The Postal Illuminati

Oct 19, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

This week kicked off the start of earnings season and from the looks of it most reports were solid.  Admittedly it is still early, but there had been some concern by analysts that we might start to see companies lower revenue and earnings guidance in the face of rising material costs, labor, and tariffs.  Fortunately, we did not see anything suggesting a slowing of the economy or concerns regarding inflation.  Like I said, it is still very early into the earnings season, but this week pointed to perhaps a better outlook than some expected.

While this week was dominated by earnings announcements, there were other stories that didn’t get as much attention, but are nonetheless noteworthy.  Perhaps the biggest story of the week is that Sears filed for Chapter 11 bankruptcy.  It is hard to believe that a company that has been around for 130 years finally met a foe in online retail that it could not beat.  With over $5.5 billion in debt and a $134 million interest payment in arrears, it simply had to pull the plug on itself.  Chapter 11 bankruptcy is technically for reorganization and relief from creditors, but it is unlikely the company will emerge this time.  Expect the creditors to pick over the company’s assets like vultures on a carcass.  It is indeed a sad day for Sears.

In others news, I came across two stories that, on the surface, appear connected but leave one wondering.  The first appeared on Tuesday with the title, “U.S. Budget Deficit Widest Since 2012.”  The U.S. government closed out its 2018 fiscal year $779 billion in the red as tax cuts pinched revenues and expenses rose on a growing national debt.  Yet just a few days earlier I read, “Feds Collect Record Individual Income Taxes in FY 2018.”  So how can it be both the widest deficit AND record revenue?  It really is hard to wrap one’s head around the size and complexity of this issue.  The federal government collected a record $1.68 trillion in individual taxes this year.  One explanation for the difference is that while individual income tax collection hit a record, corporate tax collection fell by approximately $100 billion.  Also worth noting, interest service on the debt continues to grow as the size of the national debt increases and interest rates rise.  Future generations are going to have a very difficult time grappling with the consequences.

While we are on the subject of interest rates, it is also worth noting that President Trump is not very happy with his pick for Federal Reserve Chairman.  Mr. Powell has reiterated his commitment to normalizing interest rates which started prior to his appointment to the Federal Reserve.  President Trump went on the offense this week stating the Federal Reserve is “my biggest threat” because it is raising interest rates too fast and is “too independent.”  None other than Alan Greenspan came to Mr. Powell’s defense, suggesting on CNBC that perhaps the Fed Chair would be well advised to buy a pair of headphones to block out the political rhetoric.  The market expects the Fed to raise interest rates again in December, and perhaps as many as three more times next year.  I don’t think this is the last we’ll hear from the President on this subject.

In closing, I want to turn to a story I heard about on a podcast this summer.  Do you ever wonder why shipping on goods from China is so inexpensive?  In some cases it is cheaper to buy a product from China, including shipping, than it is to buy the product locally.  It turns out there is an international organization called the Universal Postal Union.  This entity is tasked with establishing international mailing rates between countries.  In a nutshell, once a package arrives onto U.S. shores, the U.S. postal service is responsible for delivering the package the “final mile.”  When these rates were set decades ago, the U.S. was a net exporter of our goods.  No one ever imagined that just a few decades later the U.S. would import such a large amount of goods.  When first implemented the rates benefited U.S. companies, however, the tables have turned and it now works against us.  To hear the story, listen to this podcast which first aired August 23, 2018 on NPR’s Planet Money.  It is a fascinating story.  Now you know.

October 19, 2018

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