Looking Backwards …
LB #1
The weird thing about being pinched is that it doesn’t hurt at first. If I reach out and touch a rock that is too close to a fire, I instantly feel the burn, much like obese America in a Tai Chi Class. However, if I am being pinched it starts out as a touch, then , feel something happening, and only after considerable time or force has been exerted do I yammer and cuss , knock it off! The consumer is being pinched and they are starting in the yammer and cuss phase. Companies are starting to take notice as well. Target, Wal-Mart, Starbucks, Cracker Barrel, they have all mentioned the softness in the low income customer. Ferrari seems to be doing famously. ZeroHedge wrote this regarding a note that Goldman Sachs put out, “”companies increasingly called out a weaker lower-end consumer in Q1 earnings calls”, or in other words, mentions of low-income consumers are at record levels, and matching the post-covid crash.” That was pretty bad as I recall. I wish it were that simple, but it is actually much worse.
Venessa Wong writes for Marketwatch, “Many Americans have housing debt and automobile debt. Now, many are also taking on grocery debt.
A new report from the Urban Institute found that 20% of adults who paid for groceries with a credit card in 2023 didn’t pay off their full balance — meaning they would likely accrue interest — but always made the minimum required payment. Another 7.1% paid for groceries with a credit card and did not make the minimum payment, meaning they would likely accrue interest and also incur fees. In addition to carrying debt on credit cards, many people (19.3%) in the survey, conducted in December 2023, paid for groceries by drawing from savings; 3.5% used a buy-now-pay-later service; and 1.9% used a payday loan.
“We see it as a canary in a coal mine, indicating that families might be having trouble,” Kassandra Martinchek, a senior research associate at Urban Institute, told MarketWatch.”
Kassandra, I don’t know a lot, but I do know three things. One, you never play poker with someone named after a city or state, two, never believe a stripper if she says she loves you, and three don’t pay interest on your groceries. We have talked about how groceries are up 37% since 2019. This is bad news for one bike ridin’ Joe Biden. I know politicians on both sides of the aisle are beholden to big money donors and lobbyists, but every four years they do have to win an election and if this economy doesn’t turn around quickly Biden will be pedaling uphill.
LB#2
Following last week’s implementation of tariffs on China, China answered back with some tariffs of their own as well as denouncing Anthony Blinken for his comments on Taiwan. They also flexed their military might as more exercises surrounding the island of Taiwan took place this week as the saber rattling continues. Dustin Volz, Drew Fitzgerald, Peter Champelli and Emma Brown wrote an exhaustive piece for the Wall Street Journal about disappearing Chinese ships. That’s right China has been sending ships that repair undersea internet telecommunications cables and these ships are disappearing from the grid for days at a time. “State Department officials said a state-controlled Chinese company that helps repair international cables, S.B. Submarine Systems, appeared to be hiding its vessels’ locations from radio and satellite tracking services, which the officials and others said defied easy explanation.
The warnings highlight an overlooked security risk to undersea fiber-optic cables, according to these officials: Silicon Valley giants, such as Google and Meta Platforms, partially own many cables and are investing in more. But they rely on specialized construction and repair companies, including some with foreign ownership that U.S. officials fear could endanger the security of commercial and military data.
The Biden administration’s focus on the repair ships is part of a wide-ranging effort to address China’s maritime activities in the western Pacific. “
The good news is that no one uses the internet anymore. Oh, I’m being told that people still do in fact use the internet, how progressive. However, with all that water pressure and crustaceans surely wiretapping would be out of the equation. Funny you should ask, because “Safeguarding underwater cables has been a focus of U.S. national-security officials since the Cold War, when fears of Soviet espionage were paramount. In the 1970s, the U.S. secretly placed wiretaps on underwater Soviet lines in an intelligence coup known as Operation Ivy Bells.” That’s right, we already invented this. I’m sure it was after the Russian men’s basketball team won gold at the Munich Olympics and nothing more devious was going on than trying to break their infamous 2-3 zone defense, but this loophole existed 50 years ago and now these ships are disappearing for days at a time. We invented this trick and now we are just turning the other cheek while we let AI tell us what to think.
It gets worse, “Cable owners have few choices among an aging fleet of roughly 50 ships around the world, according to Mike Constable, who runs telecom consulting firm Infra-Analytics and previously led China’s Huawei Marine Networks, now known as HMN Technologies.
“You’ve got a Chinese asset repairing U.S.-invested cables,” Constable said. “No one had really thought about that before.” Oh vey, what a way to run a railroad we have in this country.
LB #3
Gold, silver, and copper have all made new 52 week highs in the last week or so, but we have another metal that is also rising quickly. Nickel prices are surging as the battery metal is seeing its fortunes rise as the EV market needs nickel for its cars, but also because of some geopolitical tension.
New Caledonia, a small French Pacific island, is facing political unrest. This from ZeroHedge “Last year, New Caledonia was the world’s third-biggest producer of the battery metal. The tiny Pacific island accounted for 6% of global output, according to the US Geological Survey.
So far, French miner Eramet SA’s output in the country has been disrupted, and it is currently operating at minimum capacity. This news helped propel nickel futures trading on the London Metal Exchange to its best trading week since early December 2022, rising a little more than 11%.”
That is a big week, and these commodity prices are not going to help bring down inflation, but seem to be a sign of accelerating inflation. I actually think it might be a little more nuanced than that. I think things that you can’t print are going to be more valuable like nickel, but things that are printed like fiat currencies or us treasuries are going to be worth less. Now currencies are usually traded vis a vis another currency so there will be relative strength winners and losers, but against real assets, land, oil, metals I think they will be the real rockstars as these fiat tissues might end up being used in New Caledonia as they cry in unison, we want our nickelback.
New Caledonia causing nickel surge
Looking Forwards…
LF#1
I am looking forward to seeing how this AI narrative plays out. This week Google had more problems because their new chatbot got incredibly easy things wrong again. This whole thing is starting to smell like Denmark, aka something is rotten. I’m sure the Danes are fine smelling folks in general. The Wall Street Journal’s Suman Bhattacharyya wrote an interesting piece about how companies should be careful using AI. The article was titled “Hate Chatbots? You aren’t the only one” so naturally I had to see what he had to say and he had some fascinating data.
“Last year, 71% of more than 4,500 employees across industries surveyed by Forrester Research ; green up pointing triangle said their companies were either experimenting with or implementing conversational AI and chatbots on their websites. The benefits are obvious: Brands are looking to cut costs, and chatbots are cheaper than people. What’s more, they believe, chatbots have the potential to improve customer experiences.
At the same time, a Forrester survey conducted last year found that just 16% of consumers said they often used chatbots, and over a third said they never use them.
Why the disconnect? Chatbot adoption “has been significantly hampered by bad design,” says Max Ball, principal analyst at Forrester. “People just look at the cost savings and they don’t look at the customer experience.”
Right you are, Max. The author then goes on to describe the many different ways that these things are annoying, unhelpful, confused, too human, not human enough etc. What I found fascinating was a chart that was used to show the differences in perception between customers and business leaders. The two groups were surveyed and 87% of business leaders think that AI will improve how customers engage with businesses within a year while 58% of customers think it will take 5 years or longer and 33% say they never believe it will. 49% of business leaders think Customers will engage now with AI and only 16% of customers agreed. That is as bifurcated as our grocery purchase dilemma we talked about earlier.
I got the lucky experience this week to try one of these. I spent two hours trying to talk to a human to simply pay a bill. Billing codes didn’t match, and then the little bot got confused and sent me to a frequently asked question screen. The next time it crashed, and I had to start the little conversation over. I finally got a human to chat with me and they tried to get me to a human, keep in mind this is middle of the day and middle of the week. Three different people were out of the office or couldn’t respond back. This is a large company, whose name you would recognize, that is based in Silicon Valley. They couldn’t figure out how to accept money from a willing person. I went to my desk and looked up their stock price and contemplated shorting the stock right there. If that is the common experience, this is beginning to feel a lot like full self-driving and the flying cars that should have been made by Tesla by now. I’m feeling like this Ai is starting to resemble green energy, EV cars, and self-driving- long on promise and short on deliver. The only full self driving I have experienced is after I go through the drive thru at Chick Fil-A.
LF#2
It has been about a year or so since we mentioned billionaire Barry Sternlicht, he was one of the guys begging for rates cuts and as we have seen those cuts haven’t come. Now he seems to be in real trouble. He has the big REIT named Starwood that has been gated, meaning customers can’t withdraw all of their money at once which has saved him from the equivalent of a bank run. This from ZeroHedge and the Financial Times “Starwood Real Estate Income Trust (SREIT), a $10 billion non-traded REIT ranked second-largest behind Blackstone’s struggling BREIT, faces a severe liquidity crunch as investor redemptions soar amid concerns ‘higher for longer’ interest rates will worsen the commercial real estate storm.
The Financial Times reported at the end of last week that SREIT is “running low on liquidity as investors demand their money back” and tapped $1.3 billion of its $1.55 billion credit facility since the start of 2023.
Redemptions have jumped among concerned investors. In the first quarter, SREIT investors requested $1.3 billion of their cash back. However, the fund only returned $500 million of the requests in the quarter because of a 5% redemption cap.
Now, Barry Sternlicht’s SREIT is in dire straits. The current pace of redemptions suggests the fund will run out of cash in the second half of the year unless it disposes of properties or expands its credit facility. The filing from last week shows the fund has $225 million left to draw down.“
It gets worse for the commercial real estate space as the first AAA commercial real estate backed note took losses this week. This marked a first since the great financial crisis. The details are here from ZeroHedge via Bloomberg, “Bloomberg first reported that CMBS strategists at Barclays pointed out that buyers of the AAA portion of a $308 million note backed by the mortgage on the 1740 Broadway building in midtown Manhattan received less than three-quarters of their initial investment in recent weeks after the loan was dumped at a sizeable discount. All low-tier creditors were wiped out.” That’s right wiped out. There is a chart showing that class b,c,d,e,f tranches of the note backed by 1740 Broadway and having S&P ratings ranging from AA- to b+ lost 100% of their capital invested. That’s over $150 million dollar loss on the sub-AAA tranches and a $40 million dollar loss on the AAA rated class A tranche. Folks, this toxic debt is sitting on bank’s balance sheets everywhere. These losses are going to be real. Conduct your business accordingly. Don’t cry for Barry, he will be fine. He’s a billionaire.
Billionaire Barry back in the news
LF#3
I have a confession to make, I have never eaten at a Red Lobster. I may be running out of time. They filed for bankruptcy this week and the headlines are saying it is because of all you can eat shrimp. That’s only part of the story. Allison Morrow writes for CNN business, “Red Lobster’s bankruptcy report included a blow-by-blow account of its path toward financial ruin, and it was as juicy as a fresh crab leg dipped in butter and washed down with a crisp Chardonnay.” Hey that’s a nice opener to the story! She continues, “What went wrong for Red Lobster, the chain that effectively introduced the concept of affordable seafood and kitschy coastal aesthetic to landlubbers across the Midwest and beyond? First, Red Lobster got screwed by private equity. Then, it got screwed by its own managers.
Back in 2014, the Darden restaurant group spun off Red Lobster to a private equity firm. To finance the deal, that PE firm sold off most of Red Lobster’s property assets and then leased them back to the restaurants. But, as we learned in the bankruptcy filing, the vast majority of those restaurants were being charged rent at above market rates.
That cash drain might have been manageable under normal circumstances.”
I have been pissing on private equity for awhile now and here we go again. They come in and take a business with assets, sell those assets, they probably gave themselves a special dividend, agreed to pay too high of rent as part of the deal, and the executives absconded with the money of a perfectly buttery little business. Now it gets worse. Their seafood supplier, Thai Union, took a majority stake in the company and handpicked the CEO Paul Kenny wink wink. This is what happened, I own you Kenny and you are going to buy shrimp from me, a lot of shrimp. The next thing you know, Red Lobster has all you can at shrimp and that was the end of Red Lobster. I like how Ms. Morrow finished the article as well, “What happened to the Red Lobster of the ’80s and ‘90s? Like so many beloved brands, it got caught in the net of private equity before being reeled in and gutted.” That is what politicians are doing to this country. They are just playing a bigger game and the all you can eat shrimp is all you can print fiat currency.
Sincerely Yours,
C Thomas Printer
The Dow Jones finished trading at …..at 39,069.
The 10-year Treasury bond is at …a 4.467%
The price of Brent Crude is … at $82.12 per barrel.
The price of gold is … at $2,335/oz.
The price of silver is … at a $30.54oz.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.