Looking Backwards …
LB #1
The clock is ticking before the wee orange man takes his second oath and starts issuing tariffs like Chinese throwing stars to the rest of the world. Ping, zing, pow! That is at least what he says, and I believe only some of that so who knows what will happen. What I do know is that people are uncertain, and primarily our trading partners. Canada somehow just became a huge enemy of the US evidently. Their borders allow fentanyl in according to the orange man. It doesn’t seem to matter to anyone that all of the fentanyl users seem to be in the US. I have an idea of how to solve this problem… I would simply outlaw drugs. This is why I write a blog and do a podcast every week because I am a genius. America please outlaw drugs and the problem will stop and we won’t have to put a tariff on Canada. Oh snap, that isn’t how that works?
Well back in reality Andrew Chen makes a fine point in the Epoch Times via ZeroHedge, “ Nearly half of Canadian manufacturers may freeze hiring or lay off workers if U.S. President-elect Donald Trump imposes 25 percent tariffs on all Canadian goods. A survey of 300 manufacturers found that 48 percent are considering these moves in response to the proposed tariffs, according to data released Dec. 19 by Canadian Manufacturers and Exporters (CME).
Additionally, 46 percent are considering postponing or cancelling planned capital investments, while 49 percent say they may shift some production to the U.S. if the tariffs are implemented. “Tariffs will endanger nearly $600 billion in exports to our largest trading partner, two-thirds of which are manufactured goods,” CME president and CEO Dennis Darby said in a press release.
“These findings show why we need an urgent and coordinated response from governments to protect manufacturing businesses, workers, and families.”
Failure to do so “will be devastating for our economy,” Darby said.”
Canada our best trading partner is now going to have to retaliate against us. Care to know where we import the oil that goes to our refineries to make gasoline? Let’s go to Damian Troise writing for the AP, “The U.S. increasingly relies on Canadian crude oil to meet domestic demand, and that relationship faces potential strain amid the threat of tariffs from President-elect Donald Trump.
More than 50% of crude oil imported to the U.S. comes from Canada, up from 33% in 2013. The increase follows a jump in production from Canada’s western provinces and growing pipeline capacity to its southern neighbor. Another roughly 10% of imports come from Mexico. Canada, with its proximity to the U.S., is also the nation’s biggest trading partner. Nearly all of Canada’s oil is exported to the U.S.
Canadian oil makes up the majority of overall oil imports in the U.S., despite the nation’s own oil boom over the last decade. That boom has made the U.S. the world’s biggest producer of crude oil and a net exporter. But a mix of chemistry and infrastructure, along with geography and prices, means the U.S. still has to import a significant amount of oil to meet demand.
The U.S. produces mostly light, sweet crude, which is easier to refine than heavier crude oil, like the kind that Canada mostly produces. But refining infrastructure in the U.S. is geared toward heavier crude oil because of a history of having to import that type. Heavier crude is less expensive to purchase because it is tougher to refine.”
Cancelling capital investment means less loans, less money in circulation, less money velocity remember the Smoot Hawley tariff example from 1930 that we talked about. Good and growing economies use capital investment to better its citizens and cancelling future investment will cancel jobs making the nation poorer. It is bad for both economies. Now Canadian officials are talking about putting tariffs on oil which would make gasoline more expensive, and they are also talking about putting tariffs on electricity generated at Niagara Falls which would impact US residents of the neighboring states. Remember the goal is to make America great again. Making our neighbors poorer means they can’t buy as many American made goods that we don’t produce but somehow will have to produce with higher energy costs. That hasn’t worked out too well for Germany…
LB #2
One of the pillars of the economy that is crumbling is the commercial real estate market. We have been chronicling its demise for over a year now. The sound of cracking is getting louder. This from Neil Callanan and Patrick Clark at Bloomberg, “Slumping office property values are rippling through US banks, with smaller lenders in particular ramping up the use of loan modifications in their commercial real estate books.
The typical bank with less than $100 billion of assets modified 0.32% of its CRE loans in the first nine months of the year, a Moody’s Ratings report found. That’s a big increase from the first half of 2024, when it was just about 0.1%…Modifications are typically sought by struggling landlords looking to put off making payments and get short-term extensions on loans. Their increased use is the latest sign of rising distress in CRE credit as a wave of loans come due for refinancing….At the same time, the bigger US lenders, which are subject to stress tests and other forms of intense regulatory scrutiny, have so far been setting aside more money to cover bad loans than smaller banks, according to Rebel Cole, a finance professor at Florida Atlantic University who also advises Oaktree Capital Management LP…About $500 billion of CRE mortgages will mature in the next year “and a significant portion of them are going to go into default,” Florida Atlantic University’s Cole said. “There are going to be fire sales. They’re gonna put more downward pressure on commercial real estate prices across the board.”
Over three times more modifications than last year. This comes after we just looked at how the Seattle commercial real estate market is starting to run out of time on its modifications in last week’s LBLF regarding Martin Selig’s struggles.
This isn’t isolated either. ITM trading writes in ZeroHedge, “The delinquency rate for office loans has surged to 10.4%—just shy of the peak during the 2008 meltdown,” warns Taylor Kenney of ITM Trading. With $1.5 trillion in commercial real estate debt maturing by 2025, the ticking time bomb of vacant office buildings could trigger a domino effect through the economy.
As delinquencies spike, small and regional banks are holding dangerously high exposure—150% to 228% of their total risk capital tied to these loans. “All it takes is a 10% loss in commercial real estate loans to render 100 banks undercapitalized. At 20%, that number jumps to 900,” Kenney explains.
Despite media assurances of stability, the cracks are undeniable. When banks fail, it’s not just their problem: lending tightens, jobs vanish, and property values collapse. The ‘kick the can’ strategy is running out of road.
“Do not count on the Fed, the FDIC, or even larger banking institutions to save hundreds of banks simultaneously. It’s just not going to happen that way.”
This is one of the black swans we have been watching. The collapse hasn’t happened but real estate takes a long time to run out of runway. Extend and pretend is coming to an end.
LB #3
I often think of “The Gentleman from Montana.” It is an unpublished story written by Lewis Foster but better known as the movie adaptation name of Mr. Smith Goes to Washington written by Sidney Buchanan. It is loosely based on the life of Montana Senator Burton Wheeler who fights against government corruption during the Harding administration. Well, today we have Elon Musk and Vivek Ramaswamy about to undertake the same task. Just last week Musk and Vivek tweeted their way into a hornet’s nest by actively voicing their displeasure against the pork laden bill that was part of raising the government debt ceiling. 1100 pages of self interest rolled into a debt ceiling bill. Congress scrapped it, but also scrapped the Don Trump proposed bill. They ended up passing a kick the can down road option which isn’t surprising.
Lost in this are other tweets by the two as they venture into government corruption fighting. Earlier this month via ZeroHedge, “ Non-governmental organizations receiving taxpayer dollars are under scrutiny for misusing funds in shady operations. Elon Musk and Vivek Ramaswamy, set to lead the Department of Government Efficiency (DOGE), have announced plans to investigate how taxpayer funds are funneled into NGOs.
Let’s begin with an exchange between Musk and Ramaswamy on X one week ago…
“We need to scrutinize U.S. government funding of “non-government organizations.” It’s an oxymoron that represents a waste of taxpayer dollars”… Musk agreed, commenting, “Absolutely.” With such vague and expansive authority, some of these NGOs effectively act as agents of the government, often pursuing politically motivated agendas such as promoting woke propaganda, engaging in censorship, supporting endless foreign wars, and even supporting the migrant invasion into the US.”
There should definitely be insight how taxpayer dollars are spent and this could be a large area of waste to be cut. Here is where the difficulty will lie with doing so. In the same article both of them comment on tweets from a source called Datahazard @fentasyl. First, he shows a chart from the ST Louis Fed showing how non-profit total asset levels have increased from below $2T to $14T today in the last 20 years. Armed with that information, the air began to smell funny but here was the data that really pissed me off. “More than 10% of the US workforce is employed in the non-profit sector. In 2012, they made up 27% of DC’s workforce, 18% of New York’s, Massachusetts’, Maine’s, Vermont’s, and Rhode Island’s, and 16% of Pennsylvania’s workforces.
We already talked about how vulnerable Maryland was to the government efficiency cleanup, but if they attack NGOs the unemployment rate is going to go through the roof. Here is the rub, I am happy they are and I think they should attack this. Plenty of people make plenty of profits in non-profits. God knows I hate a hypocrite. If Vivek and Musk have the spine to go after this one section of the waste, it would be wonderful, eventually. It would wreck the economies of those states. If they cut it in half, you can’t have 9% of New Yorkers and 8% of Pennsylvanians lose their jobs. I am sure they realize that this is a service-based economy built upon a consumer. Remove the jobs, and be sure these are good paying jobs, and the economy slows down and contracts. It needs it, and I hope these two can make it happen, and this area looks like a great start, but it will be felt. Buckle up buttercup.
Looking Forwards…
LF#1
As the turkey vultures circle the NGO waste pile, we need to be looking forward to what might happen if they decide to cut and cut deep. The stock market is at all-time highs so if government spending gets cut what would happen? If unemployment goes up what would happen? If the $2T that the government is spending above our tax receipts (Aka the deficit) which flows from the government into the private markets stops, what would happen? The Market Ear posted on ZeroHedge, “The Nasdaq 100 currently trades at 27.7x forward earnings (vs 10Y Mean 23.6x) and 41.4x trailing earnings (vs 30.1x 10Y mean)… Many years ago, Warren Buffett mentioned that he likes to follow the ratio of the total value of US corporate equities at market value divided by nominal GDP. The Buffett Ratio rose to a record-high 2.96 during Q2-2024…S&P500 price-to-book ratio now exceeds March 2000 high…The S&P 500’s dividend yield (1.15%) is the lowest since 2001.
“The worth of a business is measured not by what has been put into it, but by what can be taken out of it.” (Benjamin Graham)” Benjamin Graham was Warren Buffet’s mentor and someone we have long admired here. The Nasdaq is trading 33% above the 10 year mean, the last ten years have been pretty frothy as well so it is actually much higher long term. Everyone is after growth and no one is interested in earning a dividend. Guess who wants that? Everyone. Simon White of Bloomberg writes this via ZeroHedge “The latest Federal Flow of Funds data for the third quarter was released Thursday and shows that US households are now as long equities as they ever have been, with data going back to the 1940s. This is another indication of the zeal for US stocks, and points to poor long-term returns. The household sector’s stock ownership is now at 39% of financial assets, exceeding the high reached in 2021. US households are the largest owners of stocks, owning 44% of the outstanding supply.
It’s not just households though, the cross-sector (households, corporates, financials and foreigners) ownership of equities also hit an all-time high compared to financial assets held. When everybody is already long, it’s harder for prices to keep appreciating indefinitely.”
In poker parlance, that would be all-in. If there was one takeaway from the poker movie “Rounders” it was this: always leave yourself outs. It seems that no one is heeding that advice.
People are long the stock market
LF#2
One of the reason that you should always leave yourself outs is this. Sometimes it can be bad luck or even worse your judgment is based on bad information. Speaking of bad information, I give you this. We have talked about the Bureau of Labor Statistics putting out bad information in their jobs’ reports. Many people have said this was because they were pro-Democrat and trying to reelect Joe Biden then Kamala Harris. When the real data and not the survey data got released for the April 2023-March 2024 data there was an adjustment down of 818,000 jobs. This would help explain why the bean counters were saying the economy is fine and the public being outraged and voting the status quo out. The public could feel the jobs market wasn’t good through lived experience not faulty survey data. Here is the real eye opener via ZeroHedge, “The final results, as everyone knows by now, was a shocking 818K revision lower, just as the Philadelphia Fed had predicted 6 months prior, in March, when it calculated correctly that the Biden Department of Goalseeking Propaganda had overstated payrolls by “at least 800,000.” We mention all of this up because on Friday, the Philly Fed served up its latest shocker: not only did the Biden admin lie again, but the collapse in the labor market that had been covered up for much of the past year and was only exposed with the annual benchmark revision, extended into the second quarter.
“Estimates by the Federal Reserve Bank of Philadelphia indicate that the employment changes from March through June 2024 were significantly different” – read lower – “in 27 states compared with preliminary state estimates from the Bureau of Labor Statistics’ (BLS) Current Employment Statistics (CES)”, the Philly Fed said on December 12…And so, after it first revised the 12 months ending March 31 by 818K, the downgrades extended into the second quarter of 2024, when the Philadelphia Fed early benchmark estimates showed that instead of the 1.1% gain shown initially by the BLS, payroll jobs in the 50 states and the District of Columbia were actually down 0.1%! And while we don’t yet know the specifics of the revisions – those will be revealed on Feb 7, 2025 when the final numbers are published – at the national level, we do know that all the jobs reportedly “created” in the second quarter, were actually fake, there were no net jobs created at all, and in fact, the US lost jobs in Q2!”
LF#3
Now that has lots of ramifications. If there were less people working, then it breaks a lot of models that the government is using. If we lost jobs, how does that affect GDP? Are we really growing as fast as we think? I know there will be lots of revisions coming to data coming out of the Fed but I also know that it is too late for many companies that have already experienced and realize that the Fed data doesn’t jive with what they are feeling. This from Jack Phillips via the Epoch Times, “Discount retail store chain Big Lots announced Thursday that it will initiate “going out of business” sales at all its remaining locations after it was unable to reach an agreement with an investment firm.”
As I said, extend and pretend is coming to an end.
Sincerely Yours,
C Thomas Printer
I’ve added a part II in the spirit of giving and all…