Maui On My Mind

By Jeff Kelly on August 11, 2023

“I went to Maui to stay a week and remained five. I never spent so pleasant a month before, or bade any place goodbye so regretfully. I have not once thought of business, or care or human toil or trouble or sorrow or weariness, and the memory of it will remain with me always.” 

― Mark Twain 

In all our lives there are special places. Maui is such a place for us. We spent several spring breaks, a few Christmases and assorted summer days in its friendly confines. There was a special feeling that started the moment you walked out of the airport. The air smelled of lilacs. The wind was warm and soft. Your skin felt the moisture in the air. Those around you were happy and excited. You had just arrived in paradise.  

We watched the kids grow up there. We made some friends there. We met Charlie. He raced outrigger canoes between the islands. He was also a terrific guide who took us on the hike of a lifetime. Up through the bamboo forest to see waterfalls. We went a day after some torrential rains had hit the island. The air was so clean and pure. It was an amazing day. 

Beach day 2000 

Tracy was the concierge at the place we stayed. One year between visits he lost 50 pounds. He and a buddy did a video trying to get on the Amazing Race TV show. A great person.  

We lost touch with many of those we met on our visits. I hope they are safe. It’s shocking to see the images of Lahaina burnt to the ground. The kids played on the banyan tree. There are reports that it survived the fire. We hope so. Sometimes hope comes from unexpected places.  

Kids on the banyan tree. 1997 

The images are especially striking because of how quickly the damage occurred. In some ways we can take it as a metaphor for our country. A small fire hit by big winds from a hurricane far away destroys a community.  

We must be watching all the time for the potential hurricanes in our country and our markets. Too many underestimate the potential for winds currently buffeting our democracy. The same is true in the markets. Debt downgrades, highest ever credit card debt, slowing earnings and a clueless Federal Reserve aren’t usually the ingredients for a quiet fall period.  

Risk happens in life and markets the same way. Slowly then all at once. We are in a period to be cautious and on guard. Fall will soon appear, and the calendar will turn more favorable. Now through the 1^st week of October is seasonally weak. Companies reporting solid earnings have been sold in the past two weeks. This is a change from earlier in the year. We’ve also seen many of the highflyer “AI” companies come back to earth. There will be opportunity here as the selling progresses.  

The Maui community is strong and resourceful. They will endure and overcome. They are also tough. That toughness will be tested as they navigate the road to rebuild.  

My heart goes out to all those on the island. The kindness of the people and the beauty of the island are unmatched. We are going to look for ways to help in the coming days and weeks. I hope you will consider doing so as well.  

CHARTS FROM THE WEEK PAST

Factory building in the U.S. is the highest since 1981.

Bulls still out number bears in the latest survey.

This is not good for forward returns.

• Revolving Credit (credit cards):  Total revolving credit breached the $1T milestone for the first time in 2Q23, rising +16.2% Y/Y.  That is the second fastest pace of growth ever with the exception of last quarter where revolving credit accelerated to +17.2% Y/Y.
• Credit Card Interest Rate:  Credit Card interest rates are currently at 22.2% and the highest in at least 3 decades according to the latest May data from the Fed.   
• Consumer Bankruptcies & Foreclosures:  Consumer Bankruptcies and foreclosures were up +17.4% Y/Y.  That is a deceleration from +20% Y/Y in 1Q but the Y/Y growth numbers remain distorted from the plunge associated with pandemic support/stimulus.  Notably, 2Y avg growth (helps normalize for the comp distortion) accelerated to +10.1% … easily the fast pace of growth/acceleration since the GFC. Source: Christian Drake, Hedgeye, 08/09/2023

BofA clients buying Japan, High Yield bonds and Municipal Bonds.

They are selling most other sectors.

Since the May CPI report, Energy is outperforming tech by almost 14%.

7 U.S. stocks now represent a larger portion of the MSCI World index than Japan, UK, China, and France combined.

Seems rational.

Almost 700 banks have exceeded CRE loan guidance.

Counting the days until the bailout.

Auto loan and credit card balances up to 1.5 trillion.

The highest ever. Source: SS

China headed to a deflationary environment.

High Yield spreads (low) vs. lending standards (high) are wider than at any time in the past 20 years.

July NFIB mall Business Optimism:

– Optimism index (blue) increased to 91.9 (vs. est. 91.3 & prior 91).

– Outlook index (orange) improved to -30 (best level since Aug 2021).

– Hiring plans rose, while earnings expectations declined.

Corporate interest cost as a % of profits at lows despite the Federal Reserve rate increases.

Inflation risk being priced in?

Maybe.

AI will see big spending/revenue as the decade progresses.

Only one can be right.

Billionaire investor Bill Ackman says he is shorting US Treasuries. If long-term inflation is 3% not 2%, the 30y Treasury yield could rise to 5.5%. In contrast, Warren Buffett has announced buying positions in 10y US Treasuries.

We had a chance to refill the SPR with oil in the 60s but blew it.

Fed has never continued to tighten with earnings per share growth negative.

• “The starts are aligning against consumer spending. Last year’s savings and credit tailwinds are now increasingly headwinds… just as employment & wage growth slow.”
• “Normalizing savings behavior means less money for consumption. The excess savings from stimmy that kept us out of recession last year, are nearly gone. Savings rates have already turned up, and are destined to trend higher as the economy slows, and the labor market weakens.”
• “Cooling credit supply and softer credit demand means less money for consumption.”
• “With inflation slowing faster than wage growth, margin pressures will pinch EPS, forcing layoffs – rising real wages are a short-term consumer boon now, but longer-term, aggregate incomes are at risk from layoffs.” Source: Piper Sandler, 08/07/2023

Hard landings are preceded by tight lending standards.

Standards are tight now.

Energy sector leads the pack.

Just like in 2022.

Max drawdown in Mannheim U.S. Used Vehicle Index thru July now nearly 18%, which is by far worst drop in history of data (going back to mid-1990s).

Hospital System mergers are bad for consumers’ costs and care.

The car market is the most expensive in history.

Retail option order imbalance the highest in history.

We are always told there will be a soft landing.

Even when it doesn’t happen.

WEEKEND HOMEWORK

Great podcast with Jocko Willink and Don Faul.

Don Faul, a former U.S. Marine Corps platoon commander and accomplished executive with more than eight years of CrossFit experience, is stepping into the role as the company’s new CEO. Prior to accepting this position, Faul held key operational roles at growth-oriented consumer technology companies, including Pinterest, Meta, and Google.

Lots of schools are back in session. Summers winding down. Get out and enjoy it. Say some prayers for the folks on Maui. Lives have been changed. Many will never be the same. Life changes in the blink of an eye. Make it a weekend to remember.