms that prices continue to rise marginally as the large cohort of millennials forms households and inventory remains bleak. We're listing another house next week. I'll report to the board how this one goes.
Also, as the Chinese reported a few days ago that they are expecting 65 million new covid cases per day. That will slow them down, and I cannot imagine that we shall escape its medical effect, even though many had been vaccinated.
Reviewing crude oil continuous contracts, the price is getting close to $50 a decade out. At the upcoming OPEC meeting they may lower output again.
China's economy is slowing as their debt continues to rise. From the WSJ.
China’s Fading Recovery Reveals Deeper Economic Struggles
Ballooning debt, tepid consumption and worsening relations with the West to weigh on growth, economists say
China’s era of rapid growth is over. Its recovery from zero-Covid is stalling. And now the country is facing deep, structural problems in its economy.
The outlook was better just a few months ago, after Beijing lifted its draconian Covid-19 controls, setting off a flurry of spending as people ate out and splurged on travel.
But as the sugar high of the reopening wears off, underlying problems in China’s economy that have been building for years are reasserting themselves.
The property boom and government overinvestment that fueled growth for more than a decade have ended. Enormous debts are crippling households and local governments. Some families, worried about the future, are hoarding cash.
Chinese leader Xi Jinping’s crackdowns on private enterprise have discouraged risk-taking, while deteriorating relations with the West—exemplified by a new campaign against international due-diligence and consulting firms—are stifling foreign investment.
Economists say these worsening structural problems are hobbling China’s chances of extending the growth miracle that transformed it into a rival to the U.S. for global power and influence.
Instead of expanding at 6% to 8% a year as was common in the past, China might soon be heading toward growth of 2% or 3%, some economists say. An aging population and shrinking workforce compound its difficulties.
China could drive less global growth this year and beyond than many business leaders expected, making the country less important for some foreign companies, and less likely to significantly surpass the U.S. as the world’s biggest economy.
“The disappointing recovery today really suggests that some of the structural drags are already in play,” said Frederic Neumann, chief Asia economist at HSBC.
China’s economy expanded at an annual rate of 4.5% in the first quarter, boosted by the end of Covid-era restrictions.
Yet more recent signals suggest the revival is ebbing. Retail sales rose 0.5% in April compared with March. A bundle of data on factory output, exports and investment came in much weaker than economists were expecting.
More than a fifth of Chinese youths aged 16 to 24 were unemployed in April. E-commerce companies Alibaba and JD.com reported lackluster first-quarter earnings. Hong Kong’s Hang Seng Index, dominated by Chinese companies, is down 5.2% year to date, and the yuan has weakened against the U.S. dollar.
Most economists don’t expect China’s problems to lead to recession, or derail the government’s growth target of around 5% this year, which is widely seen as easily achievable given how weak the economy was last year.
McDonald’s and Starbucks have said they are opening hundreds of new restaurants in China, while retailers including Ralph Lauren are launching new stores.
A boom in electric-vehicle production allowed China to surpass Japan as the world’s largest exporter of vehicles in the first quarter. Beijing’s industrial policies and China’s manufacturing prowess mean it is still finding ways to succeed in some major industries.
“We still have confidence in the long-term growth story of China,” said Phillip Wool, head of research at Rayliant Global Advisors, an asset manager with $17 billion under management. He said the country’s transition to one that relies more on domestic consumption instead of exports will help keep it on track.
Still, many economists are growing more worried about China’s future.
The big hope for this year was that Chinese consumers would step up spending, as the main drivers of China’s past growth—investment and exports—languish.
But while people are spending somewhat more after almost three years of tough Covid-19 controls, China isn’t experiencing the kind of surge other economies enjoyed when they emerged from the pandemic.
Consumer confidence is low. More important, some economists say, is that Beijing hasn’t been able to meaningfully change Chinese consumers’ long-running propensity to save rather than spend—a response to a threadbare social-safety net that means families must sock away more for medical bills and other emergencies.
Chinese household consumption accounts for around 38% of annual gross domestic product, according to United Nations data, compared with 68% in the U.S.
“Consumer-led growth has always been a bit of an aspirational target” for China, said Louise Loo, China lead economist in Singapore at Oxford Economics, a consulting firm. Now, it might be even harder to achieve, she said, given how cautious Chinese consumers are coming out of the pandemic.
Although Beijing is trying to make it easier to borrow this year, lending data indicate households prefer to pay down debt than take on new loans.
In March, Zi Lu dipped into her dowry and paid off the remaining 1.2 million yuan, equivalent to about $170,000, on her mortgage for an apartment she bought in Shanghai two years ago. Working for an e-commerce retailer, she said sales have been underwhelming this year. Lu said she is anxious and wants to reduce her debt burden.
“I’m scared of getting laid off out of the blue,” she said.
Also looming over the economy is its massive debt pile.
Between 2012 and 2022, China’s debt grew by $37 trillion, while the U.S. added nearly $25 trillion. By June 2022, debt in China reached about $52 trillion, dwarfing outstanding debt in all other emerging markets combined, according to calculations by Nicholas Borst, director of China research at Seafarer Capital Partners.
As of last September, total debt as a share of GDP hit 295% in China, compared with 257% in the U.S., data from the Bank for International Settlements shows.
Viewing the debt buildup as a threat to financial stability, Xi has made deleveraging a centerpiece of his economic policy since 2016, weighing on growth.
To help deflate the country’s housing bubble, regulators imposed strict borrowing limits for property developers from late 2020. Property development investment fell 5.8% in the first quarter of this year despite policy efforts to stem the pace of the slide.
Two-thirds of local governments are now in danger of breaching unofficial debt thresholds set by Beijing to signify severe funding stress, according to S&P Global calculations. Cities across the country from Shenzhen to Zhengzhou have cut benefits for civil servants and delayed salary payments in some cases for teachers.
These problems are deepening when China’s appeal as a destination for foreign firms is waning, data show, as tensions rise with the U.S.-led West.
Foreign direct investment into China tumbled 48% in 2022 compared with a year earlier, to $180 billion, according to Chinese data, while FDI as a share of China’s GDP has slipped to less than 2%, from more than double that a decade ago.
Competition for investment with countries including India and Vietnam is heating up as firms seek to diversify supply chains, partly in response to the risk of disruption from conflict between the U.S. and China.
Jens Eskelund, president of the European Union Chamber of Commerce in China, said uncertainty over China’s long-term economic prospects is another factor in companies’ investment decisions.
“Naturally, it dampens the willingness to go out and invest in additional capacity if you are not super optimistic about the economic outlook,” he said.
Reforms to foster more productive, private-sector activity have stalled under Xi, who is placing greater emphasis on security than economic growth. Beijing has tightened regulation of sectors including technology, private education and real estate, leaving many business owners unwilling to invest more.
In the first four months of this year, fixed-asset investment made by private firms grew 0.4% from a year earlier, compared with 5.5% growth in the same period in 2019.
Chinese leaders have dialed up rhetoric to reassure entrepreneurs and investors. Li Qiang, China’s No. 2 official and new premier, said in March that China will open further to foreign players, and told Communist Party officials to treat private entrepreneurs as “our own people.”
Economists are split over whether policy makers, who have held off on launching large-scale stimulus as they did in 2008 and 2015, will resort to more aggressive stimulus now. Some, including economists from Citigroup, expect China’s central bank to cut interest rates in the coming months to lift sentiment.
Others say that Beijing’s restraint stems from fear of compounding already-high debt levels, and that more stimulus might do little to trigger demand for credit anyway.
Jeff Bowman, chief executive of Cocona, which makes temperature-regulating materials used in apparel and bedding, said he is still optimistic about China. He said that during a recent two-week business trip to Taiwan and China, customers who were focused on China’s domestic market were far more upbeat than their counterparts exporting to the U.S. or Europe, who he said “are hurting for sure.”
He said that Cocona, based in Boulder, Colo., plans to set up a subsidiary in China to expand its business there.
But many analysts still wonder where the growth will come from.
“The big question is, have we reached the point where awareness of the structural slowdown is becoming a near-term issue for confidence? Then it’s a bit of a vicious cycle,” said Michael Hirson, head of China research at 22V Research, a New York-based consulting firm.
This also explains why oil is falling into the 60's.
Using FRED data; this from the WSJ. When lending standards are raised, 2000, 2008, 2020, a recession follows. This combination of rising interest rates and rising lending standards may be leading us toward a 2023 recession. At best, growth will remain minimal for several months. Also, the Chinese economy is faltering again. With the world's two major economies struggling to grow, it's looking a bit sketchy for a market recovery this summer.
That is a very nice dividend in ABR, 13%+. As well as reasonable safety.
Energy Select Sector SPDR: Pivot points
THE FLY 8:26 AM ET 5/31/2023
The following are the pivot points for the Energy Select Sector SPDR. Pivot High: $78.48, Pivot Low: $77.53. These were calculated using the DeMark method. It is generally believed to be bullish when price breaks out above the pivot high or bearish when price breaks down below the pivot low.
The debt ceiling bill is out of committee and McCarthy got the 7 Republicans he needed so the Dems could feign anger while voting no and 2 Republicans could perform Kabuki theater style and also vote no, saving McCarthy from falling on his sword. The vote in the House should be tomorrow with, one would expect, more Kabuki performance from the far right before the bill passes and moves on to a bit more sanity in the Senate.
Hat tip to Elroy who appears to have seen this play before.
Furious Mormon election-denier, Rep. Chris Stewart from Utah to resign from Congress.
With his agenda to repeal all government funded healthcare repulsed by debt deal, the man who was expected to challenge Mitt Romney for his Senate seat from the far-right leaves the House 'due to his wife's serious illness'.
The SPX was up 7/100ths of one point today. Tech saved it.
Also not my strong suit but I believe there are 13 committee members; 9 Republicans and 4 Democrats. The problem for McCarthy is that he needs 7 Republicans out of the 9 to vote for it. If he has 3 then the 4 Dems will vote for it and he effectively will have shunned the crazy caucus and sided with moderate Democrats and a few Republicans. Dark Brandon appears to own McCarthy now as it looks like he'll need Dems to vote for him to remain speaker. Crazy times.
McCarty bargained with the devil to get his position and the devil will claim his due.
Round trip trades today in MO 5 Calls, BTI 10 Calls and ANET 14 Puts. A fair day.
There's likely to be enough votes in the House and Senate to pass the debt-ceiling legislation . . . . if they get to vote.
The loony-tunes members of the micro-minority 'freedom caucus' may still hold enough influential committee positions in the House to prevent a vote and cause a default, let alone lose Kevin McCarthy his job.
Hopefully this proves untrue, I don't know House rules well enough to be certain.
I can't begin to guess who the 'freedom caucus' co-founded by Ron DeSantis is trying to impress with a debt default.
Congress-members George Santos, Marjorie Trailer Queene, Jim Jordan, Paul Gosar, Louie Gohmert, Matt Gaetz, Dan Bishop, Lauren Boebert ?
Wow ! These people are all certifiably mentally ill.
At a House Freedom Caucus press conference on Tuesday, Bishop was the sole Republican to raise his hand signifying he would support a motion to oust McCarthy over the bill. “I think it’s got to be done,” Bishop told reporters after the press conference. - https://thehill.com/homenews/house/4026377-first-republican-publicly-supports-ousting-mccarthy-as-speaker/
The SPX is trying to hold above 4,200. Market is looking for some good news but it's not going to happen today.
You, who had not uttered a polite word on this site or perhaps anywhere else also, ever, complain about lack of politeness? That is a bad joke.
It appears Biden and McCarthy plan to carve out the middle of both parties to secure enough votes to pass the debt ceiling bill if they can get it out of committee. How McCarthy maintains his post as speaker is another issue.
You've created a false dilemma Dew. I addressed a possible solution that doesn't support the continuation of one of the biggest deficit creating tax cuts in US history. An AMT would solve both the problem of high corporate taxes and corporations paying no taxes.
God knows American's primary concern should be the valuation of the companies in your personal portfolio.
I have to take a hard-pass on that.
The Government Accountability Office finds the average effective federal income tax rate paid by large, profitable corporations fell to 9 percent in the first year that the Trump tax law was in effect, and the share of such companies paying nothing at all rose to 34 percent that year.
Even though MMM benefited from this largess, it still wasn't able to make them successful.
We do disagree vis-à-vis the Trump tax cut. To reiterate, in #msg-171978792 I said:
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