The Days Ahead:

  • Housing markets and retail sales

This Week:

  • Some “customer-facing” jobs may never come back
  • Small businesses under 100 employees are the backbone of the labor market
  • And they seem in no mood to hire or expand
  • I invested in Tupperware. What was I thinking?
  • It’s a zombie company
  • Are banks lending less? Maybe not. The seasonal numbers and some misreporting make it difficult to tell
  • No progress on debt ceiling

The Jobs Report

We had an unusual day for the jobs report last Friday. The bond market was open for half a day, but stock and international markets were closed. That’s happened about 2% of the time in the last 25 years and set many traders on edge. The jobs report is usually the most tradable event on the calendar and we were absent some major players and braced for some big moves.

But it all turned out as expected with 236,000 new jobs. That’s the lowest number since December 2020 and probably exactly what the Fed wanted. For months, the Fed has stated it expects to see the unemployment rate rise to 4.6% this year from a current rate of 3.5%. The workforce is currently 161 million with 5.8 million unemployed. The Fed’s goals, at least as written, is for 1.4 million more people to be unemployed between now and the end of the year, for an average monthly job loss of 155,000.

That’s probably not going to happen because job growth, despite some strong numbers like January’s 472,000 read, has been pretty meh since Covid-19.

Let’s wind our way back to February 2020. In the three years since then we lost a total of 22.2 million jobs and gained 25.4 million. At the same time, the population grew 6.6 million, or 2.5%, but the workforce grew at less than half that rate, at 1.3%.

Here’s a chart with the total U.S. employment in the blue line swan-diving from 159 million to 133 million in a few months and slowly coming back to pre-Covid-19 levels.

Source: FactSet, 4/10/2023

The green line shows the current workforce as a percent of the February 2020 level. It fell to 83% and is now only 101.3%. By any measure, it is not a strong employment recovery. The economy, meanwhile, grew from $21 trillion to $26 trillion or 23%, and in real terms from $19 trillion to $20 trillion, or 4.3%. The difference between those two numbers is inflation, which is what the Fed is trying to fight.

So, it’s an ok story on the employment side but all we really managed to do was backfill what was lost, and it’s taken three years to get there.

Last week’s payroll number looks like a rehiring of “customer-facing” jobs. We looked at nongovernment private jobs, which excludes the self-employed, and saw this.

Source: FactSet, 4/10/2023

There are about 133 million private sector jobs in the US of which around 15.7 million are broadly customer facing. We chose airlines, food services, accommodation, leisure and entertainment as the obvious categories. In all those, the jobs recovery was much slower than for the manufacturing, health care and service industries that can work from home.

The recovery in the blue line “noncustomer-facing” (green line) group was quick. Employment fell 12% but then retraced half of its Covid-19 losses in just three months and 80% within a year. The customer-facing group saw employment fall 51%, took 6 months to retrace 50% of the losses and 18 months to retrace 80%. The non-customer facing group was at 100% of February 2020 levels by December 2021 but the customer facing group has yet to regain pre-Covid-19 levels.

It may be that the employment recovery in food services and leisure has peaked and may not reach pre-Covid-19 levels again. Technology has played a big part with on-line ordering, QR codes, contactless payments, online reservations, and kitchen display systems, which do away with paper orders and allows real-time status updates, all becoming increasingly prevalent in both sit-down and take-out dining. Owners and managers probably need fewer workers to manage the same volume and throughput.

Small businesses are coming under pressure with increased borrowing costs. Businesses don’t usually carry large debt burdens but they need working capital especially if they have inconsistent accounts receivable, say a business that pays workers weekly but invoices customers monthly, or if a company has seasonal sales. You can bet your local gardening center has just seen a big jump in loan costs to build inventory for the spring planting months. It’s becoming harder for firms to pay expenses. That’s why we’ve seen a more job cuts in Q1 than we’ve seen since 2009, leaving Covid-19 aside.

We have to remind ourselves that small companies are the backbone of the U.S. workforce. Here’s how private sector employment, excluding sole practitioners, looks in the U.S.

Source: BLS

Now, large companies beget small companies and many use small companies as subcontractors so it’s not a case of large companies don’t matter. But it is a case that small companies matter very much and if they’re not in a hiring mood, then job growth is pretty much doomed.

We’ve seen the National Federation of Independent Businesses (NFIB) report its lowest level of hiring plans since 2018 with only 2% of companies expecting to expand in the next three months. The average NFIB poll responder is a company with around $500,000 in sales and 10 employees. Those small businesses provided 13 million of the 28 million new jobs over the last 25 years. Companies with less than 100 workers employ 57% of the workforce.  It’s not a great outlook.

Source: FactSet, 4/11/2023

The blue line shows hiring plans falling and the green line the percent of companies that think it’s a “good time to expand.” Both are headed down.

The slowing of new jobs in the report also came with a slowdown in wages. The Fed focuses on average hourly earnings and they were up 0.3% for the month and 4.2% for the year. But as we’ve noted before, it’s not hourly wages that matters, it’s weekly wages. It’s no good to a worker to be given a 10% hourly pay increase and end up working a 36-hour work week. The take-home pay doesn’t change. Wage pressures are clearly easing.

Source: FactSet, 4/10/2023

We’ve taken the hourly and weekly wages and adjusted them for inflation. Since the beginning of 2021, real hourly wages are down 3.6% and real weekly wages down 5.0%. Neither have risen above 2020 levels.

What’s next? Well, we’d expect slower employment and wage growth, a probable halt in the rise of customer-facing jobs, more lay-off announcements and small businesses paring back on hiring.

Looks like we’re getting the slow down the Fed wants.

I Have a Confession

I invested in Tupperware. Once. I sought help and got it out of my system. I haven’t touched the stock or the products for years. Still, it was enough to lose about 50% of my investment. This week, the company announced that it has “doubt[s] about [its] ability to continue as a going concern” and the CEO said

Tupperware has embarked on a journey to turn around our operations and today marks a critical step in addressing our capital and liquidity position”

Which is a nice thing to say when the New York Stock Exchange has just sent you a note saying, “Hey, you’re late with your annual report…either send one out within six months or we de-list you. Best.” That’s not the end of the world except that the company took on an extra $333 million of debt in the last year against total assets of $952 million. Total debt went from 55% of all assets to 120% and interest expenses went from 20% of operating income in 2020 to 49% in 2022. When that happens, banks come calling and say, “Those loans we made, we, er, said that you have to file your 10-K reports on time, otherwise, you know, you’re in breach of the loan agreements. Sorry.”

The way it was expressed was a little harsher. Tupperware took out $880 million in loans in 2020, all maturing in July 2025. The company had to reach certain financial ratios, and file stuff on time, and if, they didn’t, it’s a default event.

So, apart from financial mismanagement, spiraling debt costs and short-term debt that was about to become considerably more expensive, what else went wrong with Tupperware? Here’s a short list.

  1. Emerging markets: in 2008, Tupperware made a big announcement that it was an emerging markets play. About half the company’s revenue came from emerging markets and they made a big deal out of increasing populations, buying power, and the emergence of a wealthy middle class…which was right out of the play book of all emerging markets companies at the time. Anyway, they never published a full breakdown of the sales and profitability and we never really knew how well it was going. By 2018, emerging markets barely received a mention.
  2. Covid-19. In 2020, the company made a big play out of lock down. People stayed home, whipped up recipes and kept the leftovers in Tupperware bowls. Tupperware shared the limelight with Zoom, Peloton, DocuSign and Netflix as a lockdown stock. Sales grew 27% in six months and operating income peaked. The company also embraced new “digital media” and marketing tools. It was all great. But then people started to dine out more and abandoned cook-at-home hobbies.
  3. Management: One CEO ran the company from 1992 to 2017, and picked his own successor, who lasted less than a year. From 2019 to 2022, the company ran through another three CEOs. Meanwhile, in the last three years, all but two of the thirteen-person board left.
  4. Selling: Tupperware parties were the original social marketing strategies. The company sold its products wholesale to individuals who then held parties to demonstrate and sell products. It was a great strategy to bring suburban living women into the workforce in the 1960s. It also pioneered multilevel selling which meant the more people a sales person recruited, and the more those people recruited, the more sales directors at the top earned. It was a great idea for its time but hardly fits modern distribution methods. Sales peaked at $2.6 billion in 2014 but were less than half that by 2022.
  5. Competition: A Tupperware 7 piece container set costs $189. A Rubbermaid 14 piece set costs $24. A glass set of 14 containers costs $38. Younger customers are likely to use none of the above and prefer more environmentally pleasing products like beeswax paper.

We’d agree that Tupperware is not systemically important and that its share price collapse from $72 to $1.20 in three years is barely going to catch the attention of wiser investors.

But it’s a salutary tale of company life cycles. A great product, a niche distribution strategy, global expansion and forceful word-of-mouth brand building went well for 50 years. Then complacency set in, management became entrenched, and competition moved in. The company was able to keep going much longer than it deserved because it was able to finance at low rates, year after year. A true zombie company. Now it’s over.

We’ll probably remember it the way we do Kodak, Polaroid, Tower Records or Blockbuster. Great companies that couldn’t change.

Are Banks Lending Less?

Maybe. Since the unlamented end of Silicon Valley Bank (SVB) on March 10, 2023, there’s been massive money moves between the banks, the Fed and the money market industry. The net result has been no major stresses on the banking system but a shift in where money is kept and lent.

Think of it as three stages.

Stage 1: Banks need to raise cash in three steps

The first move was for the Fed to offer three programs to banks who needed to meet customer withdrawals.

  1. Bank Term Funding Program (BTFP) Banks could take their securities to Fed, hand them at par value and receive cash in return for a year. The rate is around 4.7%. The bank has money, and does not have to take a haircut on the value of the security
  2. But there’s more. The Fed also opened the discount window where any bank can pledge not just securities but also loans of almost any type, including student, boat, auto and construction loans as well as mortgages. The bank hands them to the Fed (actually to the local regional Fed you’re in), receives cash for 90 days and pays a rate of 5%.  
  3. And one more. The FDIC takes over a bank, like SVB, and sets up a bridge bank. In the case of SVB it was called Silicon Valley Bridge Bank, N.A. The bank opens for business. Depositors want their money but the bridge bank doesn’t have enough to meet all the demands. The Fed loans the bridge bank the money and the FDIC guarantees the repayments.

So those three steps mean no bank need worry about liquidity. The Fed will keep lending cash. This is what this looks like on the Fed’s balance sheet.

Source: Federal Reserve

This is all going to plan. The loans at the discount window spiked up, then down. Meanwhile the more favorable BTFP program climbs steadily and then down. As people worry less about getting their money out of the bridge banks, the FDIC loans fall too.

Stage 2: Once a bank’s liquidity and depositors are taken care of, what happens to the bank’s assets?

They go down. Not because of the what the banks did with the Fed but because depositors wanted their money out of the bank. The chart shows the deposits of large and small banks over the last few months.

Source: FactSet, 4/11/2023

Around $231 billion in deposits left the large banks and $290 billion left the small banks.

Where did they go?

To money market funds. Around $380 billion went straight into Government Money Market Funds. The money left partly because of the fears about banks but also because rates are considerably higher in money market funds. That’s because money market funds can invest in two things that banks don’t or can’t.

One is short-term bills, which yield around 5%. Banks can invest in those but typically do not because they prefer longer maturity securities or loans. As we mentioned recently, you could theoretically run a profitable bank right now paying depositors 2% and investing in T-Bills of 5%. But, the bank would have to pay FDIC premiums of 0.15% to 0.42%, open branches, market itself, pay for audits and regulators and all the other stuff that goes with running a bank. In normal times, when the yield curve is not upside down that’s an unsustainable businesses plan.

Two, banks don’t use the Fed’s reverse repurchase rate operations (RRO). Technically, they can. But they would need to deliver cash to the Fed and take securities in return. Banks typically need cash for transactions, like taking money out of ATMs, advancing loans, or transferring cash to payroll companies.

Banks are thus usually short cash. But money market funds are not. They have plenty of it and they deposit at the Fed overnight and take securities in return. The Fed sets the RRO rate at the same time as it sets the Fed Funds rate and it’s usually the mid-point of the target Fed Funds. Currently it’s 4.8% compared to a near zero rate on overnight bank deposits. That’s a good deal for a money market investor and worth any inconvenience of buying and selling the mutual fund shares. 

Stage 3: Bank deposits leave and now what?

Well, in theory, they banks could just go back to Stage 1, but they’re going to run out of securities to pledge and both the BTFP and discount window are temporary solutions. So, they either have to lend less, or raise more capital. Raising capital these days is expensive so they begin to reduce loan exposure. Here’s the chart of large and small bank commercial and industrial (C&I) loans

Source: FactSet, 4/12/2023

C&I loans are probably the easiest loans for banks to cut. Many of them are short-term facilities at variable rates and all the bank has to say is, “Sorry, your loan rate just doubled and we can only advance you half of what we did last time.” The company on the other end doesn’t have many options.

Other loans are more difficult to cut. That’s because they’re tied to long-term loans like mortgages, real estate, autos or multifamily properties. Banks won’t cut back on credit card loans because they’re very profitable and they get to charge around 20%.  

Those C&I loans in the graph are down around $22 billion for both the small and large banks. That has people worried. What if small companies can’t get access to capital? That’s definitely an issue but there are two mitigating factors.

One, the latest drop in bank lending included $60 billion in loans that went from banks to no-banks, probably private equity. So those loans weren’t called. They just changed owners.

Two, the chart above is a seasonally adjusted number. This is what it looks like for non-seasonal adjustment.

Source: FactSet, 4/12/2023

The loan drop is now not $44 billion, from the seasonal numbers, but only $11 billion. If you add back in a portion of the $60 billion of transferred loans, well, then, we may not have seen any drop in C&I loans.

Now, you may say “Come on, you can’t just cherry-pick from seasonal to non-seasonal adjusted loans!” Fair point. But we’d say that the seasonality was messed up big time by the Covid-19 era when bank deposits jumped 25% in six months and companies took out loans backed by the CARES Act of April 2020. As we’ve noted before, in times of stress, companies draw down any existing line of credit that they can. It’s taken time for those distortions to wind their way through the seasonal adjustments.

So, returning to the question, are banks lending less? We know deposits are shrinking and they’re cutting back some types of loans. But the actual level is not as big as reported. Credit conditions for small companies were deteriorating long before SVB failed. We’ll know in a few more months if bank lending to small companies is curtailed. For now, it looks manageable.

Debt Ceiling Update

We won’t list all the items we’re watching other than to mention there seems to be no premium for T-Bills expiring around the “X-Date” in mid-June. House Speaker Kevin McCarthy is mad at his Budget Committee chair, Jodey Arrington of Texas for proposing terms that were never actually published.

The debt ceiling may breach in mid-August, depending on tax revenues. Credit default prices are around 0.9% for one year but 0.6% for three years. That means an investor buying a 1-Year U.S. Treasury would receive 4.7% but have to pay 0.9% to protect against default, so the net yield would be 3.8%. That’s high by historical averages but the price hasn’t moved much in the last month or so.

Congress is in recess for another week so we don’t expect any news.


Back in February we wrote about Armenian imports from everywhere and how exports to Russia had ballooned following Russian sanctions. We summed it up as: “Normally, Armenia exports copper and tobacco. Now, it’s a lot of “other” and goods.  Where are they getting all that stuff? Well, everyone, including the U.S., UK, EU, and Japan. Armenia’s imports from the EU grew from around $70 million a month to $150 million a month last year and imports from Japan rose by a factor of six. Not to put too fine a point on it, but Russia has found a workaround. They import as many goods as they can through third countries. Armenia just happens to be a very major beneficiary.”

In the latest news from the very reliable Swiss daily, Neue Zürcher Zeitung, it seems Armenia is now under imminent threat from Azerbaijan. They’ve been at war before and a cease fire has mostly held since 2020, with the help of 2,000 Russian peacekeepers (yes, that’s right.) Russia acted as a sort of guarantor for Armenia’s security, but they’re busy these days and it’s improbable they’ll wade in.

The only reason we put this out is that Ameena’s role as an entrepôt to help Russia evade sanctions will change. That has implications for Russian energy exports. We’re just not sure which way. Just add this to the list of polycrisis we face.

The Bottom Line

The market saw good news on the inflation front this week. On the broad CPI, the monthly rate dropped to 0.1% and the yearly to just under 5.0%. Recall it was as high as 9% last June so the Fed has nearly halved the inflation rate in 9 months. The housing component, which accounts for 43% of core inflation, also dropped to 0.5% on monthly basis, which is half of what it was in December 2022.

From the Producer Price Index, we saw headline prices fall by 0.1% for the month and 2.7% for the year. Annual producer prices peaked at 12% last year, so, again, unmistakable improvement. Remember those “trade services” we banged on about? Those were the margins for producers and wholesalers and had increased at an annualized  rate of over 30% back in 2021 and 2022. Our point was that businesses like car dealers and trucking companies could not sustain profit margins growing at that rate without attracting a lot of competitors. They’re now falling around 0.2% a month and down 2% on the year. They’ll continue to fall.

Finally, the Fed minutes pointed to concerns about recession and there were 23 comments about the banking crisis. They went ahead with the rate increase but there’s as whiff of caution in the air.

Treasuries have remained in the 3.2% to 3.4% range. We don’t expect them to reach the hit their October highs of 4.2% again this cycle. Stocks are tuned in for the earnings season, which starts this week and hits full stride in the next two weeks. The S&P 500 is holding on to it’s 7.5% gains for the year, recovering well from the bank scare of early March.

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Art: Zoey Frank (b. 1987)

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