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An Italian National Crisis

The markets continued lower this week as debt ceiling negotiations stalled and news outlets, like the opportunists they are, chose to spark fear over the dire consequence of a U.S. debt default.  Before you hunker down or run for the hills, just know it is improbable that the U.S. government will default.  They will likely kick the can down the road at least once, if not more before they inevitably compromise.  However, they won’t compromise until they accumulate enough media appearances and soundbites to carry them through the next election or until the electorate gets entirely fed up with the antics.  We still have a way to go.

Instead of harping on the same stuff I’ve hit on repeatedly (I know you are probably getting tired of it), let’s talk about a few things you may not have heard about this week.  I mentioned early last year (2022) about the U.S. Treasury and the Federal Reserve jointly investigating the idea of a U.S. Digital Currency (USDC) that utilizes blockchain technology.  The goal being to speed up the transfer of money and perhaps even increase the velocity of money (money changing hands).  There is heated debate around this topic as one might expect.  This week we learned the Bank of Canada is seeking public input on a potential digital looney.  “The way Canadians pay for everything from the daily necessities to major purchases is evolving rapidly,” the bank said in a statement.  “As the world becomes increasingly digital, the Bank – like many other central banks – is exploring a digital version of Canada’s national currency.”  While we haven’t heard any updates, you can bet the groundwork is being laid behind closed doors.  Are you ready to transact only in ones and zeroes?  The day is coming.

In other news, you may remember, as part of President Biden’s Inflation Reduction Act (IRA), that starting in 2026 Medicare could begin negotiating drug pricing on 10 drugs of its choosing.  This week we learned the leading drugmakers are preparing for a legal fight against this reform.  Among those drugs whose prices may be negotiated include, blood thinner Eliquis (BMY), breast cancer therapy Ibrance (PFE), blood cancer therapy Imbruvica (ABBV & JNJ), diabetes drug Ozempic (NVO), and anticoagulant Xarelto (PFE & JNJ).  At the least, expect an emergency injunction to delay government negotiations.  Stay tuned as we’re sure to hear more about this in the next two years.

On to not-so-great news.  While the stock market has held up remarkably well this year given all the uncertainty, issues, and slowing economy, we should not become complacent.  Market breadth is exceptionally weak.  The thinking goes, the greater the market breadth, the healthier the market.  Think of it in terms of a rising tide lifting all boats.  As an investor, we like to see all sectors do well in good times as it indicates all parts of the economy are participating in the rally.  However, breadth is at one of its lowest points in the past twenty-five years, the only worse points were December 1998 and December 1999.  Additionally, it is worth noting that just two stocks (Apple & Microsoft) make up 14% of the S&P 500, an all-time high.  The ten largest stocks are responsible for 90% of the S&P’s return this year – also the most ever.  We’ve taken measures to reduce the overweight in these positions so when the floor inevitably falls out we won’t be overly exposed.

In company news, I’ll touch on one item.  It seems artificial intelligence (AI) isn’t limited to just the hypothetical (and sometimes resourceful high school kids).  You may remember some years back there was a panic that fast food restaurants would outsource their drive-thru windows to lower-cost employees overseas.  While that wasn’t widely adopted, the latest news is Wendy’s is aiming to bring AI to the drive-thru window.  Wendy’s FreshAI in conjunction with Google Cloud’s generative AI and large language model technology is being prepped to handle the roughly 75 to 80 percent of Wendy’s customers choosing to use the drive-thru.  The pilot will be in Columbus, Ohio naturally.  And what that means for the employees who fill those roles is unknown, but one can guess.

In closing, I turn to a national crisis playing out in Italy.  I read the Italian government has convened crisis talks about something of critical national importance.  It seems there has been a surge in the price of pasta, one of the country’s most beloved and culturally important foods.  I jest, but this is a real issue as it appears the price of pasta soared 17.5% YoY in March.  This is double the national inflation rate which stood at 8.1% according to EU statistics.  Many producers have provided assurances that increases in pasta prices are only temporary, but not everyone is so sure.  The average Italian consumes about 51 pounds of pasta a year.  While we’re talking about this, how are they not all overweight?  Anyway, the pasta crisis should be over soon followed by the resumption of the national afternoon nap.  Now you know. 

Bruce J. Mason, MBA