Weekly Reflection for September 15, 2023

The Week - An Update in Charts

The major stock market indices looked like they were going to pull off a win for the week until today. Less than rosy earnings reports in the technology sector lead some of the bellwethers, like Microsoft, Meta and Nvidia, down. A survey showed that the consumer (aka the spending backbone of America's economy) is feeling less optimistic. Higher gas prices (oil is up 15% since late August) have some concerned that inflation will increase again.

This is the "yield curve" or the plotting of all U.S. Treasury bonds starting witha 1-month note out to a 30-year bond.

There are two significant data pieces to know here. Real yields, or an investor's return after deducting inflation, are the highest since 2008.

And, the curve remains inverted with yields on short-term securities higher than on long-term. It is an ominous signal for the economy. Although many experts still anticipate a "soft" landing for our economy, the bond market is forecasting a recession.

This business lifecycle chart is classic Economics 101. Businesses loop through expansion, peak, contraction, and trough. It also plots where some of our major economic contributors are in this so-called rolling recession time. By no measure is the U.S. fully in a recession, but some sectors of our economy are suffering.

Take housing and construction, which are headed towards "trough" on this chart. As very interest-rate sensitive businesses, there has been a decline in sales and employment since 2022. After two years of booming business, a Redfin report released today shows home sales are down 14% since last year.

While job openings per worker remain historically high, workers are seemingly more content with the job that they have. The "Great Resignation" period seems to be over. The risk to leave a position for the promise of better wages, benefits and other perks is no longer worth it for employees, who are now apparently choosing to "love the employer that they are with", at least for now.

Economists surveyed by Bloomberg this week anticipate inflation ending the year at 3.2% and getting to the Federal Reserve's goal of 2% in 2025. Most are not expecting a federal funds rate hike next week after the Federal Open Market Committee meets. They are becoming more optimistic on the US economy with less than half expecting any recession in the coming year, even as they expect unemployment to rise.

Old news is new, or renewed, due to the release of the film Dumb Movie. More on this below!

No Cheap Way to Raise A Child

Inflation leaves no space sacred, including the cost to raise a child. And parents know, even if they do not torture themselves regularly with doing the math, raising another human costs a bundle. But helpful researchers like those at the USDA and Lending Tree will run the numbers for us. They calculate that a "Generation Alpha" baby, one born in the 2010s, will costabout $240,000 between birth and age 17. Those are just the "bare-bones" as they say, without higher education or trips to Disneyland built in.

The basic rising costs over the last few years have been particularly unkind to parents. Take the changes just since 2016.

Food, child care and healthcare have all risen double-digits. Transportation is wildly higher and anyone who needed to buy a used or new car to fit a family in the last few years can attest to the strain of making that purchase. The pandemic car market made vehicles very expensive.

As mentioned, these costs do not include much for extracurriculars - like sports and arts or private school. On the flip side, adding in another child does not necessarily double the expense given some economic efficiencies that come with a growing family - kids can share bedrooms and clothing; older kids can help with younger children's childcare.

A middle income family in 2021, per the U.S. Census Bureau, earned nearly $71,000 before tax, with a broader range defined as earning between $47,000 and $142,000. After-taxes that median comes down to $63,000. On that income, child costs consume around 30%.

Still, it is not clear that these sheer expense of having a family has had any impact on the declining birthrate. A large drop-off since 2007 of births has not changed even after the economy improved from the Great Financial Recession of 2007-2009. Economists suspect that a broader shift in attitudes around parenting is underway.

Reliving The Trade

"Dumb money" is a derivative term for the average person on the street who makes investment decisions based on their neighbor's recommendation, on what they overhear in an elevator and what they read on Reddit posts. Institutional and professional money managers call themselves the "smart money". The dumb money trades on instinct; the smart money, with access to research and powerful people, trades on informed data. Both dumb and smart are capable of big wins and losses, as we have learned.

Based on Ben Mezrich's book The Antisocial Network, the new firm out today, Dumb Money takes us back to the franetic days of 2021 when the dumb money said that the stock of GameStop, a has-been in the technology world, was going up and fortunes could be made. Even better, a small investor could stick it to the smart money, which had put massive bets on the stock falling. In real life, the stock soared and made money, at least on paper, for thousands of non-professional traders. In real life, hedge fund Melvin Capital Management lost so much that it needed a $2.8 billion lifeline from a friend. Also, in real life both the dumb and smart monied traders won some and lost some, all within 6 weeks that winter. Reviews of the movie are generally positive.

Traders are not finished with the frenzy of day-trading and "meme" stocks like GameStop. This year saw Bed, Bath & Beyond (BBBY) trade all over the place just as it was taking its last gasps as a functioning business. And traders are forever looking for the next pump-and-dump idea, which these investments have effectively become. Just this week, an investment magazine hyped Lithium Americas (LAC) as a buy - this is a company with no revenue in years, and therefore no earnings and a ton of debt. But yet, with nothing to sell, LAC might be a buy for those who say fundamentals do not matter. But they do, at the end of the day, matter, as did GameStop's and Bed Bath & Beyond's did.