Weekly Reflection for September 29, 2023

The Week - An Update in Charts

It was a rough end to the week and the quarter. All three major averages closed out the third quarter with losses. More commentary on the markets will come in next week's quarterly letter to our clients.

A Federal Reserve Bank of New York survey from last monthly said working Americans consider this their “wage floor” or "reservation" wage. In 2023, employees asked for nearly $79,000 to take a new position. This is up 14% from $69,0000 a year ago. The survey identified gender and educational differences – men ask for higher but women are focused on closing the gap. College educated workers expect $98,000 while those without a degree

expected $63,000.

The Financial Times and University of Chicago surveyed economists to find out what the next big thing is in inflation. Not surprising, especially given the rise in price in just the last 30 days, is oil. Russia is apparently halting all diesel exports next month in an effort to lower prices at home. OPEC says that the world will be short approximately 3 million barrels of oil a day through the rest of 2023. Those data points are more than enough to send oil higher on the markets and at the pump.

The U.S. has 600 less nursing homes than it did six years ago. With families taking over a lot of the elder care and fears of safety after Covid-19, revenue had fallen. Throw in a challenging worker shortage and operators have been closing homes all over the country. We still need more beds though. Many patients who desire a nursing home bed have been left waiting for weeks, sometimes months, often spending that time in a hospital, the most expensive place they can be.

The world has not been playing nice for several years. Counties have been throwing up trade restrictions upon each other like tariffs, bans, and so on, and the number of blocks have tripled since 2019. The International Monetary Fund says these restrictions actually raise costs, reduce resiliency and exacerbate hardships that arise when the world is shocked by crises, such as illness (Covid-19) or by war (Ukraine-Russia). The restrictions often impose a lose-lose balance on all involved, and not the win-lose results countries are

expecting.

As they say, a body in motion stays in motion. The same goes for companies. Innovation should not be executed exclusively by startups. Amazon, the largest innovation spender on this list, is known for relentlessly pushing its business forward by any means. Just this week it announced it will invest up to $4 billion into Anthropic, the creator of chatbot Claude; Anthropic has agreed to use Amazon's Trainium and Inferentia chips to build future large language models.

The Seinfeld of Shutdowns

On October 1st what is currently a "potential" government shutdown will likely become an actual shutdown. The new federal government fiscal year begins on October 1st and since Congress has not yet approved the coming year’s spending, it must pass a temporary 30-day bill, called a continuing resolution or “CR”, to keep the money flowing until everyone can agree on the new budget. The Senate seems ready to pass a bi-partisan bill but the House of Representatives, with its small but extremely vocal Republican faction is entirely resistant to the spending gap proposals, leading to expectations that shutdown is almost inevitable.

The most at risk here are the hundreds of thousands of federal employees and their families, who will forgo a paycheck during this time. Some might still have to work, others will be fully furloughed. This is a situation fraught with economic consequences amid political deadlock over nothing. Or so says Neil Bradley, the executive vice president of the US Chamber of Commerce, who has wryly dubbed it the "Seinfeld" shutdown. Bradley said on Bloomberg TV that it “is unclear what if anything that they are fighting over, other than fighting”.

Gregory Daco, the chief economist at EY, warned of dire financial repercussions if the shutdown persists. Each week would drain approximately $6 billion from the US economy and take 0.1% percentage points off of our fourth-quarter GDP growth.

During a shutdown, nonessential functions would grind to a halt, affecting hundreds of thousands of federal employees in "non-critical" roles such as parks, museums, food inspectors, and researchers. Essential services like the Transportation Security Administration (TSA), post office and mail delivery, and federal prosecutors would continue unaffected. This unsettling déjà vu marks the 22nd government funding gap since 1976, with the infamous 2018-19 shutdown standing out as the longest, lasting 35 days andexposing the shocking lack of emergency savings among many Americans. In modern times, only President George W. Bush never oversaw a shutdown during his two administrations.

To Rent or To Buy

This is the question on millions of minds of renters - keep renting or buy? Given the rise in housing prices, a trend that is now six months long in the U.S., clearly some buyers out there are willing to pay the asking price. It is not just here in the U.S. Housing prices are high around the world, as are the world's mortgage rates.

UBS is calling the following major metropolitan areas (see chart) the world's most expensive. Only five in the U.S. were included in the survey which compared housing to other economic metrics like income, GDP and the cost of the city relative to other areas in its country. Only two cities landed in "bubble" territory although UBS admits we will never know how accurate that is unless there is an actual "burst".

One of the considerations in compiling this list was the city's rental costs. Of the U.S. cities included, Miami (#3) and Los Angeles (#9) have rental costs that are much more affordable than a purchase. For example, housing prices in Miami have doubled over the last 10 years but rentals have only gone up 50% over that same time period.

Another recent survey of just the U.S. found that the cost gap between buying and renting is the largest since 2000. Generally speaking, it is now 70% more expensive to purchase a home than to rent when factoring in maintenance, property taxes, and closing costs.

The other cities on UBS' list, New York (#18), Boston (#21) and San Francisco (#22), faired well in the survey. It might sound odd to someone that a home in San Francisco, which averages $1.2 million per realtor.com might be fairly valued but then, housing is all relative. Or is it all location?