Elon Musk And David Sacks Blast Soros Over Funding Liberal District Attorneys
Days after it was revealed Soros Fund Management, the family office of billionaire George Soros, slashed its stake in electric vehicle maker Tesla, Elon Musk then tweeted Monday night: “Soros reminds me of Magneto.”
Magneto is a Jewish supervillain who “fights to help mutants replace humans as the world’s dominant species,” as explained on Marvel’s website – which of course sparked an ADL-esque firestorm of anti-Semitism complaints against Musk (though Marvel apparently gets a pass on the whole ‘Jewish supervillain’ thing in the first place).
In response, left-wing commentator Brian Krassenstein tweeted at Musk:
“Fun fact: Magneto’s experiences during the Holocaust as a survivor shaped his perspective as well as his depth and empathy. Soro, also a Holocaust survivor, get’s attacked nonstop for his good intentions which some Americans think are bad merely because they disagree with this political affiliations.”
During a Tuesday interview with CNBC’s David Faber, Musk reaffirmed his thoughts about Soros when asked about the Magneto tweet, and denied being an anti-Semite.
“I’m a pro-Semite, if anything,” he told Faber. When asked if his tweets may affect Twitter revenues, Musk replied: “I’ll say what I want, and if the consequence of that is losing money, so be it.”
Elon Musk on Tuesday said that if his inflammatory tweets scare away advertisers from Twitter, he will accept that. “I’ll say what I want, and if the consequence of that is losing money, so be it.” https://t.co/0Pi3Yl8Jo2pic.twitter.com/rpZ3Ff8Dw0
This segways into a late Tuesday night discussion between David Sacks and Musk. Sacks, citing a 2016 article by Politico titled “George Soros’ quiet overhaul of the U.S. justice system,” said Soros “has been so uniquely destructive to law & order in American cities” through funding progressive district attorneys. Here’s the full tweet:
George Soros has been so uniquely destructive to law & order in American cities that there’s a name for the carnage he’s wrought: “Soros DAs.” His organization described its strategy to Politico in a 2016 article: it would change the law, not by going through legislatures, but rather by buying under-funded DA elections. His DAs would then change the law through the abuse of prosecutorial discretion.
Soros’ strategy worked because few were paying attention to hyper-local DA elections. No one expected out-of-town money to come in and seek to radically change their quality of life. Now that the results are clear, many more people are paying attention. This has caused some in the mainstream media and leftwing political groups to attempt to portray any criticism of Soros as anti-semitism. This is absurd.
Soros sought to have an outsized impact on public policy. He should not be immune from criticism. In any other context, the influence of money in politics would be a legitimate topic of conversation. Indeed, it is highly appropriate in a democracy to recognize when a special interest has subverted the public interest.
Perfectly said. Among other things, Soros astutely identified a massive arbitrage opportunity in district attorney elections, where a relatively small amount of money has outsized influence.
Soros’s instructions to his pet prosecutors were (essentially) to minimize prosecuting even violent criminals.
That’s why a criminal – someone who had already stabbed his roommate – could brutally assault Dave Chapelle on stage with that same deadly weapon and yet receive merely a misdemeanor!
Musk might believe Soros “hates humanity” because a Soros-funded DA (recently booted from office) helped transform downtown San Fransico into a hellhole through progressive policies.
“The disaster that is downtown SF, once beatiful (sic) and thriving, now a derelict zombie apocalypse, is due to the woke mind virus,” Musk recently tweeted.
Musk’s Twitter headquarters is based in the progressive hellhole, for now.
Finally, we give the last word to Summit News’ Steve Watson, who seemed to sum the furor over Musk’s comments perfectly: “What is more dangerous? Saying George Soros is eroding the fabric of civilisation or George Soros actually eroding the fabric of civilisation?“
We have been vocal that long-term Treasury bonds are an excellent investment at current yield levels. However, timing the purchase of bonds will prove difficult as numerous headwinds may temporarily impede their path lower in yield.
Discussing the potential headwinds to our trade idea is an important disclosure, given how often we voice our bullish bond opinion.
First, though, we remind you once again why we like bonds.
Key Takeaways
Economic and inflation trends will likely continue their pre-pandemic trends.
Bond yields and inflation are closely correlated.
As the Treasury’s x-date nears, more bond investors may sell.
Post-debt cap resolution will be met with significant Treasury debt issuance.
The Fed is not doing the Treasury any favors.
Our Bullish Case for Bonds
Economic and inflation trends of the last 30 years will continue. That is it! That is our simple and concise thesis for why bond yields will be markedly lower in the future.
Pandemic-related fiscal and monetary stimulus generated above-trend economic growth and high inflation. Consequently, bond yields spiked to levels last seen 15 years ago, as shown below. They also broke the downward trend persisting for thirty-plus years.
Our thesis rests on the premise that the current yields, reflecting the past few years’ events, are an anomaly, not a new trend.
Bondholders invest to increase their future purchasing power. They can only achieve such a goal by earning a yield greater than inflation. Therefore, bond yields are a function of expected inflation, primarily a function of economic activity.
As economic activity gravitates downward toward its natural rate of 1.5% to 2.0%, inflation and bond yields will surely follow.
The graph below shows the strong correlation between economic growth and inflation.
The following graph shows that bond yields and inflation have trended lower for the last thirty years.
The current Ten-year U.S. Treasury yield, less the CPI and GDP trend lines, is significantly elevated from the prior trend, as shown below. If pre-pandemic inflation levels resume, the ability to earn a long-term yield of 1.50-2.00% greater than the likely ten-year future inflation rate will be a steal. The circle within the graph shows that achieving a positive real yield (yield less inflation), even if small, has been an anomaly, not the rule over the last fifteen years.
Headwind 1- Debt Cap Drama
As political tensions heat up and the date of potential default (x-date) nears, the media and politicians will amp up their scare tactics. To wit:
The debt ceiling must be raised to avoid economic calamity- Janet Yellen
The fight over the debt ceiling could sink the economy – NPR
US debt ceiling impasse pushes government credit default swaps to record high – Reuters
How a U.S. default crisis could devastate your finances – Forbes
Such harrowing statements cause consternation among bondholders. Some domestic investors may sell bonds and move to cash until the situation is resolved. Foreign bondholders, less familiar with the ritual debt cap shenanigans, may also seek shelter. While most of the volatility will occur in the shortest of maturities, longer bonds will also gyrate with the headlines.
The graph below, courtesy of Bianco Research, shows the tremendous volatility in one-month bond yields. Short-term investors flocked to one-month Treasury bills when the x-date was longer than a month. At the time, the one-month yield fell to as low as 3.25%, while similar two- and three-month bills were around 4.75%.
With the x-date now occurring before the one-month bill matures, the yield is 5.60%, .50% above the 5.10% it should reside at.
Headwind 2- Post Debt Cap Issuance
Per Yahoo Finance:
For the first seven months of the fiscal year, the budget deficit hit $924.5 billion, more than double the same period of 2022, according to budget figures released Wednesday by the Treasury Department. Weaker revenues — including diminished transfers from the Federal Reserve — and bigger outlays for interest on the public debt, education and Social Security are among factors that propelled the widening.
The graph and comments highlight the sizeable fiscal deficit. As the chart shows, the deficit for fiscal 2023, thus far, is running on par with 2020 and 2021. Both years saw massive covid-related stimuli. The nation is running an emergency-like deficit despite a strong economy and the end of the pandemic.
Since January, when the Treasury debt outstanding hit $31.4 trillion, the Treasury ceased adding additional debt. Instead, they have used their “checking account” held at the Fed to fund the nation. The formal name for the account is the Treasury General Account (TGA). The graph below shows the steady decline in the TGA. It is expected to hit zero by June 8, 2023.
Once Washington agrees to increase the debt cap, the Treasury will ramp up issuance to restock its “checking account” and fund the widening deficit. Such a bump in the supply of bonds may require higher yields to help the bonds find a home. That said, the market knows heavy supply is coming and is likely pricing in much of the issuance before the Treasury issues new debt. Given the seemingly insatiable demand for Treasury Bills, the issuance bump may affect longer-term debt more than shorter-term debt.
Headwind 3 – Higher for Longer, QT, and Fed Remittances
The Fed, via monetary policy, drives up the deficit through higher interest expenses and remits less money to the Treasury. Further, the Fed is reducing its holdings of bonds.
The graph below shows that the Treasury’s interest expense has risen over $300 billion or 50% in a little more than a year. It now rivals defense spending. Higher inflation and the Fed’s monetary policy are to blame.
The Fed typically remits its interest on its bond holdings to the Treasury. Per the Fed:
The Federal Reserve Act requires the Reserve Banks to remit excess earnings to the U.S. Treasury after providing for operating costs, payments of dividends, and any amount necessary to maintain a surplus.
In 2021 and 2022, the Fed sent $109 and $76 billion to the Treasury, respectively, which ultimately reduced the Treasury’s borrowing needs. This year, the Treasury should expect very little help from the Fed.
Lastly, the Fed is reducing its balance sheet via quantitative tightening (QT). Doing so will essentially put an additional $95 billion of Treasury and mortgage bonds into the market every month. The extra supply will sap demand for new issue U.S. Treasury bonds.
The graph below shows how much new issuance the Fed absorbed via QE and is now returning those bonds to the market via QT.
Summary
The headwinds to lower bond yields are significant but surmountable as demand for bonds is high, especially at today’s yields. Further, if one believes the economic and inflation trends of the past thirty-plus years return, current yields are well above their potential lows. Only three years ago, the ten-year Treasury yield was 0.50%!
It’s important to note that just because one invests in a long-term bond does not mean they hold it until maturity. We envision holding long-term bonds until yields revert to pre-pandemic levels. At that point, we may sell the bonds, monetize the yield change, and reinvest the funds into another asset class or even higher-yielding corporate bonds.
Uptick In Russian Military Flights Near Alaska As US Leads Massive Drills
The North American Aerospace Defense Command (NORAD) has confirmed in a Wednesday statement it has witnessed an uptick in Russian aircraft flying near US airspace of Alaska over recent days.
The fresh statement posted to twitter indicated it detected and tracked a Russian military plane or planes operating in the Alaska air defense identification zone on Monday, which has been revealed for the first time. “This flight occurred as several planned large-scale military training exercises are ongoing in and around Alaska,” NORAD added.
This came on the heels of a May 11 incident wherein NORAD jets were scrambled and intercepted “a mix of Russian bombers, tankers, and fighters in the Alaska Air Defense Identification Zone (ADIZ).”
“It’s not the first Russian flight,” Pentagon Press Secretary Brig. Gen. Patrick S. Ryder said of that prior large Russian grouping of aircraft. “It probably won’t be the last.” While all of these Russian flights have stayed in international airspace, the ADIZ acts as an early warning buffer and most countries typically warn foreign aircraft away once there’s a breach of the zone.
As for the large-scale military exercises which are ongoing in Alaska, called Exercise Northern Edge 23, a military media source explains:
Northern Edge is a massive multinational exercise involving the U.S., U.K., and Australian militaries led by U.S. Indo-Pacific Command. Thousands of American service members, five ships, and more than 150 aircraft are participating, according to officials. The roughly two-week long exercise began May 4.
While the US military has said these Russian flights are not necessarily a threat, tensions between the sides have been much higher of late over the Black and Baltic seas after a series of intercept incidents.
These types of intercepts which occur not infrequently over both the Baltic and Black sea regions have grown more dangerous in the wake of a March incident which resulted in the downing of a MQ-9 Reaper drone in the Black Sea.
“The U.S. military’s declassified 42-second color footage shows a Russian Su-27 approaching the back of the MQ-9 Reaper drone and releasing fuel as it passes, the Pentagon said,” the AP described of the incident at the time. “Dumping the fuel appeared to be aimed at blinding the drone’s optical instruments to drive it from the area.” The Reaper drone then crashed, also after a reported aerial collision (clipped) with one of the Russian fighters.
The Pentagon subsequently said it would temporarily restrict the extent of its flights which are near Russian border regions, given the threat.
WTI Slides After Big Crude Build, 7th Straight Weekly SPR Drain By Biden Admin
Oil prices have whipped around overnight since API reported a big crude build (and Cushing stocks soaring) as hopes for debt ceiling deal trumped the latest (weak) China demand signals.
The International Energy Agency on Tuesday said it expects demand to outstrip supply by more than two-million barrels per day in the second half of 2023. The prediction is being widely ignored by the market as it remains focused on a potential US debt default as debt-ceiling negotiations continue, while slowing OECD economies amid rising interest rates raise recession worries.
API
Crude +3.69mm (-800k exp)
Cushing +2.87mm – biggest build since Jan ’23
Gasoline -2.46mm (-1.3mm exp)
Distillates -886k (unch exp)
DOE
Crude +5.04mm (-800k exp) – biggest build since Feb 2023
Cushing +1.46mm – biggest build since Jan 2023
Gasoline -1.38mm (-1.3mm exp)
Distillates +80k (unch exp)
Confirming API’s report, the official data showed big builds in total crude stocks and at Cushing while Gasoline inventories drew down as expected…
Source: Bloomberg
While the Biden admin proclaimed their intent to buy 3mm barrels to start refilling the SPR this week, they drained another 2.4mm barrels – the 7th straight weekly drain (draining 11.993mm barrels)
Source: Bloomberg
US Crude production was flat at cycle highs despite the ongoing slide in rig counts…
Source: Bloomberg
WTI was hovering around $71.80 ahead of the official data, and extended losses on the crude build…
“Crude oil continues to trade with a negative bias on near-term demand concerns, especially in China, and the US debt ceiling debacle which is lowering the general level of market risk appetite. The IEA concluded the monthly batch of oil market reports by joining OPEC in saying global oil demand in 2023 will be stronger than previously expected, rising by 2.2m b/d to a record 102m b/d as China demand recovery surpasses expectations, clearly not a view that is being shared by the market at large,” Saxo Bank noted.
After Treasury Secretary Yellen spoke of “an unprecedented economic and financial storm” if the US hits its debt ceiling, we might be close to a deal. President Biden cancelled trips to Australia and Papua New Guinea to shore up the Quad and sign a key defense pact after the G7 in Japan this week in order to fly back to D.C. to negotiate. Yet close is still not time for a cigar. Not when the White House says it’s optimistic on a deal by week end but McCarthy says he isn’t; and not when we are talking about the four horsemen of the financial apocalypse.
Relatedly, the Fed’s Barkin just said he isn’t convinced inflation is defeated and would be “comfortable” with more hikes; Mester thinks rates aren’t sufficiently restrictive; Logan added a slower pace doesn’t reflect a lack of commitment to reaching the CPI target; Goolsbee said services inflation is more persistent than previously thought, and he wasn’t sure if the Fed had restrained the economy sufficiently yet; and Bostic added if unemployment rises and inflation remains sticky, the Fed will face enormous pressure but must maintain its commitment to fighting inflation. Only Williams was in any way dovish, projecting CPI to be down towards 3% by year end. So close to a rates peak, perhaps, but nowhere near the rate cuts the market wants to match the cigar already in its mouth.
Indeed, yesterday’s US retail sales data showed ex-autos and gas 0.6% m-o-m vs. 0.2% expected with upwards revisions to the previous month’s data, and the control group 0.7% vs. 0.4%. Moreover, industrial production was 0.5% in April vs. a flat expectation, manufacturing 1.0% vs. 0.1%, and the NAHB housing survey up from 45 to 50 vs. no change expected. Even Japanese GDP got in on the act, with Q1 at 1.6% q-o-q annualised vs. 0.8% consensus. The Q1 Aussie wage price index was also up 0.8% q-o-q vs. 0.9% consensus but 3.7% y-o-y vs. 3.6%: that’s too high for comfort, and was led by the public sector. Sometimes, to paraphrase Freud, when you think you see an imminent recession, a cigar is just a cigar.
However, things are closer to getting lit globally. This week’s G7 will focus on Russia and China. On the former, the Financial Times warns ‘Russia’s economic war with the West moves to a new frontline’, and Western firms risk losing their assets there with little or no compensation. What makes them think the same wouldn’t be repeated in China should sanctions be rolled out for it?
Indeed, Bloomberg says ‘Wall Street’s Biggest Banks Face a Harsh Reality Check in China’, and that they are: “scaling back ambitious expansion plans and profit goals as a deteriorating geopolitical climate and President Xi Jinping’s willingness to sacrifice economic priorities for security concerns rock the private sector and throttle dealmaking… there’s now a realization that they need a fundamental rethink on the world’s No. 2 economy because the business climate has weakened significantly and the best opportunities for making outsized profits in the country are over, according to the senior executives… Publicly, everyone’s saying the same thing: China is still a massive opportunity and they have no plans to pull out, especially since so much money has already been spent. Privately, Wall Street executives are saying it’s difficult to maintain good standing with both sides as tensions repeatedly flare” The article adds China is no longer a top-three investment priority for a majority of US firms, according to an American Chamber of Commerce survey; and China is also now closing down cross-border broker trading apps to prevent capital outflows.
If only these Masters of the Universe had read political-economy, economic history, or Marxism-Leninism: or read someone who had – recall we were warning of this outcome as far back as 2017.
Yet this is just the economic war that markets now pretend isn’t happening or think doesn’t require anything beyond waving flags at the Eurovision Song Contest. In the actual war, the UK is already providing Ukraine long range Storm Shadow missiles and France is to send SCALP-EG cruise missiles. Now we see the ‘UK and Netherlands agree ‘international coalition’ to help Ukraine procure F-16 jets’, as the AFR notes ‘Australia has 45 FA-18 Hornets it could give to Kyiv’. That’s further escalation to which Russia will respond in kind or, maybe, in the ‘grey zone’: internet cables and key EU gas pipelines could ‘fall off a yacht’. In short, anyone thinking this war is close to an end in terms of its market impact gets no cigar, just a rocket. Especially when the EBRD says Ukraine will require $250bn to rebuild: so double that, and add it to the list of multi-trillion dollar commitments being made by Western governments.
Lastly, some good news, unless you are from Sunderland. My hometown, Luton, won 2-0 last night to make it to ‘Wemberleee’ to play either Middlesborough or Coventry in the Championship play-off for promotion to the Premier League. Yes, that Premier League. Yes, that Luton. For those who follow Wrexham under Ryan Reynolds and Rob McElhenney, imagine if in 2032 they are one game away from playing against Manchester United, Liverpool, Arsenal, and Chelsea, etc. That’s the journey here, and without any trace of Hollywood money or glamour. A town which a childhood friend recently tried to enthuse to me was “not as stabby as it used to be,” which fans of Manchester United, Liverpool, Arsenal, and Chelsea, etc., may soon have to test for themselves, knows all too well that close is no cigar. But to be able to imagine what one might be like in a place where they are never seen is already something special.
In Desperate Hail Mary, House Dems Launch ‘Discharge Petition’ To Force Debt-Ceiling Vote
House Democrats plan to collect signatures on Wednesday for a ‘discharge petition,’ a long-shot parliamentary maneuver designed to circumvent House Republican leadership and force a vote on the debt ceiling, the Wall Street Journal reports.
The top-ranking Democrat on the House Budget Committee, Brendan Doyle (D-PA), says he plans to initiate the petition in the well of the House when the chamber begins session at 10 a.m., where he’ll be the first to sign.
“We only have two weeks to go until we may hit the x-date,” he said, referring to the anticipated default date. “We must raise the debt ceiling now and avoid economic catastrophe.”
Early Wednesday, House Minority Leader Hakeem Jeffries (D-NY) sent a “Dear Colleague” letter backing Doyle’s effort, claiming that the “urgency of the moment” justifies pursuing all legislative options in the event that negotiations fall through.,
“It is imperative that Members make every effort to sign the discharge petition today, which will be available at the Clerk’s desk on the House Floor beginning at 10 a.m.,” reads the letter.
The move comes as the White House is negotiating with House Speaker Kevin McCarthy (R., Calif.) over possible spending cuts to pair with a debt-ceiling increase. Talks currently center on potential spending caps in coming years, as well as rescinding unspent Covid-19 funds and toughening work requirements for federal benefit programs. The White House said Tuesday that President Biden would curtail a planned overseas trip to get him back to Washington sooner.
The Treasury Department reiterated this week that the U.S. could become unable to pay its bills on time as soon as June 1 if Congress doesn’t raise the debt limit. -WSJ
In order to move a bill to the floor by discharge position, Doyle will need at least 218 House members to sign – however since Republicans control the house 222-213, at least five GOP representatives must sign on.
The petition is structured so that Democrats can fill in the text of the bill later, with Boyle saying that Democrats want to keep their options open for now.
“I’ve always said a discharge petition is not a high probability move. But at this point, we must try whatever it takes,” said Boyle. “I urge my Republican colleagues, especially those who like to call themselves moderate at election time, to join us and ensure America pays its bills.”
Treasury Secretary Janet Yellen warned on Monday that “time is running out” to avert an economic catastrophe, and that default could see financial markets “break” with worldwide panic that triggers margin calls, bank runs and fire sales.
“We are already seeing the impacts of brinksmanship: investors have become more reluctant to hold government debt that matures in early June,” Yellen said in remarks prepared for delivery to a banking conference on Tuesday, Bloomberg reports. “The impasse has already increased the debt burden to American taxpayers.”
Meanwhile, President Biden is shortening his trip to Asia for the G7 meeting in order to return early to continue debt limit negotiations with Republicans.
The White House had emphasized how Biden’s attendance at a summit of the Group of Seven major industrial countries in Japan this week would shore up optimism that the U.S. is able to resolve its differences at home. The president had next planned to travel to Australia for a “Quad” meeting on May 24, with China’s provocative actions in the region expected to be front and center in meetings with the leaders of Australia, India and Japan. –NBC
Biden will also cancel a trop to Papua New Guinea, where he was planning to stop on his way to Sydney to discuss regional security, as well as economic and climate support, whatever that means
“Softening Sales Trends” – Target Stores Go Woke As Consumer Slowdown Signals Accelerate
Analysts and traders have been questioning whether the robust consumer spending trend observed early in the season would sustain, or if a slowdown in spending was imminent. Their answer arrived over the past few days as Home Depot cut its forecast due to sliding sales as the home improvement boom appears to be waning. Additionally, Target, one of the biggest retailers, voiced concerns about “softening sales trends.”
Comparable sales from brick-and-mortar stores and digital channels operating for at least 12 months were flat for the three-month period that ended April 29 compared with the same quarter last year. That is lower than the previous quarter’s 0.7% increase.
Target executives told reporters that consumers are dialing back discretionary purchases and switching to staple goods as price rises and higher interest rates crimp household budgets. They said food and beverage, household essentials, and cosmetic sales were strong.
The Minneapolis retailer beat Wall Street expectations and maintained annual profit guidance above industry analyst projections. However, warned about faltering consumers:
“We came into 2023 clear-eyed about what consumers are facing with persistent inflation and rising interest rates.
“We were determined to build on our guests’ trust by unifying as one team to deliver affordable joy each and every day as consumers and businesses navigate a third straight year of dynamic challenges,” Target chairman and CEO Brian Cornell told reporters.
Target expects earnings in the current quarter to range from $1.30 to $1.70. Data from Bloomberg showed that it would trail the $1.91 average of analyst estimates.
Its first-quarter net earnings slid 5.8% to $950 million because of increasing labor costs, inflation, and ‘shrink’ — the loss of merchandise due to theft.
“We continue to contend with a significant headwind caused by inventory shrink, building on a worsening trend that emerged last year,” said Cornell.
Specifically, Target pointed to a worsening blow from organized retail theft, which is expected to erode profit by an additional $500 million compared with last year, when Target was already contending with rising theft.
“We are making significant investments in strategies to prevent this from happening in our stores and protect our guests and our team,” Chief Executive Officer Brian Cornell said in the statement.
“We’re also focused on managing the financial impact on our business so we can continue to keep our stores open.”
Finally, Christina Hennington, Executive Vice President and Chief Growth Officer, dropped the hammer on the ‘strong consumer’ narrative:
In many ways, the themes of the first-quarter operating environment were very similar to what we’ve outlined in recent quarters. So it likely comes as no surprise that we continue to face elevated volatility and see a reprioritization of spending away from discretionary categories in the face of persistent inflation in groceries and essentials.
…
American consumers continue to face difficult trade-off decisions as they as they juggle the wants and needs of their families. Consumer saving rates are down, and while inflation rates are finally declining, so is consumer confidence. The fear of a looming recession weighs heavily on many American families…
…total sales were strongest in February, began decelerating in March, and softened further near the end of April…
Target’s mixed picture underscores a slowdown in consumer spending that Home Depot first showed on Tuesday. The next earnings report will be from Walmart on Thursday, with Macy’s, Kohl’s, and Nordstrom later this month — all will provide valuable insight into consumer health.
On Monday, we shared the latest monthly Consumer Checkpoint report published by Bank of America, which showed signs of a slowdown in consumer spending.
Target shares were flat after the earnings report.
Other retailer shares range between up 5% to 10% year-to-date.
It appears Target’s taken a ‘new’ angle to addressing this consumer slowdown… go woke!
What @Target is doing is far worse than anything Bud Light did. They are selling chest binders & “tuck-friendly” bathing suits for children.
Target is calling our bluff. But just like any other company, they need our business. We did it with Bud Light. Now it’s Target’s turn. pic.twitter.com/C2O2mkgDxw
— The Matt Walsh Show (@MattWalshShow) May 16, 2023
Hungary won’t agree to EU financing as long as Ukraine keeps its ban on OTP Bank…
Hungary will block funding worth €500 million for arms to Kyiv, which would be the eighth transfer from the European Peace Facility (EPF), business daily Világgazdaság reported.
Budapest has demanded guarantees that the EPF will maintain its global horizon in the future and not only be used to arm Ukraine.
The Council of Foreign Ministers of the EU member states approved on May 5 the joint purchase by EU countries of artillery ammunition and missiles for Ukraine worth €1 billion, the EU Foreign Affairs Council announced on Friday. The aid, approved as part of the European Peace Facility, will allow the Ukrainian armed forces to be supplied with 155-millimeter caliber artillery ammunition and rockets.
A day before the council’s decision, the Ukrainian National Agency for the Prevention of Corruption (NACC) included OTP Bank in the list of international war sponsors. This decision was justified by the position of the bank’s management on the continuation of its activities in Russia and the de facto recognition of the so-called “people’s republics” of Donetsk and Luhansk.
Minister of Foreign Affairs and Trade Péter Szijjártó said on Friday in Stockholm that until Ukraine revokes the decision, the Hungarian government would be “hard pressed” to negotiate further sanctions that would require further sacrifices.
“It is scandalous that Ukraine has put OTP, which does not violate any laws, on the list of international sponsors of the war,” Szijjártó said.
Relations between Ukraine and Hungary have not been good for a while, dating back to before the war, mainly on account of Ukraine’s poor treatment of its ethnic Hungarian minority. However, Hungary’s decision to not send weapons to Ukraine, and its promotion of a peace deal and ceasefire in Ukraine have angered Ukraine and a host of Western governments.
Last month, Tamás Menczer, state secretary for bilateral relations at the Ministry of Foreign Affairs and Trade, said that Hungary will not support Ukraine’s integration into the European Union or NATO until the rights of the Hungarian community in Ukraine are restored.
It has also been revealed that Ukraine planned to blow up a vital Russian pipeline supplying oil to Hungary in order to cripple Hungary’s industry, according to leaked U.S. intelligence documents. The news has been met with shock in Hungary, with one security analyst saying it amounted to an attack on Hungary, and therefore an attack on NATO.
“This is an attack on Hungary and therefore NATO, according to NATO Article 5,” Hungarian security policy expert György Nógrádi told daily Magyar Nemzet in an interview.
“It’s the worst freight market since the Great Financial Crisis.” This statement is commonly heard on our channel checks among carrier and broker executives and often repeated on social media. Now we have some evidence to support it.
The National Truckload Index (NTI), available on SONAR, which measures the average national truckload spot rate, is $1.49 a mile, breaking below the 2019 seasonal equivalent.
While extremely low rates are bad enough on their own, the worse news is that operating costs for trucking companies (not including fuel) are up more than 30 cents a mile in that same period. Operating expenses include maintenance, insurance, driver salaries and equipment.
On a cash flow-adjusted basis, current spot rates are equivalent to $1.19 a mile, without including any increases in the cost of capital to finance operations.
With the soft market conditions and low rates, where is the surge in 2023 bankruptcies?
While we know that thousands of small carriers have revoked their operating authority, we have yet to see a rash of bankruptcies in the truckload industry.
So far in 2023, FreightWaves has reported on only seven bankruptcies, a little more than one a month. The worst trucking market prior to the current one was in 2019, the “Trucking Bloodbath.” At one point, FreightWaves reported on 10 trucking bankruptcies in a single week.
Is this a function of trucking companies doing so well during the COVID economy that they were able to pad their balance sheets and prepare for a massive downturn?
If so, it may mean that capacity stays in the market longer than in a typical down cycle.
Tender rejections show how dire conditions are in the freight market
Tender rejections have dropped to an all-time low of 2.53%. The previous record low was set during the COVID lockdowns at 2.57%.
A tender rejection measures the balance of supply and demand in the trucking market.
A high rejection rate means that trucking firms have a lot of discretion on what loads they will take. Carriers want a high rejection level. It gives them a lot of choices on loads and drives up rates.
A low rejection rate is the opposite. It means that the carriers have few loads to pick from and are taking almost anything, without consideration of where it is going and at what price.
A rejection rate that is this low is significant because it means that carriers are struggling to find load opportunities and have lost pricing power.
Even though we are talking about freight, let’s look at this in the context of dating
When feeling desperate — you swipe right on everyone, without considering the quality of those prospects — you have a “low rejection rate.”
When feeling “hot” — you swipe left often and are highly selective — you have a “high rejection rate.”
It’s the same idea, just applied to “freight tenders,” not “Tinders.”
There are reasons to expect things could get worse
We know that a lot of the weakness in trucking is related to the expansion of capacity over the past few years.
The total number of registered Class 8 vehicles in the over-the-road truckload industry grew from 1.47 million in February 2020 to 1.7 million as of April 2023. This 16% increase in capacity is a primary reason that freight feels so soft in the carrier community.
Volumes, on the other hand, are relatively stable, at least for now.
After coming down significantly over the past year, outbound tender volumes have shown a greater degree of seasonality than we’ve seen since 2019. The Outbound Tender Volume Index, which measures volumes in the truckload market, is down 18% from a year ago but up 6.8% since May 2019.
The softness that the market is currently experiencing is related to too much capacity that chased strong market conditions during the COVID economy that has now come back to earth.
If volumes were to fall further, it could get even more challenging for the trucking industry
The conditions in the freight market are dependent upon the balance of supply and demand.
Any slowing of freight demand will have a negative impact on the economics of the industry. During the COVID economy, government stimulus drove a lot of goods consumption, and thus freight demand.
The government debt ceiling debate currently hangs over Washington, with no real visibility on whether this will get resolved or how painful it will be. Federal government spending is 25% of GDP, so any delays to resolving this matter will most certainly be felt in the economy. Government employees, contractors and vendors will be significantly impacted, along with entitlement program payments.
This isn’t the worst outcome.
The nightmare scenario — one that causes the U.S. government to default on its debt — would roil financial markets, potentially causing one of the worst financial crises in history. This is such a doomsday scenario that it defies forecasting and prediction and isn’t even worth diving into.
But there’s something looming over the economy this summer with a far more certain impact.
A FreightWaves analysis found in March that federal government programs boosted personal income by an estimated $2.3 trillion from March 2020 to December 2022. According to The Motley Fool, consumers received an average of $3,450 in stimulus during the COVID economy. This included direct payments into bank accounts, an expanded Child Tax Credit and an expanded Earned Income Tax Credit.
We know from our freight data models that freight demand saw substantial increases in the weeks following government stimulus payments being transmitted.
Consumers with student loan debt were able to save, on average, more than $15,000 since March 2020 — and that’s about to end
One of the biggest COVID-related stimulus programs is not factored into our analysis or Motley Fool’s numbers: student loan forbearance. Since student loan payments were put on hold and not forgiven, neither FreightWaves nor Motley Fool calculated these as part of its consumer stimulus estimates.
Education Secretary Miguel Cardona said the student loan deferment program will end no later than June 30, 2023, and payments are expected to resume by Sept. 1, 2023. The amount of money we are talking about, in excess of a trillion dollars, is staggering. Student loans represent 7% of U.S. GDP.
Sixty-four percent of the $1.7 trillion in student loan debt remains in forbearance, amounting to $1.1 trillion. Many of the 25 million Americans who have deferred payments for student debt are aged 18-44 years old, one of the most important demographic groups that drive consumer spending.
According to a New York Federal Reserve Study, the average student loan payment is $393 per month. The original forbearance program was instituted by President Donald Trump at the beginning of COVID in March 2020.
For consumers taking advantage of the program, they have deferred 39 months worth of payments, resulting in more than $15,327 in additional discretionary income during the period, much larger than the amount most consumers received from other COVID stimulus programs.
The forbearance program, when originally conceived, was intended to be a short-term program to protect consumers from the COVID black swan event. But many consumers made financial decisions based on this short-term cash flow boost, treating the cash as permanent.
The Biden administration has been working to forgive up to 30% of outstanding student loans, but that is currently in doubt, with the Supreme Court expected to rule within the next month that the president lacks the authority to cancel the debts.
Because the president has been signaling a desire to cancel student loans and consumers have not had to make payments for over three years, the resumption of payments will come as a personal cash flow shock to many households.
This couldn’t come at a worse time
For the past few months, we’ve heard carrier executives predict that the second half of the year is going to be much better than the first half.
There is good reason to endorse this view. Most of the excess inventory was ordered at least 18 months prior, and retailers have been pulling back significantly since they recognized they had a problem in Q1 2022.
But consumers are facing financial stresses from a lot of different directions.
Inflation has the biggest impact on the same consumer segment that holds the majority of student loans. These consumers have already maxed their available credit.
A sudden increase of $393 per month will force consumers aged 18-44 years old to cut back on discretionary spending. Since portions of this demographic have a tendency to prioritize experiences over goods consumption, we can expect this will have a much bigger impact on freight demand in the coming months. Last week’s April senior loan officer opinion survey indicated that lending standards continue to tighten and loan demand is weakening, both of which augur poorly for future consumer spending as well.
Colder temperatures are coming for the freight market — just in time for July. The “worst freight market since the Great Financial Crisis” may get worse.
“Inflection Point In The Conversation On Atomic Power” Begins
“The world should increase use of nuclear power!” Elon Musk tweeted last week while commenting on a Times Magazine article featuring J. Robert Oppenheimer’s grandson, who stated transitioning to a net zero-carbon economy would involve nuclear power.
We presented a bull nuclear thesis to readers back in December 2020, recommending uranium on the belief that nuclear energy would eventually be incorporated into the ESG (Environmental, Social, and Governance) framework, as highlighted in our article “Is This The Beginning Of The Next ESG Craze,” is proving to be accurate.
“It’s also important to underscore that nuclear energy became unpopular in part due to its association with nuclear weapons and fears about its safety. But the actual safety record shows it is one of the safest sources of energy, and it is becoming more popular to be an environmentalist and pro-nuclear,” Charles Oppenheimer wrote.
Meanwhile, seven years and $16 billion over budget, Southern Co.’s Vogtle nuclear power plant project in Georgia is coming online and will unleash a new nuclear generation of carbon-free electricity.
“It’s also coming online just as the world has hit an inflection point in the conversation on atomic power,” Bloomberg explained.
“We are at a moment when the nuclear renaissance has a chance,” said Jigar Shah, who heads the US Energy Department’s Loan Programs Office.
Earlier this year, the US Nuclear Regulatory Commission certified a new small modular nuclear reactor that will likely be used in the next generation of power plants by the end of the decade. The Biden administration has been plowing billions of dollars to upgrade existing nuclear power plants while expanding domestic infrastructure that will eventually pave the way for building new reactors.
