To follow along please click here for the reference slides.
Here is Part 1 of a three part presentation recently given to a distinguished group of Shell marketers through their NASM group in Houston, Texas in early September. Joining me for topic questions and discussions was Faheem Jamal, Vice President of Operations for Chestnut Markets, the retail division of the CPD Group. Shell marketers interested in joining should contact Natasha Pitcock by email or at 859-554-3175.
The presentation consisted of three sections; today’s first being on the Economy and Interest Rates, and next week’s sections will be on Industry Trends, and finally Mergers & Acquisitions which is actually mixed in all sections. Please feel free to stop by NRC’s booth N-2462 at the upcoming NACS Show 2024 in Las Vegas, or call or email me to meet at the Show’s Hunter Club or elsewhere for an appointment. I arrive on Sunday, October 5.
Today’s section on the economy and interest rates is shown on pages 5-13. When asked whether the audience felt like we were in a recession or not, every attendee thought we are not. With Q3 2024 almost completed, most forecasts are currently in the +2.5 to 3.0% real GDP range, which is a very good rate of growth for the U.S. in the 21st century.
The chart on page 7 simply shows the short term Federal Funds rate, 5.25% earlier this month and since reduced .5% to 4.75%, minus the standard Consumer Price Inflation rate, or CPI, which has been steadily decreasing for some time. The CPI is currently being helped by gasoline prices declining to under $3.00/gallon in many parts of the U.S. The gray vertices show recessionary periods, which are often preceded by declines of varying time frames by many months in the index, so called periods of ‘pain’ until inflation is more under control. The chart also shows how far behind the Fed was in raising rates during Covid, adding confusion whether we are headed for a ‘soft landing’ or not. Many countries of the world follow our lead in monetary policy. In fact, just this week, China announced a huge monetary easing to try to stop their deflation, which is often much more difficult to reverse. Our economy is five times the size of China’s, and we’ll see how long it takes to impact their economy and others. China uses large amounts of raw materials including hydrocarbons, metals and grains, so we’ll watch those price trends next year.
We still have our own issues as shown on page 8 reflecting the dramatic increase in the size of our Federal debt, now over $34 Trillion and growing almost $2 Trillion per year. Our interest payments as a percentage of our economy is now one of the largest in the world (page 9), and actually are greater than our entire defense budget. Can capital spending for data centers to support Artificial Intelligence (AI), on shoring, infrastructure, new fuels, etc., allow us to grow our way out of these deficits while also helping inflation? We continue having the strongest economy by far.
Near term, looking at the charts on pages 10 and 11 give us some clues of where we are in the U.S. business cycle.
The chart on page 10 shows the so called Treasury Bond Yield Curve, which is simply the difference between the 10 Year Treasury Bond yield minus the 2 Year Treasury Bond yield. It is a key indicator that reflects tightening monetary policy when declining and easing policy when rising as determined mostly by open market transactions. Rising above the zero line reflects fast monetary easing when the Fed realizes they may be creating a recession, so it says it’s time to ease quickly, although at times too late or not enough as shown by the vertical recession lines. It is currently at +.2% and rising.
Unemployment is what the Fed says is their focus at the moment.
Chairman Powell has noted that one inflation spurt frequently precedes a second one, but promises of AI benefits are keeping markets hopeful.
Watch the U.S. Dollar for economic clues. The U.S. maintains an AAA rating in spite of having its very high ratio of debt to GDP. We need a strong Dollar to support foreign purchases of real estate, stocks and especially bills and bonds to help fund our deficits.
Page 11 shows the trend of the 10 Year Treasury Bond Yields, still historically quite low. Many countries want an alternate currency to the Dollar, most obvious being the BRICS group of Brazil, Russia, India, China and South Africa.
I then asked Faheem if he thought whether the higher cost of debt and always present industry headwinds were affecting industry construction spending and M&A. It is certainly some, partly as well because our industry is facing more price competition making it more difficult to pass through cost increases. These uncertainties have certainly been a factor increasing the M&A earnings multiple spreads between sellers waiting for higher multiples and buyers more cautiously bidding. Normally, the extent of expected Federal Reserve easing narrows these spreads and increasing M&A transactions are expected in our space.
In addition, we discussed the non-bank private debt and equity markets now said to be as much as $20 Trillion worldwide, which of course also includes cryptocurrencies. Fortunately, our industry has been looked at quite favorably by Wall Street and the standard banking system because of often prime real estate ownership and the flexibility to add profit centers like foodservice, financial services, gaming, etc., such that it appears the non-bank alternative financing market has not been used much, so far.
Stay tuned next week for Sections 2 and 3 of the NASM presentation.
Please click here for the presentation reference slides.
Comments