Uncategorized
Janet Yellen Suggests Much Lower For Much Longer
On October 5, 2023, Treasury Secretary Janet Yellen made a very telling statement about the future course of interest rates.
YELLEN SAYS DEBT SERVICE…
Share this:
On October 5, 2023, Treasury Secretary Janet Yellen made a very telling statement about the future course of interest rates.
YELLEN SAYS DEBT SERVICE COSTS WILL BE 1% OF GDP FOR THE NEXT DECADE. – Reuters
Her statement implies that the economy will be strong and the government will run budget surpluses, or interest rates will be near zero for the next ten years.
Instead of guessing what she is pondering, we do some math and arrive at the only possible answer.
The Government Can’t Afford Today’s Interest Rates
Before walking through various scenarios to figure out what Yellen may be implying, it’s helpful to provide background on what drives her mindset. In our article The Government Can’t Afford Higher For Longer, Much Longer, we shared the following graph and commentary:
Total federal interest expenses should rise by approximately $226 billion over the next twelve months to over $1.15 trillion. For context, from the second quarter of 2010 to the end of 2021, when interest rates were near zero, the interest expense rose by $240 billion in aggregate. More stunningly, the interest expense has increased more in the last three years than in the fifty years prior.
The graph above is just the tip of the fiscal iceberg. Every month, lower-interest-rate debt matures and will be replaced with higher-cost debt.
Higher interest rates are an additional funding burden for the federal government. Janet Yellen surely understands the damaging situation and grasps that higher interest rates are not feasible given current debt levels.
Low-Interest Rates Make Debt Manageable
The government’s debt-to-GDP ratio has climbed three-fold since 1966. Yet, until very recently, the ratio of the federal interest expense to GDP was at its lowest level since 1966.
While the amount of debt rose sharply, its cost was offset by rapidly falling interest rates. As a result, higher debt levels were very manageable.
If $1 trillion of debt with a 4% coupon matures, and the Treasury replaces it with $2 trillion at a 2% coupon, the interest expense doesn’t change despite doubling the debt. While a simplified example, that is essentially what has occurred for the last 30 years.
The following graph compares the 5-year U.S. Treasury note and the implied cost of funding the government’s debt.
In time, as lower interest rate debt is replaced with higher interest rate debt, the benefits of lower rates work in reverse.
“Debt Service Costs At 1%” – Is It Possible?
We return to Janet Yellen’s message and walk through scenarios of why she is likely correct.
Balanced Budgets and Unicorns
In the five years leading up to the pandemic, nominal GDP grew at 5.03% annually. Let’s optimistically assume growth continues at 5% consistently for the next ten years. Now, let’s tack on an even bolder presumption: the government balances its budget every year for the next ten years. Thus, the amount of outstanding debt will remain constant. For context, in the last 57 years, there has only been one year in which the amount of debt has not increased.
In such a far-fetched scenario, the debt-to-GDP ratio would drop considerably to 70%. However, interest costs would equal 2% of GDP. Such is much better than the current 3.36% but double Janet Yellen’s 1% objective.
Budget surpluses for the next ten years would lower interest expenses even more and possibly get the interest expense to GDP ratio to 1%. However, the odds of a unicorn spraying rainbows across the sky and the government running a surplus are the same: zero percent.
Consequently, we exclude surpluses as a viable way to reduce the interest expense to a more manageable level.
Budget Deficits And The Magic Of Low-Interest Rates
Balanced budgets or surpluses are unrealistic, given the political and fiscal trends. Further, the economy relies heavily on government spending. While fiscal prudence would be good in the long run, the short-run effect would be a recession.
Instead of using pipe dreams as scenarios, let’s get realistic. The more likely, albeit still optimistic, scenario involves the debt and GDP growing at the same rate. Let’s also assume interest rates remain at current levels. In this exercise, we assume an average borrowing cost of 4.75%, which is a little below the current weighted average funding cost for the government. Under this “realistic” picture, interest expense would climb to 5.6% of GDP.
The only logical variable in the equation that can make Janet Yellen correct is the future interest rate.
To arrive at Yellen’s 1% figure, assuming debt grows at the rate of GDP, interest rates must be much lower.
In time, a weighted average interest rate of 0.85% would put the nation’s interest expense at 1% of GDP.
When Janet Yellen tells us the debt cost to GDP ratio will be 1% over the next ten years, she is really saying interest rates will be below 1% for the next ten years.
Therefore, Janet Yellen must believe that the recent spike in inflation and yields is an anomaly. If the pre-pandemic economic and interest rate trends resume, she will be correct.
Summary
Part of Janet Yellen’s job is to exude confidence to its investors. In this case, it means telling the public that the current jump in interest expenses will not last. While she would probably prefer to be straightforward and say interest rates will be much lower, she must also be sympathetic to the Fed’s job of getting inflation down. Therefore, to walk the party line, she must speak in code, so to speak.
Whether you agree with Yellen’s projection or not, the following CBO graph projecting interest costs as a percentage of tax revenues, courtesy of Bianco Research, highlights that the government has no choice but lower for longer interest rates. The current level of interest rates will bankrupt the nation.
The post Janet Yellen Suggests Much Lower For Much Longer appeared first on RIA.
recession fed gdp interest rates
Uncategorized
Shipping company files surprise Chapter 7 bankruptcy, liquidation
While demand for trucking has increased, so have costs and competition, which have forced a number of players to close.
Share this:
The U.S. economy is built on trucks.
As a nation we have relatively limited train assets, and while in recent years planes have played an expanded role in moving goods, trucks still represent the backbone of how everything — food, gasoline, commodities, and pretty much anything else — moves around the country.
Related: Fast-food chain closes more stores after Chapter 11 bankruptcy
"Trucks moved 61.1% of the tonnage and 64.9% of the value of these shipments. The average shipment by truck was 63 miles compared to an average of 640 miles by rail," according to the U.S. Bureau of Transportation Statistics 2023 numbers.
But running a trucking company has been tricky because the largest players have economies of scale that smaller operators don't. That puts any trucking company that's not a massive player very sensitive to increases in gas prices or drops in freight rates.
And that in turn has led a number of trucking companies, including Yellow Freight, the third-largest less-than-truckload operator; J.J. & Sons Logistics, Meadow Lark, and Boateng Logistics, to close while freight brokerage Convoy shut down in October.
Aside from Convoy, none of these brands are household names. but with the demand for trucking increasing, every company that goes out of business puts more pressure on those that remain, which contributes to increased prices.
Image source: Shutterstock
Another freight company closes and plans to liquidate
Not every bankruptcy filing explains why a company has gone out of business. In the trucking industry, multiple recent Chapter 7 bankruptcies have been tied to lawsuits that pushed otherwise successful companies into insolvency.
In the case of TBL Logistics, a Virginia-based national freight company, its Feb. 29 bankruptcy filing in U.S. Bankruptcy Court for the Western District of Virginia appears to be death by too much debt.
"In its filing, TBL Logistics listed its assets and liabilities as between $1 million and $10 million. The company stated that it has up to 49 creditors and maintains that no funds will be available for unsecured creditors once it pays administrative fees," Freightwaves reported.
The company's owners, Christopher and Melinda Bradner, did not respond to the website's request for comment.
Before it closed, TBL Logistics specialized in refrigerated and oversized loads. The company described its business on its website.
"TBL Logistics is a non-asset-based third-party logistics freight broker company providing reliable and efficient transportation solutions, management, and storage for businesses of all sizes. With our extensive network of carriers and industry expertise, we streamline the shipping process, ensuring your goods reach their destination safely and on time."
The world has a truck-driver shortage
The covid pandemic forced companies to consider their supply chain in ways they never had to before. Increased demand showed the weakness in the trucking industry and drew attention to how difficult life for truck drivers can be.
That was an issue HBO's John Oliver highlighted on his "Last Week Tonight" show in October 2022. In the episode, the host suggested that the U.S. would basically start to starve if the trucking industry shut down for three days.
"Sorry, three days, every produce department in America would go from a fully stocked market to an all-you-can-eat raccoon buffet," he said. "So it’s no wonder trucking’s a huge industry, with more than 3.5 million people in America working as drivers, from port truckers who bring goods off ships to railyards and warehouses, to long-haul truckers who move them across the country, to 'last-mile' drivers, who take care of local delivery."
The show highlighted how many truck drivers face low pay, difficult working conditions and, in many cases, crushing debt.
"Hundreds of thousands of people become truck drivers every year. But hundreds of thousands also quit. Job turnover for truckers averages over 100%, and at some companies it’s as high as 300%, meaning they’re hiring three people for a single job over the course of a year. And when a field this important has a level of job satisfaction that low, it sure seems like there’s a huge problem," Oliver shared.
The truck-driver shortage is not just a U.S. problem; it's a global issue, according to IRU.org.
"IRU’s 2023 driver shortage report has found that over three million truck driver jobs are unfilled, or 7% of total positions, in 36 countries studied," the global transportation trade association reported.
"With the huge gap between young and old drivers growing, it will get much worse over the next five years without significant action."
Related: Veteran fund manager picks favorite stocks for 2024
bankruptcy bankruptcies pandemic stocks commoditiesUncategorized
Wendy’s has a new deal for daylight savings time haters
The Daylight Savings Time promotion slashes prices on breakfast.
Share this:
Daylight Savings Time, or the practice of advancing clocks an hour in the spring to maximize natural daylight, is a controversial practice because of the way it leaves many feeling off-sync and tired on the second Sunday in March when the change is made and one has one less hour to sleep in.
Despite annual "Abolish Daylight Savings Time" think pieces and online arguments that crop up with unwavering regularity, Daylight Savings in North America begins on March 10 this year.
Related: Coca-Cola has a new soda for Diet Coke fans
Tapping into some people's very vocal dislike of Daylight Savings Time, fast-food chain Wendy's (WEN) is launching a daylight savings promotion that is jokingly designed to make losing an hour of sleep less painful and encourage fans to order breakfast anyway.
Image source: Wendy's.
Promotion wants you to compensate for lost sleep with cheaper breakfast
As it is also meant to drive traffic to the Wendy's app, the promotion allows anyone who makes a purchase of $3 or more through the platform to get a free hot coffee, cold coffee or Frosty Cream Cold Brew.
More Food + Dining:
- Taco Bell menu tries new take on an American classic
- McDonald's menu goes big, brings back fan favorites (with a catch)
- The 10 best food stocks to buy now
Available during the Wendy's breakfast hours of 6 a.m. and 10:30 a.m. (which, naturally, will feel even earlier due to Daylight Savings), the deal also allows customers to buy any of its breakfast sandwiches for $3. Items like the Sausage, Egg and Cheese Biscuit, Breakfast Baconator and Maple Bacon Chicken Croissant normally range in price between $4.50 and $7.
The choice of the latter is quite wide since, in the years following the pandemic, Wendy's has made a concerted effort to expand its breakfast menu with a range of new sandwiches with egg in them and sweet items such as the French Toast Sticks. The goal was both to stand out from competitors with a wider breakfast menu and increase traffic to its stores during early-morning hours.
Wendy's deal comes after controversy over 'dynamic pricing'
But last month, the chain known for the square shape of its burger patties ignited controversy after saying that it wanted to introduce "dynamic pricing" in which the cost of many of the items on its menu will vary depending on the time of day. In an earnings call, chief executive Kirk Tanner said that electronic billboards would allow restaurants to display various deals and promotions during slower times in the early morning and late at night.
Outcry was swift and Wendy's ended up walking back its plans with words that they were "misconstrued" as an intent to surge prices during its most popular periods.
While the company issued a statement saying that any changes were meant as "discounts and value offers" during quiet periods rather than raised prices during busy ones, the reputational damage was already done since many saw the clarification as another way to obfuscate its pricing model.
"We said these menuboards would give us more flexibility to change the display of featured items," Wendy's said in its statement. "This was misconstrued in some media reports as an intent to raise prices when demand is highest at our restaurants."
The Daylight Savings Time promotion, in turn, is also a way to demonstrate the kinds of deals Wendy's wants to promote in its stores without putting up full-sized advertising or posters for what is only relevant for a few days.
Related: Veteran fund manager picks favorite stocks for 2024
stocks pandemicUncategorized
Comments on February Employment Report
The headline jobs number in the February employment report was above expectations; however, December and January payrolls were revised down by 167,000 combined. The participation rate was unchanged, the employment population ratio decreased, and the …
Share this:
Prime (25 to 54 Years Old) Participation
Since the overall participation rate is impacted by both cyclical (recession) and demographic (aging population, younger people staying in school) reasons, here is the employment-population ratio for the key working age group: 25 to 54 years old.
The 25 to 54 years old participation rate increased in February to 83.5% from 83.3% in January, and the 25 to 54 employment population ratio increased to 80.7% from 80.6% the previous month.
Average Hourly Wages
The graph shows the nominal year-over-year change in "Average Hourly Earnings" for all private employees from the Current Employment Statistics (CES). Wage growth has trended down after peaking at 5.9% YoY in March 2022 and was at 4.3% YoY in February.
Part Time for Economic Reasons
From the BLS report:"The number of people employed part time for economic reasons, at 4.4 million, changed little in February. These individuals, who would have preferred full-time employment, were working part time because their hours had been reduced or they were unable to find full-time jobs."The number of persons working part time for economic reasons decreased in February to 4.36 million from 4.42 million in February. This is slightly above pre-pandemic levels.
These workers are included in the alternate measure of labor underutilization (U-6) that increased to 7.3% from 7.2% in the previous month. This is down from the record high in April 2020 of 23.0% and up from the lowest level on record (seasonally adjusted) in December 2022 (6.5%). (This series started in 1994). This measure is above the 7.0% level in February 2020 (pre-pandemic).
Unemployed over 26 Weeks
This graph shows the number of workers unemployed for 27 weeks or more. According to the BLS, there are 1.203 million workers who have been unemployed for more than 26 weeks and still want a job, down from 1.277 million the previous month.
This is close to pre-pandemic levels.
Job Streak
| Headline Jobs, Top 10 Streaks | ||
|---|---|---|
| Year Ended | Streak, Months | |
| 1 | 2019 | 100 |
| 2 | 1990 | 48 |
| 3 | 2007 | 46 |
| 4 | 1979 | 45 |
| 5 | 20241 | 38 |
| 6 tie | 1943 | 33 |
| 6 tie | 1986 | 33 |
| 6 tie | 2000 | 33 |
| 9 | 1967 | 29 |
| 10 | 1995 | 25 |
| 1Currrent Streak | ||
Summary:
The headline monthly jobs number was above consensus expectations; however, December and January payrolls were revised down by 167,000 combined. The participation rate was unchanged, the employment population ratio decreased, and the unemployment rate was increased to 3.9%. Another solid report.
Wendy’s has a new deal for daylight savings time haters
Watch Live: President Biden Reminds Americans Just How Good They’ve Got It Thanks To Him
Watch: President Biden Delivers The “Darkest, Most Un-American Speech Given By A President”
People Who Received Ivermectin Were Better Off, Study Finds
Interest rates, the best it gets. It’s time to deploy cash
Is the biotech market rally real? Data suggest comeback in private, public markets
COVID-19 May Lead To Persistent Cognitive Impairment, Brain Fog, And Lower IQ Scores
Europe Is Alarmed Enough To Begin Wargaming A Food Crisis
Wealth Inequality by Age in the Post‑Pandemic Era
Normalise the underlying conditions when “rating” a company’s share price
-
Uncategorized2 weeks agoAll Of The Elements Are In Place For An Economic Crisis Of Staggering Proportions
-
Uncategorized1 month agoCathie Wood sells a major tech stock (again)
-
Uncategorized3 weeks agoCalifornia Counties Could Be Forced To Pay $300 Million To Cover COVID-Era Program
-
Uncategorized2 weeks agoApparel Retailer Express Moving Toward Bankruptcy
-
Uncategorized3 weeks agoIndustrial Production Decreased 0.1% in January
-
International2 hours agoWalmart launches clever answer to Target’s new membership program
-
Government1 month agoWar Delirium
-
Uncategorized3 weeks agoRFK Jr: The Wuhan Cover-Up & The Rise Of The Biowarfare-Industrial Complex