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5 Things to Know in Investing This Week – September 29th, 2023

The Shutdown Isn’t an Issue Issue

Lots of interesting news this week where we address these important questions:

  • Is the coming government shutdown a real problem or just theater?
  • Counter-intuitive inflation: Is there anything the Federal Reserve can do?
  • New home sales plummeting – from already low levels!
  • Smart Bitcoiner takes aim at sovereign debt. We think he has a point.
  • Macau had the longest lockdown of any gaming hub followed by a massive typhoon. What’s next for Las Vegas Sands ($LVS)?

Ready for the week? Let’s dive in:

 

1)  Government Shutdown as Reality TV:

With respect to the people who will experience delays in receiving government checks, from a macroeconomics point of view, the government shutdown that seems inevitable as of this writing, is nothing more than political theater. Defenders of the status quo will blame the few who want to limit government spending for trying to destroy the country. The upstart House members trying to exercise a little fiscal responsibility will blame everyone else for spending us into bankruptcy. Speaker McCarthy and the White House aren’t even talking to each other at this point. If they’re not going to take this seriously, then why would the rest of us do so?

It’s all theater. No one is cutting spending.

DKI Takeaway:  Continuing resolutions, budget negotiations, and debt ceiling talks are the few places where people who want to slow the growth of government spending have any (perceived) influence. However, if you look at the chart above, no one who wants to cut spending has had influence in decades. The “debate” is between people who want the US to continue to spend its way into bankruptcy and those who want to spend even more. I promise you the end result won’t be spending cuts.

 

2)  Counter-Intuitive Inflation – The Fed is Trapped Like Japan:

The US has so much debt that Federal Reserve interest rate hikes to reduce inflation will end up increasing interest expense. That higher interest expense will need to be monetized (paid for by printing dollars) and will lead to MORE inflation. DKI has already released a long-form report to premium subscribers last week going through the issue in detail. We’ll post excerpts on the DKI blog and on Twitter over the next two weeks. There will be an eBook in the next couple of weeks.

The yield on the 10-year Treasury went from 4.3% to 4.6% last week.

DKI Takeaway:  When you read the full piece, you’ll see that the problem is unsolvable, and there’s no one in Congress inclined to even try. Spending will increase until the dollar is debased into worthlessness. Does that mean we’re doomed? Not at all. There are lots of things DKI subscribers are doing to protect their portfolios from persistent non-transitory inflation. Reach out if you’d like some help.

 

3)  Home Sale Volumes Continue to Fall:

Economist and DKI Board Member, Michael Shedlock (Mish), points out continued distress in the housing market. New home sales on a seasonally-adjusted annualized basis were down 8.7% in August from July. Making the entire analytical exercise more futile, there have been massive monthly adjustment in prior reported statistics. Small adjustments are normal, but we’re seeing moves of 3% – 4% in some data when revised just a month later. Mish also highlights that sales of existing homes are down in 17 of the last 19 months.

Volumes back at the worst of the pandemic levels. Graph from MishTalk.

DKI Takeaway:  With the Fed’s “higher for longer” approach, higher interest rates have led to a large increase in mortgage rates. This has made housing even less affordable, and has provided an extra incentive for people with favorable mortgage rates to stay in their homes for longer. (“Higher for longer” means homes for longer? – Still workshopping that one.) In turn, that has kept supply off the market leading to rising prices and reduced sales volume. DKI has written about this in the past, but we acknowledge that this trend has gone on longer than we expected it would.

 

4)  Negative Interest Rates – Both Dumb and Not Safe:

Hat tip to FinTwit star, Stack Hodler, who points out the insanity of the negative rate bonds that were so popular in the EU in recent years. People who lent money to the EU at a NEGATIVE yield expected to receive less than what they invested over 30 years. Hiding the money under a mattress would have had a better return. When this kind of decision-making and negative interest rates predictably led to inflation and the ensuing higher interest rates, these “safe” government bonds now mark to market at a loss of more than 60% in just 3 ½ years.

Best case scenario was losing a small amount of money. Original post here.

DKI Takeaway:  There are two issues here. First, never be in a situation where the up-side is you lose a little money and the down-side is you lose a lot of money. This gets worse when considering inflation. I try to find opportunities that are the opposite of that. Second, this kind of mistake is only possible with static analysis when you assume all other factors remain consistent. If you’re buying 30-year securities, you need dynamic analysis where you consider how other events will affect the value of your bonds.

 

5)  Golden Week in Macau and Las Vegas Sands ($LVS):

Recently, Las Vegas Sands’ ($LVS) stock has been down on fears of a Chinese recession and a typhoon that temporarily hurt gaming activity in September. Golden Week, a time when many Chinese people celebrate by gambling, started this past weekend. Due to the timing of the holiday approaching a weekend, the celebration will be a little longer than usual this year.

4Q Property level EBITDA could be back to pre-Covid levels.

DKI Takeaway:  We’re seeing reports that Macau is more than 80% booked for the coming weeks. In addition, after 3 years of lockdowns, the Chinese people who are returning to gamble are coming with a “pent up bankroll” meaning they have more to spend. Finally, there has been a shift in the market from low-margin VIP gaming where operators like $WYNN excel towards the mass and premium mass gambler. This is a higher-margin business and one where $LVS has leading share. You can buy the stock trading at distressed levels ahead of likely good news coming next month.

 

Information contained in this report is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied and DKI makes no representation as to the completeness, timeliness or accuracy of the information contained therein or with regard to the results to be obtained from its use.  The provision of the information contained in the Services shall not be deemed to obligate DKI to provide updated or similar information in the future except to the extent it may be required to do so. 

The information we provide is publicly available; our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion are precisely that and are subject to change. DKI, affiliates of DKI or its principal or others associated with DKI may have, take or sell positions in securities of companies about which we write. 

Our opinions are not advice that investment in a company’s securities is suitable for any particular investor. Each investor should consult with and rely on his or its own investigation, due diligence and the recommendations of investment professionals whom the investor has engaged for that purpose. 

In no event shall DKI be liable for any costs, liabilities, losses, expenses (including, but not limited to, attorneys’ fees), damages of any kind, including direct, indirect, punitive, incidental, special or consequential damages, or for any trading losses arising from or attributable to the use of this report. 

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