Pet Problems

By Matthew Gutierrez and Shawn O'Malley · January 08, 2024

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How’s Dry January going? Probably not well if you’re a high-income, middle-aged adult or a college student ??

At least, that’s according to a recent Pew Research study, finding those two groups are the most likely to partake in alcohol consumption.

Today’s Chart of the Day shows the full picture.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the three biggest stories in markets:

• How buying home and auto insurance has become a hassle
• Implications of an end to quantitative tightening
• The rising cost of pet ownership leads to a shelter “crisis”

All this, and more, in just 5 minutes to read.

POP QUIZ

?Chinese internet stocks like Alibaba, JD.com, and Tencent have been crushed by regulatory crackdowns — how much market value has been erased from this sector? (The answer is at the bottom of this newsletter!)

CHART OF THE DAY

IN THE NEWS

??Buying Home and Auto Insurance Has Become a Challenge

Huge losses from national disasters. Soaring prices. “Worst possible scenarios” for consumers.

Welcome to the new age of homeowner and auto insurance, which is straining Americans’ budgets. Some insurers aren’t fairing much better, coming off their worst years in history thanks to damage from storms and wildfires.?

What’s happening: The cost of natural disasters is rising, temperatures are up, and droughts have contributed to higher wildfire risk. Many homes were built in areas at risk of hurricanes, flooding, and fire, driving mounting losses.?

• For insurers, climate change has made it difficult to measure risk. Many are demanding higher premiums.
• Allstate has eaten billions in losses and raised auto rates as a result.?
• “I have never seen the overall market this bad,” noted a 52-year veteran of the industry in Florida, one of the most-impacted states.?

Homeowners and drivers are faced with higher premiums, less coverage, and fewer choices of insurers. Some people have no coverage options at all, making homes harder to sell and cars less affordable.?

• Farmers Insurance Group has increased home-insurance rates by over 23% last year for policyholders in Texas and Illinois, and Nationwide Mutual wouldn’t renew over 10,000 policies in hurricane-prone areas of North Carolina.
• Get this: State Farm had $13 billion in property underwriting losses in 2022. Last year, it stopped writing new home-insurance policies in California.
• Allstate’s CEO noted that the industry is changing because “we can’t afford to use shareholder money…to support an underpriced product.”

Why it matters:

The insurance problem has compounded issues around housing affordability.

Meanwhile, insurers picked up $32.2 billion in net underwriting losses in the first nine months of 2023, $7.6 billion worse than the same period in 2022.?

• Insurers who try to anticipate the future are increasingly raising their prices or cutting offerings altogether, putting Americans in a bind.
• Car insurance rates have risen six times more than the overall rise in consumer prices; premiums haven’t risen this much since the mid-1980s.?

Breakdown? Some analysts believe the industry’s business model is under pressure and on the verge of breaking down.?

“Climate change will destabilize the global insurance industry,” research firm Forrester Research predicts as insurers are expected to leave more states than just California, Louisiana, and Florida.?

Allstate’s CEO remarked: “There will be insurance deserts,” and everywhere in the country is at risk from increasingly bad weather. “There is no place that’s safe, and no place that’s not going to be impacted.”

Read more

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?? The Implications of an End to Quantitative Tightening

The prospect of Fed rate cuts next year isn’t the only structural change supporting bond prices (bond prices ??as interest rates ?? .)

Investors are also anticipating an end to the Federal Reserve’s “quantitative tightening” efforts, effectively the opposite of everyone’s favorite pandemic-era buzzword: quantitative easing, aka QE.

Not QE, QT: Instead of creating bank reserves out of thin air to purchase Treasury bonds, as the Fed does via QE — expanding the size of its balance sheet as it snaps up bonds — quantitative tightening shrinks the central bank’s balance sheet by either explicitly selling parts of its bond portfolio or just not “rolling over” maturing bonds.

• While QE pushes bond prices higher by artificially constraining the supply of bonds as they pile up on the Fed’s balance sheet, quantitative tightening can increase the supply of Treasury bonds or, at least, bring a major buyer (the Fed) out of the market.
• Quantitative tightening is done strategically in tandem with the Fed’s policy rate hikes, helping push up borrowing costs across the yield curve — part of an effort broadly to fight inflation.

Why it matters:

Recently released minutes from the Fed’s last meeting in December indicated that officials are considering an end to quantitative tightening, corresponding with expected rate cuts.

• Analysts at Deutsche Bank predict this may happen as early as June.

Big numbers: Thus far, the process has shrunk the Fed’s balance sheet by $100 billion per month, with primarily Treasury and some mortgage bonds maturing and not being replaced. In 2023, that reduced the Fed’s balance sheet by over $1 trillion.

Still, widening deficits as the federal government ramped up spending in recent years means the Treasury Department must issue record amounts of Treasury bonds to fund that spending. And like any market, there are limits to how much new supply the Treasury bond market can absorb before weighing on prices.

• With an estimated $20 trillion in deficit spending this decade, that’s a lot of new Treasury bonds, which some argue will more than offset any relief provided by an end to quantitative tightening.
• Said Morgan Stanley’s co-head of fixed income, “The slowing down of quantitative tightening is a positive, but I think the deficit situation is worse.”

Read more?

MORE HEADLINES

?? A full look at the NFL playoff picture

?? Apple’s Vision Pro headset to launch in February, with pre-orders beginning January 19th

?? Tesla, SpaceX leaders concerned over Elon Musk’s drug use

?? Boeing stock plunges after Alaska Airlines incident

?? The first U.S. moon-landing mission in 50 years kicked off Monday but appears to be “doomed”

?? BlackRock and VanEck set low fees for Bitcoin ETF

?? The Rising Cost of Pet Ownership Leads to Shelter ‘Crisis’

One of the most inflation-impacted markets since the pandemic has been pet ownership.?

It’s not often that Bloomberg’s “Most Shared” story concerns dogs, but that speaks to just how large the shelter crisis has become.?

Overflow: Return-to-office mandates, high pet costs, and landlord restrictions have driven a 22% jump in stray dogs in U.S. shelters since 2021.

• Animal shelters nationwide are overflowing, according to a Bloomberg report, while pet essentials, including food and veterinary care prices soar.
• “Shelters are quite literally at crisis, and some of them are making the decision to close their doors or reduce hours of operation or reduce the kind of animals that they bring in,” said the director of an animal nonprofit.?

Food on the plate: It’s a reversal from the rise in adoption rates during the pandemic when the U.S. pet population rose 6% in 2020 and 4% in 2021. Historically, the growth rate is about 1%.?

• Some animal shelters are so overwhelmed that they’ve stopped accepting dog surrenders. That includes Animal Care Centers of New York City, the city’s largest animal shelter, which receives up to 20 calls daily from pet owners looking to surrender their pets. Employees have placed dogs in the office area of the shelter due to overcrowding.
• Reasons include landlord disputes and financial insecurity.
• “Sometimes people are choosing between putting food on their plate and putting food on their pet’s plate,” the shelter’s director said.?

Why it matters:

Because of higher costs for everything from housing to rent to healthcare, many families deem the rising expense of pet ownership as too much to handle.?

Per the American Pet Products Association, dog owners paid $344 annually for veterinary visits, $354 for food, and $315 for boarding last year. Some owners spend thousands of dollars per year on veterinary care and boarding.

Perfect storm: The majority of people USA Today?surveyed?(91%) said pet care costs led them to experience a degree of financial stress in 2023. Nearly half of respondents (47%) have gone into debt to pay for animal care. About one-third of respondents have taken on a second job to help cover costs, while 66% said they’ve cut back on their expenses to care for their pets.?

It’s a “national dog crisis,” another animals executive director said. “There’s so many compounding forces that are creating this perfect storm right now.”

Read more

QUICK POLL

Roughly how much do you spend yearly on food, grooming, boarding, and vet care for your pet(s)?

Comment to clarify your response and tell us about your pet(s)!

Less than $500

$500-1,000

$1,000-2,000

$2,000-4,000

$4,000 or more

N/A

On Friday, we asked:?Does the approval of a (spot) bitcoin ETF change your outlook on the digital asset?

— One long-time Hodler told us: “I’ve been pro BTC since 2013!”

— A reader pointed out that “Buffett said it is rat poison squared.”

— Wrote another on team No: “Unless it can be used more commonly as a medium of exchange, it still is what it always was…digital gold. An ETF adoption, to me, doesn’t change that.”

TRIVIA ANSWER

?$1.2 trillion. That’s how much market value the Wall Street Journal estimates has been wiped out by regulatory crackdowns in China on the internet sector.

SEE YOU NEXT TIME!

That's it for today on We Study Markets!

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