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Life and Debt

It was an active week that saw mostly upside as news of a potential debt ceiling deal was in the works.  However, it seemed just a tad too easy and as it turns out, negotiations stalled later in the week taking back some of the gains.  When the dust settled, markets did end the week somewhat higher with the Nasdaq edging out the other indices once again.  Note, the Dow Jones Industrial Average and S&P 500 saw only modest gains this week.

There weren’t any huge developments regarding interest rates, the Federal Reserve, or the debt ceiling so let’s again focus on what you may not have heard in the news.  I mentioned last week that the largest pharmaceutical companies are pushing back on negotiating with Medicare.  This week we learned Biogen’s new Alzheimer’s drug could raise annual Medicare costs by up to $5B annually in the event of broader coverage.  There are currently 6 million Americans with Alzheimer’s.  A decision to include coverage in Medicare and Medicaid is due in July.  If it is covered, there is a good chance we could see a hike in premiums to meet Part B coverage.

In other news, it appears the Internal Revenue Service (IRS) is working on its own government-run tax filing portal that would provide an alternative to the likes of TurboTax and H&R Block.  For filers with straightforward returns, this could be a godsend.  If you have had the pleasure of using the current crop of tax prep software, you will undoubtedly know that “free” rarely means free.  Like… you have dividends AND you want to file your taxes too?  That’ll be $150.  Anyway, the idea got a lot of pushback from the likes of those same private companies that stand to lose, but quickly was followed up with, “That’s okay, go ahead and do it.”  Simultaneously, private tax prep companies have increased their spending on lobbying lawmakers to oppose a shift that could reduce their revenue.  The larger fear for these companies is that the next step could be a government service that would automatically fill out tax returns from the information it already has on filers’ wages and other income.  This idea has been kicking around for some time now.

If you’re wondering about retailers and more specifically consumer spending, don’t worry.  Or perhaps worry a little.  U.S. household debt rose further in Q1 topping $17 trillion.  With inflation continuing to outpace consumers’ wage increases, it is no surprise that their levels of debt are rising.  The current balance of $17.05T stands $2.9T higher than it was at the end of 2019, before the pandemic recession hit.  Mortgage balances increased by $121B to $12.04T at the end of March, student debt rose by $9B to $1.60T, and auto loans edged up $10B to $1.56T during the quarter.  Credit card debt was unchanged at $990B.  Other debt, which includes retail cards and other consumer loans, increased $5B to $510B.  Home equity line of credit debt increased $3B to $340B.  So, yes it appears consumers are still consuming.  However, debt is increasing fast at the same time savings rates are falling (again).

I tend to talk a lot about what’s happening in the United States because our investment approach is mostly domestically focused.  However, it is worth noting that the issues we continue to face regarding inflation are not solely a U.S. problem.  France’s unemployment rate is 7.1% (versus 3.4% in the U.S.) and inflation in the Eurozone increased to 7% (versus our 5.9%).  Issues in the UK post-Brexit continue to act as an anchor on Britain with some going so far as to say Brexit was a major regret.  While we continue to hear that investing abroad remains a viable option, it does not go without its own risks.  And truth be told, they may not have our debt ceiling issue, but they face other issues no smaller in size.  Owning large U.S. multinational companies gives us worldwide exposure without necessarily the company-specific risks that are a minefield abroad.  Our approach has worked well for more than a decade, although we are always reassessing the balance, the opportunities and its risks.

In closing, I again turn to artificial intelligence as it seems to be popping up in the most unexpected places.  The restaurant chain Sweetgreen, which specializes in salads, is piloting a program to provide automated service to customers.  Two weeks ago I mentioned Wendy’s is looking to use AI in its ordering and drive-thru system.  Sweetgreen is taking a slightly different approach.  In a statement, the company said it will offer automated salad-making via a conveyor belt process.  I have visions of I Love Lucy and the chocolate factory episode.  Additionally, the company will begin using a “tasting counter” which will provide “brand-storytelling digital screens and a revamped merchandising strategy.”  If you can translate that one for me I’d appreciate it.  It went on to say, “We believe that automation will enable us to elevate the quality and integrity of our food while also providing a faster and more convenient experience for our customers.”  I just want to know which robot I need to talk to when the order is inevitably wrong.  Now you know. 

Bruce J. Mason, MBA