Month: June 2024

Authored by Matthew Piepenburg via VonGreyerz.gold,

I spend a lot of time tracking the ripple effects of embarrassing and unsustainable debt levels on our credit markets, rate markets, equity bubbles, inflation metrics and, of course, the daily-debasement of our currency’s inherent purchasing power.

Inevitably, I round that all up with the role precious metals play in insuring against the same.

But there’s more to debt than gold and other financial conversations.

We All Cherish Our Children’s Future

Global and national debt forces have a ripple effect on far more than portfolio returns; they affect our kids.

For anyone blessed to parent a child, there is no greater love, no greater joy nor any greater vulnerability and source for endless concern.

This is intuitive, axiomatic and universal. As John Kennedy said just (hauntingly) weeks before his own death in 1963:

“For, in the final analysis, our most basic link is that we all inhabit this small planet. We all breath the same air. We all cherish our children’s future. And we are all mortal.”

But what does cherishing our children’s future have to do with the current state of the global and financial markets?

Invisible and Visible Forces

Love for family, friends and partners of all stripes (despite its painful lessons, mistakes and contradictions) is the most important yet invisible wealth. As Saint-Exupery’s Little Prince reminds, “the essential is invisible.”

But there are other invisible forces, from politics to inflation, which have a direct bearing on our collective well-being from one generation to the next.

And if we were pause to reflect on the hard math of unprecedented debt, openly (criminally?) failed monetary policies and a US-lead global economy falling to its knees in deficits and the concomitant currency destruction which always follows, it would seem, at least at an “economic” level, that we and our leadership do not hold a very high regard for, well—our children…

Below, we soberly consider the evidence that the prior generations (including my own) seem to be collectively thinking more of themselves and less of the next generation.

Really?

Passing the Buck and the Bill

When a once-great nation like the U.S. reaches a debt-to-GDP ratio of 120%+, when its national balance sheet has trillions more in unfunded liabilities (210T) than it does assets, and when its own Congressional Budget Office confesses that its social security and Medicare budget will be tapped out by 2030 unless we print more money, we should be concerned about the reckoning—i.e., the bills to pay.

And when the holder of the world reserve currency runs an annual twin (budget and trade) deficit of $3T and counting, or mis-reports actual inflation to achieve a carefully hidden negative real return on its IOUs to inflate its way out of debt on the backs of the working poor, we should not only be concerned about the bills to pay (and who pays them), but also consider the neutered profile of the “bucks” used to pay them.

But perhaps such concerns feel less immediate to the Baby Boomer et al generation who, knowingly or unknowingly, can (via the help of an increasingly geriatric leadership) simply pass this embarrassing tab on to the next generation?

The Club Baller…

If I, for example, wanted to flaunt my status at the nearest “Popinjay Club” by arriving in the latest fashions and fastest car while indulging in the most elaborate and consistent dinner tabs, polo fees and trendiest wine selections, I suppose I’d have the right to spend as I please and flaunt my “success.”

After all, I am a capitalist, and like all capitalists, who doesn’t prefer first-class over economy seats?

But what if I lived this life for years, smiling through every chucker, wine bottle and sports car only to leave this world in my sleep at ripe ol’ age while leaving the entire invoice to my kids?

That is, what if I enjoyed it all, but then made them pay for it? What if I thrived so that they could suffer?

Seems insane, no? Diabolical? Selfish beyond belief? Absolutely grotesque at the micro level.

But here’s the rub: At the macro level, that is precisely what the older generation of American financial “leadership” is now doing to the younger generation.

The Past Thrives, The Future Suffers

As a nation, my generation has thrived–mostly on debt, extend-and-pretend monetary policies, grotesquely (debt-driven) inflated market bubbles, feudalistic rather than capitalistic wealth transfers, and entirely myopic politicos—so that our collective children will be stuck with the bill.

This is not fable but fact, this is not sensational, it’s merely historical.

And as every sober economist or thinker from David Hume, von Mises or even Reinhart and Rogoff to Mark Twain or Ernest Hemingway already knew: A nation which lives on debt for decades of joy leaves the next generation with decades of pain–all in the form unsustainable expenses paid for with debased paper money.

Any who understand the fantasy of MMT, the open crimes of the US Fed and its various (direct and indirect) forms of “liquidity” (from QE and Operation Twist to the Reverse Repo Markets, Supplementary Leverage Ratios and the Treasury General Account) already knows: We are expanding our debt while weakening our dollar.

And that, folks, is a double whammy for our children and grandchildren.

Enjoying the Punch Bowl, Transferring the Hangover

How we got here is simple.

For generations, we as a nation have been getting drunk (and re-elected) on debt at levels far beyond our national income (as measured by tax receipts or GDP).

In short, prior generations enjoyed the Fed martinis (and even a Bernanke [ig]Noble Prize) while the next are left with the hangover and the tab.

And what does this “drunk phase” look like?

Well, drunk is fun, and it makes a nation appear all warm and happy and seemingly care-free. It also makes us a bit greedy, as we keep putting the drinks (fake liquidity) on a credit card whose pains and costs are less noticed so long as the punch bowl is constantly re-filled and the bill ignored.

To help this sink in, let’s add some data to the drama.

Data Point 1: Greed

As for greed, America in particular has had it in spades.

When my grandfather was an executive at Ford long before my birth, the aggregated CEO-to-worker compensation ratio for the largest publicly traded companies was 20-to-1.

Today (Statista data below) that ratio has leapt to 340-to-1.

And in the case of those oh-so essential (Main-Street-destroying/Sherman and Clayton Act violating) executives at Amazon, the ratio is a staggering 6,474-to-1.

Again, I’m a capitalist, but such wealth inequality and c-suite greed are not the products of a fair playing field and an equal access to credit or genuine, capitalistic competition.

Instead, it’s an open symptom not only of individual psychopathy but of insider advantages based on credit and legal mechanizations that far more resembles a case of modern feudalism than traditional capitalism.

Scott Galloway described it as a generation focused on “increasing compensation while reducing accountability,” as the $34M annual salary of BOEING’s CEO, for example, makes comically apparent.

Data Point 2: Stock Markets

But let’s not forget the oh-so rigged playing field of the US stock market, of which 90% of its actual wealth belongs to the top 10% of the population, most of whom came of age in the aforementioned “greed” generation.

This wealth effect is largely due to a generation of Fed chairs who never let a market dip suffer too long before reflating the same with money literally created out of thin air.

I came of age when Greenspan sold his PhD to the highest bidders on Wall Street, sending rates to the floor and building a credit-driven tech bubble 1.0 which allowed my generation of young dragon-slayers the chance to buy Amazon, Apple and Netflix at single digit share prices.

By contrast, today’s market-tracking youth (the very few who can even afford to speculate after tech sirens) are chasing blow-off tops in a meme-familiar NVIDIA comedy.

Yesterday’s policies, from bank bailouts (Wall Street socialism) to the current (oxymoronic) narrative of “debt-based growth” ($35T and ticking), have led to the greatest wealth inequality and poorest “next gen” population in US history, yet Powell openly denies that the Fed has anything to with this.

Hmmm.

Data Point 3: The Cost of the American Dream

Unfortunately, our kids already feel what Powell’s demographic often ignores.

The last two U.S. generations, for example, are making less money on an inflation adjusted basis, while their cost of living, on everything from unaffordable housing to grotesquely rigged (debt enslaved) tuition goes higher.

My generation saw public university as an option, with an average admission rate of 27% and student debt at 31% of first-year incomes.

Today, however, those public education admission rates have sunk to 6% yet the debt percentage of first-year salaries has skyrocketed to 53%.

This objectively means that less and less young people can access and afford a real education, which Thomas Jefferson understood as the foundation to our nation’s future.

Sadly, most current 20-somethings can’t afford that future and have lost both hope and faith.

In my day, the average house price to first-year income was 4.4x, today it’s 8.5x.

For the first time in American history, 30-year-olds are not doing as well as their parents were at 30, which suggests that the social contract from one generation to the next is now officially broken.

But as Galloway also observes, the results of this broken contract are far more than economic.

He argues that the inequities (or national bar tab) passed to this generation are “incendiary,” creating a collective sense of undeserved “rage and shame” that finds its current, splintered and identity-obsessed expression in everything from MeToo, BLM and LBGTQ to the highest self-harm (especially among women), overdose, teen depression, gun death and suicide rates in our history.

The young are even having statistically more problems finding someone to sleep with, which stems more from depression, tech-induced isolationism and growing tribalism (self-censorship) than from natural biology…

In short, economics do impact society, and when those economics are characterized by the highest debt levels ever recorded in history, the consequences are not theoretical but appallingly real.

Data Point 4: Political Zombies

As for politics, it should be obvious that our so-called leadership is hardly representative of the coming generation, but an openly embarrassing (and power-holding) representation of their own generation (interests).

Galloway, who observed that “DC has become a crossroads between the land of the dead and the golden girls,” calls our top leadership options the “walking (or in Biden’s case, stumbling) dead,” as the following images remind (average age: 80.5)

This is not “agism” but power-ism, and though it is nice to see that senior poverty is down from 17% in the 70’s to less than 8% today, the fact that child poverty has risen to 19% in the same era should make even my generation pause.

But let’s not blame everything on the old faces…

The New “Success” Icons?

The few new faces of the latest generation to make “success headlines” and motivate today’s youth have more than just a little bit of a problem with being financial or social role models…

The damage that “success stories” like Adam Neuman or a socially-troubled Mark Zuckerberg have done to the coming generation are not to be missed.

That censoring and profoundly toxic “compare me” site otherwise known as Facebook, for example is, in my opinion, one of the worst things to infect our country since the 1916 Influenza.

The Wealth Transfer is a Debt Transfer

The foregoing and highly complex financial, political, social and generational concerns all stem from something as otherwise “academic” and straightforward as debt.

Prior generations have been gorging on it, and coming generations will be paying for it—not just in absolute or nominal terms, but far more invisibly yet insidiously in real, inflation-adjusted returns.

This is because central bankers will continue to steadily devalue the inherent purchasing power of their national currency with inevitably rising levels of mouse-clicked, fiat “money,” the ultimate (but largely invisible) insult to our children’s and grandchildren’s generation.

Since 1989, the 70+ group has expanded its share of national Household wealth by 58%, whereas the share of wealth held by those under 40 has fallen by 42% in the same period.

This is not by accident, but policy design. And it’s not because American’s don’t love their children, but because those making financial policy decisions just love themselves even more.

My kids often tell me they aren’t keeping up with dad when I was their age.

But unlike their dad, their generation was born with a politically-culpable debt canon ball chained to their ankles which was unlike anything my generation knew in our 20’s or 30’s.

Most of my children’s generation are working harder for less, and yet they somehow think it’s their fault.

It’s not.

The new generation inherited a $93T (public, household & corporate) debt nightmare and we gave it to them…

The Supreme Court on Thursday morning rejected a bankruptcy reorganization of OxyContin maker Purdue Pharma that would’ve shielded Sackler family members from civil lawsuits related to the hundreds of thousands of overdose deaths attributed to the opioid crisis. 

In a narrow 5-4 ruling written by Justice Neil M. Gorsuch, the Supreme Court’s majority determined that the federal bankruptcy code does not permit a liability shield for third parties in bankruptcy agreements. Justices Clarence Thomas, Samuel A. Alito Jr., Amy Coney Barrett, and Ketanji Brown Jackson joined Justice Gorsuch in the decision. 

 

“Someday, Congress may choose to add to the bankruptcy code special rules for opioid-related bankruptcies as it has for asbestos-related cases, Justice Neal Gorsuch wrote for the majority, adding, “Or it may choose not to do so. Either way, if a policy decision like that is to be made, it is for Congress to make.”

Meanwhile, Justices Brett Kavanaugh, John G. Roberts, Sonia Sotomayor, and Elena Kagan dissented. 

“Opioid victims and other future victims of mass torts will suffer greatly in the wake of today’s unfortunate and destabilizing decision,” Kavanaugh wrote.

Today’s Supreme Court ruling ends the bankruptcy plan that would have shielded members of the Sackler family from civil litigation. As part of the accord, Sackler members agreed to give up Purdue ownership and pay upwards of $6 billion. 

“Today’s Supreme Court ruling marks a major setback for the families who lost loved ones to overdose and for those still struggling with addiction,” Edward Neiger, a lawyer representing 60,000 overdose victims, wrote in a statement quoted by AP News. 

Neiger said, “The Purdue plan was a victim-centered plan that would provide billions of dollars to the states to be used exclusively to abate the opioid crisis and $750 million for victims of the crisis, so that they could begin to rebuild their lives. As a result of the senseless three-year crusade by the government against the plan, thousands of people died of overdose, and today’s decision will lead to more needless overdose deaths.”

The ruling means that settlement talks must be reset, which ultimately means more time.

Purdue Pharma and the billionaire Sacklers have long been viewed as the source of America’s opioid crisis, starting in the 1990s with the debut of prescription painkiller OxyContin. The crisis has since morphed into the worst overdose death crisis this nation has ever seen, with the drug death catastrophe eclipsing the Vietnam War every six months. 

In recent months, the House Select Committee on China revealed that the Chinese Communist Party used tax rebates to subsidize the manufacturing and exporting of fentanyl chemicals abroad. Mexican drug cartels are cooking fentanyl chemicals and flooding the nation via Biden’s open southern borders. 

By Philip Marey, Senior US Strategist at Rabobank

The US dollar continued to strengthen and EUR/USD briefly dropped below 1.0670 yesterday as the Fed and the ECB have been trading places in the cutting cycle. Bloomberg reported that the ECB will start the next strategy review after summer; expected to be completed by 2025H2. Our ECB watcher Bas van Geffen provided the following comments. Recall that the previous one was in 2021, when the ECB decided, amongst other things, to change the exact definition of its price stability target to 2% symmetrically, and set some climate goals. The agenda for the next strategy review is unclear yet, but I would not expect big updates this time. First of all, the price stability target has recently been reviewed, and so has the toolkit. Secondly, the time between reviews is much shorter than it was with the 2021 update. In fact, more regular reviews were also part of the previous conclusion. One element of policymaking that has been under discussion is the economic projections. Perhaps the ECB will update the way it communicates these. Options are the presentation of scenarios via e.g. fan charts (like the Riksbank produces) or a Fed-style dot plot. But especially the latter is not uncontested.

US new home sales are very volatile, but the 11.3% drop in May reported yesterday was the largest since September 2022. High mortgage rates and high house prices are holding back purchases, despite the rising supply of available homes.

The results of the Fed’s annual bank stress test showed that while large banks would endure greater losses than last year’s test, they are well positioned to weather a severe recession and stay above minimum capital requirements. Vice Chair for Supervision Michael Barr said: “While the severity of this year’s stress test is similar to last year’s, the test resulted in higher losses because bank balance sheets are somewhat riskier and expenses are higher.” This year’s hypothetical scenario is broadly comparable to last year’s scenario. It includes a severe global recession with a 40 percent decline in commercial real estate prices, a substantial increase in office vacancies, and a 36 percent decline in house prices. The unemployment rate rises nearly 6.5 percentage points to a peak of 10 percent, and economic output declines commensurately. However, as we explained in The commercial real estate-small bank nexus, most commercial real estate loans have been made by smaller regional banks that are not included in the Fed’s stress test.

In the UK, the BBC hosted the final debate between Conservative Prime Minister Rishi Sunak and Labour leader Keith Starmer before the July 4 election. Essentially, both claimed that the other person and party were not credible. Sunak accused Starmer of not being straight with the country on migration, taxes and women’s rights. Starmer responded that Sunak was too rich to understand the concerns of ordinary people. The YouGov poll showed the debate had been a draw in the eyes of the British voters. One questioner from the audience said: “Are you two really the best we’ve got to be the next prime minister of our great country?”

The Day Ahead

Tonight the first of two debates between current President Biden and former President Trump is going to take place in Atlanta. The debate will be televised by CNN at 21:00 ET (Thursday evening), which means 3:00 CET (Friday early morning). With Jake Tapper and Dana Bash moderating the debate, and CNN hosting it, it will be a home match for Biden. There will be no studio audience, which is favorable to Biden, because it will make it easier for him to keep his focus. Also, the microphones will be muted except for the candidate whose turn it is to speak. However, there will be no pre-written notes or other props to help him remember. While there will be two commercial breaks, campaign staff may not interact with their candidate during that time. The debate will last 90 minutes. Biden will go first at the conclusion of the debate and Trump will deliver the last closing statement.

The fact that the first debate is taking place so early in the year – they normally start in September or early October – shows that the Democrats are desperate to turn around the election dynamics. Since September 2023, Trump has been leading in the polls, and his legal conviction in the Stormy Daniels case only slightly dented his prospects as we discussed in Elections, tariffs and lawfare.

So Biden is playing at home, but he needs to go on the offensive. If Trump plays it cool and compares their records on the economy, the border and overseas wars, he could very well counteract the attacks on his character and his actions on January 6, 2021. The downside could be larger for Biden, if doubts about his age are reinforced by this debate. It would be more difficult to recover from than Trump going off script and digging a hole for himself.

The debate will be attended by his intended VP pick, Trump said over the weekend. However, it remains uncertain when Trump will reveal his choice to the public. Given the age of both candidates, vice-presidents matter this time. According to PredictIt, Doug Burgum is now the most likely candidate. He is followed at some distance by Vivek Ramaswamy and J.D. Vance. At an even further distance, completing the Top 10, in order of decreasing probability, we have Glenn Youngkin, Marco Rubio, Ben Carson, Tim Scott, Byron Donalds, Elise Stefanik and Tulsi Gabbard. For Trump, the VP is especially important to widen his net and attract moderate Republicans and swing voters. Picking a wannabe Trump would not help him get elected.

There is a second debate scheduled on September 10. Is this first debate going to be a game changer? Note that we still have a Trump victory in our baseline forecast. Given the asymmetric risks we mentioned, a poor performance by Trump would not necessarily invalidate our current baseline. In contrast, a poor performance by Biden would solidify it.

Authored by Andrew Korybko via Substack,

Many X users described Bolivia’s failed coup on Wednesday as another CIA regime change attempt, mostly due to its history of meddling in this landlocked and lithium-rich South American nation, but there’s much more to it than just that. Casually dismissing everything as a CIA plot overlooks the preexisting problems that preceded this dramatic event and oversimplifies complex dynamics. The present piece will concisely clarify what happened, why, the reason that it failed, and what might follow.

General Juan Jose Zuniga was dismissed earlier in the week after threatening to arrest former President Evo Morales if he tries running for a fourth term like the latter said that he wants to do in 2025 despite the Constitutional Court ruling late last year that it would be unconstitutional. Bolivia’s 2019 military coup was set into motion upon Morales winning a contentious fourth term after a 2016 referendum on extending term limits failed but was overruled by the Constitutional Tribunal in 2017.   

For those who are interested in learning more about what happened back then, “Here’s How the Hybrid War on Bolivia Succeeded in Carrying Out Regime Change”, which was pretty much due to a significant share of the population already being preconditioned to consider his victory illegitimate. In parallel with that, the US once again co-opted its traditional allies in the armed forces there to get them to intervene against him, which led to a brief de facto dictatorship that was democratically overturned a year later.

Incumbent President Luis Arce from Morales’ “Movement for Socialism” (MAS) won a commanding victory with 55% of the vote compared to his next closest challenger who only scored 28%. The prior military-installed government folded due to the political impossibility of holding onto power under those circumstances, after which some of its members were held accountable before the law for their role in the coup. This included Jeanine Anez, who assumed the presidency during that period and is still in jail.

Over the past year, Arce and Morales had a nasty falling out over the run-up to 2025’s elections, which saw Arce being expelled from Morales’ MAS. Readers can learn more about this intra-leftist dispute here and here, but it basically boils down to personality differences, not any significant policy ones. As the ruling party’s infighting worsened, so too did the economy as its financial crisis began to climax, resulting in growing protests across the country in the immediate run-up to the failed coup.

Earlier this month, Arce was one of President Putin’s two guests of honor (the other being Zimbabwean President Emmerson Mnangagwa) at the St. Petersburg International Economic Forum, where he gave a powerful speech about multipolarity that can be read in full here. It was with their countries’ increasingly strategic partnership in mind, which importantly includes lithium and nuclear energy dimensions, that many X users assumed that the failed coup was a US-backed geopolitical revenge plot.

Nevertheless, the economic-financial and political (specifically intra-leftist) tensions that preceded it show that this interpretation isn’t all that accurate even though the US would have gained had the regime change succeeded, such as if the new authorities radically altered their country’s policies. Moreover, the timing suggests that this was an impromptu personal putsch by Zuniga after he was dismissed earlier in the week, not something that he and the CIA had been cooking up for a while.

After all, Arce personally confronted Zuniga in the presidential palace and convinced his comrades to call off the coup, which coincided with him and Morales putting aside their differences for the greater national good to call on their compatriots to mobilize in support of the government. The coup therefore failed precisely because the armed forces hadn’t colluded with the CIA in any meaningful way, nor did that agency precondition the public to support this latest regime change like they did the 2019 one.

That’s not to say that there wasn’t any US trace whatsoever at all in what happened, which might be discovered during the ongoing investigation, but just that it would have only been opportunistic at most and not part of a plot that they seriously invested in far ahead of time. As for what might unfold in the aftermath, it’s possible that Arce and Morales might reconcile or at least reduce the intensity of their rivalry, all with a view towards making next year’s elections as uncontroversial as possible.

Zuniga’s scandalous claim in the aftermath of the failed coup that Arce had earlier told him to stage some drama in order to boost his popularity amidst the country’s converging crises likely isn’t credible, but it could still have the effect of exacerbating tensions between those two. Not only that, but some of the electorate might also be influenced by what he said too, which could make some of them sour on MAS ahead of the next vote and thus potentially give a boost to their right-wing rivals.

The new socio-political situation could more easily be exploited by the CIA to facilitate any speculatively subsequent efforts to seriously carry out a coup ahead of or during next year’s elections in the event that Morales still decides to run in contravention of last year’s Constitutional Court ruling. This insight suggests that while many X users are arguably crying wolf about the CIA’s role in the latest events, this might actually end up becoming a self-fulfilling prophecy by sometime next year if Bolivia isn’t careful.

Last night, ZeroHedge brought together four prominent pundits to debate one of the most combustible topics of the day: illegal immigration across the porous US border.

Immigration is the most important political problem facing the US today according to Gallup and about a half-dozen other pollsters, not to mention at least half of America. If you missed it, here were the highlights:

“This is a leftist argument.”

In response to arguments put forth by author Ryan Girdusky that immigrants lower American wages, The Hill correspondent Robby Soave dismissed it as a tactic of the left.

“The economy arguments are nonsense.”

“How many Mexicans have made a billion-dollar company?”

Girdusky pointed to the disproportionate entrepreneurial representation among immigrants of different nationalities, noting that Israel, China, and Europe making up the lion’s share of Fortune 500 founders.

“You have a better chance of being struck by lightning twice than you do finding a Mexican national in this country with a billion-dollar business,” he said to which Soave replied: “OK let’s deport everyone who did not start a Fortune 500 company.”

“The war is already on our shores.”

Human Events editor Jack Posobiec advocated for sending the U.S. military into Mexico to carry out targeted military operations against the cartel.

“We’re not the ones starting the war. The war has already begun… You can look at fentanyl deaths. You can look at child trafficking deaths… The war is here.”

“We need to be a great country that builds things again.”

Pro-immigration Libertarian presidential nominee Chase Oliver said he does not support minimum wage laws and argued that Americans do not have a “right” to a job. According to him, the U.S. should “let immigrants come here to compete 1-on-1 for an equal wage and see who does the best work. The best work should get hired.”

Oliver’s debate partner Soave agreed, saying centrally planning labor and migration is no different than socialist governments ignoring market forces to manipulate the lumber supply.

“So much of the problems in our country are created by government artificially creating shortages… one of those is a restriction on the labor pool.”

Deport the Woke?

Pro-immigrant Soave broached the idea that if one wants to use government to reshape America’s demographics, we ought to begin with Marxist American citizens.

“If I wanted to make this country more right-wing and based and patriotic, then I would deport the existing population because they are the people whose views are antithetical to the right and antithetical to Trumpism.”

“How fucking dare you!”

Girdusky — fed up with the Libertarian live-and-let-live attitude on drug use — ripped into Oliver and Soave for their nonchalance towards the fentanyl crisis.

“It makes me beyond angry… these are our people. Millions are dead. More than the Civil War, World War 2. They are all dead.

“If you want to sit there and represent them and say ‘oh, it’s over the war on drugs, their cartel members’ lives are more valuable than yours? I’m sorry but how fucking dare you!“

Watch the full debate on X, Rumble, or YouTube. It will also go live on Spotify later today. Be sure to subscribe to the various ZeroHedge channels (you never know when we’ll be banned from one of them).

Let us know in the comments what debate topics and guests you would like to see in the future.

After crashing in April, analysts expected a small rebound in pending home sales in May, but they didn’t.

Instead, sales tumbled 2.1% MoM…

Source: Bloomberg

That dragged the YoY change down 6.6% to a new record low…

Source: Bloomberg

“The market is at an interesting point with rising inventory and lower demand,” NAR Chief Economist Lawrence Yun said in a statement.

“Supply and demand movements suggest easing home price appreciation in upcoming months. Inevitably, more inventory in a job-creating economy will lead to greater home buying, especially when mortgage rates descend.”

Potential homebuyers are turned off by high selling prices, which hit a record $419,300 in May, although the market is gradually seeing a pickup in listings.

On a call with reporters last week, Yun noted optimistically that the supply of existing homes was up more than 18% from a year ago.

“Let’s wait to see if this leads to more home sales,” he said.

More problematically, the pending-sales figures tend to be a leading indicator of sales of previously owned homes, because houses typically go under contract a month or two before they’re sold.

Mounting evidence of a consumer slowdown is becoming undeniable for the Biden team, which has nothing but cheerleaded failed economic policies dubbed ‘Bidenomics’ ahead of the presidential elections this November. We have detailed the consumer downturn extensively, citing notes from Goldman, whose top analysts told clients earlier this week to begin shorting “our Middle-Income Consumer basket (GSXUMIDC).” 

It was only Wednesday that Cheerios cereal maker General Mills reported a dismal sales outlook as consumers pulled back on spending in the era of elevated supermarket prices. Now, drugstore chain Walgreens Boots Alliance Inc. has slashed its full-year earnings thanks to a “worse-than-expected” consumer environment. 

Walgreens revised its forecast range for full-year adjusted earnings to $2.80 to $2.95 per share from $3.20 to $3.35.

• Sees adjusted EPS $2.80 to $2.95, saw $3.20 to $3.35, estimate $3.20 (Bloomberg Consensus)

Adjusted earnings for the third quarter ending May 31 were 63 cents a share, worse than the 68 cents that Wall Street analysts tracked by Bloomberg estimated. Sales beat on the quarter, but investors focused on the dismal full-year guidance. 

Here’s a snapshot of the third quarter earnings (courtesy of Bloomberg):

• Adjusted EPS 63c, estimate 68c

• Sales $36.4 billion, estimate $35.81 billion

• International sales $5.73 billion, +2.8% y/y, estimate $5.72 billion

• US Retail Pharmacy Sales $28.50 billion, +2.3% y/y, estimate $28.04 billion

• US Healthcare Sales $2.13 billion, +7.6% y/y, estimate $2.13 billion

On slide 15 of the investor deck released with earnings, Walgreens blamed the worsening outlook for the year on “Worse-than-expected consumer environment driving higher promotional activity, negatively impacting retail margin.” 

“We continue to face a difficult operating environment, including persistent pressures on the US consumer and the impact of recent marketplace dynamics which have eroded pharmacy margins,” Chief Executive Officer Tim Wentworth said in a statement in response to the earnings report. 

Wentworth said, “Our results and outlook reflect these headwinds, despite solid performance in both our International and US Healthcare segments,” adding, “Informed by our strategic review, we are focused on improving our core business: retail pharmacy, which is central to the future of healthcare. We are addressing critical issues with urgency and working to unlock opportunities for growth.”

In an interview with The Wall Street Journal, CEO Wentworth said the drugstore chain plans major store closures nationwide. The chain has approximately 8,600 stores in the US, and the executive said the company has yet to provide a final number of locations to close. 

 In markets, if premarket losses of -21% hold, this will be the worst single day decline for Walgreens in 30 plus years of data via Bloomberg. 

Shares are set to crash to levels not seen since the mid-1990s. 

Here’s how Wall Street analysts are responding (courtesy of Bloomberg):

Evercore ISI, Elizabeth Anderson (in line, PT $17)

• Calls the results disappointing

• Says lowered guidance will raise investor questions about the run rate number for FY25

Leerink Partners, Michael Cherny (market perform)

• Says the outlook cut on the back of this quarter’s performance is not “overly shocking to us as the company now begins the next leg of its turnaround”

• Sees a “murky multi-year pathway” with persistent near-term challenges that will make creating a constructive case on the stock challenging

Bloomberg Intelligence, Jonathan Palmer

• Says Walgreens’ second reduction to fiscal 2024 guidance “underscores the challenges in its turnaround”

• “Modest Ebitda in US Healthcare is a minor positive, though the wait is on for a more meaningful strategic transaction”

The big theme here is that low-income and middle-class Americans are suffering. Goldman recently illustrated this with charts, which we highlighted in a note titled “Goldman Exposes Bidenomics Real-World Disconnect: Low-Income Americans Are Struggling With High Prices.”

Besides Goldman, corporate America as a whole is beginning to freak out about the pullback in spending.  

We suspect corporate America’s warnings about the consumer slowdown will grow louder as the fall elections approach.

Let’s not forget that consumerism is nearly 68% of GDP. And, if you’re wondering how a recession could form, all it takes is one incident in the Middle East to spike Brent crude over $100/bbl to create a shock (remember 2007/08).

While absolutely nobody cared about today’s final Q1 GDP print – which in 3 days will cover a quarter that is more than three months old – there were two notable things about the print: first, the headline number came in fractionally higher than last quarter’s downward revised print, printing at an annualized 1.4% increase, up from 1.3%. That was also right on top of estimates. Despite the slight upward revision to the final number, the 1.4% print was still the lowest since June 22 when the mini technical recession ended.

However, while the overall GDP print came in higher, the composition was decidedly uglier, with Personal Consumption unexpectedly sliding from a 2.0% annualized number to just 1.5% (and a big miss to the 2.0% expected).

This confirms what recent earnings reports from MCD, MMM, KO, POOL, and most recently, Walgreens, have made very clear (and why Goldman recently said to short the middle-income consumer): the US consumer, that pillar supporting 70% of GDP growth, is cracking.

Taking a closer look at the numbers, we find that the sharply reduced increase in consumer spending reflected an increase in services that was partly offset by a decrease in goods. Within services, the leading contributors to the increase were health care as well. In other words, soaring health insurance costs are “boosting” GDP once more.  Meanwhile, within goods, the leading contributors to the decrease were motor vehicles and parts as well as gasoline and other energy goods.

• The increase in housing investment was led by brokers’ commissions and other ownership transfer costs as well as new single-family housing construction.
• The decrease in inventory investment was led by decreases in wholesale trade and manufacturing.

In terms of contribution to the bottom line GDP, here are the key numbers:

• Personal consumption was responsible for 0.98% of the bottom line 1.41% GDP growth, a big drop from the 1.34% in the second estimate and almost half the 1.68% consumption in the first estimate!
• Fixed investment added 1.19% to the bottom line, up from 1.02% in the previous estimate.
• The change in private inventories was almost unchanged from the previous estimate, at -0.42%, up fractionally from -0.45%.
• Net trade (exports less imports) subtracted only 0.65%, a revision from the -0.89% in the previous estimate. With the dollar soaring, expect this number to plunge for the Q2 print.
• Finally, government consumption managed a modest increase, rising to 0.31%, up from 0.23%.

One final point: while certainly not relevant today, one day ahead of the latest core PCE print, the BEA reported that in Q1, prices rose slightly more than expected, with the GDP price index rising 3.1%, up from 3.0% and the core PCE up 3.7% vs 3.6% previously. Some more details from the report:

• Gross domestic purchases prices, the prices of goods and services purchased by U.S. residents, increased 3.1 percent in the first quarter after increasing 1.9 percent in the fourth quarter. Excluding food and energy, prices increased 3.3 percent after increasing 2.1 percent.
• Personal consumption expenditures (PCE) prices increased 3.4 percent in the first quarter after increasing 1.8 percent in the fourth quarter. Excluding food and energy, the PCE “core” price index increased 3.7 percent after increasing 2.0 percent.

Bottom line: the stagflationary pressures are rising, with growth about to dip into contraction especially as the consumer is now tapped out, while prices remains very sticky, and while tomorrow’s core PCE may show a modest drop due to a handful of technicalities we will discuss shortly, everyone knows that absent a huge recession (or depression) prices will just keep on ticking higher.

In the first five months of this year, the Federal Aviation Administration received more than eleven times as many Boeing whistleblower complaints compared to all of last year. The surge in whistleblowers first came after the 737 Max mid-flight door plug blowout in January. The latest Boeing whistleblower was revealed on Wednesday, warning about 787 Dreamliners. 

Attorneys for Richard Cuevas, airplane mechanic and contractor for Boeing manufacturing partner Spirit Aerosystems, detailed in a statement on Wednesday that they filed complaints with the FAA and Occupational Safety and Health Administration, alleging that the mechanic “witnessed substandard manufacturing and maintenance processes on the 787 forward bulkheads, including critical drilling and sealant issues.” 

“Cuevas complained that these safety issues, if unremedied, could compromise power and air pressure on the planes, creating a serious public safety risk,” attorneys Debra Katz and Lisa Banks at law firm Katz Banks Kumin wrote in the statement. 

After he brought up these troubling concerns—initially with Spirit management and later with Boeing’s ethics program—he was fired. A Spirit manager told him his termination was a “sign of the times.” 

The lawyers continued, “Our client witnessed critical issues with the forward pressure bulkhead assembly on multiple planes that deviated from Boeing’s specifications,” adding, “He recognized the substandard work and expressed concern about his safety concerns, but Spirit and Boeing failed to stop the faulty manufacturing processes. Mr. Cuevas was fired when his manager found out that an employee complained about these issues, and suspected that employee was Mr. Cuevas.” 

Here’s a summary of Cuevas’ technical allegations (courtesy of his lawyers):

Mr. Cuevas’s complaints allege that Spirit made a range of manufacturing and assembly specification changes on the 787 forward pressure bulkhead without Boeing’s permission. These allegations are different from previously reported issues with the forward pressure bulkhead in 2021. 

Mr. Cuevas alleges that Spirit deviated from Boeing’s manufacturing specifications while drilling holes in the fasteners of the forward pressure bulkhead of 787s. Deviations from these specifications compromise the seal necessary to maintain air pressure during flight. Boeing requires fastener holes in this section of the plane to be drilled at .2475 inches, which provides a near-perfect “interference-fit” that best retains air pressure during flight. Instead of drilling at that size, Spirit workers were directed to drill holes using a .2495 drill bit, to clear excess paint from the holes and speed up a slow process. Mr. Cuevas alleges that this caused the interference fit to be compromised in Row 3 of these fasteners, which houses critical electrical components, risking power failure and depressurization inflight. Mr. Cuevas observed that Boeing conducted an unannounced inspection and identified 117 out of 200 improperly drilled holes on the bulkhead, but that it has yet to correct the issue. Mr. Cuevas witnessed these problems with three planes he worked on and believes that these issues may affect at least 10-12 planes either in production or already released to Boeing.

Mr. Cuevas also alleges that, because of the ethics investigation, Spirit had fallen behind schedule on its repairs, and therefore instructed workers to incorrectly apply sealants to the plane’s bulkhead fasteners. Usually, the first layer of sealant on this section of the plane requires approximately 168 hours to cure. On occasion, Mr. Cuevas witnessed only a two-hour gap between applying the first and second layer of sealant, which caused bubbles to form between the two layers, disrupting the needed torque to keep the fasteners in place. Boeing noticed this issue during its inspections on one aircraft and asked Spirit to reapply the sealants. Mr. Cuevas, however, fears that this and other issues, like the lack of an interference fit due to improper drilling, will go undetected on other planes.

Responding to the complaint, Boeing told the local paper Seattle Times that Cuevas’ concerns were investigated and that an engineering analysis “determined the issues raised did not present a safety concern and were addressed.”

“We are reviewing the documents released today and will thoroughly investigate any new claim,” Boeing said.

Boeing’s list of problems appears to be growing weekly (from federal investigations to hearings on Capitol Hill to whistleblowers to mid-air mishaps). One of the last whistleblowers (still living), Sam Salehpour, a former Boeing engineer, warned lawmakers on Capitol Hill in mid-April about safety concerns for the 787 and 777 aircraft. 

Salehpour warned that the 787 Dreamliner fuselage was improperly put together and that the company “rushed to address the bottlenecks in production.” The result, he warned, is “premature fatigue failure” on these planes. He noted, “They are putting out defective airplanes.”

Meanwhile, outgoing Boeing’s CEO Dave Calhoun apologized for the planemaker’s recent series of safety failures in testimony delivered to a Senate committee last week. 

In markets, Boeing shares have been more than halved since peaking in early 2019 at $446 a share, which was around the time of the twin Max 737 crashes, killing 346 people. 

Boeing will eventually resolve its issues. The planemaker’s pending acquisition of Spirit is a strategic move designed to bring supply chains in-house, ultimately improving manufacturing quality. However, Boeing is going to have a difficult time in restoring confidence among passengers. 

New Orders for Durable Goods in the US rose by just 0.1% MoM in preliminary May data (better than the -0.5% exp, but that was thanks to a major downward revision in April from +0.6% to +0.2%).

Source: Bloomberg

The last four months have seen gains ebb rapidly and now durable goods orders are down 1.2% on a YoY basis.

Of course this is constantly flattered before its revised later – 4 of the last 5 months have been revised lower (and 8 of the last 12)…

Source: Bloomberg

Core Capital Goods Orders (non-defense, ex-aircraft) plunged 0.6% MoM (well below the +0.1% exp), matching the biggest drop this year…

Source: Bloomberg

…with both defense and non-defense spending slowing…

Source: Bloomberg

Furthermore, Capital Goods shipments non-defense, ex-aircraft plunged 0.5% MoM – a big drop for a key signal of business spending and GDP…

Source: Bloomberg

How many times can a data series be downwardly revised before conspiracies about manipulated data flip from theory to actual ‘standard operating procedure’?