In this issue of the peel:

• The economy is doing that annoying thing where everything seems almost too good. Inflation? Chillin’. Personal incomes? Getting fatter. Spending? Still going strong. But when things get too nice, you just know there’s a storm brewing.

• Meanwhile, space stocks are launching, Wynn Resorts is living it up in Vegas, and Vail Resorts might be sliding down the slope—literally. Costco is serving up a solid "mid," because why not?

• And China? Well, they’re slapping financial band-aids on their ailing economy, hoping that their stimulus party doesn’t turn into a hangover of epic proportions.

Market Snapshot

Banana Bits

• A breakdown of the money behind all the super annoying political ads you’ve been unfortunate enough to suffer through.

• OpenAI has to have the worst financials ever for a $150bn startup.

• Nuclear might be the solution to more than just the burgeoning energy crisis.

• Hedge funds are pouring into China faster than the CCP censors a viral meme.

• CNN is unveiling a new approach to paywalls, sure to be even more annoying than their average show host.

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Macro Monkey Says

Can’t Have Nice Things

Getting a new shirt, car, apartment, relationship,—whatever—feels incredible. It’s exciting, fresh, clean, and can feel like an awakening into an age of peace, tranquility, and endless potential.

Then, at a certain point, you realize quality fades, nothing ever lasts, and it’s all downhill from here…

Happy Monday, by the way!

That’s essentially what the economy is experiencing right now. The trends we’re seeing aren’t new but are borderline optimal. So, you know what that must mean for the future.

Let’s get into it.

The Numbers

Yesterday, the Bureau of Economic Analysis (BEA) released August's Personal Income and Outlays report, covering Personal Consumption Expenditures and the Fed’s favorite monthly inflation report.

The PCE Price Index, the Fed’s preferred measure of inflation, continued to decline in August. The headline figure clocked in at 2.2% annually, below expectations and well below July’s 2.5%.

However, the Core PCE Price Index is causing jitters. Excluding volatile food and energy prices, PCE inflation increased to 2.7% in August, up from 2.6% in July.

Both are broadly trending in the right direction and dancing around the Fed’s target of 2% annually. 

That 2% target isn’t meant to get inflation to clock in at 2% every single reading. JPow and the gang know that’s unrealistic, so this target refers to the Fed’s goal for the long-term average inflation rate.

Given that the decade leading up to the pandemic posted average headline and core annual PCE inflation of 1.4% and 1.5%, respectively, remaining over 2% isn’t awful. But, looking at the monstrosity of 2021-2023, we for sure don’t need any more upticks.

Thankfully, that inflation came with a raise for the entire economy.

Personal incomes grew 5.6% during the year through the end of August. After Uncle Sam stole your lunch money, incomes grew 5.4%. And finally, after adjusting for Uncle Sam’s mooching and inflation, incomes grew 3.1% annually. Not bad at all.

It’s especially encouraging to observe strong income growth as the labor market (allegedly) weakens. 

Keep in mind—what really matters behind all this nonsense is its impact on consumer spending. Spending remain upwards of 70% of the U.S. GDP, and in August, we were still going strong.

American consumption increased 5.2% from August 2023 through last month and, after adjusting for inflation, grew 2.9%, both healthy levels.

The good news is that most of that spending was done on services, generally a far greater percentage of a household’s income statement than goods. Services spending increased by 0.4% for the month, while goods spending fell by 0.1%.

However, some of the most discretionary spending categories led the way lower last month. Similar to observations from Thursday’s GDP and Durable Goods data, restaurant spending declined, but other recreational activities increased.

The Takeaway?

It’s scary how well the economy is performing—and not just because spooky szn is right around the corner.

Inflation, incomes, spending, GDP growth, and almost everything outside of housing and durable goods are about as good as we could ask for without risking a re-triggering of inflation.

Markets tend to prefer when economic conditions are improving, not peaking. Remember, markets are always forward-looking.

Given that conditions are about as good as they get, it’s difficult to be optimistic. It seems that the narrative now is focused on making our current macro state last as long as possible as opposed to necessarily seeking to improve it.

This is exactly why we can’t have nice things—as soon as they become nice, all we do is worry about how and when that will change. 

Again, happy Monday.

Career Corner

Question

Could an associate who started less than 1 month ago ever have the ability to give a referral?

Answer

Likely yes. You don’t know their history with that group or the individuals in it. Could’ve been a summer intern, could’ve worked previously with the group head, etc.

Head Mentor, WSO Academy

Check out WSO Academy

What's Ripe

Space Stocks (RKLB, LUNR, RDW) 12.54%, 10.03%, 3.18%

• Rocket Lab was rocket fuel for the entire space industry on Friday. It wasn’t exactly rocket science to figure out why, with KeyBanc providing liftoff.

• Analysts raised their price target on Rocket Lab without explaining why, vaguely attributing the upgrade to “increased visibility/confidence in RKLB’s ability to scale its business.”

• The market smelled the firm’s bullsh*t, implying the rest of the industry must have a reason for takeoff as well.

Wynn Resorts (WYNN) 7.24%

• Las Vegas and stability generally go together, as do Las Vegas and a priest. However, according to Morgan Stanley, Wynn Resorts owns that town.

• On Friday, the investment bank raised its rating on the casino and hotel operators, moving shares to Overweight from Equal Weight.

• MS believes Wynn is the best positioned among its peers in the massive Las Vegas market. Plus, any news about the firm’s integrated resort under construction outside Dubai is expected to be an upside catalyst.

What's Rotten

Vail Resorts (MTN) 3.91%

• I’m sorry. Is getting sh*tfaced and then barrelling down the side of a mountain not cool anymore? Maybe the whole travel boom is on thin ice after Vail’s latest earnings.

• The world’s largest ski resort operator reported flat sales and an earnings decline of 14% for FY’24, both missing estimates. Winter is coming, but so are layoffs.

• Vail is axing 14% of corporate jobs and less than 1% of their 45k seasonal workers as part of a turnaround plan to save $100mn by year-end 2026.

Costco (COST) 1.75%

• Defining the word “mid,” Costco’s quarterly earnings summarize well the story of American consumers in a dramatically uncertain macro backdrop.

• Earnings of $5.29/sh beat the $5.08/sh expected, while sales of $79.7bn just missed. But, with a pre-earnings YTD return of 37%, they can’t be too mad.

• The firm’s expansion beyond food while maintaining lower prices due to its annual subscription structure has only grown the cult following among consumers.

Thought Banana

Chinese Stimulus Party

It’s a poor carpenter that blames their tools. 

But, at the same time, you can’t chop down a tree with a pool noodle.

That’s not stopping China from trying, however. The country just unveiled another massive round of stimulus for its ailing economy, just in a really weird way.

Let’s dive in.

What Happened?

There’s a lot wrong with the Chinese economy, including Kurt Cobain’s levels of depression among consumers, sky-high youth unemployment, and a worsening trade position. 

But arguably, the driving force behind these issues is a massive debt deflation cycle in the country’s real estate market, which once accounted for 1/3rd of GDP.

Activity has dried up faster than a VPN in China, leading to many of these issues, like weak employment and consumer spending.

This in itself has created a deflationary cycle, which is horrific for any economy but particularly damaging in China due to the economy’s reliance on heavily indebted property developers and real estate investors.

The debt-deflation cycle works like this: 

• Because demand is so weak economy-wide, deflation sets in. 

• This reduces the real value of assets, like real estate.

• Nominally, debt levels remain the same. But the real debt burden increases as the yuan's purchasing power increases (because CN¥ needed to pay that debt could be used to purchase more goods and services than before deflation).

• Desperate to service the debt, the developer sells properties at lower prices, pushing the market down further.

• As more businesses do the same, deflation and debt burdens spiral.

Scary stuff. To fix this, the government can initiate direct lending programs to affected programs or conduct bailouts using straight cash, homie.

But China isn’t doing much of that. Instead, the stimulus measures announced include:

• Decreasing reserve requirements to encourage banks to lend to property developers and other real estate companies.

• Decreasing the down payment required on a second home from 25% to 15%.

• Sending cash from the federal to local governments to purchase unsold properties and convert them into state-owned social housing.

• Lending from the PBOC to institutional investors to buy Chinese stocks.

• A re-lending facility to allow companies to buyback shares from investors.

The Takeaway?

This is a classic bandaid on a bullet hole move.

China is trying to financially engineer its way out. However, as we saw during Japan’s past real estate-driven debt deflation cycle, the only solution is to remove regulatory restrictions from the property market and lend to direct market participants.

President Xi and the CCP could remove restrictions on mortgage lending, reform its local government land sale practice, remove punitive measures on renters, lend directly to developers and homeowners, and a million other things.

But that means the CCP and Daddy Xi would have less direct control over the market. I’m no expert on communism, but I don’t think that’s something they get hyped about.

The Big Question: Will China need to take further steps to fix its economy? What else could the CCP do?

Banana Brain Teaser

Previous

If the amount of federal estate tax due on an estate valued at $1.35mn is $437,000 plus 43% of the value of the estate in excess of $1.25mn, then the federal tax due is approximately what percent of the value of the estate?

Answer: 35.6%

Today

Running at their respective constant rates, Machine X takes 2 days longer to produce w widgets than Machine Y. At these rates, if the two machines together produced 5/4w widgets in 3 days, how many days would it take Machine X alone to produce 2w widgets?

Send your guesses to [email protected]

How Would You Rate Today's Peel?

Happy Investing,
David, Vyom, Ankit & Patrick

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