If You’re Broke, Just Say That

In this issue of the peel:

• ?? Uncle Sam just got exposed for being even broker than we thought, thanks to our favorite certified smart pants. Find out how bad our debt problems are below.
• ?? Super Micro shares rose for a mega-micro reason. Tesla caught a bid from potential regulatory changes. Spirit Airlines pulls a Boeing, crashing and burning all over the market, while Palantir’s board has the maturity of a disabled puppy.
• ?? Amazon smells margin, and for Bezos, that means opportunity… no matter how small the margin. The firm just launched its Shein competitor, Haul.

Market Snapshot

Banana Bits

• In their first move to seek an antitrust remedy, the Justice Department will push Google to sell Chrome amid other changes .
• Investing legend Stanley Druckenmiller has made some interesting moves lately .
• Russian interest rates hit 21% and are expected to climb as Moscow’s macro troubles come into focus .
• Applications are still open for the next Treasury Secretary, but you’ll be competing against the likes of Apollo CEO Marc Rowen and plenty of others .
• MicroStrategy raised billions more to buy a bunch of BTC … which is funny because CEO Michael Saylor has historically been dogsh*t at timing .?
• Fit for a novel, the WSJ goes deep into the mystery of Citadel CEO Ken Griffin’s real estate adventures in Miami .

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Macro Monkey Says

Just Say That

Uncle Sam is the type of guy to post up on someone else’s Lamborghini and flex on Instagram about how “mindset is everything.”

Then, he’ll go back home to his parent’s house and ask his mom to help cover his phone bill for the month.

We’ve all heard the famous line, “If you’re broke, just say that.” Well, unfortunately, Uncle Sam and everyone who knows him is saying that, but we refuse to hear ourselves.

Let’s get into it.

The Numbers

Certified smarty pants Torsten Sl?k, the Chief Economist of PE giant Apollo Global Management, is back with a banger of a chartbook, and we have to talk about it.

Yesterday’s edition of his newsletter, The Daily Spark (the second-best daily newsletter around), went deep into the U.S.’s fiscal position—spoiler alert, it’s not great:

Source

It took the U.S. 244 years for our national debt to reach 100% of GDP. Now, the Congressional Budget Office (CBO) expects we’ll add the next 100% in a little less than 30 years, roughly 10x faster than we racked up the first 100%.

The immediate concern is not that this debt load will turn into a Thanos-like beast that beats up JPow and the whole economy. The real risk is threefold: 1) not being able to pay obligations, 2) losing the bond market’s confidence as the “risk-free” rate, and 3) inflation.

There’s no magic ratio of debt-to-GDP where the system blows up; right now, Italy, Singapore, Portugal, Spain, and others have debt-to-GDP ratios much higher than the U.S. In fact, Japan boasts a world record with debt-to-GDP close to 260%.

But, when government spending looks like this, the risk of meeting non-discretionary spending presents yuge concern.

Source

U.S. federal spending is categorized as either discretionary (must be approved by Congress and the President every year) or non-discretionary (required by law, like Social Security, Medicare/caid, VA benefits, SNAP, unemployment insurance, interest, etc.)

The above image separates Uncle Sam’s net interest expense, but it is considered non-discretionary, so discretionary spending is actually closer to 20% of outlays.

Right now, that means the federal government has little to no wiggle room to increase spending on discretionary items, like the military, education, housing, etc.

It’s obviously not ideal to lack flexibility in spending. However, the real risk is if (and maybe when) non-discretionary spending becomes more than 100% of outlays.

Source

33% of the federal government’s marketable debt will mature within the next year. Of that, ~31% will be financed at market rates or about 10% of total outstanding debt.?

That means we can absolutely expect net interest to increase as a percent of outlays as long as rates remain elevated.

To increase their budget, the federal government can do a few things, primarily raising taxes, tariffs, or issuing more debt.

The problem is that, in general, raising taxes and/or tariffs tends to slow GDP growth, thereby potentially slowing the U.S. government’s ability to grow its budget naturally over time. Just look at Europe and their tax rates.

Issuing bonds, needless to say, comes with its own problems. This is primarily how the U.S. government closes deficits and, in recent years, both deficits and Treasury auctions have ballooned:

Source

Since the pandemic, deficits have blown up, reaching over $1tn and are projected to maintain a level of at least 5% of GDP for the next decade.

If nothing changes, the U.S. government will have to issue treasuries in the same amount to plug spending gaps and meet obligations.

The big, immediate problem with running deficits fatter than the average American is that they tend to be inflationary—either artificially raising demand through increasing government spending as a percent of GDP or by printing money to borrow.

This is largely why we’ve seen such an increase in bond yields in recent months. Markets are already pricing in elevated inflation.?

At this point, if all we get is higher inflation, we should consider ourselves lucky.

The Takeaway?

The math simply ain’t mathin’.

Check out the rest of Apollo’s chartbook for a more holistic perspective, but the writing on the wall is clear. Government spending has to be cut, and the more that comes from the non-discretionary side of the budget, the better.

The challenging part is that advocating for cuts to non-discresh spending is a surefire way to lose re-election.?

Grab your popcorn while you can still afford it. Regardless of what happens, it’s sure to be interesting.

Career Corner

Question

How to be memorable at a networking event?

Answer

Try to find something personal to connect on. Networking does not equal just pitching yourself hard and only seeming to care about yourself. Networking also means being with everyone; don’t ignore those whom you don’t find relevant. The industry is as you work into it over time, skill sets mix, and people end up in multiple places.

Head Mentor, WSO Academy

Check out WSO Academy

What's Ripe

Super Micro (SMCI) 15.93%

• Much like the modern dating scene plaguing young people’s lives, investors are accepting—and even getting pumped—on something that’s less than the bare minimum.
• Super Micro shares gained Monday on reports that the firm plans to soon announce a plan to deliver its 2024 Form 10-K that is already 82 days late.
• Read that again. Throwing up yet? Me too. Keep in mind the firm’s auditor, EY, quit a month ago, leaving the firm to do anything it can to avoid delisting.?

Tesla (TSLA) 5.62%

• I guess we gotta add a chapter to The Intelligent Investor focused on the newly discovered upside catalyst of sharing Happy Meals with the President.
• Along with getting the yellow heart on Snapchat with President Trump, Musk’s EV maker popped on freshly announced plans to prioritize self-driving regulations.
• The President-elect’s team intends to task the U.S. Department of Transportation with developing a regulatory framework for self-driving vehicles as a “top priority.”

What's Rotten

Spirit Airlines (SAVE) 100.00% (?)

• It’s a bad day for Spirit but a great day in the history of airline passenger rights as America’s most infamous airline officially goes bankrupt, filing for Chapter 11.
• Years of losses added up to a point where Spirit couldn’t pay its debts. However, most creditors support the company’s intended restructuring plan.
• The plan includes a $350mn equity investment, $300mn of debtor-in-possession financing, and the conversion of $795mn worth of funded debt into new equity.
• Actually, scratch the whole “airline passenger rights” thing as, apparently, Sprit will remain operational through the proceedings, expected to end in Q1’25.

Palantir (PLTR) 6.89%

• We can all sleep comfortably tonight knowing that a board member of arguably the most technically advanced member of the military-industrial complex is dumb enough to tweet this .
• Bro deleted his whole account after, and now the firm is almost definitely going to delete his employment. His big mistake was saying the quiet part out loud.
• Admitting you’re only moving the stock’s listing to the Nasdaq to force ETF buyers to pump your share price raises concerns over the firm’s strategy and image.
• This comes just months after CEO Alex Karp took to CNBC an unhinged rant on his hatred of short sellers. Larry David started a spite store , but this might be the first spite stock.

Thought Banana

Here Comes Bezos

Taking his famous philosophy of “Your margin is my opportunity” to one of the lowest margin sectors possible, Jeff Bezos and Amazon are going after Shein and Temu.

Let’s dive in.

What Happened?

Back in 2008, entrepreneur Chris Xu decided fast fashion wasn’t enough of a problem, using his talents to really blow the issue up by founding Shein (then called “ZZKKO.”)

Shein is a global online retail platform selling clothing, accessories, home goods, and more know for extremely cheap prices, fast deliveries, and tolerably low-quality products.

The brand has blown up over the past few years as the company’s marketing team delivered a huge ROI by targeting content creators and college students to promote the app and website to their followers, starting a grassroots movement.

Now, Shein is the largest fashion retailer in the world. The company earned $32.5bn in revenue in 2023, 43% growth over 2023, and earned ~$2bn in net income. The company has 90mn accounts, with nearly 20mn based in the U.S.

Source

Smelling the success, Chinese e-commerce platform Pinduoduo launched Temu, their carbon-copy version of Shein, which has now blown up almost as much as the OG.

Now, it’s Amazon’s turn.

Last Wednesday, the world’s largest retailer launched Amazon Haul, or just “Haul,” in a bid to stop bleeding market share to low-priced overseas competitors.

Haul, like Temu, is basically a carbon-copy of Shein. However, Haul has a strict price limit of $20, sells almost anything (legal) that you can imagine, will take longer to deliver than normal Amazon products, and is only available on Amazon’s mobile app right now.

Amazon plans to rely on the same de minimis exemption that allows Shein and Temu to sell products so cheaply—shipping orders individually to avoid tariffs that otherwise would apply if the products were packaged with others that added up to a value over $800.

The Takeaway?

The U.S. and other non-Chinese retailers have been looking for ways to stymie market share losses to Shein, Temu, and other smaller rivals.

Most have vied for alternative strategies, but Amazon decided to challenge them at their own game, likely due to the firm’s extensive, loyal customer base of Prime account holders.

Launching before the Holiday season is likely to be clutch for both shareholders and those of us who don’t yet hate our families enough to stop buying gifts for them.

Happy Holidays!

The Big Question: Will Amazon Haul be able to compete with Shein and return Amazon’s share of this low-priced market to growth? Should investors be worried about a higher proportion of low-priced products in Amazon’s revenue mix and its potential threat to margins?

Banana Brain Teaser

Previous

Last year, $48,000 of a certain store's profit was shared by its 2 owners and their 10 employees. Each of the 2 owners received 3 times as much as each of their 10 employees. How much did each owner receive from the $48,000?

Answer: $9,000

Today

On a vacation, Rose exchanged $500.00 for euros at an exchange rate of 0.80 euro per dollar and spent ? of the euros she received. If she exchanged the remaining euros for dollars at an exchange rate of $1.20 per euro, what was the dollar amount she received?

Send your guesses to [email protected]

?

If you decide that you’re going to do only the things you know are going to work, you’re going to leave a lot of opportunity on the table.

Jeff Bezos

How Would You Rate Today's Peel?

?? All the bananas

?? Meh

?? Rotten AF

Happy Investing,

David, Vyom, Ankit & Patrick