The Retired Investor: Streaming Comes of Age
There are roughly 817,000 unique and different programs available via streaming services in the U.S. The median streaming household pays for three to four such subscriptions costing between $20 and $30 per month. Most consumers claim the choices are overwhelming and cumulatively expensive, so why don't they plan to do anything about it?
Those were the findings of a Nielson report titled "State of Play" published in April 2022 that analyzed the state of streaming entertainment in America. The number of programs (movies, series, specials, etc.) has increased by 26.5 percent since the beginning of 2020.
The amount of content that we couch potatoes have consumed has also increased by 18 percent since 2021. To put that in perspective, in just one month (February 2022), Americans consumed 169.4 billion minutes of content. Obviously, there is a strong correlation between the amount of content available, and the amount we consumed.
Personally, there isn't a day that goes by that I am not bombarded with ads on television, radio, the internet, and emails from one streaming service or another. Most of them promise a week or so of free viewing and then automatically bill me each month via credit card for as long as forever. Honestly, when I examine the offerings, I discover that much of what they offer is old shows and series with one or more new series thrown in that were popular once upon a time.
Nielson says almost half of all users they surveyed felt overwhelmed by the quantity of programming available. I concur. My list of shows on the four services I subscribe to continues to build to the point that it would probably take me a year of constant binging to get through it all!
So, with all of this content, you would think that I would cut back, discontinue a service or two, and save some money. But true to form, no matter how much I complain, I have no plans to cut back, or reduce the amount of streaming content I consume each night. And that is exactly what most of those surveyed by Nielson said as well. A full 93 percent of respondents said they planned to either keep the streaming services they had or add more over the course of the next year.
If you asked me right now how much I pay a month and over the course of a year for my subscription services, I couldn't tell you. How about you, can you even guess? It turns out that almost a third of U.S. consumers underestimate how much they spend on subscriptions by $100 to $199 per month, according to a study by market research firm, C+R Research.
It is also true that many people (42 percent) have forgotten that they are paying for a streaming service that they no longer use. I am guilty once again. My wife and I enjoy foreign films, so about four months ago, we decided to fork over another $6.99 a month for a British service. We watched maybe one or two shows and that was it. Because we charged the fee to our credit card, the amount was automatically debited, making it easy to go unnoticed. Since 86 percent of consumers have at least some, if not all, of their subscriptions on autopay, I suspect many readers have similar experiences. TV and movie streaming came in third, after mobile phone and internet charges as the most forgotten types of subscriptions.
Way back when, if you recall, cable companies offered preset packages to subscribers that included several premium services in addition to network television for a bundled price. In a similar move back to the future, many of Nielson's surveyed consumers (64 percent) said they would be interested in bundling competing streaming services to save money if they could choose the streaming services they want. It seems to me that as winners and losers begin to become apparent among streamers some sort of bundling will make economic sense. In the meantime, I will probably continue to complain about, pay for, and accumulate additional services.
The Retired Investor: Stock Market & Midterm Elections
The stock market does not perform well in the year leading up to midterm elections. This year's election may just add to the overall woes besetting equities.
Historically, the average annual return of the benchmark S&P 500 Index in the 12 months before the Nov. 5 election is 0.3 percent, versus the historical average of 8.1 percent in non-midterm years. In 2022, of course, with the S&P 500 down more than 20 percent, those historical numbers look pretty good. Unfortunately, volatility also tends to rise before and after midterm elections.
But this year is different, you might say, since we are witnessing the first European war in decades, as well as the highest inflation rate in 40 years. And let's not forget the continued existence of the coronavirus, a pandemic the world has not seen in more than a hundred years.
While all of this is true, it does not contradict the data. For more than a century, the second year of the four-year presidential election cycle has always been the weakest in performance, so investors should brace for an even worse year than most.
Consumer sentiment is in the dumps and a growing list of issues — political, social and economic — are plaguing voters. The economy is giving off conflicting signals. It is still growing, although that growth is moderating. But right now, U.S. GDP remains strong enough to keep employers hiring and wages rising, but for how long?
Two big negatives are posing a growing threat to the economy; inflation and the Fed's determination to fight it through tighter monetary policy. Both elements are impacting the wealth effect of American voters. Higher interest rates are hurting the stock market, and with it the average Americans retirement portfolios. Housing prices, another bright spot for homeowners, are also leveling off as mortgage rates climb. The two combine to inflict a general feeling of diminishing wealth among many households. We are feeling poorer.
Inflation adds to that feeling. At the gas pump and in the supermarket, skyrocketing inflation has dramatically increased the cost of living for most voters. Workers are finding that recent pay raises are not covering the effects of inflation on the family budget.
What is worse, more and more economists are beginning to worry that the Fed's monetary tightening will ultimately lead to a recession sometime soon, whether this year or next. If so, the macroeconomic data will likely make that apparent just in time for the lead up into November's mid-term elections in 2022.
The makeup of the Congress and the Senate adds even more uncertainty to the midterm equation. If we look back at midterm elections since 1934, the president's party has lost at least 30 seats in the House and four seats in the Senate. There are only three years in history where the president's party gained seats. Democrats cannot afford to lose any seats in the Senate and few seats in the House if they hope to maintain their majority. At this point, history is against that happening.
Investors tend to dislike uncertainty and like the status quo within their governments. The stakes are high. If the Democrats hold firm in both houses of Congress, the chance of new legislation (and possibly new taxes) becomes a higher probability. If Republicans win one or both Houses, gridlock becomes the likely result within government. In that case, investors can expect little in the way of new legislation or downside surprises. Either way, we can be sure that the markets will be anything but calm leading up to Nov. 5.
Of course, there are a host of social issues, which may help determine the outcome. However, the economy usually takes precedence over all else in voters' minds. In any case, readers can expect that politicians on both sides of the aisle will be sure to add to the market's volatility in the months ahead. Starting now.
The Retired Investor: Natural Gas Prices Fall But For How Long?
Only recently have investors' focus shifted from $120 a barrel of oil to the soaring price of natural gas. Given the many uses of natural gas, from heating and cooling and generating electricity to the production of plastics and petrochemicals, the direction of prices could be critical to our economic well-being.
On Wednesday, June 8, 2022, natural gas prices fell over 10 percent after a fire at a Texas liquified natural gas (LNG) export terminal shut down the Freeport LNG facility for at least three weeks. The terminal accounts for 16 percent of U.S. export capacity. Gas prices fell because for a brief time, that gas will flow into the domestic market depressing prices in the short term.
Thus far in 2022, Henry Hub natural gas futures are trading at $8.23 Metric Million British Thermal Unit (MMBtu) down from $9.44 MMBTU but still up 10 percent, which is a fourteen-year high. Many analysts believe the present price rise is unsustainable, but summer heat, export demand, and a robust hurricane season may continue to pressure prices higher.
The Federal Energy Regulatory Commission (FERC) estimated that U.S. demand for natural gas would outpace supply this summer. FERC expects that U.S. demand for natural gas production will increase by 3.4 percent over the summer, compared to a projected 4.8 percent increase in consumption during that same period.
Overall, a drop in the U.S. supply of natural gas in storage is driving the price gains and the prospect for storage gains is dismal at best. How did the U.S. end up in this predicament? Blame the pandemic or regulation or both. There was a large decline in production in 2020, when extraction of gas, oil and most fossil fuels fell off a cliff. Many small gas producers went out of business during that period, while larger companies trailed off production to protect profit margins. Government regulations did their part as well. Wall Street bankers also wanted more dividends and stock buybacks and less production from the gas companies that survived the downturn.
As supply dwindled, demand for U.S. exports of liquefied natural gas (LNG) continued to increase to record levels. This year (2022), the U.S. has become the world's largest exporter of LNG. However, the majority of the world's LNG supply is sold under contract. Many of these contracts are decades long. As a result, most of the U.S. LNG supply is already spoken for. No one counted on the Ukraine War.
As Russia invaded Ukraine, the price of natural gas in Europe exploded higher. Traders initially thought Europe's price hikes would have an impact on this side of the pond. But over time, higher European prices had only a minor impact on the price of natural gas here in North America. As gas markets go, the U.S. is an isolated market. The U.S. natural gas market produces 97 billion cubic feet per day (BCFD) of natural gas, which is just enough for domestic consumption with another 12 BCFD available for LNG exports.
However, President Joe Biden has since promised to supply more natural gas to Europe to replace Russian fossil fuels. The problem with this pledge is that no one knows where the additional supplies are going to come from. There is little LNG available and even if there were it is extremely difficult to re-route LNG from one region to another.
One might think that with rising prices, why not simply increase production? That is easier said than done. Labor and material shortages, in addition to a more cautious approach to drilling (as a result of finance and regulation), have conspired to bring on some production, but at a much slower rate. In February 2022, monthly production hit 115.2 BCFD, but that was down from 118.7 BCFD in December 2021. Since then we have seen a steady decline. Average gas production output in the lower 48 states fell to 94.7 BCFD in June 2022 from 95.1 BCFD in May 2022.
As a result, storage levels are 18 percent lower than last year, and 16 percent lower than the five-year average. The way gas storage works, some storage historically is left unused in preparation for the winter when more gas is normally consumed. That is not happening this year. And all the above supply constraints could be exasperated by climate change.
The National Weather Service is already warning of another summer season of record-breaking heat waves in the Southern states. That wave has already commenced in places like Texas, Oklahoma and Louisiana. The nation's utilities, which are charged with supplying the electricity necessary to run all those air conditioners, have switched in times past to coal for power, but coal is now even more expensive than gas.
We have not even spoken about this year's hurricane season (June 1 to November 30, 2022). Historically, major hurricanes have disrupted both oil and gas production, refining, and delivery in many areas of the U.S. NOAA's Climate Prediction Center (a division of the National Weather Service), is predicting above-average activity this year with between 14 to 21 named storms on the horizon.
At the very least, I would suspect that down the road we will all be paying higher utility bills. As utilities grapple with higher natural gas costs, it will take some time to pass the costs through to the consumers. Depending on how tropical the summer gets, those higher monthly bills could persist well into the winter.
The Retired Investor: The Gun Industry Is Doing Just Fine
Despite the carnage caused by firearms, the business of manufacturing, marketing, and selling guns to Americans is thriving. What is worse, it appears that efforts to control and regulate the industry may only increase sales.
During the start of the COVID-19 pandemic (2020-2021), gun purchases accelerated. More than 5 million adults becoming first-time gun owners compared to 2.4 million in 2019, according to a survey published by the Annals of Internal Medicine. Approximately half of all new gun owners were female, and nearly half were people of color. Month after month, sales of guns have surpassed 1 million units for 33 months in a row.
This year (so far), monthly sales of guns have been off slightly. In April 2022, 1.5 million firearms were sold, which was a year-over-year decrease of 20.7 percent, while long guns or rifles fell by 18.8 percent. However, if past behavior is any indication gun sales will likely surge in the months ahead. It is one reason why publicly traded gun stock prices are flat-to-up despite the horrible news of the last two weeks.
The facts are that mass shootings like the ones in Uvalde, Texas, or Buffalo, N.Y., motivate more Americans to buy guns rather than to give them up. Throughout the last several years, the three highest months for gun sales occurred in December 2012, after the Sandy Hook Elementary School shooting in December 2015, after the mass shooting in San Bernardino, CA. in March 2020 as a result of the Covid pandemic. There were also gun sale spikes in June 2020 as Black Lives Matter protests erupted after George Floyd's murder.
The most-cited reason for owning a firearm in the wake of high-profile shootings and massacres is personal security. "Self-defense" seems to be an overriding motivator for most Americans. Opponents of this behavior argue that more guns at home only increase the potential risk to the 11 million household members that are newly exposed to lethal firearms, including an estimated 5 million children.
As a Vietnam veteran, I am convinced that guns as a form of self-defense is a fallacy. Unlike hunter safety courses, which teach new gun owners how to safely use rifles or bows in hunting wildlife, Americans (except veterans and law enforcement) have little to no training in the far more deadly skill of killing or wounding another human being.
Learning that skill required, in my case, more than 18 months of sophisticated training using live fire. Even then, repeated firefights were vital in learning how to survive, reduce instances of friendly fire, and accomplish the objective of self-defense or offense.
In my life, I have only met a handful of men and women, who have received and have maintained those skills. My brother, for example, who lives in Delaware, has an arsenal of guns, and has never hunted, and yet enjoys shooting up old cars with his state trooper buddies. I remind him abandoned autos don't shoot back, but he ignores my arguments.
However, there is also another important factor in generating increased gun sales — regulation. As I write this, Congress is once again demanding something be done to reduce gun violence. And as usual, most Republican congressmen and senators display few signs that they will vote for any new gun regulation. Gun control has become a partisan issue, just as important as abortion in many circles.
The more vocal politicians become over limiting or hindering the purchase of firearms, the more gun advocates feel threatened that their second amendment rights might be reduced or taken away entirely. The result is usually a rush to buy and stockpile even more guns "just in case."
Frustrated with the stalemate in Washington, many individual states are attempting to take action where they can to reduce gun violence. Other states are pushing to reverse or strengthen voters' gun rights in response. Roughly three in five state legislatures are Republican-controlled and are determined to make guns even more accessible to their citizens.
For example, one of the country's largest banks. attempted to distance itself from the firearm industry after a mass shooting in Parkland, Fla., which left 17 dead. Texas, in response, passed a new law that bars state agencies from working with any firm that decimates against companies or individuals in the gun industry.
The law requires banks and other professional service firms to provide the state written affirmations that they are complying with the law. Banks could be subject to criminal prosecution if they don't comply. In addition, banks worry about their bottom line, since Texas is one of the nation's largest bond issuers, with $50 million in annual borrowing, generating $315 million in fees last year for financial firms.
The facts are that in a country where one third of Americans own guns, don't blame the politicians for their lack of new regulations on guns and gun violence. They are simply following the wishes of their voters. Just recognize that three out of ten of your neighbors, regardless of whether you live in a blue state or red state, may disagree with additional gun controls.
And don't dismiss gun owners as a bunch of red-neck, no-nothings. There are countless, male and female professionals — doctors, lawyers, financial planners, etc. — that own and collect guns. As such, while my heart breaks for the slaughter that we see perpetrated by Americans with guns on an almost on a daily basis the solution eludes us. One suggestion might be to require insurance when purchasing a gun, like the existing practice of requiring insurance along with the purchase of an automobile. It would avoid the Second Amendment controversary and probably reduce those willing to pay yearly insurance for each firearm they own.
The Retired Investor: Wealth Effect Cuts Both Ways
Economists know that consumers spend more when their wealth increases, even if their income remains the same. However, if wealth decreases, the opposite occurs.
The concept, known as the wealth effect, has spurred the economy for well more than a decade as savers' 401(k) and other retirement accounts increased year after year. At the same time, real estate values have also risen. Of course, most of the time these gains are only paper profits unless you sell your house or withdraw money from your portfolios.
Nonetheless, there is a behavioral element to this concept. People tend to spend more when stocks and housing prices continue to climb because they feel wealthier and become more optimistic. It is one of the reasons why, in the U.S., consumer spending continues to remain robust — until recently.
The Federal Reserve Bank, in past efforts to control inflation, focused on removing the supply of credit to the financial markets. They did so through hiking interest rates and slowing bond purchases. However, this time around, the Fed is targeting the demand side of the economic equation as well. Reducing demand in this case would require reversing some of the wealth accumulated over the last 10 years or more.
During the COVID-19 pandemic, stock portfolios and home prices soared, thanks to the huge governmental monetary and fiscal stimulus that occurred. America's top income earners, who were working from home, splurged on home remodeling, new autos, durable goods and all sorts of electronics. Trillions of dollars in stimulus checks and unemployment benefits supercharged consumer spending for those who made less.
As a result, all income groups increased spending at rates far faster than before the pandemic. The most recent government survey of retail sales for April 2022, indicated that retail sales outpaced inflation for a fourth straight month. And while inflation climbs, higher earners, who already account for a large share of overall consumption, seem willing to keep spending, at least for now.
That retail sales data doesn't tell the whole story. Low-and even middle-income households are already cutting back. Demand is falling as the wealth effect appears to be working in reverse. Almost 60 percent of U.S. consumers, according to a survey by brokerage firm Jeffries conducted in April 2022, said they have reduced the number of items they typically buy. In every category, low- and middle-income consumers were cutting back far more than those in higher income groups.
In addition, the National Retail Federation identified that 47 percent of consumers they surveyed last month (April 2022) were switching to cheaper products and alternatives as well. I have already pointed out this trend in past columns. Consumers are reducing meat consumption, or choosing cheaper alternatives such as chicken, pork, or fish. Supermarket sales of private label brands are booming as well.
But inflation is not the only variable that is impacting consumers. Interest rates are also playing their part. Mortgage rates are the most obvious victim of a rising interest rate environment. Borrowing costs have jumped for 30-year mortgages from a sub 3 percent level last year to 5.25 percent today. New home sales in April 2022 fell 16.6 percent from March and well below forecasts, which was the slowest pace since April 2020. Existing home sales were also falling for the last three months according to the National Association of Realtors.
Auto leases and loans and credit cards are also big areas where higher rates hit the consumer. Most credit cards and car loans are priced off the prime rate, which is in turn closely tied to the Fed funds rate. Consumers can expect those rates to climb higher, since the Federal Reserve Bank is planning to raise the Fed funds rate at least two more times in the next two months.
The big question most economists are asking is when will the combination of higher inflation, declining stock markets, and a possible downturn in the housing market start to reverse engineer the wealth effect at the higher income levels.
So far this year, many investors have suffered anywhere from a 20-30 percent decline in their portfolios and retirement savings. People are already having to rethink their retirement date as a result. Inflation and supply shortages are crimping remodeling and housing plans even as higher interest rates are expected to put a dent in housing prices soon. As a result, many Americans are starting to feel less wealthy than they did last year.
The Fed is counting on all of the above to change the psychology of consumers from spending like drunken sailors to something a bit more moderate (but not enough to have them swear off entirely). Tinkering with the wealth effect can have unpredictable reactions. How far is too far when you are trying to dampen down demand? It is a fine line, and the Fed's tools to accomplish this feat are far from perfect. If they get it wrong, the economy will likely suffer. Let's hope they get it right.