Apr 8, 2024

John Zolidis on top retailers signaling economic distress

The market is focused on tech, but consumer spending is still 2/3 of the U.S. economy.

I am not a fan of making macro-economic predictions.  Some of the smartest people I know who try to do it are basically always wrong.  However, as a consumer sector specialist, I am close to retailers and restaurant companies.  Their reports provide an important window onto the single largest segment of the U.S. economy.  This in turn lets me pretend I have some insight into the macroeconomic state of things.  Last year, what we saw was weakness develop in the lower-income consumer cohort.  Higher prices (inflation) for basic goods and services were a problem, and any excess monies saved during Covid had been spent.  Outside this group, further up the income spectrum, the balance of the country kept spending.  Last year’s concern was that weakness would eventually leak into more of the consumer base.  This didn’t happen.  The 2023 Holiday season was solid, resumed student-loan payments be damned. 

2024’s early signals are decidedly squishier.  A 1,600-store chain of low-priced discretionary goods, Five Below (FIVE) recently reported that the year had started “soft”.  Lululemon (LULU) later said the same thing.  Then, last week, retailer Ulta Beauty (ULTA) messaged a deeper-than-expected slow-down in the category.  What’s noteworthy about these three retailers is that they all had better-than-expected 2023 revenues.  LULU serves a high-income consumer.  The beauty category had been among the strongest segments in all of retail.  FIVE was seeing accelerating transactions through most of the year.  We can add these signals to already entrenched troubles at footwear retailers, home improvement superstores, car wash operators and the sales of discretionary products at mass retailers among others.  Worrisome?  Maybe rate cuts will save us.

~ John Zolidis, "That Irritating Noise Being Ignored is Sound of Favorite Consumer Companies Signaling Distress," Quo Vadis Capital, April 8, 2024



Apr 5, 2024

Sarah Katilyn on the evolution of modern man

Society's problem?  We're bored.  Overestimulated, but utterly bored.  Human beings are hardwired for adventure.  To hunt and hoard, to fight and fuck and conquer.  To rise against challenges and adversaries and emerge victorious.  Failure wasn't an option.  It was victory or death.  What we were not wired for is a placid life on a hamster wheel of 9-5s, endless streaming services, processed foods, social media scrolls & 30 second Tiktoks.  We adapt to our environment.  Too many are walking around numbed out in pastel Crocs with shrimp spines and plus sized fupas.  Couldn't fight a pigeon and win.  What a fucking tragedy. 

~ Sarah Katilyn, tweet, August 6, 2023



Mahmoud Issa on the economic costs of the Gaza invasion

Israel's retaliation has killed more than 33,000 people, with thousands more still unrecovered in the rubble, according to Gaza health authorities. Most of the territory's 2.3 million people are now homeless.

Long blockaded by Israel, Gaza's economy had struggled for years before the current conflict, suffering one of the world's highest unemployment rates.

The economic shock inflicted by the latest war - the deadliest in decades of Israeli-Palestinian conflict - is one of the largest observed in recent history, the World Bank and the United Nations said in a recent report.

As of Jan. 31, it said, the enclave had suffered some $18.5 billion of damage to critical infrastructure - equal to 97% of the GDP in 2022 of Gaza and the West Bank, where Palestinians exercise limited self-rule under Israeli military occupation. 

~ Mahmoud Issa, "A life's work destroyed - Palestinian counts cost of Gaza war," Reuters, April 5, 2024

Palestinian owner of a mobile phone business
holds phones inside his shop which was
destroyed in an Israeli strike


Apr 4, 2024

The Economist: "the supposed decoupling between America and China is in fact illusory"

Last year The Economist argued that lots of the supposed decoupling between America and China is in fact illusory.  Look closer, we wrote, and the two countries' economic relationship is holding strong, even if this fact is masked by tricks on both sides.  Since then a growing body of evidence confirms, and strengthens, our original findings.  The economics of America and China are not coming apart.  Indeed, some changes to supply chains may be binding the two countries even closer together.

[...]

A complete picture of Chinese-American trade would cover trade in services, including America's use of Chinese apps and China's love of American films.  But these are difficult to track, meaning that economists have focused their attention on trade of goods, which customs officials measure reasonably accurately.

[...]

The headline [trade] figures do not tell the whole story, however.  To understand why, start with Mr Trump's tariffs, which Mr Biden has largely kept in place.  Before their introduction in 2018, American statistics suggested that America received many more imports from China than did Chinese statistics.  Now the opposite is true.  China reports that its exports to America rose by $30 bn between 2020 and 2023 whereas America says its Chinese imports fell by $100 bn.  If China's data are correct, the country's share of American imports still declined, but by much less.

[...]

Other data provide additional reason for skepticism about decoupling.  "Input-output" tables, as published by the Asian Development Bank, show the share of a country's economic activity that can be traced back to others.  Examining 35 industries, we calculate that in 2017 the Chinese private sector contributed on average 0.41% of American firms' inputs.  That may not sound like much, but it beat the 0.38% that came from Germany and the 0.24% from Japan.  By 2022 China's share had more than doubled to 1.06%, a larger proportional increase than for either Germany or Japan.

[...]

We estimate that since 2019 China's global exports of intermediate goods have risen by 32%, compared with a rise in other sorts of exports, such as finished goods, of only 2%.  The surge is driven by exports to countries such as India and Vietnam, which are two of the American government's preferred trading partners.  American trade with these countries is, in turn, increasing - from 4.1% of its goods imports in 2017 to 6.4% today.  In combination, these trends imply that the two countries often act as something akin to packaging hubs for goods made with Chinese inputs that are destined for America's shores...  Vietnam's trade with America is booming...  [T]he South-East Asia manufacturing high-flyer increasingly plays a role as a conduit, matching Chinese production to American demand.

~ "Still coupled: Why both Donald Trump and Joe Biden have failed to cut ties with China," The Economist, March 2, 2024



Michael Fritzell on China's economic experiment: "A return to Mao-era governance seems unlikely"

It seems to be true that China’s development has occurred in fits and starts, in periods of opening up and closing off.  Perhaps we are now in one of those latter periods. 

I’m not convinced the change will be as dramatic as some might fear.  Private companies face weakening construction activity, reduced access to credit and meddling by Communist Party committees.  But many of them are doing well, and I wouldn’t rule out continued global market share gains in specific sectors of the economy despite weaker headline GDP growth.

A return to Mao-era governance seems unlikely.  While China under Xi has certainly become less free-wheeling than in the past, that doesn’t necessarily mean that the capitalist experiment is over.

~ Michael Fritzell, "China’s capitalist experiment," Asian Century Stocks, March 20, 2024

A poster of Deng Xiaoping demonstrating his commitment
to further economic reforms


Bloomberg Businessweek on muted impact of stimulus in China

The economy is besieged by deflation, a persistent housing market slump and a stock selloff.  And Beijing's piecemeal stimulus policies - such as lowering bank reserve requirements to encourage more lending and issuing more government bonds to fund construction projects - don't seem to be improving sentiment.

[...]

Chinese government advisers' calls for more stimulus reached a fever pitch last summer, and Beijing responded with an unusual midyear dose of deficit spending.  While the timing signaled a welcome flexibility, the scale of the effort, at 1 trillion yuan ($139 billion), paled compared with past interventions.

[...]

Stubbornly low confidence among households and businesses is blunting the impact of stimulus...  One sign Chinese families are feeling less secure: Rather than investing in housing or stocks, they're socking away money away in savings accounts at banks.  Companies are being showered with credit, but outside of growth sectors such as EVs and cleantech, business owners appear to be reluctant to expand amid weak demand and falling prices.

~ "China Limps Into the Year of the Dragon," Bloomberg Businessweek, February 12, 2024

The Economists: "Foreign investors are fleeing Chinese stocks"

Foreign investors are fleeing. They have been net sellers for months, dumping $2 bn-worth of shares in January alone… As miserable as the performance of Chinese stocks has been for most of their three-decade history, the present downturn feels different. That is because China’s economic prospects are gloomier than at any point in recent history. 

~ “Fanning the flames: China’s stockmarket nightmare is nowhere near over,” The Economist, March 2, 2024