IN THE NEWS

✈️ Memorial Day Air Travel Tops 2019 (U.S. News)

The leisure spending hot streak continues.

Memorial Day air travel surpassed pre-Covid pandemic levels, showing consumers are shelling out for trips despite persistent inflation.

• The Transportation Security Administration(TSA) said it screened 9.79 million people from Friday through Monday, up slightly from 2019. Friday’s screening of more than 2.7 million people was a single-day post-pandemic record.

• Memorial Day marks the start of peak travel season, a crucial period for airlines, hotels, and other leisure-based industries that count on Americans to pay for vacations and other trips.

Despite high interest rates and lofty food and housing costs, consumer spending remains strong. Americans who spent on home improvement in 2020 and 2021 now enjoy trips nationwide, and restaurants also have seen an uptick this spring.

Why it matters:

• A recent survey from Bank of America showed that 68% of Americans plan to take a vacation this year. That’s after nearly three million Americans took a vacation from work in March, the highest number for that month on record going back to 1976, according to the government’s Current Population Survey.
• The four largest U.S. airlines — American, United, Delta, and Southwest, which control 80% of the market — all reported record cash flows or first-quarter revenues, some of which are due to higher fares. They’re also all projecting strong bookings for the second and third quarters.

Priorities: “It’s become less ‘revenge travel’ and more of a lifestyle in terms of sort of a generational shift in the prioritization of in-person experiences over goods,” a PricewaterhouseCoopers partner said this month.

• She added: “The pandemic did result in a permanent shift in preferences, particularly for younger generations. People used to create a bucket list of what they’d want to handle during retirement, but now they’re saying ‘why wait until retirement.’”

🏦  Insiders Made Billions Before SPAC Bust (WSJ)

Remember the SPAC euphoria? It cost investors billions as insiders in the companies that turned public were on the other side of the trade, banking on well-timed sales worth about $22 billion.

• In other words, executives and early investors in those companies profited before the share prices collapsed.

• Among the winners: Detroit Pistons owner Tom Gore and his investment firm Platinum Equity, British billionaire Richard Branson, and convicted Nikola founder Trevon Milton.

A “SPAC” is a special-purpose acquisition company, a publicly traded shell company with a two-year lifespan, formed with the sole purpose of merging with a privately held business to bring it public, bypassing the normal IPO process.

In hindsight, it has become crystal clear why many executives went the SPAC route as trend-followers: the payout.

• “It’s easy to understand why executives at the companies went with this option,” said NYU Law School professor Michael Ohlrogge, who studies SPACs. “It wasn’t because it was a better financial technology—it was because it was just better for them.”

Check out this (telling) chart from 2021:

Why it matters:

At their peak, SPACs accounted for 70% of all IPOs. But now, the market has dried up, and shares of companies that did SPAC deals have crashed.

Insiders at 12 companies alone that The Wall Street Journal analyzed sold shares worth at least $500 million. On average, insiders sold shares at a staggering $22 million each.

• One reason it’s troublesome: As Platinum Equity was selling for about $20 to $25 per share in 2021, five pension funds were buying. But after announcing disappointing results in 2022, the price plunged, and the pension funds collectively lost nearly $2.4 million.

• Other winners include venture capitalist Chamath Palihapitiya, once a Facebook executive, who was lauded as the “SPAC King.” He made $310 million from selling shares of the SPAC that took Virgin Galatic public.

Said Ohlrogge, the professor: “These company owners were aware the valuation the SPAC was giving them was exceptionally generous. It’s a no-brainer to take advantage of that.”

GET USED TO INFLATION

Is inflation here to stay?

Unfortunately, fighting inflation isn’t as simple as raising interest rates.

Sure, if you hike rates enough, you’ll smother the economy and kill off inflation, but at what cost?

That point is particularly relevant because slowing economic activity with higher rates doesn’t fix the core structural challenges to preserving your purchasing power.

Yes, inflation has come down (thanks partly to base effects), though it’s still well north of the Federal Reserve’s 2% target, and our inflationary struggles may be more than just a pandemic-induced phenomenon.

Green & gray

As the financial writer Matthew Klein puts it, we face two major paradigm shifts that make a return to the pre-pandemic era of price stability unlikely. He calls these the “green” and the “gray” transitions.

The green transition refers to the planned efforts to rework the global economy in response to climate change. In contrast, the gray transition reflects the costly effects of quickly aging populations in the world’s largest economies.

Put differently, Klein suggests, “the compounding effects of climate change will require massive investments in everything from sea walls to electric transmission lines to clean power generation.”

At the same time, we’ll also need to “find replacements for traditional plastic and discover greener ways to produce cement, steel, and meat economically.”

Altogether, this requires “trillions of dollars in new investment” to reach stated goals for global carbon emissions.

Balancing supply and demand

At the same time, during this green transition, we face worsening weather extremes, from fires to droughts and floods, reducing society’s productive capabilities.

Heightened uncertainty makes the world economy less robust. For example, more variability in weather makes crop production less predictable.

And because countries cannot afford to run short of food to feed their populations, you might see more stockpiling, which makes shortages worse.

Remember how hoarding contributed to tissue paper shortages during the pandemic?

You might even see resource nationalism.

That is, blocking food exports abroad to ensure there’s enough for everyone at home (example).

As we painfully learned during the pandemic, supply chain bottlenecks and shortages for key items create an imbalance between supply and demand, pushing prices up as folks are willing to pay a premium to get their hands on needed food, household items, medications, gasoline, etc.

Aging workforce

On top of this, we have the gray transition.

As Klein puts it, “By the end of the century, high-income countries and China, which together have consistently produced about 80% of the world’s economic output since at least 1960, are projected to lose more than 40% of their working-age populations.”

Basically, as countries have industrialized, parents are less likely to want to raise large families.

• Where a family with six kids was an asset when living on a farm with more hands to help, paying to house, educate, and feed a family of the same size in a modern major city is almost unimaginable without an incredible salary.

Consequently, birth rates have slowed worldwide as people have migrated to big cities. Countries’ demographic profiles have shifted dramatically, as fewer babies are born (per capita) while the largest population groups age.

Short of an unanticipated and unprecedented reversal in these decades-long trends, the gray transition will only worsen, and countries must adjust to a new reality.

One where they have increasingly large elderly populations while their proportion of working-age people, those doing the work to drive economic growth and stability, continues to decline.

The inflationary consequences are clear: Fewer younger workers against more retirees, primarily consumers of things produced by others, results in a chronic imbalance between supply and demand.

Fewer workers will produce the goods and services demanded by older populations with excess spending money.

Managing slow-moving crises

Says Klein, “Handled badly, either of these transitions alone would be enough to generate unwelcome price increases as businesses and consumers struggle to adapt to massive changes in the mix of goods and service we need, changes to the ways we produce, and impairments in our overall ability to produce anything.”

It’s a recipe for ongoing inflationary problems over the coming years, marked by increased volatility.

Rather than hovering around 2% as it had for decades, inflation will probably be harder to predict, with greater extremes to the upside and downside.

Dive deeper

You can read Klein’s full assessment herefor a more detailed breakdown.

See you next time!

That’s it for today on We Study Markets!

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