Tematica Chief Macro Strategist Lenore Hawkins provides regular insights and musings into today’s markets, economics and politics, while fighting for liberty with great wine & music, scores of stilettos and an excessive love of dogs
The headlines are increasingly dominated by frightening images of people wearing masks or encased in hazmat suits along with words like “pandemic,” not exactly pleasant over morning coffee. We are being told that this virus isn’t all that much worse than the usual flu, yet cities are being quarantined, travel is being restricted or outright banned, and companies are making all kinds of severe contingency plans. How can this be no worse than the usual flu if everyone seems to be having a total meltdown?
I did some simple math to show why this virus could be both:
(A) something I personally don’t need to get overly worked up over when it comes to my own health, while at the same time
(B) a major medical threat on a global level.
Sounds like I’ve lost my mind right? Just give me a few minutes and we’ll walk through the numbers.
The breakdown for the impact of the typical influenza virus every season is illustrated in this chart from the Center for Disease Control (CDC). Since 2010 the number infected by an influenza virus every year ranges from 9.3 million to 45 million. The number hospitalized ranges from 140,000 to 810,000 and the number that die from the virus ranges from 12,000 to 61,000.
In the chart below I took the midpoint of each of the ranges shown above. I realize that those ranges are quite large so simply taking the midpoint of the numbers loses some meaning, but bear with me here as we are just looking to understand magnitudes. On average 8.23% of the population of the United States has been infected by the seasonal influenza virus every year since 2010. Of those who have been infected, 1.75% have needed hospitalization and 0.134% have died.
If we assume that the coronavirus is just an average flu bug, then we can use these averages. In the example below I assume that 1.75% of those that contract the virus need hospitalization and 0.134% will die. In the chart below I show how many will need hospitalization and how many will die based on 5% to 50% of the population contracting the virus.
(Please note on the chart below that I took the total number of hospital beds from the 2020 American Hospital Association’s 2020 AHA Hospital Statistics, developed from the 2018 AHA Annual Survey. I estimated the number of ICU beds using data from the Society of Critical Care Medicine which referenced AHA data that found the ration of ICU beds to total beds to be 14.3% in a 2015 study. Surprisingly enough the number of ICU beds is not an easy number to find.)
The problem quickly becomes evident. Under our assumptions, when the percent of the population infected by the virus gets between 15% and 20% of the total population, there simply aren’t enough hospital beds in the country even if every single bed is dedicated to someone with the coronavirus. This is the problem. It isn’t the health risks to any one particular person, but rather the sheer number of people that this virus may be able to infect.
So while the risk to me of needing hospitalization may be no worse with coronavirus that the usual flu, there may be no beds available to treat me if I end up needing one! Now I’m worried.
According to the Center for Disease Control (CDC), on average, about 8% of the US population gets sick from the flu every season, with a range of between 3% and 11% depending on the year. What about the contagiousness of the typical flu? This is from the CDC:
People with flu are most contagious in the first 3-4 days after their illness begins.
Some otherwise healthy adults may be able to infect others beginning 1 day before symptoms develop and up to 5 to 7 days after becoming sick.
Some people, especially young children and people with weakened immune systems might be able to infect others for an even longer time.
Part of why the typical flu is not as contagious as the coronavirus is because you know more quickly when you are sick. The problem with the coronavirus is we are seeing evidence that people can be contagious for more than 14 days and may not have any symptoms. This gives the coronavirus the potential to totally blow away the usual 3% to 11% infection rate during a typical season.
This is why the virus can have the same health risk to any particular person as the usual flu bug while at the same time being an enormous health risk on a city, state and national level. Recall the movie Mission Impossible 2 where our hero Ethan Hunt needs to stop the biological weapon “Chimera” from getting out? Chimera was fatal within 20 hours and those infected quickly experienced severe symptoms. That movie got it all wrong. The most dangerous virus would be one that infects its host and is easily transmitted from one person to the next for years without its host having any symptoms. With such a virus, by the time we even knew of its existence, the majority of the world’s population could already be infected.
As a final note, in the example above we assumed a fatality rate (meaning the percent of those infected that die) of just 0.134%. In China, as of February 11, 2020, according to data compiled by Statista, the fatality rate has been much higher – 21.6x higher in Hubei, 17.2x higher nationwide and 3x higher in other regions excluding Hubei.
As of February 27, 2020 at 18:00 Central European time, there were 650 confirmed cases in Italy, 17 deaths and 45 healed. This makes for a mortality rate of 2.6% which is 19.5x more deadly than our example. Current statistics can be found here.
In South Korea, as of the writing of this piece, the total confirmed cases had reached 2,022 with 13 deaths. This makes for a mortality rate of 0.64% which is 4.8x more deadly than our example.
According to LiveScience.com, as of the afternoon of February 28, 2020 there are have about 83,704 confirmed cases and 2,859 deaths. This makes for a mortality rate of 3.4% which is 25.5x more deadly than our example.
On that note, I’m going to go wash my hands… again.
Tuesday the overnight funding markets broke down and the Fed took a few tries to get their (now rusty) open market operations up and running to resolve the liquidity crunch for the first time since the financial crisis — TBD if the week’s liquidity crunch was “idiosyncratic” as many pundits claim. FedEx (FDX) results gave everyone a bit more to worry about with respect to the global economy as if we needed that.
Wednesday the Fed both met expectations and simultaneously confused the hell out of markets.
The biggest market move was ignited when the (claimed) Yemeni Houthi rebels (aka Iran?) attacked the Saudi Aramco Abqaiq oil processing facility. That attack on what is the largest such facility in the world led to Brent crude oil prices rising as much as 19.5%, a record intraday spike. US West Texas Intermediate (WTI) futures rose as much as 15.5%, the biggest jump since December 2008. The attack took an estimated 5% of global oil production (around 5.7 million barrels per day) offline, more than the Iraq invasion of Kuwait in August 1990, which was a loss of 4 million barrels a day and the hit to Iranian production in 1979 during the Islamic revolution. The Saudis are claiming it was no big deal and all will be resolved in a matter of weeks.
Currently, the US and Saudi Arabia are claiming that there is conclusive proof that Iran was actually behind the attack. The US has been following a policy of maximum pressure on Iran and in response, Iran has been following a policy of maximum chaos from attacks in Strait of Hormuz to (potentially) this latest attack on a vital input to the global economy. With all the geopolitical stability (sarcasm), the world really needed this jolt of additional risk.
We will never really know just how severe the strike was as that would be a clear security risk for Saudi Arabia — why show those who attacked what they got right and what they missed so they can improve on another round? Only time will tell if they are able to get production up as quickly as has been promised, with most back online by October. I did mention last time that volatility was seriously underpriced!
US Dollar Liquidity Warning Signs
I’ve been warning for quite some time that we would likely see significant liquidity strains in the coming months as the Treasury issues an unprecedented volume of bonds, the baby boomers take their forced seasonal minimum distributions and the impact of higher bank reserve requirements is more acutely felt thanks to the Fed’s tapering. Last week we saw what may be the first hints of problems to come as with the price of oil spiking higher, the demand for US dollars spiked as well. Starting last Tuesday, the Federal Reserve had to provide liquidity four consecutive days in a row, pumping around $200 billion into the US financial system, something we haven’t seen since just prior to the 2008 financial crisis.
There is no clear consensus on what is causing this and there wasn’t back in 2008 either. Many are claiming this is an isolated event due to a combination of unique circumstances from the strike on Saudi Arabia and tax filings this month. If you’d like more details, I highly recommend this read. Only time will tell if this truly was idiosyncratic or if we are seeing warning signs of liquidity problems — I’ll be watching this one closely. Last Friday the Fed announced that it would extend overnight repo operations of “at least $75 billion” each day until mid-October — that doesn’t read idiosyncratic to me.
Major Moves in Bonds
Looking at longer-dated bonds using the Merrill Lynch 10+ Year US Treasury Index as a proxy, we see that August enjoyed the best monthly gains since December 2008. As equities were taking it on the chin, long bonds were getting a lot of love. But then, in the first ten trading days of September, long-term Treasuries lost 6.5% — the worst ten-day start to a month going all the way back to at least 1987. I say at least 1987, because that’s when daily data begins, so we cannot go back farther. In a period of just six weeks, longer-dated Treasuries saw their best monthly gain in almost eleven years followed by the worst start to a month since daily data began – at least thirty years! These are not normal bull market moves.
As I’ve mentioned in prior issues, the Treasury has been issuing massive amounts of debt. When the federal government hit the debt ceiling, its deficit spending was funded by the Treasury’s general fund account – its piggy bank. Now that the debt ceiling issue has been punted, the Treasury is issuing bonds to both refill its piggy bank and fund the government’s ever-growing fiscal deficit. As those bonds are issued, they are financed in the short-term by the repo markets.
The most recent Bank of America Merrill Lynch Fund Manager Survey gives some color to the dramatic moves in bonds. The survey found that 38% of respondents expect a recession within the next year, up from 34% in August. The biggest tail risk concern for the group (40%) was the trade war with China. Bond allocation for the group dropped to a net 36% underweight after having August’s allocation reach the highest since September 2011. Overall long US Treasury remains the most crowded area for the fourth consecutive month.
Last week the Federal Reserve cut the funds rate by (as expected) 25 basis points to a 1.75-2.00% range. What wasn’t expected was the lack of agreement amongst members with two dissents, Esther George and Eric Rosengren preferring no cut. And then there was Jim Bullard preferring a 50-basis point cut. Five FOMC members want to raise rates again before the end of the year (really!?) with another five wanting to go on hold and seven want to cut one more time. No one is looking for more than one more cut before 2020. In response, the yield curve flattened and President Trump took to Twitter to express his disapproval.
Equity Bumping Against the Ceiling
We are now seeing equity markets both in the US and Europe bumping up against some major overhead resistance.
The Stoxx 600 has failed to push up above 392.5 five different times in the past fifteen months, three in the past three months alone. Yet another failure here likely means dropping down to test the 200-day moving average.
The S&P 500 is also getting quite a headache, having trouble breaking through the same 3,025 level from July. We’ve now had two rate cuts and yet the S&P 500 cannot break into new highs. Seasonality is not on the side of the bulls.
The major US indices have little to show over the past year. Since the beginning of September 2018 the S&P 500 has gained all of +3.1%, the Nasdaq a whopping +0.1%, the Dow Jones Industrial Average +3.7%, the NYSE Composite +0.6% and the small cap Russell 2000 has lost -10.4% – some bull market. The S&P 500 remains in a rather profound consolidation mode.
That said, overall breadth looks decent as all eleven S&P 500 sectors have more than 55% of their component companies above their 50-day moving average. The past week four out of five days the S&P 500 Advance/Decline line has been negative – so breadth has been weakening. We’ve seen strength in the last hour of trading, which is typically a bullish sign as investors are willing to take on overnight risk despite the potential headline or tweet risk. On the other hand, the defensive Utility and Real Estate sectors both have 100% over their 50-day while the cyclical Energy, Industrials and Financial sectors, which had previously been headwinds for the major indices are now more supportive with more than 80% of their components trading above their 50-day. When Utilities are consistently outperforming, do you really call that a bull market?
Taking a step back to look at the bigger picture of equities and bonds, I see a rather troubling picture, shown below (click to enlarge). Looking at the long-term trendlines for the S&P 500 on a weekly basis versus the spread between the US 10-year Treasury yield and the US 3-month yield, major market turning points tend to happen when that spread is negative (shaded in light grey in the S&P 500 weekly). Before anyone gets apoplectic over this one, no person nor any chart for that matter ought to be relied upon to divine the future. We can only deal in probabilities, so we look at a wide range of data points to see if there is a consistent story being told.
It is also interesting to see that this past week General Motors (GM) suffered its first strike since 2008. The car manufacturer is not alone. Strikes of 1,000 or more workers are expected to affect more than half a million workers this year, the most since 1986 and an increase over last year’s multi-decade high. This coming at a time when earnings growth for many companies has become more and more of a challenge.
This past week FedEx (FDX) reported its second-biggest earnings decline since 2001 after missing its EPS estimates and lowering its guidance. From a macro perspective, the shipping company’s growth has historically closely tracked US GDP – another concerning data point. The company’s quarterly revenues were down slightly year-over-year for the first time since its June 2009 report. The company lowered its full-year 2020 EPS estimates from $14.62 to between $11 and $13, citing the US-China trade war.
The Bottom Line
While the economic data for the US came in stronger last week, with the one exception for the Empire Manufacturing report, overall the economy is on a slower (slowing) trajectory, highly dependent on consumer spending fueled by falling savings rates. A recent Gallup poll found that more American’s think the economy is getting worse than better. The US-China trade war, coupled with rising geopolitical tensions and uncertainty (Brexit), is hampering growth around the world as execs from the multinationals and many small business look to hunker down until the dust clears. Volatility remains under-priced and the safety plays more attractive for the time being.
The markets closed last week in a bullish mood on the news that (stop me if you’ve heard this one before) the US and China will be back at the negotiating table in October. You don’t say! Oh but this time we have schedules and a list of attendees so it is totally different.
h/t @StockCats
The past three days of bullishness have been in sharp contrast to the chaos of August during which global stock markets lost around $3 trillion in market cap thanks to the ongoing trade wars and more data pointing to global slowing. As of Friday’s close, over the past year, the S&P 500 is up 3.7%, the Nasdaq 2.5%, Dow Jones Industrial Average up 3.4%, the NYSE Composite Index up 0.17% and the Russell 2000 is down -12.1%. During August 2,930 acted as a resistance level for the S&P 500 multiple times, but the index managed to break through that level last week, which is typically a bullish signal.
As the markets have taken an immediate about-face on the reignited hopes for progress in the trade wars, we’ve seen a profound flip-flop in equity performance which gave many a portfolio whiplash.
Those stocks with the lowest P/E ratios that were pummeled in August are up an average of 5.3% since last Tuesday’s close.
The stocks that held up best in August are barely breakeven over the final three trading days last week while those that were soundly beaten down in August are up the most so far in September.
Stocks with the most international revenue exposure are materially outperforming those with primarily domestic revenue exposure.
While corporate buybacks have been a major source of support for share prices in recent years, corporate insiders have been big sellers in 2019 selling an average of $600 million worth of stock every trading day in August, per TrimTabs Investment Research. Insider selling has totaled over $10 billion in five out of the first eight months of 2019. The only other time we’ve seen so much insider selling was in 2006 and 2007.
Bonds
August saw an additional $3 trillion of bonds drop into negative territory. We are now up to $17 trillion in negative-yielding bonds globally, with $1 trillion of that corporate bonds – talk about weak growth expectations! We also saw the yield on the 30-year Treasury bond drop below the dividend yield for the S&P 500 recently. The last time that happened was in 2008.
The yield on the 10-year Treasury dipped below the 2-year multiple times during the trading day in August but closed for the first time inverted on August 26th. August 27th the spread between the 10-year Treasury yield and the 2-year rate fell to negative 5 basis points, its lowest level since 2007. Overall the yield on the 10-year Treasury note fell 52 basis points during the month of August – that’s a big deal. The last time we saw a fall of that magnitude in such a short period of time was in 2011 when fears of a double-dip recession were on the table. Currently, the real yield on US 10-year is sitting in negative territory which says a lot about the bond market’s expectations for growth in the coming years. Keep that in mind as you look at the PE multiple for the S&P 500 after having two consecutive quarters of contracting EPS.
A growing number of countries have their 10-year dropping
into negative territory:
Switzerland first in January 2015
Japan in February 2016
Germany and Netherlands in the Summer of 2016
Finland and Denmark in the Fall of 2016
Ireland, Latvia, Slovakia, Belgium, Sweden, Austria, France all negative
The US is now the only nation in the developed world with any sovereign rate above 2% (h/t @Charlie Bilello). My bets are that we are the outlier that won’t stay an outlier indefinitely.
Recently the Italian 10-year bond dropped to new all-time lows as Cinque Stelle (5 Star) movement managed to team up with the center-left Democratic Party of former Prime Minister Matteo Renzi. Don’t expect this new odd-couple coalition to last long as these two parties have basically nothing in common save for their loathing of Matteo Salvini and the League, but for now, the markets have been pacified. These two parties detest one another and were trading insults via Twitter up until about a month ago. This marriage of convenience is unlikely to last long.
The European Central Bank meets on September 12th, giving them one week head start versus the Federal Reserve’s Open Market Committee meeting, which is September 17th & 18th, kicking off the next round of the central bank race to the bottom. The ECB needs to pull out some serious moves to prop up Eurozone banks, which are near all-time lows relative to the broader market. We’ll next hear from the eternally-pushing-on-a-string Bank of Japan on September 19th.
Currency
Dollar Strength continues to be a problem across the globe. The US Trade Weighted Broad Dollar Index recently reached new all-time highs, something I have warned about in prior Context & Perspective pieces as being highly likely. It’s happened and this is big – really big when you consider the sheer volume of dollar-denominated debt coming due in the next few years and that this recent move is likely setting the stage for significant further moves to the upside.
In the context of the ongoing trade war with China, the renminbi dropped 3.7% against the dollar in August, putting it on track for the biggest monthly drop in more than a quarter of a century as Beijing is likely hunkering down for a protracted trade war with the US, despite what the sporadically hopefully headlines may say.
Make no mistake, this is about a lot more than just terms of trade. This is about China reestablishing itself as a major player on the world stage if not the dominant one. For much of the past two millennia, China and India together accounted for at least half of global GDP. The past few centuries of western dominance have been a historical aberration.
As the uncertainty around Brexit continues to worsen (more on this later), the British pound last week dropped to its lowest level against the dollar in 35 years, apart from a brief plunge in 2016 likely for technical reasons.
Domestic Economy
The US economy continues to flash warning signs, but there
remain some areas of strength.
The Good:
Consumer Spending rose +0.4% month-over-month in July, beating expectations for an increase of +0.3%.
Average hourly earnings for August increased by 0.4% month-over-month and 3.2% year-over-year, each beat expectations by 0.1%.
ADP private nonfarm payrolls increased by 195,000 in August versus expectations for 148,000.
Unemployment rates for black and Hispanic workers hit record lows.
The prime-age (25-54) employment-population ratio hit a new high for this business cycle, still below the peak of both the prior and 1990s expansion peaks, but still an improvement.
While employment growth is slowing, jobs continue to grow faster than the population.
Despite the weakest ISM Manufacturing report in years, the ISM Non-Manufacturing report painted a much rosier picture of at least the service sector. While expectations were for an increase to 54.0 from 53.7 in July, the actual reading came in well above at 56.4. In contrast to the ISM Manufacturing report, New Orders were much stronger than the prior month and only slightly below the year-ago level.
The Citi Economic Surprise Index (CESI) has continued to recover, moving above zero (meaning more surprises to the upside than down) for the first time in 140 days after having been in negative territory for a record 357 days.
The Bad:
Nonfarm payrolls increased by only 130,000 versus consensus estimates for 163,000 and only 96,000 of those jobs came from the private sector – the slowest pace since February. Both July and June job figures have been revised lower, which is basically what we have been seeing in 2019. A long string of revisions to the downside means there is a material shift in the labor market. Total nonfarm payroll employment increased by 130,000 in August.
Job growth has averaged 158,000 per month in 2019, below the average monthly gain of 223,000 in 2018.
University of Michigan Consumer Confidence survey total contradicted the Conference Board’s findings with its main index falling the most since 2012 in August, dropping to the lowest level since President Trump took office. Concerns over tariffs were spontaneously mentioned by 1/3 of the respondents. The most concerning data from the survey where Household Expectations for personal finances one year from now experienced the biggest one month drop since 1978, falling 14 points.
Consumer spending doesn’t look so great when you look at the drop in the Personal Savings rate from 8.0% in June to 7.7% in July, which means that 75% of the increase in spending was at the cost of savings. Net income only rose 0.1% in nominal terms in July versus expectations for a 0.3% increase – not at all consistent with the narrative of a strong labor market.
The Chicago Fed’s Midwest state economy survey found that the number of firms cutting jobs rose to 21% in August from just 6% in July while those hiring dropped to 25% from 36%.
The Quinnipiac University poll found that for the first time since President Trump took office, more Americans believe the economy is getting worse (37%) than believe it is improving (31%).
Camper van sales dropped 23% year-over-year in July. This has historically been a pretty accurate leading indicator of future consumer spending.
The Duncan Leading Indicator (by Wallace Duncan of the Dallas Fed in 1977) has turned negative year-over-year for the first time since 2010. A Morgan Stanley study found that when this indicator has turned negative, a recession began on average four quarters later, with only one false positive out of seven going back to the late 1960s.
While expectations were for the ISM Manufacturing Index to increase from 51.2 to 51.3 in August, the reading came in at 49.1 (below 50 indicates contraction), the fifth consecutive monthly decline in the index and the first time the index has dropped into contraction in three years. Even worse, the only sub-index not in contraction was supplier deliveries. New Orders (the most forward-looking of all sub-indices) hasn’t been this weak since April 2009.
Durable Goods New Orders and Sales are improving but remain in contraction territory while Inventories are rising at around a 5% annual pace – that’s a problem.
US Producer Prices experienced their first decline in 18 months.
The Atlanta Fed’s GDPNow estimate for the third quarter has fallen to 1.5%.
The Ugly:
US Freight rates have fallen 20% from the June 2018 high. Even more dire warning comes from freight orders, which dropped 69% in June from June 2018.
Europe
That nation that has been the region’s strongest economy is
struggling as the fallout from the US-China trade war expands around the world.
TheGerman unemployment rate rose for the fourth consecutive month.
German retail sales took a bigger battering than expected in July, falling 2.2% from June to reveal the biggest drop this year in the latest indication that Europe’s largest economy may well slide into recession. Since February, monthly retail sales figures have either declined or been flat, with the exception of the 3% gain in June.
A recent survey revealed that employers are posting fewer jobs, intensifying fears that the downturn in the country’s manufacturing industry has spread into the wider economy.
Manufacturing orders came in weaker than expected, declining -5.6% versus expectations for -4.2%.
Construction activity has contracted at the fastest rate since June 2014.
Germany’s export-dependent economy shrank 0.1% in the second quarter while the central bank warned this month that a recession is likely.
The rest of Europe continues to weaken.
Italian industrial orders fell -0.9% in June, making for a -4.8% year-over-year contraction
French consumer spending is up all of +0.1% year-over-year.
Spain’s flash CPI has fallen from 0.5% year-over-year in July to 0.3% in August year-over-year.
Switzerland’s year-over-year-GDP growth has fallen to 0.2% versus expectations for 0.9% – treading water here.
Brexit has turned into an utter mess as Prime Minister Boris Johnson has lost his majority in Parliament. Novels could and likely will be written on this mind-boggling drama in what was once one of the most stable democracies in the world. Rather than put you through that, as they say, a picture is worth a thousand words.
The challenge for anyone negotiating terms for Brexit with the Eurozone basically comes down to this.
Talk about a Sisyphean effort
Understanding this impossible reality, here is what to expect in the coming weeks.
For those who may not be convinced that this is a material problem, this is an estimate of the impact of a hard Brexit on the Eurozone alone.
Bottom Line
Around 70% of the world’s major economies have their Purchasing Managers Index in contraction territory (below 50) – that is a lot of slowing going on. Much of the world is drowning in debt with excess productive capacity – a highly deflationary combination.
We are witnessing a major turning point in the global economy and geopolitical landscape. The past 60 post-WWII years have primarily consisted of US economic and military dominance, increasing levels of globalization and relatively low levels of geopolitical tension.
Today we are seeing a shift away from an optimistic world of highly interconnected global supply chains towards one driven by xenophobia and nationalism. We are seeing rising economic and political tensions between not only traditional rivals but also between long-term allies. In the coming decades, the US economy will no longer be the singular global economic and military powerhouse, which will have a material impact on the world’s geopolitical balance of power.
The big question facing investors is whether the US and much of the rest of the world are heading into a recession. Many leading indicators that have proven themselves reliable in the past indicate that this is highly likely but today really is different.
Never before in modern history have we had these levels and types of central bank influence. Never before have we had such a long expansion period. Never before have we had this much debt, particularly at the corporate level. Never before have we had such profound demographic headwinds. On top of all that, we have a directional shift away from globalization that is forcibly dismantling international supply chains that were decades in the making with no clarity on future trade rules.
Will central bankers be able to engineer a way to extend this expansion? No one who is intellectually honest can answer that question with a high level of confidence as we are in completely uncharted territory. This means investors need to be agile and put on portfolio protection while it remains relatively cheap thanks to historically low volatility levels.
I’ll leave you with a more upbeat note, my favorite headline of the week.
Another aspect of our Connected Society is the datafication of nearly every aspect of our lives and the use of that data. As the cost of data storage and transmission rapidly slides towards zero and the cost of data collection devices also declines dramatically, more and more of our daily activities are being turned into opportunities for data collection.
A recent article on Bloomberg discussed how the aggregate number of mobile phone signals is being used to provide insight not just on consumer behavior, but on manufacturing plants and oil refineries.
While most geolocation data use has focused on consumer-facing businesses such as retailers, hotels and amusement parks, “valuable insights can be gleaned from the data by examining activity at specific manufacturing facilities,” said Octavio Marenzi, co-founder of Opimas LLC, a capital markets management consultant. Thasos Group has used the data to show increases in shifts at Tesla Inc.’s factory in Fremont, California, the Wall Street Journal reported.
As more and more data is produced from our every day activities and the devices that improve our lives, industries are developing to turn that data into actionable information. These are companies that sit at the intersection of our Connected Society and Disruptive Innovators investing themes.
US consumers spent more money on Airbnb last year than they did on Hilton and its subsidiary brands like DoubleTree and Embassy Suites, according to new data from Second Measure, a company that analyzes billions of dollars in anonymized debit and credit card purchases. Their Airbnb spending is even catching up to Marriott, the world’s largest hotel company, which added to its revenue by acquiring Starwood hotels in 2016.
Airbnb, which is expected to go public next year, sits at the intersection of our Connected Society and Middle-Class Squeeze investing themes and illustrates that while we continue to point out why investors need to we aware of rising risk levels in the stock market, there are still plenty of areas that are experiencing significant growth.
According to data from Second Measure, Airbnb experience 30% growth in the US consumer market, with much of that growth coming from travels who live in the heartland area of the US with only a third of US consumers coming from the coastal states such as California and New York.
Even more impressive is that while many of these tech unicorns have failed to breakeven, Airbnb has reportedly generated positive EBITDA for two years.
While the overall markets look to be overpriced relative to fundamentals and if history is any teacher, the overall outlook for equity returns in the coming years is likely to be grim. That being said, there are still plenty of areas that will benefit from the long-term and powerful tailwinds in our investing themes.,
We’ve all read the statistics on just how chubby Americans have become and all the lovely little health problems that come along with those extra pounds, from diabetes to heart disease not to mention the physical discomfort of lugging extra pounds around. Making healthier eating and drinking choices is part of our Clean Living investment theme and this week the Wall Street Journal ran an article discussing how as Americans increasingly lay off the booze, the world’s biggest brewers and liquor companies are having to push beyond their traditional fare and roll out teas, energy drinks, and nonalcoholic spirits.
As a confirmed wine lover who owns more wine fridges than I’m willing to publicly admit and who is also known to enjoy a great glass of scotch (travel tip British Airways offers Johnnie Walker Blue in first class) or a gin and tonic, (new favorite gin is Darjeeling) I’m struggling to wrap my head around kombucha or spiked coconut water (who knew there was such a thing) to replace the heaven of pouring a glass of Barolo, but I applaud the effort by a nation that clearly has room for improvement on the health front.
According to the Wall Street Journal,
Americans’ consumption of ethanol, or pure alcohol, has declined sharply over the past couple of decades. Alcohol consumption stood at 8.65 liters per person in 2017—the most recent year for which data is available—compared with 10.34 liters in 1980, according to research firm Bernstein….
New data show that U.S. alcohol volumes dropped 0.8% last year, slightly steeper than the 0.7% decline in 2017. Beer was worst hit, with volumes down 1.5% in 2018, compared with a 1.1% decline in 2017, while growth in wine and spirits slowed, according to data compiled for The Wall Street Journal by industry tracker IWSR.
Way to go America!
From an investors standpoint…
IWSR forecasts low- and no-alcohol products in the U.S.—still a small slice of the market—to grow 32.1% between 2018 and 2022, triple the category’s growth over the past five years.
And this trend has legs…
Diageo Chief Executive Ivan Menezes said last year that adults opting for lower alcohol options was “an important trend over the next many years” and that the company was “putting a lot of focus behind it.”
The bottom line is as consumers look to make healthier choices, companies are forced to respond by altering their offerings. Those that recognize the change and take advantage of it are part of our Clean Living investing theme, those that don’t… well … remember Blockbuster?
A recent Wall Street Journal article points out that the American dream is further out of reach for a growing number as plans for retirement go up in smoke thanks to the needs of aging parents and their adult children.
A 2014 study by the Pew Research Center found 52% of U.S. residents in their 60s—17.4 million people—are financially supporting either a parent or an adult child, up from 45% in 2005. Among them, about 1.2 million support both a parent and a child, more than double the number a decade earlier, according to an analysis of the Pew findings and census data.
Rather than enjoying the fruits of their decades of labor, many are finding that their household burdens are growing as they enter their sunset years.
More Americans find themselves housing two generations simultaneously, just when they thought they could kick back and retire. Instead, they face the strain of added expenses, constant caregiving and derailed dreams.
This pressure is coming as our Aging of the Population investment theme sees more senior citizens with inadequate savings and a healthcare system that is unable to provide the care they need at a price they can afford. On the other end of the spectrum, adult children are struggling with student debt levels the likes of which this country has never before seen and years of lackluster wage growth.
The squeeze is coming from both ends. With lifespans growing longer, the number of 60-somethings with living parents has more than doubled since 1998, to about 10 million, according to an Urban Institute analysis of University of Michigan data, and they are increasingly expensive to care for. At the same time, many boomers are helping their children deal with career or health problems, or are sharing the heavy burden of student loans.
I’ve written a few times this week here and here about how disruptive technologies can upend industries, quickly tossing leading companies into the back of the pack. Given that it is Friday afternoon where I am in Genova, Italy and we’ve had a week of horrendous storms, I’m looking forward to a relaxing weekend that will see me spending a decent amount of time curled on the couch working through my required weekly reading. That brings me to the subject of this post, the disruptive technology of yoga pants.
I personally think that all clothing ought to have at least some sort of stretch so yoga pants are right up my alley for everything from down dog to walking the dog to lounging when I’m dog tired and loving some doggone good wine. But I digress. How can yoga pants possibly reflect disruptive tech you ask? Bloomberg answers.
In 2014, teenagers began to prefer leggings over jeans. Then people started wearing athletic clothing (or athleisure, but it’s mostly just yoga pants) to run errands. Now they’re wearing yoga pants to the office. U.S. imports of women’s elastic knit pants last year surpassed those of jeans for the first time ever, according to the U.S. Census Bureau.
To be fair, this preference for “elastic knit pants” may have some correlation to the health challenges of the American public resulting in expanding waistbands. But part of the shift in preferences is also reflective of our Clean Living (focusing on living a healthier lifestyle) and Guilty Pleasures investing themes. If you’ve seen the price of Lululemon Athletica (LULU) clothing you understand the guilt. Bloomberg reports that,
Yoga pants have similarly managed to plunge denim into an existential crisis, threatening Levi Strauss & Co. so deeply that it had to scramble to adapt. The company added stretch and contouring to its jeans while hoping to retain some of their rugged essence.
So where is the disruptive tech involved?
“Consumers expect a lot more,” said Sun Choe, chief product officer at Lululemon. “They’re washing their garments more and more, and from a quality standpoint, it needs to stand up. They’re expecting some versatility in their product. They expect to be able to wear that pant or tight to Whole Foods or brunch.”
Ok, so that doesn’t sound terribly impressive, but then there is this.
Now there are fabric labs, especially in the athletic-wear space. Lululemon’s research arm does motion-capture testing and uses pressure sensors that allow researchers to test how garments work as they move. The team can even test “hand feel” to help it figure out how to “engineer sensations” for that critical commercial moment when you feel the fabric for the first time, said Plante.
Those labs have a large customer base to impress.
What was once a simple stretchy legging, it seems, has become an engineering marvel. Not too surprising, though, when you realize that about $48 billion is being spent on activewear in the U.S. every year.
Those yoga pants account for a large portion of that spend.
Active bottoms and leggings are now a $1 billion industry, according to NPD Group analyst Marshal Cohen.
With a phenomenal range of available options.
These days, there are more than 11,000 kinds of yoga-specific pants available at retailers worldwide, according to data from retail research firm Edited, across both men’s and women’s apparel.
The bottom line is that no industry, business model or product is immune from the threat of disruptive technology.
We’ve all heard endlessly about the death of brick and mortar, (we discuss how that death is overstated in our podcast with Katherine Cullen of the National Retail Federation next week) as online retailing continues to gain market share and is nearly equal that of brick and mortar as a percent of consumers’ spending. While online retailing has made enormous gains, brick and mortar is far from dead, but rather is evolving and disruptive technologies are part of that evolution, even in your local grocery store. A recent Wall Street Journal article revealed that an enormous amount of capital is being invested in improving the way the grocery industry operated, (emphasis mine).
Grocers are stocking their warehouses with robots and artificial intelligence to increase efficiency as competition for consumer spending on food picks up. Robots are relatively new to the food industry, where customer interaction is common and many goods like fruit are fragile and perishable. Startups are vying to sell supermarkets an array of robots that perform different tasks. Venture-capital firms have invested more than $1.2 billion in grocery technology this year, according to PitchBook, a financial-market data provider, double the total for 2017.
Online groceries retailing has been a relatively weak area for growth in online retail, despite the early efforts of now-defunct Webvan and HomeGrocer. But that looks like it will be changing as investments in disruptive technologies are increasing.
Altogether, spending on technology by many of the biggest U.S. food retailers could accelerate the adoption of online ordering for groceries. Deutsche Bank expects online orders to represent roughly 10% of the $800 billion grocery market by 2023, up from 3% today.
Learning from those who tried in the early dotcom era and failed, the WSJ article reports that according to Narayan Iyengar, senior vice president at Albertsons Cos., the second-biggest U.S. supermarket chain,
“We have to find a model where we can deliver groceries to customers’ homes and do it in a more profitable way,”
Beyond robotics, companies like Kroger are also getting into delivery.
The bottom line is those disruptive technologies can and have upended all aspects of our lives. Our Disruptive Technology investing theme focuses on those companies providing the technologies that completely change the way we communicate, shop, eat, work, exercise and even play.
One of our investing themes is focused on Disruptive Innovators, those companies that are utterly upending the way the world works. This week we saw more signals concerning the major changes taking place in an industry infamous for its brutally low margins, grocery stores…. and it entails robots.
Kroger (KR) is working on improving its operations, and defending itself against Tematica Research all-star Amazon (AMZN), which in turn ought to translate into better cost management by replacing people with robots – a trend that is occurring across a wide range of industries and geographies. A recent article on Reuters reported that
Through the deal with its largest partner, Ocado will ratchet up its delivery business by building robotically operated warehouses for Kroger in the United States, raising the stakes in the battle with Amazon.com Inc. The Kroger deal is Ocado’s biggest yet, exceeding all of the warehouses the firm has built or plans to build with Morrisons in Britain, Casino in France, Sobeys in Canada and ICA Group in Sweden. … Kroger is expected to order 20 CFCs over the first three years of the agreement. Ocado shares rose as much as 6 percent on Tuesday, taking gains over the last year to 195 percent.
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