Author: Scott Buchanan

Canadian Wildfires Will Burn All Summer; Ways to Filter the Air in Your Home

Scott BuchananLeave a comment

This past week, smoke from wildfires in Canada once again drifted southward and gave very unhealthy air in parts of the U.S.  Several sources I checked indicated that it is unrealistic to expect human effort to extinguish these fires (see here , here, and here). The Canadian forests are just too huge in relation to the fire-fighting resources. What usually happens, even during a normal fire season, is that summer fires just keep burning until they are dampened down by winter rain, snow, and cold. Most of the fire-fighting efforts are devoted to saving communities that are in the path of the flames.

Thus, we may expect periodic episodes of unhealthy air for the next several months. The most hazardous smoke particles are those less than 2.5 microns in size. Particles this small make it past your body’s defenses and penetrate deep into your lungs, promoting a number of serious medical conditions. These smoke particles are made of toxic chemicals like polycyclic aromatic hydrocarbons.

What to do to protect yourself? A first line of defense is to don an effective mask, even indoors. We all probably have Chinese KN95 or Korean KM94 masks left over from pandemic days, and (properly fitted around the nose) these should filter out most of the smoke, including the particles that are less than 2.5 microns. (I prefer the more-comfortable KM94 masks, as discussed here.)  These masks are supposedly about as effective as the more-rigid N95 masks that are the U.S. standard.

Air Filters in Your Furnace

See here for some general tips on dealing with smoke in the home, e.g. damp-mop non carpet floors rather than vacuuming, to avoid shooting settled particles into the air. However, what is really needed is some means to filter the smoke out of the air in your home, otherwise over time the air inside may be as polluted as the air outside. All furnace/central air conditioning systems have a filter in the circuit. A simple solution would be to use an air filter which can catch the smoke particles. The problem here is that the better the filter is at catching small particles, the more restrictive of air flow it is.

Most air filters are rated according to MERV values. MERV 13 filters can remove most smoke particles in a single pass. Unfortunately, most home heating/cooling systems cannot handle that much restriction in air flow; the fan motor would get overloaded and perhaps burn out. One solution here is to install a parallel air filter, with its own booster fan, using a MERV 13 filter. Here, only part of the home air circulation goes through the MERV 13 filter on each pass, but with time most of the home air gets cleaned.

Another approach is to install a MERV 11 or (if your furnace is newer) MERV 12 filter in the furnace. A MERV 11 filter might only capture around 25% of smoke particles per pass, but in the course of a day your whole house air volume should pass through the filter several times. If you have a common size air filter, you can probably get a MERV 11 that would fit on Amazon or at a local big box store. For uncommon sizes, try here.

Make Your Own High-Capacity Filter Box

In addition to working with your furnace/air conditioning filter, you can buy a compact stand-alone air purifier for your home. This Shark HP202 model will provide a continuous read-out of air quality.

For even more air-cleaning muscle, you can make a box-style air purifier by duct-taping together four MERV 13 furnace air filters (four sides of a cube), and adding a box fan on top. Instructions (including YouTube links) for doing this are here, with further details here. These diagrams give the general picture:

An example of a finished product is below; note the red tape covering the outer part of the fan outlet. Blocking that outer area, giving a smaller diameter opening for the air to blow out, increases the net air flow significantly. (It prevents back-eddies of air around the edges).

 It turns out that the air flow through one of these home-made air filters is so high that, even though the per-pass capture efficiency is lower than a HEPA filter, the home-made filter box can remove more particulates from a room than a store-bought HEPA filter.

I have made two of these filter boxes so far, using premium and regular filters. They have worked quite well in clearing the smoke from our rooms: the benefit is well worth the cost of parts and labor. See here for more on my experiences and construction tips.

Some on-line resources:

Accuweather  seems to have straightforward reporting of air quality, including specifically the less than 2.5 micron particles. (Search on your location, then find Air Quality and click Details).

NOAA provides a real time satellite map of smoke patterns (click on “Surface Smoke”), but don’t rely on their color coding to decide whether your local condition is orange or red.

This web site from Natural Resources Canada shows locations of current wildfires in Canada. See Overlays for the meaning of the symbols; red denotes fires that are out of control. You can click Fire Perimeter Estimate to see the enormous extents of some of these fires.

My $109 Raspberry Plant: Growing “Raspberry Shortcake” in a Container

Scott Buchanan1 Comment

One of Warren Buffet’s most famous quotes (channeling the venerable Benjamin Graham) is: “Price is what you pay; value is what you get.”  He thus rationalizes buying top-quality companies or stocks, even if their price is not beaten down. So, allow me to explain why I put over $100 into a single, not-very-large raspberry plant.

In various earlier homes I have lived in, I have grown raspberries. To my way of thinking, this is an ideal crop for a home gardener. You can get maybe five bare-root dormant plants from a gardening supply house like Burpee in the early spring, plant them in the ground, and by that fall have a crop of sweet, flavorful berries you can eat right off the bush. And then you have a perennial bed that will fill in with even more canes each year. The “everbearing” (“fall-bearing” or primocane) varieties like Heritage or Caroline can produce from June through early October, depending on your climate zone. Not many pests attack raspberries, and the only maintenance needed is pruning, fertilizing, and watering during droughts. They do need nearly full sun, and well-drained soil.

I now live in a townhouse, However, I did want to grow raspberries, partly for the fun of growing my own food, partly out of nostalgia, and partly to give my grandson the experience of picking food from a plant instead of from a grocery store shelf.

The townhouse I live in now only gets nearly-full sunlight at one corner of the house. There is no appropriate garden bed there, so I need to use a container. Raspberries normally grow 3-4 feet tall, with roots that go down maybe two feet. I did not really have the space for a two-foot high/two-foot diameter container, and such a large container would be hard to move around. So last year I tried to grow a regular raspberry (Glencoe variety) in maybe a 14-inch x 14-inch pot. It was a total fail. The root space was just too small for this large a plant, I think.

So this year I regrouped, dug deep in my wallet, and bought a special dwarf raspberry called “Raspberry Shortcake.” This variety is bred to grow in small spaces. This plant is mostly supplied in a #1 size pot (nominally 1 quart, but actually smaller). I was impatient and wanted a larger plant that would bear fruit this year, so I spent more and bought a larger (# 2 pot) plant from Plant Addicts. It arrived in late April, and I transplanted it to a 16” x 16” (40 cm x 40 cm) plastic pot from Better Homes and Gardens. This pot is white, which I hope will reflect some of the sun’s heat during the summer.

This is a summer-bearing (floricane) raspberry, so it will only bear fruit for a few weeks in June-July. However, there is a new Asian fly pest spreading in the U.S. that attacks raspberries later in the season, so it may be best to avoid the fall-bearing varieties now anyway.

The plant had been pruned back to several slender, woody stems about ten inches high. Each of these stems has since put out several side shoots, most of which have now borne clusters of berries at their tips. I have enjoyed several dozen berries, and they are still coming. Also, I have had the pleasure of seeing my grandson pick and eat berries off the bush. I am a satisfied customer. Photos:

And close-up on the berries:

This plant cost me $72 ($57 plus $15 shipping). We got lucky with the pot, paying only about $22, when you can easily pay twice that for this sized pot. Potting soil was another $15. So about $109 all-in.

Obviously, I could have bought many little cartons of raspberries in the store instead for $109. I paid a high price for my plant, but got a value that I am satisfied with.

POSTSCRIPT: Just for completeness, to inform other would-be buyers of this plant – – it’s berry production peaked in mid-June here in U.S. growing zone 7a. It continued to produce a few berries a day till the end of the month. Since about July 1, it still produces perhaps an average of one berry a day, with 6-7 visible on the bush at any one time, but they are not ripening properly. Sometimes they just fall off before they are ripe, but most often they ripen very unevenly: some of the little “drupes” turn dark red (and then sometimes fall off) while the rest are still whitish. This may be a reaction to the heat, it is sunny and has hit 90 degrees F nearly every day, so the soil around the roots in the pot is way hotter than it would be for an in-ground planting . Anyway, none of this takes away from the satisfactory performance in June.

Post-PostScript: After watering the plant more frequently to let it transpire like crazy in the heat, and also after I loosely wrapped a 14-inch high strip of aluminum flashing around the pot to deflect some of the sun’s rays, the berries seem to be ripening better…getting 1-2 berries a day, though July 15, though they really are petering out now.

Chocolate Prices Will Shoot Up

Scott Buchanan2 Comments

I write about various topics, usually with at least some loose connection to economics. Sometimes these are fairly macro issues, other times there are specific, actionable observations. For instance, back in March of 2021, we inferred from the critical shortages of semiconductors that car manufacturing would be severely crimped, likely leading to big price increases in cars.  Our post “Chip Shortages Shutting Down Auto Assembly Lines; Buy Your Car Now Or Else” came out just in time (red arrow below) to alert the readership here:

https://fred.stlouisfed.org/series/CUSR0000SETA02 – – Consumer Price Index for All Urban Consumers: Used Cars and Trucks in U.S. City Average

Chocolate Prices

But now, a price increase of more ubiquitous import looms. Most of us were not in the market for cars in March of 2021, but some 81% of us eat chocolate, with the average American consuming about 9.5 pounds a year. Indeed, 50% “cannot live without it every day.”

And so, it is with a heavy heart that I bring warning of a rise in the price of chocolate. Back in pandemic lockdown, I was bored and speculated a few bucks in cocoa futures, as tracked by the NIB exchange traded fund. My shares went up, and then down, and I sold out to limit losses (which was a good move at the time), and moved onto other investments.

Imagine my surprise when I randomly checked on NIB this week and saw the price ramp-up in the past few months:

Source: Seeking Alpha

A quick internet search led to a CNBC article which confirmed my worst fears:

“The cocoa market has experienced a remarkable surge in prices … This season marks the second consecutive deficit, with cocoa ending stocks expected to dwindle to unusually low levels,” S&P Global Commodity Insights’ Principal Research Analyst Sergey Chetvertakov told CNBC in an email.

…Chetvertakov added that the arrival of the El Niño weather phenomenon is forecast to bring lower than average rainfall and powerful Harmattan winds to West Africa where cocoa is largely grown. Côte d’Ivoire and Ghana account for more than 60% of the world’s cocoa production. 

The price of cocoa will feed into the price of consumer chocolate products, especially dark chocolate which has more actual cocoa content. And the price of sweets generally will rise on the back of sugar prices, which stand at 11-year highs, driven again largely by weather.

There is still time to stock up ahead of the hoarders…

Analysts’ Systematic Bias Makes Companies “Beating Estimates” Fairly Meaningless

Scott BuchananLeave a comment

A corporate tale

Once upon a time I was enrolled in a project economics training workshop at a certain unnamed (but generally honest) S&P 500 company, taught by a finance guy from corporate. We got on the subject of making assumptions. The planner knew he was among fact-friendly engineers, not corporate toadies, so he unguardedly told us a story. He was part of a team of young up and coming managers who (as often happened at that stage in their career track) were thrown together in a planning role. They were tasked with coming up with a plan for the upcoming year for I think some large division of the company. They worked hard and put their most realistic assumptions into the plan, and found that, as a result of market shifts beyond our control, next year’s earnings were going to decline slightly.

When they presented this result to management, they were told, “No, go back and bring us a plan for how we are going to grow earnings by [say] 8% next year.” The quick-witted young planners got the message and went back and tweaked their assumptions until they got earnings to grow the required amount. They weren’t exactly lying, but they all knew their “plan” was not straight down the middle realistic. However, the managers were happy, and that was what mattered. Such is the corporate mindset. If analysts or planners want to succeed in their careers, they have to produce what is desired by the layers above.

Earnings “beats” are often pointless

According to FactSet, with the vast majority of S&P 500 companies having reported their first quarter (Q1 2023) earnings, 78% of them reported actual earnings per share (EPS) above the mean average of analysts’ estimates. So nearly 80% of companies “beat estimates”. Woo hoo! What a great quarter for earnings!

But… the actual S&P 500 earnings declined by  2.1% from the previous (actual) earnings. Hmm, maybe not such a great quarter after all. And this is on top of a decline in the previous quarter, as well. But nobody talks about that.

This is another example of the systematic bias in “earnings estimates”, which makes the quarterly hurrahs over “beating” estimates somewhat silly. We have complained about this earlier. Here is the problem: most published analysts are employed by investment banks or similar “sell-side” institutions which are always courting the favor of large companies, since they want the companies to do business with them. What sorts of earnings estimates do the corporate brass want to see?

Well, for earnings that are due to be reported a year or more in the future, they want to see high estimates, which would justify high stock prices now. And for earnings that are due to be reported in a few weeks, the managers want to see low estimates, which they can then (tah-dah!) “beat.” And so, we see a reliable pattern of analysts starting with unrealistically high estimates, and then ratcheting down, down, down in the year before the actual reporting date.

Bring on the charts

A recent article by Seeking Alpha author Lance Roberts illustrates some of these trends. I pulled a couple of his charts here. First, here is a plot showing the decline in Q1 2023 estimates over the past 18 months or so, as analysts do their usual dance:

The blue line in the figure below shows the percentage of S&P 500 companies which “beat” their final (lowered) estimates. If the estimates were fair and unbiased, we would expect this number to be around 50%. In fact, in the past decade it has been around 70%, and growing with time.

Earnings beats or misses do get headlines and contribute to near-term stock price moves, but from a fundamental point of view there is more sizzle than steak here.

How Ceramic Pans Work and How to Restore Their Non-Stick Coating

Scott Buchanan6 Comments

I really don’t like the time and effort wasted in cleaning crudded-up frying pans, so I appreciate non-stick coatings. I have a small diameter Gotham ceramic pan that works well, and I was thinking of getting a larger one for cooking bigger loads. As usual, I went to the internet for wisdom on preferred ceramic pans to buy.

However, in the course of trying to get a fix on how they work, I fell down a rabbit hole. It turns out that this subject is complex and controversial. I will try to summarize my understanding in a brief post, with the caveat that I am not sure of everything here.

First of all, the “ceramic” coating is not really ceramic. Typical ceramics are made from firing powders of inorganic materials like silicon/aluminum oxides (including clays) at extremely high temperatures to where the particles fuse together. For the ceramic coatings on pans, this is not the case. I looked pretty hard on line without success to pin down the actual process or composition of the pan coating. It seems to involve some sort of silicone or silica polymer, applied using a sol-gel process. (Silica is just silicon and oxygen – quartz and white sand are pure silica – while silicone is typically a Si-O-Si-O-Si polymer with two extra hydrocarbon side groups attached to each Si).

100% silicone, in the form of rubbery sheets or cupcake papers for cooking on or in, is known to give a non-stick cooking surface. The “ceramic” coating in pans appears to be a solid equivalent of silicone cookware. A key factor mentioned in why it is slick and why it loses its slickness is that (supposedly) a thin layer of silica or silicone comes off with each cooking episode, and that thin layer is what gives the non-stick effect. (I would not mind ingesting a little adventitious silica, but eating random silicone worries me a little – but I don’t know if all this is actually true).

See this link for further discussion of the safety of ceramic versus teflon coatings. Be aware that makers of teflon coatings often choose names for their coatings that include the words “stone” or “granite”, perhaps to make the unwary consumer believe that these are ceramic coatings. My teflon pans have usually started to flake (into my food!) after a couple years’ use. A happy exception is a newer electric skillet which has temperature control so it never gets above about 425 F (high temperature destroys teflon). We do keep it oiled in use. Its teflon coating is still good as new after two years.

There seems to be general agreement that ceramic pans start off super slick, that fried eggs slide right out, but that after some months of use, food starts sticking noticeably. It helps to use a little oil every time you cook, and to avoid using metal utensils or abrasive cleaning pads, and to avoid very high temperatures or the use of cooking sprays (which deposit something harmful to the ceramic coating) or olive oil (which can burn on). Some users say it is important to clean the pan well between uses, e.g., using salt as a mild abrasive.

Why Do Ceramic Pans Lose Their Non-Stickiness?

There seem to be two main schools of thought as to the deterioration of performance. One school points to the (alleged) continual loss of silica particles or (presumably oily) silicone from the surface; perhaps once this surface layer is depleted, it’s game over. Another camp points to the buildup of burned-on deposits, even very thin, nearly invisible deposits, that then become a locus of food sticking.

What Can Be Done to Restore a Ceramic Pan Coating?

It is common to read that you just have to be prepared throw the pan away every 1-2 years. However, this does not seem economical. Can these pans be salvaged?  One author claims that slickness can be restored by “seasoning” a ceramic pan, similar to how cast-iron pans are treated: after cleaning the pan, rub a very thin layer of a recommended oil (e.g. soybean oil, not olive oil) on the pan and then heat it to the smoke point. This should bond a polymerized oil layer to the surface. I have not tried this, but it might be worth a try.

A diametrically opposite approach is recommended by the maker of GreenPan ceramic pans. Here the theory is that if an offending film of cooked-on crud is removed, the native, clean ceramic layer beneath will once again be non-stick. A wet Magic Eraser type cleaning pad is recommended.

A similar remedy touted on the internet (e.g. here and here) is to rub with coarse salt (for long time, but not too hard) to get down to a pristine ceramic surface. Good results are claimed.

As a (retired) experimental scientist, I was itching to try something like this. At a family member’s house, I found an older ceramic pan that was not in really bad shape, but had lost its primal non-stick.

The BEFORE picture is above. There was a persistent brown film in parts of the pan, and cooked omelets (my test vehicle) did not simply slide out. I cleaned the pan with soap and water and a sponge, then went at it with a wetted Magic Eraser. I got the brown film off, though you could still see some pitting in the coating due to the use of metal utensils.

The AFTER picture is below. This is after cooking yet another omelet (with oil), and just wiping the pan with paper towel afterward. I can’t say that it was a night and day difference, but the Magic Eraser treatment definitely seemed to improve the performance. Score one for sustainability.

APPENDIX:  Finally Understanding What Make Ceramic Pan Coatings Non-Stick

As noted in the original article above, I was puzzled over how the ceramic coatings worked. The descriptions in articles I could find on-line talked of forming these coatings from sol-gel solutions, using ingredients such as tetraethoxysilane. Without going into details, my chemical intuition led me to believe that, yes, you could form a dense silica pan coating from that, but the final outer surface would have Si-OH groups, like quartz or glass or ordinary “enamel” ceramic pan coatings. This would not give the oily, silicone-like surface that is evident with the nonstick ceramic pan coatings.

My “Aha” moment came when examining a patent application ( United States Patent Application No. 20180170815) for making a GreenPan ceramic pan coating. Among the ingredients for making the coating is methyltrimethoxysilane (MTMS).  And THAT should give Si-CH3 groups on the outer surface, which is exactly the type of oil-like outer surface that silicone has.  (The -CH3 methyl group is a fairly nonpolar, “oily” hydrocarbon type group).

A restless itch has now been scratched. I think I now understand why fresh ceramic pan coating can have such fine non-stick properties, and perhaps why they might be vulnerable to losing their non-stick properties. With Teflon type pan coatings, it is plasticky, oily Teflon all the way down, so if you abrade off a hundred molecular layers, it should make no difference. But with the ceramic coatings, it is not clear to me whether the oily Si-CH3 groups are only in the topmost atomic layer; maybe if that gets abraded off, there is only the quartz-like Si-OH groups to be found; or maybe there is a substantial (in atomic terms) topmost layer rich in Si-CH3 groups. Anyway, it makes sense to keep using oil when cooking on ceramic pans, to keep a hydrocarbon-type surface coating going there, and to avoid using metal utensils that can scrape and scratch the coating.

Carl Icahn Under Siege: The Predator Becomes the Prey

Scott BuchananLeave a comment

The term “investing legend” gets thrown around a lot, but in the case of Carl Icahn, it truly fits. He kicked off the modern era of corporate raiding by taking influential stakes in many companies and forcing changes to his personal advantage. In some cases (e.g., Trans World Airlines) this involved taking over and dismembering the firm, and selling off the pieces. He is considered by some measures to be the most successful “activist” investor ever. His personal wealth is (or was) on the order of $20 billion.

Icahn has rolled much of his personal holdings into a limited partnership called Icahn Enterprise L.P.  (IEP).  According to its blurb, “…Icahn Enterprises L.P., through its subsidiaries, operates in investment, energy, automotive, food packaging, real estate, home fashion, and pharma businesses in the United States and Internationally.” This partnership structure allows Icahn to cleverly avoid paying income taxes on the earnings from his enterprises. Another score for the old wolf.

This arrangement has also allowed us mere mortals to nibble on the crumbs from his table. IEP has paid a very large and growing dividend for more than ten years. Since 2019 it has paid $ 8.00 per year ($2.00 per quarter). This generous payout has made it popular among retail investors and has kept the price of IEP steady in the $50-$55 range for a number of years. This gives around a 15% yield.

It has always been understood that IEP does not actually generate enough cash to pay out $2.00 per quarter on every share, but since “Uncle Carl” owns some 82% of the shares and takes all his dividends in stock (again, to beat the taxman), it has all worked out. That is, until the past month, when IEP was the target of a “short attack” by the ominously-named Hindenburg Research. A short attack is when some outfit takes a short position in a stock, then publishes a report claiming all sorts of misrepresentation and malfeasance on the part of management, to scare the public into dumping the stock. The attacker pockets a tidy profit on their short position when the stock price tanks. Then on to the next victim.

Often, there is not much actual substance to a short attack, but in the case of IEP Hindenburg had something of a real case. Their claim is that the actual net asset value (NAV) of IEP is way, way below $50 / share, and even lower than the NAV officially reported by IEP. Hindenburg made lots and lots of other dire accusations, describing IEP’s operation as a giant Ponzi scheme. Ouch.  Also, it seems Icahn has actually lost his mojo in the past decade (he is 87), making several market bets that went sour and lost billions. Anyway, some of Icahn’s old victims are not sorry to see the former shark being mauled by tactics similar to those he once employed.

The IEP stock price quickly dropped from 50 to 30 when the short report came out, then rallied back to about 36 after Icahn gamely announced that the usual $2.00 dividend was still going to be paid (stock chart below). That is where I sold about half my IEP shares to de-risk my position (disclosure: I had bought a very small amount before the Hindenburg report).  The price then meandered around in the low 30’s for a couple of weeks, then started to slide down again.

Share price for Icahn Enterprises L.P. (IEP). Source: Seeking Alpha.

Icahn made numerous enemies in his career, including fellow corporate raider Bill Ackman. Icahn went very long on a company (Herbalife) that Ackman was heavily shorting, back in the day. One YouTube you can listen to a 2014 CNBC show where they had both called in, where they were hurling very personal insults at each other on the air.  Ackman recently piled onto the short thesis for IEP, tweeting that even after the recent fall in price, the shares were still overvalued by at least 50%. IEP shares promptly plunged another 14%, to under $20.  Icahn’s response: “Taking advice from Ackman concerning short selling is like taking advice from Napoleon or the German General Staff on how to invade Russia.”  Some things don’t change.

Why No Recession (Yet)

Scott Buchanan1 Comment

Where is that recession that pundits have been predicting for over a year now? The suspense is killing me. Despite savage hikes in interest rates that have led to a collapse in regional banks and in home buying, the economy just keeps chugging along, and inflation continues to run way above the targeted 2% level. What’s going on?

An article I just read on the Seeking Alpha applied finance website points to three interrelated factors. I will cite and credit the author (whose moniker is “Long-Short Manager”; he runs a couple of investment funds) for the content here, while noting that I agree with his points based on other reading. These points all relate to ongoing strong financial position of the (average) American consumer, who mainly drives the spending in our economy.

( 1 )  Reduced Debt Service

The article notes:

The graph above shows household debt payments as a percent of disposable personal income going back to 2000. Since peaking at 13% right before the financial crisis, it steadily improved to 2020, with a subsequent large drop due primarily to lowered mortgage rates (usually the largest debt obligation of a household). It is the lowest it has been this century.

(Although mortgage rates have jumped in the past year, most existing mortgages were taken out pre-2023, when interest rates had been pushed to near zero by the Fed.)

( 2 )  Robust Wage Growth

The next graph from the Atlanta Fed’s wage tracker (note that the methodology used by this tracker is fundamentally different from the Fed’s employment cost index …) shows that job hoppers on average are making about 3% more than core inflation (call that 5%) whereas the average stayer is making a half percent over core inflation. This is allowing people to catch up for the year that they got behind on inflation.

Likewise, the author notes that although job quits have come down in the past year, they remain well above re-COVID levels.

( 3 ) We Are Still Spending Down Gigantic Pandemic Stimulus Windfall

As we have noted earlier, the government/Fed combination dumped some $4 trillion into our collective pockets in 2020-2021. This includes enhanced unemployment benefits as well as direct stimulus payments, at a time when much of our normal spending (e.g., on travel, sports, commuting, etc.) was curtailed. We are still spending down these excess savings at a good clip, which seems to be a fundamental driver of the currently robust economy:

The last figure on the consumer shows how excess savings (defined as the extra savings consumers accumulated during the pandemic due to fiscal transfers and reduced spending due to lockdowns) has evolved – it should now be around 700 billion and ought to be fully depleted by the end of the year – leaving the consumer still with the lowest debt service ratios of the century and wages caught up with inflation. If you are wondering why we haven’t had a recession despite economists saying we will have it within 6 months for about 12 months now, these charts should tell you why. The tailwind from consumers has exceeded any headwinds from reduced investment due to higher rates. 

And there you have it.

Save $$$, Easily Change Your Car Cabin Air Filter Yourself

Scott BuchananLeave a comment

I have done various maintenance and repairs on my cars over the decades. Usually, they turn out to be harder and more time-consuming than I thought. Changing the engine oil and oil filter has become genuinely harder since the oil filters have migrated deep up under the engine, where it is hard to access them without putting the car on a lift, and disposing of a milk jug of used oil has gotten more difficult.  I used to be able to easily change out a light bulb in the headlight, but the last car where that needed doing required you to take apart much of the front end of the car to get at the headlight. However, I recently found that changing the cabin air filters in my two vehicles (van and sedan) is so easy, I wish I had started doing it years ago.

Why Change the Cabin Air Filter?

The cabin air filter filters the air coming into the passenger section of the car. It knocks out road dust and pollen, and other bits of whatever that might get sucked into your air system as you are going down the road. So, it protects your and your family’s lungs as well as the components of the air handling system. Typical recommendations are to change out the filter about once a year or every 15,000-20,000 miles.

The photo below shows the cabin air filter I just pulled out of my van after maybe 2 years and 25,000 miles, next to a relatively clean filter. Obviously, I let this one go a bit too long: it is grey with dust/dirt, and partly blocked with plant debris.

I have not been quick to change out these filters because garages or dealers often charge something like $80-$100 for this. And until recently, I never considered doing it myself, because for some reason I thought it was a hard job. I had read of people having to contort in unnatural positions with heads inserted under dashboards as they disassemble layers of car to get at the filter.

It Is (Often) Super Easy to Change a Cabin Air Filter

It all depends on where the filter is located. For most models of cars, you can find guidelines on line, including YouTube videos. There are some models where you indeed may have to unscrew a cover plate somewhere below the dashboard to expose the filter. But in most cars, you remove the glove box to expose the filter. That may involve undoing come screws or a snap or strut, and squeezing the edge of the glove box inward. For my Hondas, all I had to do was empty the glovebox, (authoritatively) squeeze in the edges, and the glove box pivoted down, and behold, there was the filter in its little holder. Then slide out the holder, pull out the old filter and put in the new filter (purchased at AutoZone for $20 each), slide the holder back in place, and finally tilt the glovebox back up until it snapped in place.

Ten minutes max, easy-peasy. Obviously, this saved money, but it also felt empowering. I highly recommend trying it.

Leading Indicators Show Incoming Recession; Lagging Indicators Not So Much

Scott BuchananLeave a comment

Here I will draw on a recent article Leads And Lags: Timing A Recession by Seeking Alpha author Eric Basmajian. His overall points are (1) that some indicators are associated with leading segments of the economy (which have historically turned down well before the rest), while others are more lagging, and (2) the leading indicators are strongly flashing recession. Direct quotes from his article are in italics.

Leading Economy, Cyclical Economy & Total Economy

When economic data is released, the information should be contextualized based on where the data point falls in the economic cycle sequence.

We can separate the economy into three buckets: the Leading Economy, the Cyclical Economy, and the Total Economy.

The Leading Economy is defined by the Conference Board Leading Index, which is a basket of ten leading economic variables such as building permits, new orders, and stock prices.

The Leading Index has turned negative before every recession, without exception.

Conference Board, Census Bureau, BLS, BEA, Federal Reserve

The Cyclical Economy represents the construction and manufacturing sectors. The Cyclical Economy is the driving force behind recessions, always turning negative before the Total Economy, and never giving a false signal; when the Cyclical Economy turns negative, the Total Economy turns negative several months later.

Conference Board, Census Bureau, BLS, BEA, Federal Reserve

The Total Economy is defined by the “Big-4” Coincident Indicators of economic activity. Nonfarm payrolls, real personal income less transfer payments, real personal consumption, and industrial production are four major economic indicators that the NBER uses as the core of their recession dating procedure.

Conference Board, Census Bureau, BLS, BEA, Federal Reserve

A sustained contraction in the “Big-4” Coincident Indicators is the definition of a recession.

The Total Economy starts showing contracting growth rates about four months into the recession.

Could This Time Be Different?

If we do finally get a recession, it will be probably the most long-expected recession ever. Pundits have been warning for over a year that the Fed’s well-telegraphed program of rate hikes will crater the economy, as the only way to tame inflation.

According to Basmajian, When the Leading Economy and Cyclical Economy are both lower than -1%, a recession, as dated by the NBER, occurred an average of 5 months later, with a range of a 4-month lag to a 14-month lead.

His Leading indicator went negative about 11 months ago (June, 2022). However, it looks like the economy is still humming along and employment remains robust. His Cyclic Economy is on track to go negative right about now, but that has an unusually long lag between Leading and Cyclical:

The Cyclical Economy will likely turn negative with April data and potentially below -1% by May data should the current downward slope remain.

That would push the lag between the Leading Economy and the Cyclical Economy to 11 months, the longest on record.

And the lag before we finally get a bona fide recession in the Total Economy may keep dragging out longer yet. There is even a possible Soft Landing scenario where the rate hikes manage to cool the economy down without causing a severe recession at all.

It seems to me that we collectively are still spending down our excess pandemic benefits, and no recession will come till we finish running through those monies.

Regulation and Delayed Updates: Why Services Inflation Will Likely Stay High

Scott Buchanan1 Comment

Apart from some possible geopolitical upset (and theater with the debt ceiling), the Big Issue for the larger economy, and for investing decisions, remains how fast inflation will decline – since that governs how soon the Fed can relent on keeping interest rates high. Those high interest rates are having all kinds of knock-on effects, including bank failures and suppressed home sales.

The investing market seems to be pricing in expectations of significant Fed rate cuts before the end of 2023, which in turn presupposes that inflation will have ratcheted downwards far enough by then to allow the Fed to declare victory. Goods inflation (= mainly stuff made in China) has declined nicely, but services (which comprise the majority of household spending) remains high. It is coming down, but too slowly to realistically hit the Fed’s 2% target this year.

In an article in the Seeking Alpha site title Services Inflation Is Stuck, the investment firm Blackrock notes some technical factors that will likely keep services inflation high for at least the remainder of this year. I will paste in their text in italics:

Core Services ex-Shelter inflation is a bit of a hodgepodge that includes things like medical care services, video and audio services, tuition, and insurance. It comprises roughly a quarter of the CPI basket and, importantly for the Fed, is very domestically oriented.

A key insight from this article is that nearly two-thirds of this key “Core Services ex-Shelter” component consists of:

(1) Service prices that are regulated (especially insurance), and

(2) Services with infrequent price resets (such as tuition and especially medical services):

There are technical factors that make it likely that these particular items will see ongoing, sticky inflation:

Impact of Regulated Prices

Regulated prices tend to be more discrete and more lagged in their changes due to bureaucratic delays and their negotiated nature. Some types of regulated prices, like postage or water and sewage fees, are easily recognizable as subject to government regulation. Somewhat less intuitive is the degree to which insurance in the United States is a regulated price. Insurance comprises the largest share of Core Services ex-Shelter basket and state-level insurance commissioners play important roles in negotiating auto, property, and casualty insurance price changes.

The underwriting costs of insurance have been surging globally – a combination of higher reinsurance premiums, inflated asset values, and more natural disasters. These rising costs have only just begun to flow through into consumer prices; auto insurance costs were an upside surprise within March’s CPI report.

Jumps in Medical and Education Prices Will Appear Later

Though the market has been fixated on the painstaking details of the month-over-month inflation prints, many of the sub-components of the CPI do not update monthly. Two of the more important items within the core services basket – medical care services and tuition – only update their prices annually. Coincidentally, updates for both of these categories take place in the autumn, and both are set to rise strongly.

Medical care services are the largest component (28%) of Core Services ex-Shelter, but have a complex and lagged computation and update only once a year in October. Medical services inflation has been negative since last October as a consequence of excess consumer demand for post-pandemic doctors’ visits, however, we expect this mechanical effect will abate later this year and thereafter lift core services inflation.

Tuition is another example of a service with intermittent price resets, given prices are set on the basis of the academic year. We expect the broad-based upward wage pressure in education to be passed through to higher education consumer prices later this year when students return to school.

And so…I expect “higher for longer” inflation and interest rates.