# 711 -👷 Europe’s productivity fiasco – The Average Joe

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    # 711 -👷 Europe’s productivity fiasco

    victorlei

    June 7, 2024

    Good morning. The stock market is hot and the bond yields are good. What’s there to complain about? Well, the pesky cost of living is still high, but inflation bites a little less if you’re among the Americans who earned a share of the $3.7T in interest and dividends earned during the first quarter.

    That’s up nearly 26% from four years ago. Hold onto your hats because Goldman Sachs’ Scott Rubner predicts a “wall of money” — a record $7.3T sitting in money market funds — could flood into the markets as interest rate cuts near.


    GLOBAL

    Europe’s Economic Productivity is Falling Behind The US, Jeopardizing Its Stake In The Future of AI

    They work less and are happier than Americans — but not without trade-offs. Europeans earn only 44% of what Americans make — and their productivity, measuring hours worked against output, lagged by 24.6% compared to Americans in 2023.

    Losing ground: Despite a population of over 345M, the Eurozone’s economy now accounts for only 65% of the US economy’s size when measured in dollars, down from 90% in 2013. While some European nations are more efficient, American productivity has vastly outstripped most of Europe since the turn of the century — rousing concern from business leaders, politicians, and central bankers in the world’s largest economic bloc.

    • Since 2000, American productivity has risen by over 60%, while the Eurozone’s increased by only 20% and declined since 2020.

    • Swedish central bank Governor Erik Thedéen warned that Europe must move swiftly to close the productivity gap to avoid missing out on growth opportunities.

    Mind the Gap

    America achieved a new productivity record in the first quarter due to a surge in new businesses, higher wages, and embracing new technology like AI. However, replicating these successes should be easy for Europe’s wealthy and well-educated population, but European Central Bank President Christine Lagarde notes that innovators and entrepreneurs tend to “run away from Europe.”

    • European think tank IREF says that regulation, bureaucracy, and taxes are among the biggest factors dampening Europe’s entrepreneurial potential.

    • Making matters worse, Europe’s aging population redirects workers from high-growth industries like e-commerce or software toward in-demand healthcare jobs.

    Tale of two economic goliaths: While the US invests trillions in infrastructure and private subsidies to prop up domestic production in green energy, semiconductors, and industrial goods, Europe lags behind. According to GlassView’s Co-Founder Yann Coantanlem, European tech R&D spending is only one-fifth of the US expenditure — and AI investments are 50x higher in the US. Without swift action, Europe risks falling further behind.


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    LARGECAP RECAP

    📉 Interest Rate Cuts Arrive in Canada and EU, Marking Global Shift In Monetary Policy 

    Canada was the first to hike… and now, it’s the first to cut. On Wednesday, the Bank of Canada became the first major central bank to cut interest rates. Yesterday, the European Central Bank followed, slashing rates for the first time in five years. Both banks shaved 0.25% off their headline interest rates, a modest move that could kickstart a big shift.

    • The rate reductions come after both economies saw inflation fall below 3%, with Canada’s inflation reaching a three-year low of 2.7% in April, and Europe notching a 2.6% rate in May.

    • These cuts could benefit consumers, especially in Canada, where “highly indebted consumers” could see advantages from lower rates, as reduced interest rates generally decrease borrowing costs.

    Next stop… The Bank of England and the Federal Reserve have yet to cut rates, but Canada and the EU have started a domino effect. Analysts expect the BoE and Fed to follow later this year, especially after US economic indicators such as consumer spending, gross domestic product (GDP), and consumer confidence deteriorated in recent weeks.

    ✈️ Profit-Hungry Airlines Push Premium Options At The Expense of Travelers

    That extra legroom you’re craving? Well, it might not be as real as you think. Just take a look at how airlines are prioritizing premium options. US airlines are seizing the opportunity to cater to leisure travelers’ desire for comfort post-pandemic by offering a wider range of premium options with bigger perks and more spacious seats. To meet this demand, United Airlines ($UAL) has nearly doubled its premium seating, while American Airlines ($AAL) is installing 30% more premium seats for longer flights. And the results speak volumes:

    • Delta Air Lines’ ($DAL) first-quarter ticket revenue from premium travel has soared 10% year-over-year, compared to just 4% for economy fares.

    • Alaska Air ($ALK) reports that a quarter of its seats are now premium, generating 32% of total revenue, with premium class revenue leaping by 10% in 2023.

    No longer a one-class affair: Interestingly, budget airlines, who were early adopters of the “want more, pay more” strategy now resemble regular airlines more closely. Frontier ($ULCC) revamped its offerings in May, moving from a single base fare (with add-ons) to a basic, economy, premium, and business model. Meanwhile, Southwest ($LUV) — long-resistant to dividing its seating — has hiked prices for early boarding and is considering seat assignments (WSJ). These changes will likely drive travel prices even higher as travel demand remains strong.


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    Markets & Economy

    Zero-down mortgages spark 2008 fears: Experts warn of echoes from the 2008 crisis with house loans sans down payments. United Wholesale Mortgage ($UWMC) dismisses default doomsayers as “uneducated,” but risks loom amid housing market uncertainties. [Read]

    Heatwave shatters records in Southwest: A heat dome scorches California and the Southwest, with Las Vegas hitting 112°F and nighttime Phoenix sweltering in the 80s. Global temps set records for 12 months in a row, oceans for 14. [Read]

    Walmart ($WMT) hometown no bargain: Bentonville, Arkansas, gentrifies as Walmart expands headquarters, attracting million-dollar home seekers. However, everyday workers struggle to keep up. [Read]

    Business & Wealth

    SpaceX launch signals breakthrough: Elon Musk’s Starship rocket — the world’s tallest and heaviest — successfully reenters for the first time. This unmanned fourth test launch promises quicker future turnarounds. [Read]

    New York governor makes U-turn on congestion charges: Governor Kathy Hochul put an “indefinite pause” on a proposed congestion surcharge weeks before it went into effect in New York City, citing risks to post-pandemic economic recovery. [Read]

    eBay ($EBAY) boots Amex ($AXP) over high processing fees: The giant online shopping hub says it doesn’t need American Express anymore, and neither do its customers. Amex argues its fees are “comparable” to other cards. [Read]

    *Thanks to our sponsors for keeping the newsletter free.


    CHART


    DIGIT OF THE DAY

    Short Interest Plummets to Two-Decade Low of 1.7% as S&P 500 Hits New Highs, Short Sellers Retreat

    Wall Street might be celebrating new highs, but short sellers are feeling the pinch. The S&P 500 has hit 25 new records this year, climbing ~13%, which has caught the attention of analysts, day traders, and meme stock enthusiasts. But for short sellers — investors betting against stock price increases — it’s a tough market that’s unforgiving to pessimism. Renowned short sellers like Jim Chanos are retreating and rethinking strategies.

    • According to Goldman Sachs, the median short interest in the S&P 500 has dropped to 1.7% in 2024, its lowest in almost twenty years.

    • Investments in short-biased funds have decreased from $7.8B in 2008 to $4.6B today — with the number of constituents in the short-bias hedge fund index from Hedge Fund Research reducing by 74% during that period.

    No respite: The decline in short-selling not only stems from poor returns but also tighter regulations — with the SEC keeping a close eye on short-selling practices. That’s why hedge funds now prefer to make short bets against indexes through ETFs and futures rather than individual stocks. However, there are signs of a revival in short selling in the US, with short interest increasing by $76B this year — half of which comes from new short selling.


    EXTRA JOE

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