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The Economy – A Ranking on a Scale of Peach Bellini to Black Hole

June 3, 2022 · 18 min read

Take a look at your investment portfolio. If it looks anything like mine (majority red), you may feel the need to rant a little. I certainly feel the need. I am going to do what anyone who has been negatively impacted by politics or the economy would do. That is, take zero personal responsibility and throw blame in every possible direction other than myself.

I have a draft blog post from back in June 2021 called “Ranking the economy on the scale of Peach Bellini to Black hole.” Peach Bellini being everything is peachy, and black hole being a depression era hell. I spent an hour creating the graphic above that I am now happy I can share with the world.

I decided not to post the blog last year because it was turning into a ton of work and I was losing motivation. However, given the state of the economy now, I am going to paste in the work I had done so far, and include my current thoughts on the state of things.

The main part of the original post I would draw your attention to is inflation. I will discuss why I am surfacing this again in the current thoughts section below.

As an enticement to keep reading, I will tell you my overall conclusion. I always hesitate to make bold predictions because I hate being wrong, and especially being wrong “on the record.” But considering this site is viewed by almost no one (Hi Ben), my exposure is very low, and at this point, I don’t think my prediction is that bold. So here it is. We are currently in a long overdue recession. Because the recession has been so long delayed due to artificial factors like government money printing and record low interest rates, I believe this recession will be exceptionally painful.

The original, unfinished post – Written June 2021

Let’s be brutally honest upfront. If you are reading this, you are probably like me. A regular idiot, with no access to powerful people or information. We’re not well connected enough to get tips on the financial market. We aren’t rich enough to have money managers contacting us. Our personalities are average at best, meaning we’ll never earn income on Youtube. And our faces are not symmetrical, so no chance we end up rich and famous.

That means in order to rise above the mundane and average, we have to wake up early, watch less TV, read more, exercise, eat healthy, and get plenty of sleep. Like that’s ever going to happen.

No matter what the conclusion of this article ends up being (I genuinely don’t know at this point), here is one thing I know for sure. If I conclude that we are heading for trouble, and then trouble does not show up, I will be relieved. But remember: Even a broken clock is right twice a day, so I can say I was right whenever the trouble eventually comes around.

Depending on the day, you may read positive news on the economy, or negative. So are we good, or are we not?

I’ll be organizing this post by a series of signals that will hopefully answer that question.

I’ve created and patented a ranking system for each signal to judge the seriousness of them. I will use the ranking system to assign an overall score of how screwed we all are. Should we reach black hole level screwed, I encourage you to consider taking to the seas.

The signals

Insider selling
Inflation
Bankruptcy and job statistics
~~The repo market~~
~~Debt~~
~~Leverage~~
~~Banks and Hedge funds~~
~~Increase in fraud?~~
~~Volatility~~
~~Mortgages~~
~~Commercial Real Estate~~

Insider selling

Insider selling is when employees/directors of companies sell their shares. If insiders of the company are buying, it likely means they feel good about the future.

Let’s start with the lizard man himself. Mark Zuckerbot.

There is a great site called finviz.com that lets you see trading transactions from insiders within companies. Here are some of Zuckys recent transactions. (orange are sell transactions)

Ok, maybe he just needed some liquidity to buy some more WD-40 to oil his limbs. Let’s look back a bit further.

So Zuckster is selling shares basically every day for the last couple months. YTD he has sold 5.8 million shares for a total cash value of $1.7 billion. Well that doesn’t tell us much. Maybe he has just finally realized Facebook is junk, so he’s cashing out. Let’s look at other powerful people across different industries.

Company	Seller	Date Range	Shares Sold	Cash	Recent buying?
Amazon	Jeff Bezos	May 2021	2,000,000	$6,632,118,018	No
Netflix	Reed Hastings	Nov-Dec 2020	650,657	$333,517,663	No
Apple	Tim Cook	Aug 2020	265,160	$131,761,779	No
Google	Sergey Brin	YTD 2021	338,898	$492,266,116	No
Google	Lawrence Page	YTD 2021	333,336	$522,992,697	No
Caterpillar	Joseph Creed	May-Jun 2021	24,462	$4,030,264	No
Moderna	Stephane Bancel	YTD 2021	661,028	$100,098,713	No
Wal-mart	Robson Walton	YTD 2021	13,633,021	$1,913,245,196	No
CVS	Larry Merlo	YTD 2021	1,583,165	$106,082,659	3K shares
Best Buy	Corie Barry	YTD 2021	31,377	$3,660,892	No
Cloudflare	Matthew Prince	YTD 2021	785,766	$59,007,186	No

*Time of writing is early June

Follow the links to a few of these. In many cases there is no buying happening within the company at all, even from other insiders.

Let’s not panic yet though. A lot of these folks are getting a bit older, and have had share holdings for years. GIven their massive wealth, they probably don’t need to continue buying their own stock. Plus regular selling activity is probably normal given many of these people’s lavish lifestyles.

Rank

Taken at face level, this could be worrying, but it’s not a big enough sample size to truly say these people know something we don’t. I’d assign it a rank of 3.

Inflation

I wrote a post on what inflation is and what it means for us if you want a refresher. It’s clear inflation is on the rise; what’s not clear is by how much. StatsCan released May numbers recently showing a rate of 3.6%, which was a bit higher than their expectations.

3.6%. Three point six percent. Does that seem like an accurate representation to you?

The main Consumer price index item I can find that sits under the range of 3.6% is food. So good for us I guess, we kept food costs low.

Here is a chart of the Canadian consumer tax index as well. It doesn’t have 2020 data yet, but the trend is clear. Like everything else, our taxes continue to go up. (Source)

I would not be surprised to see much higher inflation numbers reported by Canada, and especially by the States considering how much money printing and stimulus is happening there.

The Fed has said they don’t plan on increasing interest rates (putting downward pressure on inflation) until 2023. And that was after they said inflation is rising faster than they thought. Bank of Canada has said they will potentially increase in 2022. That is a long time to continue the cycle of printing money.

Rank:

The inflation signals have me concerned. The governments keeps pumping out articles saying inflation is nothing to worry about and is a temporary spike that will normalize soon. Now I’m even more concerned.

This is somewhere between communism and asteroid strike level scary. I will meet in the middle at nuclear warfare, giving it a rank of 8.

Bankruptcy and Job Statistics

Don’t fret, I’ve used the reverse sandwich technique and placed some good news in among the bad.

The image below is chapter 11 filings for businesses in the US.

Bankruptcies spiked a bit in 2020, but are already trending down significantly in 2021 when you annualize the YTD figures.

Individual bankruptcy data is also trending down and even 2020 was significantly lower than the prior few years at just over 500K bankruptcies compared to generally in the 700K range in prior years..

Unemployment rate data from US Bureau of Labor Statistics

Unemployment has fallen nicely since its high in 2020 of almost 15%. 5.8% in May 2021 is higher than average in years like 2016-2019, but shows a nice recovery.

Rank

Peach Bellini baby. 1.

Current Thoughts

Let’s start with inflation. As I stated early on, I am just a regular idiot, without access to special data. I didn’t even spend a lot of time researching. But it was very apparent to me in July 2021 that inflation was way higher than the numbers our governments were reporting. Why is that? Well for starters, since I am not a politician, I live in the real world, not a fantasy land. I am actually impacted when the price of goods goes up. So it is not hard to notice when life is getting more expensive.

It wasn’t just me who knew inflation was bad already a year ago. Everyone knew. To be fair, part of the problem is the inflation reporting is always a lagging metric. As in we are looking at change over a year ago, and the reporting usually doesn’t come out until three months after the period they are reporting on. Still. Reading articles last year that on average, our prices had only gone up 3.6% and that inflation was just temporary and should normalize quickly was a slap in the face.

Here is some of the barrage of articles that were coming out telling us not to worry:

The financial times even had the balls to publish this article in January 2022 saying they are still betting that inflation is transitory.

These are supposed to be the top economic minds. These are the people making decisions on all of our behalf, and they refuse to state the obvious until the obvious has walked up to us, stolen our wallets, punched us in the face, and broken our kneecaps with a lead pipe. Fast forward to now and yea, everyone agrees inflation is out of control and not transitory, but it’s a little too late. Instead of raising rates, or stopping money printing a year ago, the train kept on rolling. I have a hard time believing those in the Bank of Canada or the fed didn’t see this coming. It was just not politically convenient. Now there is a war between Russia and the Ukraine that acts as a nice event to post blame on.

I will say, it could be worse: Turkey’s inflation soars to 73%, a 23-year high, as food and energy costs skyrocket.

So where are we at today?

Our politicians and officials have acknowledged they were wrong about inflation being transitory and it is a problem. Of course it’s not their fault, it’s the pandemic and the war.

WASHINGTON, June 1 (Reuters) – High inflation is being driven by global phenomena that could not be anticipated, including Russia’s invasion of Ukraine, U.S. Deputy Secretary of the Treasury Wally Adeyemo said on Wednesday, adding that U.S. demand remains strong.
U.S. Treasury’s Adeyemo says global phenomena, war driving inflation

It makes me angry reading stuff like that. Inflation is certainly impacted by global phenomena, but have some humility and admit that our governments and monetary policies were involved as well, and much more significantly involved than the war, which only started a few months ago. We had runaway inflation long before April 2022 when the war started.

Next on the agenda is a recession. There are currently articles circulating from banks or financial columns saying that a recession is coming. Biden said a recession is “not inevitable.” Great political hedging there.

In my opinion, we are already in the beginning stages of a recession, we just don’t have the reporting to confirm it yet. A recession used to be defined as two quarters of negative GDP growth. Now it is just defined as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

Like inflation, the warning signs are fairly obvious, and we don’t need to look to the talking heads to tell us what is happening. Here are some other major signals that I believe tell us we are in a recession. Inflation would be on the list, but I have already discussed it.

Increased layoffs
Reduced discretionary spending
Rising interest rates

Increased layoffs

Here is what the layoff landscape has looked like this year so far. Many of these links were just announced in the last week or so. Though tech is disproportionally affected right now, there are plenty of non-tech examples in this list.

There are many more examples, but I think the list is dramatic enough to leave an impact. Interestingly, US job statistics were released on June 3rd, and total jobs added rose by 390,000 in May, which was better than expected. Of course, this doesn’t say much. Were they low quality jobs that were added? Were they full time or part time? Often when hardships start increasing, people take more lower quality jobs like serving or retail and work part time in addition to their regular jobs. I am not convinced these “solid” labour numbers are an indication the market is in a good state or improving.

Here is a chart from a site called layoffs.fyi that shows how layoff events and numbers are trending. May has seen a rapid increase close to pandemic levels. The numbers three days into June don’t look promising either considering we have 90% of the month to go still.

The chart says “startup layoffs” but the data includes companies like Netflix which I would hardly count as a startup, so not sure how they define startup. This site seems to only be the tech industry as well.

Reduced discretionary spending

Here is a rather funny predictor of recession:

Strippers say a recession is guaranteed because the strip clubs are suddenly empty

If even the people who frequent strip clubs are cutting back, it should tell you bad things are on the horizon.

It’s difficult to track discretionary spending as a whole as there are so many categories. There are several stats sources we can go to that can help give us a sense though.

US consumer confidence dashboard. This is a survey sent out to ~6000 people every day asking a couple questions about personal finance.

There is also a useful deck for US consumer spending as of April 2022. I’ll share a couple charts from the deck.

One thing I want to call out. Just because consumer spending might be reported as increasing, doesn’t mean sentiment is strong or the economy is healthy. You can see from the chart above that spending is increasing in areas like gas and housing, but those are involuntary increases due to inflation. So increased consumer spending doesn’t mean that the economy is strong. In fact, the increased spending in light of the huge declines in things like recreation and airfare is a big concern. It means people are spending more, but are forced to spend more on necessities. Usually people have money left over for discretionary, but that looks like it is becoming less the case.

Take note as well. These are US numbers. We know housing in Canada is much more expensive.

Rising interest rates

The impact of rising interest rates is broad.

Mortgages become significantly more expensive. Especially since we are dealing with much bigger mortgages than we’ve ever had, even moderate increases in interest rates can results in tens of thousands in increased interest costs over the life of a mortgage. Ten years ago in my old hometown, a very solid house, 3000+ square feet, fairly new, would set you back about $250-300K. Those same houses are selling for $1.3M and up now. Imagine signing up for a $1M mortgage at an interest rate of 1.2-1.5% which was what we were seeing at the bottom end of the market. Then all of a sudden rates are rising to 2.5% and show no sign of slowing down. That 1-2% increase over a mortgage that size would be a few hundred thousand of interest expense over the life of the mortgage and potentially crippling monthly mortgage payments for many owners.

Rising interest rates also impact valuations of companies. A discounted cash flow analysis takes the future anticipated cash flows of a company, and discounts them using a weighted average cost of capital (often related to interest rates) to get the value of all those future cash flows in todays dollars. With interest rates rising, the cost of capital rate is higher, meaning future cash flows are discounted at a higher rate, meaning valuations come down.

Lower valuations mean that a company needs to give away more shares (dilute themselves more) to raise the same amount of money they could have raised at a higher valuation. It makes it harder to retain control of a company as you have to give away more and more of it to raise the money you need. As a result, many companies will turn to debt to raise funds. Debt is tied to interest rates as well, which means the cost of borrowing money is higher, leaving less cash flow for operations, and more required to give to the banks.

The result of increased rates in the tech ecosystem has been a complete halting of fundraising. If a company needs cash, they are either forced to take it in a down round (lower valuation) or have to bring on debt with unfavourable terms. Companies that don’t need the cash are just freezing any financing activities and focusing on operations. The IPO market is also at a dead halt. There was a massive amount of IPO activity over the last two years, but it has completely dried up.

Companies that invested aggressively on the bull run of the last two years are going to be in trouble if they don’t have significant runway to carry them through this dry season. That is why we are seeing so many layoffs right now. Companies over leveraged themselves with hiring and investments during the bull market of the last two years and now the party is over.

Not only is access to capital more expensive, but it is more difficult to get. Investors are shifting away from riskier investments now that interest rates are up. When interest rates are near zero, there is not many options to park money to get a decent return, so investors turn to riskier investments like tech startups to invest their money. That party is also over.

I expect to see a lot more layoffs this year as companies run down their cash reserves and adjust for a slowing economy. I expect we will lose a number of companies as well. The surge in layoffs and bankruptcies will further exasperate the economic issues as people have to take unemployment income and drastically reduce spending.

How screwed are we?

Governments, banks, large companies, and those handling large amounts of capital are the ones adjusting for a downturn right now. They are raising interest rates, running layoffs, freezing investments, etc. These changes will flow through to the consumer soon enough, and that is when we will start seeing official data and articles come out confirming we are in a recession.

Circling back to my patented rating system. In light of all the above, I would say we are somewhere around a 7 or 8 level of screwed which is equivalent to somewhere between living under communism or experiencing nuclear warfare.

Have a great day!

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The Economy – A Ranking on a Scale of Peach Bellini to Black Hole

The original, unfinished post – Written June 2021

The signals

Insider selling

Rank

Inflation

Rank:

Bankruptcy and Job Statistics

Rank

Current Thoughts

So where are we at today?

How screwed are we?

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