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Santa Sleighs Stimulus Spending

đź’¸ Consumer spending remains strong according to BofA as consumers pivot from wasting money on themselves to wasting money on other people.

November 13, 2024

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In this issue of the peel:

  • đź’¸ Consumer spending remains strong, according to BofA, as consumers pivot from wasting money on themselves to wasting money on other people. 

  • 🍗 Shopify is the only thing in Canada not falling apart, while Americans’ appetite for meat gave Tyson a beefed-up day. Find out why Trump Media shares declined, and why Home Depot’s earnings could use some (home) improvement.

  • đź’ł Few things are as exhilarating as gambling with borrowed money. Thankfully, borrowing is getting easier and easier, according to this quarterly Fed report.

Market Snapshot

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Macro Monkey Says

Santa Claus Stimulus

Fed Chair Jerome Powell costs the taxpayer $190k/yr to print money, pump my portfolio, and not destroy the entire economy… and yet we still got 9.1% inflation.

Meanwhile, another key tool of monetary policy costs us just a few cookies and a glass of milk one night per year. 

Santa Claus is set to unleash a new round of stimulus across the U.S. and global economy in the coming weeks, encouraging us to waste money on other people for a change.

And it’s already boosting the macro outlook. Let’s get into it.

The Numbers

According to Bank of America’s Consumer Checkpoint released yesterday, aggregate credit and debit card spending per household grew 1% annually in October.

That’s a welcome improvement from September’s 0.9% YoY decline. However, on a monthly basis, spending in October fell 0.1% after rising 0.6% in the prior month. 

The uptick in annual spending growth from September to October is largely attributable to a jump in outlays in the middle and lower income brackets, from near 0.0% growth in September to 0.5% in October.

High-income households increased their rate of spending growth too, clocking in at a fat 0.9% last month.

Usually, this is where we wonder if these levels of spending growth can be maintained. Luckily, the Holiday season is right around the corner (or here, depending on how big a Mariah Carey you are), and consumers are ready to spend big:

According to BofA’s Holiday Survey, Americans plan to spend an additional $2,100 “outside of typical obligations or necessities” this Holiday season.

That’s a 7% YoY rise if it comes to fruition. Judging by the increase 2024 spending already has over 2023, we’re right on track.

We can thank kind, sweet rich people for the majority of that spending increase—Holiday related or not. Wages have grown especially well in this income cohort compared to lower and middle-income households:

Those few seconds in which wage growth was concentrated on the lower end of the earning spectrum appear to be over. So, make sure to thank your local rich person if spending is up in Q4.

In addition to sparking our inner French Revolution at the sight of high earners driving wage growth, higher-income households typically have a lower propensity to spend compared to their lower-earning counterparts.

A lower propensity to spend means wage gains are more likely to be saved or invested—a.k.a, not put back into the economy to drive GDP growth.

Consumer spending encompasses 66-70% of U.S. GDP in any given period. So, any threats to wage growth on the lower-income end of the spectrum should be treated like how a mother bear treats someone who gets too close to her cubs.

However, spending is usually okay as long as real wages are growing for lower and middle-income consumers. The declines in growth should be monitored, but we don’t have to storm the Bastille today.

Plus, if we take a look at where that spending growth is coming from, it gets even more constructive for the U.S. economy:

September spending delivered huge upticks in money wasted on clothes and getting fat—two high beta spending categories we love to see posting an increasing rate of acceleration. 

As we discussed yesterday, restaurant spending and apparel spending are usually some of the first categories to get cut from consumer budgets when hardship is anticipated. 

Based on September’s increases in clothing, restaurant, and discretionary services spending, the U.S. economy looks more than ready to pump on Santa’s stimulus.

The Takeaway?

Driven by strong real wage growth, declining inflation, a normalizing labor market, and high deposit balances—along with being evidenced by growth in spending on high-beta, discretionary categories—consumer spending in the U.S. looks like it will remain solid.

As the largest bank in the U.S., Bank of America’s data serves as an effective proxy for making inferences about the rest of the economy. 

Of course, capricious changes in the macro narrative/consumer sentiment could make me look like an idiot for saying that anytime it wants to, but I’ll keep my fingers crossed that we all hold it down.

Career Corner

Question

One of the responses I got from a cold email was basically just, "If you're interested in the position, send me your CV." This is definitely positive, but I think a phone call would still help me learn about the bank and allow me to speak about that in an interview.

Should I just say yes, I'm interested, and send him the CV, or should I ask again for a quick phone call?

Answer

You definitely have to respond with your CV, and you can follow up by saying you would still love to chat if he/she has time.

Head Mentor, WSO Academy

What's Ripe

Shopify (SHOP) 21.04%

  • You know that meme where the little girl is smiling while watching her house burn down? That’s what’s happening here—Shopify is the little girl smiling as its home country of Canada burns down. 

  • Revenue surged 24% YoY to $2.16bn, beating estimates for $2.12bn. Free cash flow swelled and posted a margin of 19% while net income grew 15% to $828mn.

  • Both merchant and subscription service units grew sales by 26% while gross merchandise value rose by 24%. Guidance beats as execs are fired up for the Holiday season.

Tyson Foods (TSN) 6.55%

  • Not to flex how loaded I am, but Tyson can thank me for the revenue beat last quarter as I eat their overpriced chicken tendies almost every day for lunch.

  • In fact, price hikes were almost the only reason the company beat. Beef was the only segment to increase in both price and quantity as chicken volume fell while pork prices declined.

  • Still, revenue growth of 1.6% to $13.6bn beat estimates, while EPS of $0.92/sh did so too. FY’24 revenue beat guidance, but Tyson expects flat or declining sales in 2025.

What's Rotten

Trump Media & Technology Group (DJT) 8.80%

  • The only thing more volatile than the political climate in the U.S. is shares in our President-elect’s stock. Gotta love America, but it appears the “Trump trade” is changing.

  • Going into the election, Trump Media and, eventually, betting markets were the only straightforward ways to bet on a Trump win. But, now that he did win…

  • The Trump trade is flipping to assets with fundamental reasons to buy them, such as the rise in BTC, USD, and most stocks in the S&P 500 over the past week. 

Home Depot (HD) 1.28%

  • Looks like Mike Rowe has some competition as Home Depot is claiming to be the GOAT of Home Improvement, but Q3 was far from the GOAT of quarters.

  • Sales of $40.2bn beat expectations despite a 1.3% decline in same-store sales. Same-store sales fell 1.2% in the U.S., far lower than the 3.2% expected.

  • Earnings beat as well but declined 4.3%. The slowdown in housing and other big purchases from U.S. consumers has weighed, but upbeat guidance suggests that may change.

Thought Banana

SLOOSening Up

If you want an alternative to the phrase “like taking candy from a baby” that doesn’t make you sound like a future predator, try “like getting approved for a mortgage in 2024.”

It’s getting easier to convince people to lend you money. Let’s dive in.

What Happened?

Yesterday, the Federal Reserve released its quarterly Senior Loan Officer Opinion Survey (SLOOS) for the third quarter.

Basically, the report asks loan officers if they’re tightening or loosening their credit standards for making loans and if demand for these loans is increasing or decreasing.

Remember that it’s just a survey, which means it’s about as reliable as a wet paper bag. But until we see the actual data, we’ll rock with it for now.

Almost across the board, loan officers report loosening standards along with higher demand. Notably, however, there was a sharp decline in demand for Commercial and Industrial (C&I) loans from July to October:

It’s understandable for businesses to be more hesitant to take on more credit when there’s extreme opacity in the macro backdrop, but now that we know who the next President will be and rates continue to move lower, this trend likely won’t persist.

It’s especially surprising to see C&I loan demand fall while demand for loans in the beleaguered commercial real estate (CRE) sector is spiking as lending standards plummet.

On the mortgage side, lending standards were unchanged for most borrowers but shot higher for subprime applicants… probably a good thing if we want to avoid GFC 2.0.

The demand followed a similar trend, declining only for the poor loser-I mean, *subprime borrowers:

Finally, both borrowers and lenders increased their willingness to take on and issue consumer loans. 

The Takeaway?

Like everything else in the economy, lending standards and loan demand are normalizing to their pre-pandemic trends.

As rates decrease, demand will increase. As the monetary policy and broader economic outlook become more salient, lending standards will decrease, giving us an ideal backdrop for a normalized credit market. 

Speaking of loan demand, my brokerage keeps “demanding” I pay off something called a “margin loan”? Pretty sure it was a scam, so I just deleted the app.

Anyway, have a good Wednesday.

The Big Question: At which point does this trend go from “normalizing” to “problematic”? Could the election and anticipated less financial regulation trigger even lower standards and higher demand?

Banana Brain Teaser

Previous

In a numeric table with 10 rows and 10 columns, each entry is either a 9 or a 10. If the number of 9s in the nth row is n-1 for each n from 1 to 10, what is the average (arithmetic mean) of all the numbers in the table?

Answer: 9.55

Today

The points R, T, and U lie on a circle that has a radius of 4. If the length of arc RTU is (4Ď€/3), what is the length of line segment RU?

Send your guesses to [email protected]

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Smart people go broke because of liquor, ladies, and leverage.

Charlie Munger

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David, Vyom, Ankit & Patrick