Category: Economics

The Coming $73 Trillion Wealth Transfer

The Daily Escape:

We’ve been on Cape Cod for a few days visiting daughter Kelly. Here’s a sunset photo taken this week at Campground beach, Cape Cod, MA – August 2023 iPhone photo by Wrongo. Smoke from Canadian wildfires made the sunset colors more vibrant.

Welcome to our Saturday Soother! But first, let’s talk about the coming generational transfer of wealth that’s underway as the wealthiest generation (the boomers) retire. According to Ben Carlson, 10,000 baby boomers will be retiring every day between now and the end of this decade.

The first boomers were born in 1946, meaning they’re 77 and on the fast track to 80 years old. Fortune Magazine pegs the wealth transfer from boomers to their kids at $73 trillion (with another $12 trillion going to charity). That means the boomers have $85 trillion in personal wealth!

That sounds great, since so many in our younger generations really could use a little help right now. But fewer people than you might expect will actually receive a sizable inheritance. This is due to the fact that the top 10% of America’s wealthy own something like 90% of the stock market. The concentration of today’s wealth will lead to fewer people benefiting from the generational handoff.

Here’s a chart from the NYT:

According to the NYT, ultra-high net worth households — people with $5 million to $20 million in liquid net worth — make up 1.5% of the population but will constitute 42% of the money that gets passed down in the years ahead. Many of them are boomers. From the NYT:

“A key reason there are such large soon-to-be-inherited sums is the uneven way boomers superbly benefited from price growth in the financial and housing markets. The average price of a US house has risen about 500% since 1983, when most baby boomers were in their 20s and 30s, prime years for household formation.

As US corporations have grown into global behemoths, those deeply invested in the stock market have found even bigger returns: The stock market, as measured by the benchmark S&P 500 index, is up by more than 2,800% since the beginning of 1983…”

Those rates of growth in financial and real estate assets will probably never be seen again. We’re passing a slow growth economy on to the next generations, while their own salaries and savings are having trouble keeping up with inflation.

Some worry that retiring baby boomers will crash the stock market by spending down their portfolios in retirement, leaving nothing to inherit. While it could happen, it’s unlikely that it will. The inequality of stock ownership means few people in the top 10% will never come close to spending all of their wealth in retirement.

So the wealth transfer will be more of a stream than a tsunami. Given the longevity of the wealthy, the money is going to be passed down slowly over time. A married couple that is retiring today has a 50% chance of at least one spouse living into their 90s.

Wrongo sees more and more people in the younger generations talking about how much they need help from their parents right now rather than decades down the road. The challenge is that parents need to be sure that if they make early transfers of wealth, that they keep enough on hand to maintain themselves securely in their advancing old age.

This can only be done by families having honest discussions around very awkward subjects. Talking about it can be helpful. It may be possible to work something out where some of the inheritance is parsed out slowly so the parents can enjoy seeing the kids (or grandkids) use some of the money while they’re still here.

Enough! It’s time for our Saturday Soother, where we ignore the also-ran candidate show that the Republicans put on in Wisconsin, and where we also ignore the perp walk in Atlanta. Instead, let’s focus on clearing our heads for next week’s outrages.

To help clear your head, grab a comfy chair by a window, and pour a mug of cold brew over ice. Now, watch and listen to Beethoven’s “Septet, op. 20”. It had its first performance in 1800 and was one of Beethoven’s most popular works during his lifetime, much to the composer’s dismay! He ultimately wished he had never written the piece.

Today we listen to the first movement, “Adagio – Allegro con brio” played in 2014 by the WDR Symphony Orchestra in Cologne, Germany. The WDR is a German radio orchestra:

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Economic Illiteracy

The Daily Escape:

The confluence of the Green River (L) and the Grand River (R) form the Colorado River, Canyonlands NP, UT – July 2023 photo by Michael L Mauldin. In 1921, the Grand River was renamed the Colorado.

Wrongo doesn’t think that political polls have much value if they have a national focus, but still, he presents an  Economist / YouGov Poll taken between July 8th and 11th of a nationwide sample of 1,500 adults (including 1,296 registered voters). The margin of error for adults is 2.8%, and for registered voters is 2.9%. They asked whether the country is in a recession:

Responses show that about 47% of adults and 48% of registered voters believe the US economy is currently in a recession. But, it’s not true.

We’re still seeing inflation: The BLS reported the Consumer Price Index was up 3% year over year in June. Inflation in June 2022 was 9% and it’s been falling ever since. It is now back near what the Fed says is its target for inflation, 2%.

But having inflation, even severe inflation, doesn’t mean we’re also in a recession. In fact, employment has continued to grow, even as economic growth has slowed. Growth has slowed from about 7% in 2021 to about 2% in the first quarter of 2023. But the economy isn’t shrinking. And the jobless rate in June was 3.6%, still at very low levels not seen consistently since the late 1960s. That would be 50+ years ago.

CNN quotes Justin Wolfers, an economics professor at the University of Michigan:

“We’re running out of time for a 2023 recession….We’ve never had a recession when the labor market was running this hot. In fact, it would be absurd to use r-word at a time when we’re creating jobs at this rate.”

Americans need to be taught economics. And also to read. It shouldn’t be so difficult to understand that the US economy is still humming along. Sadly though, most high schools don’t teach economics, and many college degrees don’t require it. This has resulted in economically ignorant adults (including voters) who just believe what lying politicians and an ambivalent media tell them.

The media’s endless ranting about inflation and recession has been a problem for Democrats. There’s plenty of economic unease and a lot of it is generated by so-called media “experts”.

People seem to want more concrete indications that we’ve turned a corner. But we’ve gone from  ̶800,000 jobs a month to full employment. Isn’t that turning a corner? We’ve had real wage gains after 44 years of declining real wages: Isn’t that turning a corner?

If you’re not someone who pays much attention to politics and/or if most of your information is coming from mainstream media, this is what you remember hearing about the Biden presidency:

  • The economy sucks because nobody wants to work.
  • INFLATION!!
  • Home prices are rising, which is why YOU can’t afford one!
  • Home prices are falling, which is why YOU can’t retire!
  • GAS PRICES!!! OMG!
  • There’s going to be a MASSIVE recession any day now!

Every night since Biden took office, the media has blanketed us with some flavor of all of those narratives. Every night, every newscast.

But some of us say that it’s a complete mystery why Biden’s poll numbers won’t budge.

OTOH, the cost of housing is increasing year over year. Insurance premiums are increasing by double digits year over year. The plumber or HVAC guy costs way more. But since the headline rate of inflation is down, let’s all go out for steak and lobster tonight.

From a political perspective, shouldn’t the Democrats fulfill the wishes of the voters who think we’re in a recession by having one now rather than waiting until 2024? A recession next year would make the Biden reelection effort (along with the efforts to take control of the House and keep control of the Senate) less viable.

We’re a nation of economic illiterates who can’t figure out when the economy actually is good. Right now, they are telling pollsters that they’re doing okay, but the economy is terrible.

And since they vote, Democrats will do substantially better in 2024 with a soft landing rather than a mild recession, regardless of whether polls are still showing voters believe that the country’s in a recession.

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Saturday Soother – July 15, 2023

The Daily Escape:

Dawes Glacier, Endicott Arm Fjord, AK – July 2023 iPhone photo by Wrongo. The face of the glacier is 600’ high. While we were in front of it, the glacier calved 5 times, although never when a camera was pointed at it.

Word came that Anchor Brewing, America’s oldest craft brewer, is shutting down after 127 years in business. From CNN:

“The San Francisco-based company announced Wednesday it’s ceasing operations and liquidating the beloved business “following a combination of challenging economic factors and declining sales since 2016,” a press release said. Craft brewers, in particular, have been struggling for a variety of reasons including changing consumer habits, rising costs and lingering supply-chain challenges.”

Wrongo is old enough to remember when Anchor Steam was a cult beer in the eastern US. It was difficult to find, and it was more expensive than the big local beers. It was really an upmarket lager. There’s nothing wrong with being an upmarket lager, but today, plenty of craft brewers also do that, so America’s first craft brewery and the maker of the Steam Beer will be sold for parts. The surprising fact was that it employed just 61 staff.

It’s been a few years since the Wrong family had any Anchor products in the house. The last one was the Anchor Christmas Ale, which was for a time, an annual tradition at the holidays. But with the rise of local craft beers, tastes changed.

Today, family parties often include a craft beer made near where one of the kids live. The beers are admired because they are hard to get, and often have amusing names. The taste tests are conducted with much seriousness, although they’re similar in form to decades ago when someone would bring Coors Beer back from the west for all to taste.

Back in the day, we bought Anchor and Sierra Nevada when there were very few other craft beer offerings in the NY area. Now there are hundreds of craft beer choices throughout the country. And there’s so much good beer around, it seems logical that Anchor would fail. It’s surprising that Sierra Nevada actually seems to hold up.

But the industry’s facing headwinds:

“During the first three months of 2022, at least 53 craft breweries shut their doors, up from 42 closures in the first quarter of last year. That still leaves some 9,100 breweries in operation, but more closures are expected.”

That’s 9,100 breweries and 36,000 IPAs!

The pandemic and its ongoing effects, and the war in Ukraine continue to drag down smaller brewers, who are battling climbing costs, rising rents, and supply chain challenges.

2022 was supposed to be the “make or break” year for craft breweries, but problems remain in 2023. The biggest issue is increased competition in what has become a shrinking market for beer. Since most craft breweries cater exclusively (or mostly) to local markets, why wouldn’t Anchor still be viable in CA or a few western states? Apparently they were mis-owned.

Sapporo is a Japanese beer company that bought the brand in 2017. VinePair, a digital magazine that covers beer, wine and food reported last month that employees complained about Sapporo’s alleged mismanagement and lack of understanding of craft beer in the US. Sapporo also owns Stone Brewing, another craft beer with a national following. Let’s hope that Sapporo doesn’t do to Stone what it’s done to Anchor.

But there’s still 9,000+ breweries nationwide, so it’s easier than ever for consumers to find great beers within a few neighboring zip codes. For the brewers, they need to find a niche and make an extremely good product line. The brewer in our town has become quite successful with one location, and a rotating group of about 10 beers. They have gotten distribution in local supermarkets and liquor stores and seem willing to be a big fish in a small pond.

It’s Saturday, and in the northeast, we’re experiencing continued rounds of thundershowers that make it difficult to do much outside. In the past week, we’ve picked up around 5.5” of rain, so we won’t have to water the vegetable garden for a week or so.

And since it’s Saturday, its time for our Saturday Soother, where we step back from another week of news you can’t use and find a few moments to live as simply as possible in the present.

So grab a mug of coffee and take a seat near a large south-facing window and listen to “Jupiter” from Gustav Holst’s “Planet Suite” played here by The Royal Liverpool Philharmonic Orchestra conducted by Sir Charles Mackerras. The Planet Suite took nearly three years (between 1914 and 1917) to compose:

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Monday Wake Up Call – May 15, 2023

The Daily Escape:

Scarlet Tanager, Manomet Observatory, MA – May 2023 photo by Ken Grille Photography

Today, Wrongo is going to be a grumpy old mossback. It rarely suits his politics or his outlook on life, but the WaPo is reporting that automakers are removing AM radio from their new models:

“Automakers, such as BMW, Volkswagen, Mazda and Tesla, are removing AM radios from new electric vehicles because electric engines can interfere with the sound of AM stations. And Ford, one of the nation’s top-three auto sellers, is taking a bigger step, eliminating AM from all of its vehicles, electric or gas-operated.”

More:

“Now, although 82 million Americans still listen to AM stations each month, according to the National Association of Broadcasters, the AM audience has been aging for decades. Ford says its data, pulled from internet-connected vehicles, shows that less than 5% of in-car listening is to AM stations.”

Wrongo remembers car radios before FM, and long before SiriusXM, listening to Wolfman Jack at night, beaming his show from the US–Mexico border. Or hearing Alan Freed talk about the “submarine races” in NYC. Later, living in London, he would listen to pirate radio instead of the BBC.

At night, rotating the AM dial to bring in stations like KDKA in Pittsburgh or WWVA in Wheeling, West Virginia was an art. It required that you avoid the interference of other stations or the snap and crackle of lightning. While driving in the car, the AM signal could also be corrupted by the hum of overhead power lines.

Now that less-than-ideal experience will soon be only a memory. But as always in America, there’s a political argument to be made about AM radio leaving a few high priced cars. More from WaPo:

“The removal of AM radio from cars — where about half of AM listening takes place — has sparked bipartisan protests. Some Democrats are fighting to save stations that often are the only live source of local information during extreme weather, as well as outlets that target immigrant audiences. Some Republicans…claim the elimination of AM radio is aimed at diminishing the reach of conservative talk radio, an AM mainstay….Eight of the country’s 10 most popular radio talk shows are conservative.”

But the auto makers aren’t abolishing AM radio; they’re just not offering it in their new cars. AM will persist on the dial in most of America.

As usual, the issue in America is profits. Eliminating AM is all about the numbers. From WaPo:

“Of the $11 billion in advertising revenue that radio pulled in last year, about $2 billion came into AM stations, according to BIA Advisory Services, which conducts research for broadcasters. And some of the country’s most lucrative radio stations are still on AM, mostly all-news or news and talk stations in big cities such as New York, Chicago, Atlanta and Los Angeles.”

BIA Advisory says that about 40% of AM stations have news, talk or sports formats; 11% are oriented to specific ethnic groups; and another 11% have a religious format. About a third of AM outlets play music, including Mexican and Spanish music. But they also report that the AM audience is getting smaller and older. The in-car streaming technology has grown exponentially, as has the trend away from music and toward podcasts and other spoken-word formats.

WaPo also quotes Pierre Bouvard from Cumulus Media, which owns more than 400 (mostly AM) stations:

“Radio is still the soundtrack of the American worker….It’s what people listen to on the way to work. And Ford owners are massive users of AM radio — 1 out of 5 AM listeners are Ford owners, so Ford is missing something here.”

But people can stream AM broadcasts into their cars if they must have AM programming.

The demographics of in-car listening aren’t fully understood. A new study by Edison Research found that young people often prefer AM and FM broadcast radio because it’s free. Edison says that overall, AM and FM radio still account for 60% of all in-car listening. SiriusXM satellite radio makes up 16%, followed by drivers’ own music from their phones at 7%, with podcasts and music videos at 4% each.

If this makes a difference to you, several manufacturers including Mitsubishi, Nissan, Subaru, Toyota, Honda, Hyundai, Kia and Jaguar Land Rover, said they have no plans to eliminate AM.

Time to wake up America! Nobody is shutting down AM radio stations! If you need AM in your new car, you’ll just have to shop for a car that offers it. Wrongo has nostalgia for the old days of AM radio, but the one AM station he listens to in the car can easily be streamed through Apple Air Play.

Let’s not create another faux cultural war issue over whether your new Tesla must have an AM dial. To help you wake up listen to Meatloaf performing “Paradise By The Dashboard Light” with Ellen Foley. It’s from his 1977 album “Bat out of Hell”:

Props to Mike and Marie S. who did the absolutely best karaoke version of this tune!

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Bed Bath And Beyond: Another Retailer Bites The Dust

The Daily Escape:

Super bloom, Carrizo Plain NM, CA – April 2023 photo via Today’s California

Bed Bath and Beyond (BBBY) filed for Chapter 11 bankruptcy on April 23. It said it will liquidate its assets and close its remaining stores unless it can find a bidder for the 360 Bed Bath and Beyond stores and for the 120 buybuy BABY stores.

A little history: A year ago, the prices of their bonds began to collapse. By August 2022, suppliers halted shipments due to unpaid bills. When this became public, its 30-year bonds, issued in 2014, plunged to 16 cents on the dollar (last Friday, they were at about 5 cents on the dollar).

From Wolf Richter:

“While all this was going on, the company promoted its latest turnaround plan and closed hundreds of stores. But you can’t turn around a failing brick-and-mortar retailer. On January 5th this year, the company issued a “going concern” warning.”

There are at least three lessons to take away from the BBBY story: First, they are the latest victim of the move to online shopping. People trusted Bed Bath & Beyond, and they had a pretty good e-commerce business. They could have done very well with it if they had accepted 10 years ago that they needed to phase out of their brick-and-mortar stores.

But brick-and-mortar retailers have difficulty letting go of their brick-and-mortar storefronts. They just can’t explain to their investors that their huge, fixed investment in physical stores are doomed and need to be closed.

Wolf has two great charts comparing the rapid growth in e-commerce and the steep drop in sales by brick-and-mortar retail over the past 15 years:

These two charts show that e-commerce basically replaced $5-9 Billion in annual in-store sales for the retail industry. The top chart shows that e-commerce had reached about $115 billion by 2023. The lower chart shows that in-store sales fell from $17 billion per year in 2008 to a low of $8 billion in 2020 before recovering to nearly $12 billion in 2023.

The second issue was that rather than investing in their business, BBBY spent $11.6 billion on share buybacks from 2005 to 2021. Since 2010, BBBY basically burned $9.6 billion in cash on its share buybacks. Like other companies, BBBY used share buybacks to drive up its share price, as “demanded” by its large shareholders and Wall Street. In addition, by not using that money to transition to e-commerce, they began driving the company towards April’s Chapter 11 filing.

A third problem was that the activists that won control of the BBBY board created a self-imposed disaster. While BBBY had withstood competition from Amazon earlier, in 2019, activist investors in control of its board hired a CEO who implemented a private-label product strategy. This led to customers no longer finding the national branded goods they expected on BBBY’s shelves. Products like AllClad, Kitchen Aid, Rowenta, Miele, Corning, Wustof and Braun. So customers bought them elsewhere. That sent sales down even further, and left BBBY in a cash-poor position.

Wrongo and Ms. Right occasionally shopped at our local BBBY stores, both here in CT and earlier in CA. We always thought it was a good value proposition, particularly for towels, sheets and pillows. Back then, the stores seemed well-stocked and the 20% off coupons didn’t hurt.

BBBY followed a classic path to failure: The retail founders preside over rapid growth. Then when Wall Street and the financers get involved, the founders step back. They then hire “professional” CEOs from their big retail rivals who apply whatever worked at their previous employer.

The new leadership skips the crucially important step of giving customers more of what they need than competitors do, focusing instead on sophisticated financial engineering.

All the while their aggressive rivals are going after their customers. This leads to a loss of market share, ultimately sending a once-proud retailing icon into bankruptcy. To BBBY’s credit, they outlasted far older, bigger and better financed competitors from Sears to Montgomery Ward to pretty much everyone else in their household-goods space.

Is late-stage Capitalism at fault in the BBBY story? You betcha.

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There Are No Partisan Facts

The Daily Escape:

Roaring Mountain, Yellowstone NP – January 2023 photo via Yellowstone NP. The steam vents are called fumaroles. With a limited water supply, the water in steam vents turns to steam and makes noise before reaching the surface.

Today let’s delve into the right-wing mind. Sadly we can’t go in too deep, because you know. Wrongo will try to connect the dots on a few ideas that three interesting people wrote about last week, First, the headline in Phillip Bump’s piece in the WaPo:

“There’s actually only one conspiracy theory: Democrats are evil.”

He’s writing about all of the online conspiracy theories surrounding the hammer attack on Paul Pelosi, and then generalizes from the specific:

“Last year, Pew Research Center found that 1 in 8 Republicans (12.5%) liked it a lot when their leaders called Democratic leaders “evil.” Another 16% said they liked it a little.”

So, 28.5% of Republicans think Dems are mostly evil. Bump offers the long laundry list of Democrat conspiracies propounded by Republicans.

  • For example, the 2020 stolen election shows that Democrats are dishonest and will do anything to retain power.
  • The “deep state” is out to get Trump and the Republicans. This leads to demonizing the FBI and CIA as liberals out to get Trump. This year, we can add the National Archives who just wanted their secret documents back.
  • These conspiracies have led the new Republican House majority to create a committee to look at weaponization of the FBI, DOJ and other agencies against Republicans.

Next, let’s look at recent polling on the economy. Matt Yglesias provides two charts that show the US partisan divide on the economy. First is how Democrats view their family’s economic situation over the past 8 years:

On Election Day (ED) 2016, 50% of Democrats said their family’s situation was about the same. On ED 2020, 50% said it was the same. After two years under Biden, it was 52%, so no change. On ED in 2016, about 32% of Dems said their financial situation had gotten better. That fell to about 10% by ED 2020 and is now about 23%.

Contrast that with what Republicans think now and what they thought on Election Day 2016:

From ED in 2016 when Trump won the White House until ED 2020 when he lost it, the percentage of Republicans who thought their financial situation was about the same went from 45% in 2016 to 55% on ED 2020, meaning that they were pretty satisfied with the state of the overall economy. But with Biden, that dropped precipitously to 21% in just two years.

Republicans who thought their personal financial situation had gotten worse stood at 47% in 2016, and just 10% in 2020. But in January of 2023, after two years of Biden, 74% say their financial situation has gotten worse!

But what really happened with the economy? Paul Krugman has thoughts about what we learn from watching only cable news: (brackets by Wrongo)

“Would you know that real gross domestic product has risen 6.7% under President Biden, that America gained 4.5 million jobs in 2022 and that inflation over the past six months, which was indeed very high last winter, was [growing at] less than 2% at an annual rate?”

How does Krugman explain the disconnect between actual economic data and perceptions? More:

“Partisanship is clearly part of the story….. 90% of Republicans said the national economy was poor. A longer view, from the Michigan Survey of Consumers, finds Republicans rating the current economy worse than they did in June 1980, when unemployment was above 7% percent and inflation was 14%.”

Welcome to the United States of Cognitive Dissonance.

There always has been cognitive dissonance in the world. It’s part of being human. But today, people sincerely love to complain and persist in wanting to see the bad side of everything. Egg prices are up? This economy sucks. All that Americans seem to be capable of seeing is the downside.

The country Wrongo grew up in is still here, but its culture has changed. As a member of the Silent Generation, Wrongo and most others wouldn’t have bet against the USA, or its people. But today, we can’t be certain. This dumbing down of American citizens has happened in rapid and spectacular fashion, and the fact-free perception divide is weakening our institutions. This will be extraordinarily difficult to bridge.

Wrongo has no silver bullet for fixing this, but a very basic way to start is to read up on the big problems. Speak up whenever you hear bullshit spewing. That takes courage, but it can’t go uncontested.

Attend your town meetings. Join groups that sponsor educational exchanges on issues. And vote. Vote in every election no matter how trivial.

Wrongo lives in a semi-rural town. When he overhears political talk, it can be staggering to learn what some otherwise smart people believe.

We don’t have to convert all of them, maybe getting 10% to land on the side of the actual data would create a permanent change in our politics.

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Saturday Soother – January 28, 2023

The Daily Escape:

Outside Mayfield, Utah – January 2023 photo by Robert Stevens

Wrongo read a review of two books on US agriculture in the New York Review of Books. The books are “Perilous Bounty: The Looming Collapse of American Farming and How We Can Prevent It” by Tom Philpott, and “The Farmer’s Lawyer: The North Dakota Nine and the Fight to Save the Family Farm” by Sarah Vogel.

The review is written by Ian Frazier. This gives you an idea of his writing:

“We are eating a big hole in the middle of the Midwest and sucking up California’s ancient aquifers until the land collapses like an empty juice box. The awe that new arrivals from other countries feel when they see the bounty in a US supermarket is an illusion—more like what one might experience when stepping from a cold night into a nice, warm house where they’re burning the furniture. In short, we are plundering the natural sources of our food production and can’t go on this way.”

All of this is Big Agriculture’s doing. Corporate farming controls most of our agriculture, but it’s facing the challenge that American consumers can eat only about 1,500 pounds of food per person per year and the US population is only growing at about a half percent/year. But the investors behind Big Ag want more profit than supplying food to a slowly growing US population. So their strategy is to get Americans to eat more, and to find new foreign markets.

Philpott concentrates on just two of the US’s top food-producing regions: California’s Central Valley and the Iowa-centered Corn Belt.

The CA Central Valley constitutes about half of California’s cropland. Smaller farms concentrate on fruits while the large corporate farms mostly concentrate on nuts. Nuts are a highly profitable crop with low labor costs, but they need enormous amounts of water: To grow a single almond requires about a gallon of water.

Frazier says that almond groves cover about a fifth of the San Joaquin Valley and consume four times as much water as the city of Los Angeles:

“…I eat plenty of nuts myself, including almonds. Looking in the pantry, I see I possess the almond-growing equivalent of a few dozen bathtubfuls of California water.”

Philpott points out that TIAA, a leading provider of financial services owns a 40% stake in Treehouse California Almonds. The Farmland Index, which tracks the performance of agricultural investments, has outperformed the Standard & Poor’s index 11.8% to 9.6% in recent decades.

One problem with California’s Ag dominance is that it takes an increasing share of an increasingly scarce water supply. When irrigation water from snow and rain is scarce, as it has been for decades, farmers pump more of California’s groundwater. Nobody can say when the groundwater will run out because nobody knows how much CA has.

Turning to the Midwest, Frazier points out that the Corn Belt is one and a half times the size of California’s farming acreage. The Corn Belt uses so much fertilizer that it delivers a huge amount of polluted agricultural runoff via the Mississippi down to the Gulf of Mexico. Off of Louisiana, there’s a marine dead zone the size of New Jersey.

Huge companies dominate Midwest farming, from fertilizer and seed manufacturers to large and expensive farm machinery equipment. There is concentration in the companies that buy, process and ship the grain: Three companies: Cargill, Archer Daniels Midland (ADM), and Ingredion control 87% of the US corn market. Four companies: ADM, Bunge, Cargill, and Ag Processing handle 85% of the soybeans.

It is cheaper to raise pork in the US than it is in China because our feed is cheaper. Smithfield is the world’s largest pork producer and is Chinese-owned. AND, the 23 million hogs in Iowa along with Iowa’s other livestock produce as much excrement every year as do 168 million humans.

This data are called “fecal equivalent”. Iowa produces the same amount as the world’s eleven largest cities. Shouldn’t that be on Iowa’s license plate?

But the headline is that mid-sized and small farms are dying. Frazier says that midsize farms are too small to compete with the corporate farms in volume and price. OTOH, they are too big to be supported by the farmers’ outside income. In her book, Sara Vogel says the midsize farm is in danger of going extinct:

“In today’s economy [they] wouldn’t have a prayer.”

Frazier closes by wondering who in agriculture will work to save our environment. He concludes that Big Ag won’t try. A disturbing, but important article.

Time to take a break from politics and economics. It’s also time to ignore that inflation is down and an asteroid narrowly missed the earth. Instead, let’s relax with our Saturday Soother. Readers who are into football will spend their Sunday watching the NFL’s division championship games. That will probably include Wrongo. To kick off our weekend, listen to Alexandra Whittingham and Stephanie Jones perform “Helping Hands” by Sergio Assad. Assad is a Brazilian guitarist. We have featured Whittingham here before, but Jones is new to us:

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Keep Your Politics Off Of My Economy

The Daily Escape:

Rachel Carson National Wildlife Refuge, Kennebunk, ME – January 2023 photo by Eric Storm Photo

From the WaPo:

“The economy posted another consecutive quarter of steady expansion between October and December, with economic activity increasing at a 2.9% annual rate. Consumer spending contributed to the strong fourth-quarter showing, especially given the slumps in large parts of the economy, including housing and manufacturing.”

The latest GDP figures show we have a resilient but slowing economy. Some of the slowdown is intentional, brought on by the Federal Reserve’s aggressive increases in interest rates as a way to control our high inflation. The Fed raised interest rates seven times last year, expecting that higher borrowing costs would lead businesses and households to cut back enough to slow the economy and curb price increases.

That’s happened in the real estate market, and to a lesser degree, in manufacturing. WaPo quotes Joseph LaVorgna, chief economist at SMBC Nikko Securities America:

“You may see [growth] and think the economy is out of the woods, but that would be entirely the wrong read….There are a lot of variables that are all pointing in the same direction: There’s a housing recession. Manufacturing looks like it’s approaching recession. We’re seeing weakness in temp hiring. And it’s doubtful we’ve felt the full effects of all of the Fed’s rate hikes.”

So Biden can take credit for an excellent recovery so far, but many major banks are still forecasting an economic downturn this year. As Diane Swonk, chief economist at KPMG says: (emphasis by Wrongo)

“Momentum has already begun to slow in response to rate hikes, but the bulk of the slowdown is yet to come….The Fed’s goal is to let growth stall out in 2023.”

So are we in for a bad downturn that will persist through the 2024 elections? It’s a possibility if we keep playing politics with the economy.

We need to let people know that inflation has been easing month after month while the unemployment rate has held steady at about 3.5%. The year-over-year change in the consumer price index peaked at just over 9% in June, and since then it’s fallen to just under 6.5%. Other inflation indicators like the producer price index (PPI) have trended lower from prior highs as well.

And the world’s biggest inflation scold, economist Larry Summers who has been saying for 2+ years that we need a deep recession to drive out high inflation is sounding less hawkish: (brackets by Wrongo)

“I still think it’s going to be hard…[but]…You have to recognize that the figures are better than somebody like me would have expected three months ago. It’s still a very difficult job for the Fed, but the situation does look a bit better.”

From prior experience, Larry knows how to prepare, cook, and eat crow.

Can the Democrats and Republicans get out of the way of our currently good economic growth? From Heather Cox Richardson:

“On Monday the Wall Street Journal reported that median weekly earnings rose 7.4% last year, slightly faster than inflation. For Black Americans employed full time, the median rise was 11.3% over 2021. A median Hispanic or Latino worker’s income saw a 4.8% raise, to $837 a week. Young workers, between 16 and 24, saw their weekly income rise more than 10%. Also seeing close to a 10% weekly rise were those in the bottom tenth of wage earners, those making about $570 a week.”

Overall, the economy seems to be on solid ground at least for now. But the average American probably doesn’t view it that way.

And who will the voter reward or blame in 2024? We’ve seen that the House Republicans want to hamstring Biden and the national economy by holding the debt limit increase hostage to budget cuts, possibly in Social Security and Medicare.

So the Dems countered by asking new Speaker McCarthy for a plan on what would be axed from the social services budget. Now, Roll Call is reporting that the GOP seems to be changing their strategy on the fly:

“House Republicans are mulling an attempt to buy time for further negotiations on federal spending and deficits by passing one or more short-term suspensions of the statutory debt ceiling this summer, including potentially lining up the deadline with the end of the fiscal year Sept. 30.”

They’re trying to time the engineering of a debt default crisis to coincide with the government’s new fiscal year, thinking this creates a “mega crisis” of default/government shutdown that will bring Biden to agree to the egregious spending cuts the MAGAs want.

But this should help Democrats. First, Democrats will be able to point to the MAGA cuts as being far outside the American mainstream. Second, the GOP reckless attempt at hostage-taking will be on display just as the election season ramps up.

Are the wheels of the Republican clown car already coming off?

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Monday Wake Up Call – December 19, 2022

The Daily Escape:

Skiing Santas at Sunday River Ski Resort, Newry, ME – Dec. 11, 202, AP Photo/Robert F. Bukat

(As we cruise towards Christmas, each day this week we will feature pictures of Santas and/or Christmas trees, along with loopy songs vaguely representative of the season. You’ve been warned.)

The war in Ukraine has once again reminded policy makers of the importance logistics plays in winning on the battlefield. In reading a Defense One post by Marcus Weisgerber, Wrongo learned that demand for weapons by Ukraine — combined with worker shortages, inflation, and other factors — has made it more difficult and more expensive to produce the most in-demand weapons. This describes the current problem:

“The US has sent 13 years’ worth of Stinger production and five years’ worth of Javelin production to Ukraine…”

That’s in 10 months. And a newsletter by CDR Salamander states the overall problem clearly:

“The Ukrainians would have run out of weapons and ammunition months ago if the former Warsaw Pact nations in NATO didn’t empty what inventory they had left of Soviet Era weaponry and the rest of NATO led by the USA didn’t wander the world trying to soak up as much available inventory money could buy. That and the rapid adoption of NATO compatible equipment by the Ukrainians is helping, but that has revealed other problems – who says the West has enough to give?”

It is said that amateur warriors deal in tactics while professional soldiers deal in logistics. Both sides in this war are burning through their weapons stockpiles at unsustainable rates even though the war seems (at least momentarily) to be a stalemate. The US and NATO had little in stockpiled weapons even before the Russo-Ukrainian War, able to mount only a very limited or short war as they did (poorly) in Libya. This has been true for the past 20 years. Now those limitations are out in the open.

US defense spending could rise 10% percent in 2023. A good chunk of the increase is meant to rush weapons to Ukrainian forces fighting the Russian invasion, along with replenishing the US missiles, artillery and other weapons sent to Ukraine.

But the sad truth is that it isn’t clear that US or European defense companies, along with the thousands of small businesses that supply them, can meet this increased demand. There are plenty of reasons, including worker shortages and supply-chain disruptions that have been exacerbated by the pandemic and the global current economic outlook.

And the Pentagon was slow to award contracts to rebuild weapon stockpiles. Those that were awarded quickly had to be fast-tracked by top-level Biden administration officials. And it gets worse. Many defense firms are short-staffed relative to what’s needed to fulfill anticipated Pentagon orders to replace weapons sent to Ukraine. Defense One quotes Raytheon Technologies CEO Greg Hayes:

“The real question is, can we actually build it?….They can appropriate all the money, but…if we take months and months and months to get on contract, that’s months and months of delay.”

Raytheon builds the Stingers that are so depleted.  They are willing to ramp up, but it takes investment and lead time to grow production. More from Hayes:

“We want to be prepared to meet the demand that’s out there….I wish I could snap my fingers and then all of a sudden miraculously, throw a building up and train 500 people [to build them], but it just takes time.”

American business calls this “Lean Manufacturing“.

A final illustration of how a simple part that gets caught in the supply chain becomes a big problem: The Eurasian Times reports that German ammunition manufacturers have warned about delays in receiving cotton linters. They are a necessary component for propelling charges from small guns and artillery. All European ammunition producers depend on China for cotton linters, even though it is a commodity produced and traded globally. The time to get them to Europe has tripled to nine months.

Much like we learned during the height of the pandemic, our supply chain is only as strong as its weakest link. Lean Manufacturing and “Just-in-Time” supply chains drove the prices of imported goods through the roof, but increased demand meant that we still had to wait months to get what we ordered. Have we learned anything?

Like during the pandemic, the Russo-Ukrainian War is sending a clear warning to everyone throughout the West: We need to ramp up production, capacity, and have a more reliable – if somewhat less efficient, supply chain to support our military. This is a hard lesson, because unlike jets, missiles and ships, ammunition and expendables are hidden away in bunkers. And if your governments and diplomats do their job, they will never be used.

However, if/when you need them, like right now, the need is existential. Time to wake up America! We can’t depend on capitalism only to solve our supply chain problems. To help you wake up, take a moment to watch the Foo Fighters, who closed 2017’s Christmas episode of Saturday Night Live with an extended performance of “Everlong” that morphs into a pair of seasonal classics:

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Will New House Prices Go Down?

The Daily Escape:

Mt. Hood viewed from Timberline Lodge – December 2022 photo by Mitch Schreiber Photography

We have all watched house prices go through the roof since the start of the pandemic. Of Wrongo and Ms. Right’s six kids, two do not currently own a home, and despite having good jobs, and wanting to buy, they’re priced out of their local markets. Houses near Wrongo’s daughter on Cape Cod, MA have nearly doubled in price since the start of the pandemic. The same is true for Wrongo’s son in Bergen County, NJ.

But house sales in US have been slowing down in the past few months as interest rates climb. Wolf Richter at Wolf Street says there are now too many new houses for sale:

“Inventory of new houses for sale…has ballooned to 470,000 houses, up by 21% from the already high levels a year ago, and the highest since March 2008….Which destroys the theory that home prices are high because the industry isn’t building enough houses…”

Wow, nearly a half-million unsold new houses! Much of this inventory of unsold new houses were built in locations that are far from the big suburbs and the cities. After the pandemic started, US businesses redefined the office to include working from home. That further moved to “live anywhere” remote work for some firms.

Now, firms are bringing people back to their physical offices. That makes selling houses at great distances from the office a tough proposition for new home builders. It means buying a lower price rural home based on a big remote salary is no longer in the cards for many workers.

According to Bloomberg, Lennar a major home builder, has been approaching the big corporate rental landlords with an inventory listing about 5,000 houses that it wants to offload:

“Lennar is circulating lists of properties to potential acquirers, according to people familiar with the matter….Many of the properties are located in the Southwest and Southeast…with the builder giving landlords the chance to acquire entire subdivisions in some cases.”

It’s an industry-wide problem. Home builders have pitched at least 40,000 new houses to rental operators in recent months. Bloomberg says that many of these houses had originally been sold to individual buyers who later canceled their purchase contract.

According to a survey by John Burns Real Estate Consulting, the purchase contract cancellation rate spiked to 26% in October, up from a rate of 8% a year ago, and up from 11% in October 2019. The cancellation rates were highest in the Southwest at 45%, up from 9% a year ago. In Texas, the cancellation rate spiked to 39%, up from 12% a year ago. That’s understandable since mortgage rates have been rising so quickly.

This tells us that a part of the “housing shortage” is both local and price-driven. We know that house prices are driven by building costs, which have spiked in the past two years. Prices are also driven by the quality of the schools in the area, or whether the location is near a tourist destination. Retirees can move anywhere, but they generally want to be close to doctors and medical centers and will pay a premium for location rather than pay a lower price to live in the middle of nowhere.

Entire subdivisions sold as a rental community is better from the viewpoint of an individual home buyer instead of a percentage of that development’s homes being sold into a rental pool. No one should buy into a development that is partially sold and partially rented. The big landlords will rarely improve them beyond the least amount possible. So the overall value of all the homes in that community will be diminished by the presence of a rental pool.

We saw that in California in the 2007-2009 real estate bubble, where a few houses in otherwise nice neighborhoods would have overgrown lawns and trash lying in the yard, a clear sign of vacancy. That didn’t help the property values of the individual homeowner neighbors.

How far will housing prices fall? Nobody knows. Here is a chart showing average housing prices since 2019:

Comparing 2019 to 2022, average house prices have risen by 39%. Your area’s average may be even higher, particularly if you live in or near a large city.

It’s clear that the US housing market needs a price correction. Wrongo would like to say that people shouldn’t be offering anything higher on the house they want than it would have sold for in 2019. But, we may not get back to that price level anytime soon.

A price correction alone won’t solve America’s housing crisis, but a 20% correction sure would be a nice start.

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