Friday Highlight Reel: Edition #10
A sampling of interesting observations from the Haymaker’s network of market experts and favorite resources.
#1: Summers and FT on Demographic Red Flags
From Financial Times:
“Why are Americans dying so young? US life expectancy is in freefall as the young and the poor bear the burnt of struggles for shared prosperity.”
Haymaker Take: The Financial Times, or FT, is the pink-colored newspaper that is essentially the Wall Street Journal of the UK. Although some conservative American wags think its color reflects its politics, the FT is a regular read for the Haymaker and I often find it a source of unique insights. My friend Luke Gromen recently highlighted its coverage of the shocking mortality trend among young Americans shown above. Frankly, I wasn’t aware of how bad this situation has become, especially relative to other so-called rich countries. It’s a national tragedy that deserves far more attention than it has received.
No doubt, there are multiple causes, with highly addictive and lethal drugs, such as fentanyl, playing a key role. Yet, I also suspect it’s a function of 20 years of flawed U.S. policies that have led to a sense of hopelessness among America’s youth. The U.S. has always been remarkably resilient; thus, I’m not going apocalyptic. In fact, on Monday, I’ll be highlighting a feature article from another UK business periodical that takes a polar opposite view of America’s current condition. Regardless, this problem should seriously alarm us all.
#2: Noster Capital’s Pedro Noronha on Credit and Balance Sheets
The Fed’s Hiking Breaking Things: The current cycle has been the most aggressive in recent history and unrealized losses are piling up on bank balance sheets. Consumers are also feeling the effect of this, with consumer credit delinquencies reaching their highest level since the Financial Crisis.
Haymaker Take: Pedro is not (yet) a well-known money manager. However, in recent years he’s become a friend and has shown a knack for identifying undervalued securities, particularly among resource-based securities. The above chart from his most recent investor letter is another visual representation of recession-like conditions. My collection of those is becoming voluminous and the accompanying chart from David Rosenberg, on a closely related related note, provides yet another example. Considering that consumer spending accounts for approximately 70% of U.S. GDP, it’s a hard one to dismiss, notwithstanding a stock market that’s acting as if all is well. However, that was also the case back in late 2007, right before the Great Recession pushed the global financial system to its breaking point.
#3: CBS News on How The First Republic Debacle Just Got Worse
First Republic Bank’s shares dropped on Wednesday after shedding half their value yesterday amid fears the regional firm could become the third bank to fail following the collapse of Silicon Valley Bank and Signature Bank.
First Republic’s stock tumbled $1.60, or almost 20%, to $6.50. The New York Stock Exchange halted trading in the stock at around 10 a.m. on Wednesday, citing volatility.
Since the year’s start, the shares have shed 95% of their value, or a loss of more than $21 billion.
Haymaker Take: As First Republic desperately seeks to avoid the fates of the defunct Silicon Valley Bank (SVB) and Signature Bank, the San Francisco-based commercial bank is turning to both other banks and the government to dig its way out of an ever-deepening hole. The news Monday that depositors withdrew more than $100 billion last month sent Wall Street into a frenzy and the company’s stock price into a death spiral. The question now is: where do they go from here?
There appear to be two potential outcomes:
1) First Republic Fails. In this case, the U.S. government will have to decide whether or not to issue FDIC protection to uninsured deposits and open the door for another disastrous, full-blown banking crisis. This seems unlikely.
2) First Republic finds a suitor(s). While it’s taken a massive hit over the last month or so, First Republic still has an impressive customer base and respected wealth management unit. If it were able to recapitalize quickly, the bank would likely be able to keep both largely intact. We tend to think that a bank like JP Morgan (or a group of banks) may swoop in to save the day. (There is also the distinct possibility that Warren Buffett’s Berkshire Hathaway might ride to the rescue, exacting its usual highly lucrative terms as it did with Occidental Petroleum back in 2019.) It would be potentially catastrophic for First Republic to fail and the financial services industry undoubtedly is reluctant to run that risk. All that being said, the longer First Republic lingers in a limbo state, the more its value will erode and the more difficult it will become to rescue it from collapse.
To learn more about Evergreen Gavekal, where the Haymaker himself serves as Co-CIO, click below.
#4: Goldman Sachs’ Tony Pasquariello on Banks
The US still has around 4500 banks…Russia is the next closest with 250…and China has less than 200.
Haymaker Take: Wow! There were almost 24,000 commercial banks in the U.S. back in 1966! No wonder the banking regulators have struggled to prevent panics and runs over the years, despite FDIC insurance. Lest you think small banks don’t matter much, the reality is that they hold nearly $2 trillion in commercial real estate loans. On the topic of federal deposit insurance, the former head of the FDIC from 1978 through 1986, Bill Isaac, recently wrote a persuasive Op-Ed piece for The Wall Street Journal. In it, he made the case for returning to the FDIC’s former policy of limiting uninsured deposit reimbursements at the rate of 80 cents on the dollar in order to avoid “moral hazard”. Per Mr. Isaac, those depositors who took 20% hits were given certificates entitling them to further recovery from the sale of the failed banks assets — if there was any. As he wrote, “If the government protects every depositor in a bank failure, even those who are rich and sophisticated enough to have known better, it erodes marketplace discipline and makes banks less stable going forward.” This strikes me as a superior process for containing bank runs than the current ambiguous and seemingly arbitrary approach.
#5: Fortune on the “Weird” Housing Market
Through the first few months of 2023, the U.S. housing market continues to show signs of stabilization. Existing and new home sales have inched up a bit this year, and homebuilder confidence has improved. And firms like Zillow, CoreLogic, and Black Knight have all reported positive month-over-month home price increases this spring.
“What’s going on? For starters, housing affordability has improved this spring as the average 30-year fixed mortgage rate, which topped out at 7.37% in November, came back down to around 6.5%. Additionally, a lack of homes for sale, coupled with the market entering its busier spring period, has—at least for now—pushed the national housing market back into equilibrium.
That said, under the hood, the housing market isn’t exactly normal just yet: Some housing markets are booming right now (including Scranton) while other places (including San Jose) are still passing through a home price correction. And even within a particular market, it can vary a lot.
Haymaker Take: Although many industry experts and forecasting models predicted that 2023 would see a decline in U.S. home values, the widespread drop that was expected hasn’t totally happened yet. Taking a look at different metrics, there is a substantial regional disparity in housing data around the country and predicting where the sector is headed has become quite the conundrum. While home buying has unquestionably received a much needed boost of late from lower interest rates, this area of the economy still faces many economic headwinds. The sector is best viewed through a market-to-market lens when assessing its vitality, as noted above.
Going forward, we’ll likely continue to see mixed data around the country, as rates continue to fluctuate and overall inventory remains tight. All of this could contribute to a stagflation scenario since home values appear to be on a stabilizing trajectory, economic growth is slowing, and inflation persists (albeit at moderating levels) in the U.S. economy. Such a scenario would drag on home sales because it’s harder to sell at a profit in such an environment and sellers still have to pay capital gains tax. There is also diminished mobility as homeowners are reluctant to give up their current bargain mortgage rates — assuming they locked those in when they were at, or near, all-time lows.
#6: Joel Kotkin (in a recent Spiked piece) on the Considerable Expense of “Sustainable” Life
The fabulists at places like the New York Times have convinced themselves that climate change is the biggest threat to prosperity. But many ordinary folk are far more worried about the immediate effects of climate policy than the prospect of an overheated planet in the medium or long term. This opposition to the Net Zero agenda was first expressed by the gilet jaunes movement in France in 2018, whose weekly protests were initially sparked by green taxes. This has been followed by protests by Dutch and other European farmers in recent years, who are angry at restrictions on fertilisers that will cut their yields. The pushback has sparked the rise of populism in a host of countries, notably Italy, Sweden and France. Even in ultra-with-it Berlin, a referendum on tighter-emissions targets recently failed to win over enough voters.
Haymaker Take: So many of our era’s prevailing issues bring to mind that poignant quote by David Foster Wallace — “In the day-to-day trenches of adult life, there is actually no such thing as atheism. There is no such thing as not worshipping. Everybody worships. The only choice we get is what to worship.”
One need only take in a handful of World Economic Forum clips to realize that the gathering’s Davos setting is home not so much to clearheaded thinking about real-world issues, but to an echo chamber for increasingly esoteric eco-spiritual observances and dogmatic “planet-rescuing” proclamations. While laudable in theory, in practice, a rushed and impractical application of this agenda is creating severe hardship for both developed and developing world inhabitants. In the haste to drastically reduce CO2, more practical remediations — like small modular nuclear reactors and improved emissions capture — are too often ignored.
What Joel Kotkin’s spot-on piece referenced above beautifully conveys is the sheer magnitude of indifference exhibited by global leaders in response to the very real, very measurable effects their “climate-saving” policies have or will have on the lives of hundreds of millions of human beings across scores of nations. Who cares about economic mayhem; I mean, the world itself is a degree or two away from being incinerated (or just getting a bit warmer; why split hairs?).
As class divides come into clearer relief, and as the consequences of ill-advised policies (which stroke the moral egos of their authors while condemning millions to poorer lives than they would otherwise have lived) continue to accumulate, we could see sociocultural blowback on a worldwide scale. This could be sufficient to destabilize otherwise prosperous lands, economies, civilizations. As Kotkin is effectively asking: Will it be worth it? Will placating the Green cause be good for any of us when the bill for misinformed governance falls in the lap of the emerging-market poor or the developed world’s middle classes?