Weekly Report
Artem Karida
Educator | C-suite advisor | business strategy, innovation, and marketing expert
Week 06. February 06 - February 12, 2023
INDEX
Macroeconomic indicators
Analytics
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Macroeconomic indicators
The first is a demonstration of a decrease in trade profitability and an increase in logistics costs. The second is a purely depressive signal, which correlates well with the figures for economic stagnation in China in previous weeks.
In other words, purchasing power of households in the European Union is gradually entering the "covid times" levels.
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Analytics
US corporate bonds
In January 2023, the United States issued $155 billion in corporate bonds, whereas the average volume of placements in 2020-2022 in January was $180 billion, with the largest in March 2022 ($214 billion).
High-yield bond issuance ($21.8 billion) grew considerably compared to the average issuance of $7.6 billion between February and December 2022, but this is less than January last year ($29.5 billion) and the average monthly issuance in 2021 (about $40 billion).
There were major problems with high-yield bonds in 2022 because the volume of issues was just one-third of the volume required for refinancing obligations, and there was no question of expanding debts in this category.
What has changed in 2023, and what is causing the increase in emissions?
Hence, in early 2023, market improvement, redistribution of money from deposits, normalization of real rates, and pent-up demand all played a role in the increase in emissions.
Consumer loans in the United States
The credit boom in the United States continues but at a slower rate. In December 2022, consumer lending excluding school loans climbed by $30.4 billion, compared to $40.5 billion in November and $22 billion in October. Inflation-adjusted debt climbed by $71 billion in 4Q 2022, compared to $30 billion the previous year, due to reduced inflationary momentum.
Consumer lending (any sort of unsecured consumer loan, credit card debt, and vehicle loans, but not educational or mortgage loans) increased by $300 billion in a year, which is three times (!) the national average. Higher than in 2017-2019 and twice as high as during the 2007 credit craze.
The rate is rapid, but in real terms, growth of $100 billion per year is dependent on changes in debt volume rather than the delta of credit flows. Even when adjusted for inflation, the current credit impulse is substantial, comparable to the recovery momentum of 2014-2015 and 2006-2007.
At the moment, loan accounts for more than 1.6% of consumer spending on goods and services, the highest credit penetration in 20 years. This is a lot of information. For example, from 2020 to 2019, lending accounted for 0.5-1% of total consumer spending in the national dimension, compared to 1-1.5% from 2004 to 2007.
The key to long-term consumer spending in 2022: draining savings to new lows and injecting credit. That is the entire success strategy.
There is nowhere down to drain savings, and the credit drive is fading. The reason for this is the rise in interest rates and the accumulation of debt for borrowers in the target category. As a result, average vehicle lending rates increased to 6.55%, up from 5.5% a quarter earlier and 4.65% a year ago. Clearly, this is a lot less aggressive rate-hiking procedure than the Fed's major rate hike, but the trend is clear.
Unsecured consumer lending rates are currently starting at 19%, up from 16.3% in Q3 and 14.5% in Q4 2021.
Demographics in the United States
The number of employed adults aged 55 and up has increased dramatically during the last 20 years. At the beginning of the 21 century, there was a movement in the structure of the employed from 10% to 17% in the 55-64 age group, and from 3% to 6.7% in the 65+ age group, i.e. the older generation in employment climbed from 13% to 23.7%, which is highly important.
This pattern is mostly due to demographic factors. The baby boomer generation is included. The fracture occurred in the 55-64 age group in 2021-2022, while the fracture in the 65+ age group will occur in 2026-2028.
Prior to that, the breakdown occurred in the 16-19 age group in 1975, the 20-24 age group in 1979, the 25-34 age group in 1987, the 35-44 age group in 1998, and the 45-54 age group in 2009.
What are the trends discussed?
One of the theories is that age impacts technical advancement, the rate of innovation, and economic growth, as well as the structure of employment per sector of the economy. It has an impact on socio-cultural trends, family values, political choices, the proclivity to save and take risks, and consumer behaviour.
The assumption is that the elder generation is losing its ability to innovate, which slows industry transitions and technological advances, and hence the economy's organic growth.
Around 85% of scientific/breakthrough discoveries are made before the age of 45, with the most innovative group being 25-35 years old, the top scientific productivity range being 30-40 years old, and the peak is 37 years old. It is considered that if a scientist does not generate something of worth by the age of 40, he will never invent anything.
The elder generation is more passive and conservative, both in terms of political attitudes and consumer purchasing structure.
The "old people" are now becoming the dominating demographic in Japan, Europe, and the United States, causing significant changes in the structure of consumer spending, labour productivity, and the rate of innovation.
The United States has a budget imbalance.
The American fiscal deficit is increasing once more. The budget deficit increased to $460 billion in the first four months of the fiscal year 2023 (October 2022-January 2023), up from $259 billion in the same period in fiscal 2022.
Expenditures climbed by 9% (from $1,775 billion to $1,933 billion), with financial transactions accounting for the majority of the rise in spending rather than "injections into the economy" or assistance for businesses and the population.
Interest expense on debt is increasing at an alarming pace of 42% (from $136 billion to $194 billion), while off-balance-sheet retained earnings, which counterbalance overall expenses, have lowered the positive contribution from $134 billion to $56 billion, a 42% rise in expenses over the previous year. This is over 87% of the whole cost growth structure.
The only big spending area that is increasing is social security (mostly pensions), where spending increased from $389 to $426 billion in four months, and defence spending increased from $253 to $264 billion.
It is worth noting that revenues began to fall. Revenues declined 3% at par in the first four months of the fiscal year 2023 (from $1,516 to $1,472 billion), with personal taxes making the largest negative contribution, mainly due to a decrease in collections from rich Americans.
The annual deficit is $1.6 trillion, compared to $2.3 trillion in January 2022 — this may appear to be a favourable trend, but the annual deficit was less than $1 trillion in July. The annual expenditures of the Treasury are now $6.4 trillion, while revenues are $4.8 trillion.
When we compare revenue and expenses in real terms in 2021 prices, we can observe that spending has increased since July 2022, while income has decreased, increasing the deficit.
In 2020-2021, the fiscal stimulus amounted to more than 60% of the inflation-adjusted overspending, which was given to helicopter money and subsidized loans. By July 2022, the budget switch had been effectively deactivated.
Interest, social, medical, and defence spending are now influencing spending growth. The deficit could easily balloon to more than $2 trillion.
A radical revision of US inflation numbers
The US made a huge modification of inflation data prior to the publishing of the inflation report, and the change was upward and drastic over the last 6 months.
According to the old data, the average monthly inflation from July to December 2022 was 0.16%, but it increased to 0.24%. Given the competition for every tenth of a per cent, such a difference is significant.
It was previously predicted that the cumulative price increase from July to December 2022 would be 0.94% for the broad consumer price index and 2.24% for core inflation excluding food and energy, but recent figures show that price increases were 1.45% and 2.53%, respectively.
In other words, over the previous six months, it was assumed that inflation in the United States was reducing swiftly and had attained the target (0.94% for six months is less than 2% per year, which is right on target), but the modification of the statistics altered everything.
Based on the comparison of the data series, it was discovered that the data modification has occurred since January 2018, and the further the revision, the greater the spread. The accumulated mistake is now 0.3 percentage points by the December cut-off, indicating that inflation is higher than projected at 0.3%.
The most recent report showed a 0.52% increase in the broad CPI and a 0.41% increase in the core CPI, however on a new basis, and when compared to the previous base, the price increases maybe 0.81% and 0.57%, respectively.
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Simply put, the "secret" modification of inflation data four days before the publishing of January inflation overestimated the base for calculating December and resulted in 0.5% m/m when it might have been 0.81%.
What's the deal with the revision? The shift in the weights of the CPI components (we underestimated energy on the assumption that less money is presently spent on energy than in June) and the shift in the seasonality factor, which is plainly seen in the graph comparing old and new data.
It came out that the old data had been understated, while the most recent data had been overstated and produced very "on time," when it appeared to everyone that inflation had met the target - an evident manipulation. There are six months ahead when the seasonal element will deduct around 0.5-0.6 percentage points from inflation.
Trends and Structure of US Inflation
The modification of US inflation data had little effect on the trends and structure of inflation, thus the worldwide conclusions remain unchanged, despite the fact that the rate of decrease in inflation has reduced.
To gain a better understanding of the current trend, look at the 6-month dynamics, which "resets" the effect of a system failure in mid-2022.
The main issue in mid-2021 was auto, fuel, and transportation services, which contributed heavily to inflation until June 2022, after which there was a strong slowdown and transition to deflation by the end of 2022.
Transportation is the primary contributor to the slowdown in the broad CPI in the United States, as two factors are at work: the collapse in gasoline prices, the reset of the post-COVID hype on airline tickets, and the normalization of unrealized demand for cars, which drove prices to extreme levels in 2021. As a result, transportation prices are now - this is a consistent deflation, at least until May-June 2023.
Medical services and goods are within an acceptable price range - 0.5% price growth in 6 months, which is less than the historical average over the last 15 years. This is the result of lower covid demand for medicines and services, as well as government subsidies within the context of medical insurance. The price rise will not be accelerated.
Food reduces inflationary pressure from an extraordinary 5.8% in 6 months to 3.8%, but this is about four times greater than the norm, with food prices slowing and catering following products with a four-month lag.
For 6 months, clothing and footwear were within the usual - 1.2%. Education services are twice as expensive as the norm (1.9%), and the pattern of faster price increases will continue to compensate for the effect of rising expenses in the economy.
The 3.5-fold drop in wholesale gas prices and the drop in electricity prices result in a dramatic drop in utility costs from 10.7% in June to 4.3% in January 2023. The drop in demand for real estate slowed the 2.2% increase in furniture costs.
The greatest issue right now is rent, which has the most weight and is increasing by 4.4% in 6 months. Due to labour scarcity, prices for other services (consumer and entertainment) are on average three times higher than usual.
GDP in Europe
According to updated European GDP data, Europe was on the cusp of a fall in Q4 2022 but remained at zero. Each quarter, the speed slows. We began with a plus 0.8% in Q1 2022, followed by a 0.7% q/q and a plus 0.3% in Q3 2022.
The yearly dynamics in the EU-27 countries decline dramatically, from 5.6% at the start of 2022 to 1.8% at the end of 2022. The Czech Republic, Hungary, and Finland are at least three countries in a technical fall, with two consecutive quarters of declining GDP.
Germany (minus 0.2%), Italy (minus 0.1%), and Poland are all in the red in the fourth quarter, with a very steep decrease of 2.4% per quarter. Because there is little clarity on the GDP structure at the moment, it is difficult to speculate on the reasons behind Poland's declining GDP trends. France has a symbolic advantage of 0.1%, whereas Spain has an advantage of 0.2%.
Unlike the crises of 2009 and 2020, when everything dropped at roughly the same rate, the dynamics in 2022 are quite multidirectional, indicating distinct structural traits, with energy and inflation being the key channels of influence, seamlessly transitioning into debt.
The multidirectional dynamics are caused by the diverse scales of subsidies and the extremely distinct economic structure. Countries with a high reliance on gas in their energy balances and an established industrial cluster, such as Germany, suffered the most, necessitating large-scale government subsidies to compensate for the negative effects.
According to Bruegel, Germany approved 7.4% of its GDP to compensate for energy damage through various sectors of state support from September 2021 to January 2023, Italy 5.2%, the UK 3.8%, France 3.7%, Spain 3.4%, and Poland 2.2% of GDP. It is hard to address the question of the extent of actually dispersed state aid and the stability of the European economy until there is a breakdown of government spending and the structure of GDP for 2022.
According to preliminary data, they are in a state of stagnation, which could lead to a minor fall, but a large-scale crisis has been avoided. Thus far, avoided it (the debt crisis is on its way).
The American customer
The resiliency of the American consumer defies conventional monetary theory and the primary economic models employed by the Fed and prominent foreign agencies.
Removing helicopter money as the primary source of unsecured consumption, followed by record inflation in the United States, together with the track of rapid tightening of monetary policy, should have generated a tipping point, but it did not.
Officials from the Federal Reserve and leading international organizations (IMF, World Bank, OECD) are dismayed because it was assumed that the reduction in budget support would have provided the initial negative impetus (in the direction of reducing consumption), which would have been exacerbated by inflationary and credit processes.
We reported about these processes way before official economists, so the tendency is unusual in general. The rationale has been offered before: savings depletion to historic lows, record credit momentum, and significant headroom built up over the last 15 years. These are the parameters that have not before been seen in the current composition and that have been considerably underestimated as a damper for the unfavourable macroeconomic processes in 2021-2023.
So, what's the deal with American retail?
January 2023: up 3% m/m at par after falling 1.1% in the previous two months. As a result, the November-December failure was compensated in one month and the next limit in terms of expenses was attained.
The cause for this volatility is partly due to a flawed seasonal adjustment coefficient, which substantially "resets" the volume of sales in November-December, catching up at the start of the next year.
Going back further, adjusted for inflation, we can observe that there has been a sustained stagnation on a high base since June 2021.
Sales are very good by historical standards but have not been expanding for the last 1.5 years, allowing domestic doping to maintain an artificially high base.
In the next Fed meeting, this should pull the rug out from under the Fed's doves.
China and the rest of the world
Japan is more vital than most people realize
According to the most recent data from the Japanese Ministry of Finance and the Association of Securities Dealers, home investors have made a record outflow from foreign bonds. They paid down a record $181 billion in external debt and invested 30.3 trillion yen ($231 billion) in the municipal bond market. Because there are still more than $2 trillion of foreign bonds to possibly sell, global investors should be concerned about whether the BOJ governor would lift the yield cap.
During the 2023 rise, investors withdraw from American equities funds. According to Refinitiv statistics, investors have removed $31 billion from US stock and exchange-traded funds (ETFs) in the last six weeks. This is the longest weekly net outflow run since the summer of last year, as well as the greatest volume of US assets sold at the start of a calendar year in the last seven years.
Disinterested bankers devised
"Debt-for-nature swaps" are a clever environmental financial tool devised by selfless bankers. Many countries can avoid default and lower their debt burden as a result of this provided they are willing to spend a portion of the funds, for example, to save a coral reef, save a forest, or create a wind farm.
How does it work? Belize has an issue with its national debt, and humanitarian people from Credit Suisse rush to his rescue. They claim they will help restructure the debt provided the government agrees to spend some of the money protecting the country's vulnerable mangroves and coral reefs. We are nice to you, and you will be nice to nature in return!
Belize's debt is so terrible that bondholders agreed to sell it for 55 cents on the dollar following long discussions with Credit Suisse. Credit Suisse is lending $364 million to Belize through its Delaware company to buy back bonds at a 45% discount and is issuing ESG bonds to fund the deal through a Cayman Islands SPV.
So Belize's high-risk debt was converted into good, proper, green debt, which BlackRock is happy to buy back. And Credit Suisse made millions by repackaging Belize bonds in lovely ESG packaging. But don't look for selfish motives here, for everything is done simply for the love of nature.
Startup disclosure algorithm
Startup disclosure algorithm - superficial but nonetheless great from General Partner A16Z and LeadEdge Capital. Use it, it's effective :-)
THE END OF THE REPORT
Stay tuned.
Regards, Negorbis.
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