By JAMES SPENCE
After this writer’s last trip to the US – made during the summer of 2022 and spent in Boston and its wider state of Massachusetts – he concluded “America is having no recession soon” (see link to the note published then).
This two-week trip in the December just elapsed took in two states, Florida (R) and California (D). An interesting time as it fell within the strange interregnum that falls between two Presidencies. What follows is a travelogue, taking in the many conversations and impressions gained. My companions and those I met are referred to throughout by their first names, the writer as JS. For readers who prefer to skip the travelogue bit, some investment thoughts are captioned at the end.
Politics did feature in these discussions but not to the extent that might be expected. Whilst a good part of the British population lives within 100 miles of Westminster, a much smaller proportion of Americans live within 100 miles of Washington. State identity, laws, mores and culture, matters a lot, more so than perhaps in the UK. “I don’t like your plates” was a comment on the hire car picked up at Orlando airport with New Jersey number plates.
More remarkable was the lack of fans for either Donald Trump or Kamala Harris: “she would have been a disaster” was a typical comment.
JS: “Well, she’s not strong on economics, that’s not her bailiwick”
Debra: “She’s not strong on anything”
A conversation with a high achieving portfolio manager of US stocks over a cocktail in a library in San Francisco.
Susan: “Well, Trump, he needs to focus now, he really needs to focus in”.
This sounded more like wistful thinking on her part.
Florida and California are 1,800 miles apart as the crow flies but what links them is their Latin connections. Tampa is somewhat of a Cuban city. It was a struggle to get the right sort of coffee served in the Alessi Bakery (founded 1912 by Nicolo Alessi but at some stage migrated from Italian fare to Cuban fare). Ask for an americano here and it is like asking for a gringo.
Bill: “Next time, just say cafe con leche. That’s how we do it here.”
The Tampa Bay EDC advises euphemistically “Our rich ethnic and cultural heritage dates back to the days of Spanish exploration.”
As the Democrats found to their cost, naturalised Hispanics are not locked-in supporters. They are, first and foremost, Americans. They are economically active and literate and upwardly mobile.
Roy, a neighbour of my host in Tampa came over for drinks on December 26. He began his career as a Spanish speaking cable news presenter. He now presents on an English language station, married Ana, a Greek American and they spent 7 months travelling round Europe when his new house was condemned by “Chinese drywall” a legacy of the 2000s property boom when US contractors imported defective dry wall from China.
Across on the other side of the country, hacking up Route 101. This road was first laid out in 1925 and extends 1,500 miles, running between Los Angeles and the outskirts of Seattle. These days it’s highly congested. An office worker heading for San Francisco or nearby needs to be well caffeinated and on the road by 6am to avoid tailbacks.
Ken: “In the past, the agricultural workers, almost all of whom are of Mexican descent, didn’t have cars, now they do. Most office workers can’t afford to live in SF or the inner suburbs or the outer suburbs”.
“That’s a Google bus, full of engineers. They get on and power up their laptops. Get an hour of work in”.
JS:” How come there’s no public transport?”
Ken: “Politics. 30 or 40 years ago, people up here didn’t want a Mass Transit up here as they were worried undesirables from the city would come up. Fortunately, that thinking has changed but there are big farms up here. Now, it’s too expensive to requisition the land. We’re a motorised culture”.
The jams on the 101 began to enter my dreams. A similar conversation took place about the Interstate 4 in Florida which dogged the journey from Orlando to Tampa.
This road has its own website which states “The i-4 covers a distance of aprox. 132 miles … which can be travelled in aprox. 2.2 hrs. with a sustained travelling speed averaging 60 miles-per-hour.”
Not a chance.
Advice was taken as to the trip back to Orlando to catch the flight to London.
JS: “What time should I leave?”
Shelley-Ann (Uber driver): “What time’s your flight?”
“6pm”
“11am would be perfect”
This is a trip of 60 miles.
“How come there’s no public transport?”
“There is talk. There’s a train which runs between Orlando and Miami. It’s called the Brightline. It’s kinda like a bullet train”.
Through European eyes, the lack of public transport provision is retrograde, but then look at the price of gas and the way many Americans think about energy. Gas in Florida was selling at US$2.919/10 gallon on arrival. That’s 60 pence per litre, less than half the price than petrol in the UK currently. Mike Flitton has written about the US energy advantage here.
– Florida gas prices Source: James Spence
We are, of course, entering a period of “drill, baby, drill”. The most popular TV show in the US is Landman in which Billy Bob Thorton plays a oil company manager running wells in Texas’s Permian Basin. Trump’s ability to be unambiguously supportive of US oil, gas and shale production is a boon for drillers, as well as scriptwriters, and also is perceived as supportive of the consumer.
Over in the California, gas prices are US$1 to US$1.50/gallon higher.
Ken: “That’s Democratic Californian policies for you. It’s meant to push toward EVs but ends up hurting the people who can least afford it. You don’t see agricultural workers running around in EVs and there’s no public transport”.
Ken: “The whole woke thing went too far.”
Back in Washington, Democrat firebrand Alexandria Ocasio-Cortez attempts to clear up the report of her removing the pronouns from her social media AOC: “The whole “story” of removing pronouns after the election is fake. It happened a long time ago after the SCOTUS Twitter ruling meant I had to add the “personal acct” disclosure. There weren’t enough chars so I had to swap the end. You can run the timeline to see for yourself.”
JS: “Might be fun to take a Waymo” (of which plenty have appeared in San Francisco).
This wasn’t a popular idea. The rejoinder was they’re too slow as they obey the rules. Compared with the UK, the US has next to no traffic cameras, your main look out is for the highway patrol. My friend in Tampa was pulled over for executing a “Californian stop”, so called when you give way at crawl speed rather than a complete stop.
Officer: “You realise you did a Californian stop back there. Can I see your license ma’am?”
Debra: “Sorry, officer”
Officer: “California license, that would explain it”.
On their trip back from dinner in town, Rob and Scott hailed a Waymo.
Rob: “Kinda strange. It stopped on Nob Hill and went nowhere for 5 minutes”.
Scott: “We plugged in my address and Rob’s address, and it dropped us at neither. Somewhere in-between. I guess the algorithm thought that was okay”.
The general sense was that Waymo vehicles, whilst still glitching, are doing much better. They offer a good ride in a clean cab. Like many innovations, they begin slowly with reservations but then accelerate. The only impedance over here would be the relative narrowness of European streets.
The first Cybertruck spotted was a novelty and there are many around. Don’t expect many in the UK, though. The travails of the first person to import one, Yianni Charalambous, are documented here.
https://www.youtube.com/watch?v=91uWZmoSfMI
Several people said to me: “Musk is not really about cars, or Tesla, anymore”
He’s more about space, in many people’s eyes.
– Bumper stickers. Musk’s move to back Trump has been awkward for many Tesla owners. Source: Matthew Hiller
On January 1st a Special Forces officer blew himself up in a rented Cybertruck outside a Trump owned Las Vegas hotel. Elon Musk took a break from European politics to post:
“The evil knuckleheads picked the wrong vehicle for a terrorist attack. Cybertruck actually contained the explosion and directed the blast upwards. Not even the glass doors of the lobby were broken.”
We wrote briefly about Musk and Trump in our comments published on the day after the US election.
The New York Times recently reported Trump & Musk being “mesmerized” in one another’s presence. People are no longer speculating about this “bromance” having less than 6 months to run, as was widely speculated during the election itself. This may owe to a strange meshing of extreme personalities and some cold-eyed calculations on both their parts.
Musk’s rapprochement has spurred other billionaires into action, Meta founder Mark Zuckerberg making the trip to Mar-a-Lago, appointing Dana White (CEO of Ultimate Fighting Championship) to his board and disbanding most of his content controls.
On the podcast he co-hosts with Katty Kay, Anthony Scaramucci suggests that the Democrats should appeal to Elon Musk
– Source: YouTube, Goalhanger, The Rest is US Politics
Anthony “The Mooch”: “Go back and see Elon Musk. Say hey man, how are you? I know you’re in the tank for Trump, but I also think you’re not that ideological. Let’s talk and hear some things that I’m thinking about and the world’s gonna turn. Don’t be one party, be bi-arty, be bipartisan. That’s what I would do.”
If the price of gas is an issue, then so is the weather.
San Francisco was hit by a storm in the weekend prior to arrival and it was still lashing down on the Monday. We drop in on Matt, a leading Biotech investor, in his shore-side house, by Richardson Bay.
Matt: “You can’t believe the weekend we’ve just had. My family were crouched under the kitchen table. The whole house was rockin’. The waves were above the pier and thundering into the concrete retaining wall. If it broke that the house from here would have been gone. I have no insurance. Houses like these are impossible to insure.”
Matt could be classified as a risk-taker but it should be noted that we we’re visiting him in his second home.
The topic of insurance, lack of, came up time and time again. During the autumn hurricane and floods my host in Tampa was evacuated for four weeks. She was lucky as her employer is the US Government and she’s on assignment to the military. If you chose who the evac you, you might choose the US military, the Special kind. Two thirds of metro Tampa was without electricity after the floods.
Debra: “The property market was strong but now its stalled. You can’t get insurance for many places here now. Depends whether you’re in a flood area or not.”
– Flood-proof vehicle in Tampa. Parts of me like this vehicle a lot but permitting with the Hounslow Borough Council would be an issue. Source: James Spence
What classifies as a flood area is subject to change.
Weather, and insurance, is a problem in the wine country of California as well.
Ken: “We’re ok as the fires didn’t reach here. It never bakes out. We have a lot of coastal mist. Not far away it’s a problem. People can’t get insurance because of the fires”
This gets you thinking. Most of us have grown up in a world where insurance was a given. Buy a car, get insurance, buy a house, get insurance. That world is departing.
Over to Ian & Beth’s house in Healdsburg for drinks with three generations of their family. Ian works out of his Chambers in Temple and is a KC who specialises in sports and entertainment. He’s more-or-less a go to person for certain disputes. He is also an avid collector of Burgundies with a notable collection and a well-tuned palate.
Beth is both British and American and grew up in Los Gatos to where her parents relocated several decades ago. Beth had just picked up her dad from Los Gatos and was fresh off the 880 and 101, if fresh is the word. She had that glazed look that comes with battling two interstates for 4 hours.
Ian diversified his wine interests into California Pinot. This is partly out of interest and partly on account of Europe beginning to bake. First the ski resorts fail, then wine cultivation.
Wine is going through a difficult time, as can be seen from the LIV-EX indices. French Burgundy is down 29% over the past two years, the Californian index down 20% over the same period.
https://www.liv-ex.com/news-insights/indices/
The top French chateaux have been spoilt by many years of good demand from US and Chinese buyers. The Chinese have vanished and the Americans are more circumspect as they have realised they are the only people in the buying rooms.
The issue in Napa and Sonoma is that costs of land are up, costs of production are up and the market is saturated. The Bern Steak House in Tampa’s list of Californian pinot wines is 6 pages long! This is just one of these pages.
– Source: Bern Steak House, Tampa, Florida
Ken: “Every cultivated vineyard you see here used to be an apple orchard. The costs per acre for cultivated land here is now US$250,000. It was less than US$100,000 when we started. Costs are up. If you sell wholesale your margin is 10%, if you sell off a direct list, the margin is 40%. Fortunately, we have a good direct list. We have Japan, we have Singapore. I wouldn’t want to be entering this industry now”
“When we started 20 years ago, competition was fine. Now it’s tough. So many people are doing it.”
A visit to a legal marijuana shop, Sparc in Sebastopol, to assess that micro-economy.
https://sparc.co/dispensary/sparc-sebastopol
“What’s that?” pointing at a cheroot sized joint.
“Oh, we call that a dog walker. Just the right length of smoke if you’re walking your dog. It’s grass impregnated with hash.”
Try one of those and the dog is making its way home by itself.
Ken: “The cannabis stocks have been a disaster. The problem is that the illegal trade continues and as it’s much lower cost, that undermines the legal guys”.
Over dinner at the Monterey Peninsula Country Club, George, an ex-Navy SEAL, talks through his company to streamline the provision of THC & CBD compounds to patients.
– Source: https://mountainandprairie.com/george-hodgin/
https://biopharmaresearchco.com/
A trip to a cabin overlooking the Russian River with an architect, Kent.
Kent: “This is where the generals met Oppenheimer during the setup of the Manhattan Project. A very secret location.”
It remains a somewhat secret location.
– Russian River, and on the far bank and amongst the redwoods, the 9 hole Northwood Golf Club designed by Alister MacKenzie. Source: James Spence
An early dinner on Christmas Eve with Steve and his family. Steve works in SOCCENT (Special Operations Command Central) on the MacDill Air Force Base.
Steve: “They call me the JAG in SOCCENT. But I’m not the JAG (Judge Advocate General), I’m part of the corps.”
JAG Corps motto is “Soldier first, lawyer always”. Steve works in uniform which underlines this point.
Trump has been quoting Reagan recently “Peace through strength”. Does this add up to a foreign policy?
– Better times? Source: James Spence
The general view gained from those with an active role in how the US projects power across the world is that disengagement neither works nor is possible.
“Ignore these problems and they end up on your doorstep”.
Christmas Day dinner was put on by a transplanted Scot, Dave and his wife Julie who also works on the MacDill Air Force Base. The base is like a city with its own hospitals, shops, hotels and golf course.
Dave: “Am I Scottish? I was born in Malta, grew up in Cyprus, went to school in Scotland, played the opposite wing to Kenny Logan. My Dad was in the RAF. My US naturalisation process was not difficult. You get the sense that the authorities work back from your name and align their biases that way. It’s a very biased system.”
Dave works with underprivileged kids. He arranges and overseas summer camps and previously worked for VisionQuest which seeks to take children on lengthy wagon trails across the country and introduce aspects of Native American practices in a healing context.
JS: “What’s the thing that helps these kids the most?”
Dave: “Getting them away from their parents.”
JS: “What’s the biggest problem?”
Dave: “Poverty. They are labelled addicts but there not. Many of them are dealers who use. The AA approach doesn’t work well as step one is facing up to addiction which isn’t the issue. Sure, they are using. You might too if your mum was an addict doing tricks”.
“Thing is they need to imagine themselves into another life. So, you need to get them away from their parents and their friends. They need to see themselves clean and work it forward from there.”
Back in San Francisco, Susan and her husband are congratulating me on visiting when San Francisco is on the up.
“Two years ago was the worst but it was never as bad as the media reported”.
JS: “What’s made the difference?”
“Big police presence downtown. Fentanyl use is going down. Working on cutting supply from international sources.”
– Source: DEA
It was suggested by a few people that the homeless should be provided with facilities outside of towns, perhaps in the desert. Those same people try to avoid using the word “camp”. Back in Washington, the incoming administration is considering bringing in street sleeping as a felony. You get the sense that such a measure would have wide backing.
Street sleepers are not solely a San Francisco phenomenon. Quite a few were spotted in Tampa as well, with that zombie look and tremulous gate that comes with self-administered sedatives of the very strong type. They provided a stark contrast from the affluent congregation at the Christmas Eve mass at The Sacred Heart Church. Ukraine was mentioned in the homily but not the folk outside the face of the church.
Downtown San Francisco was super quiet. While office workers have come back in the US’s other major cities, not in San Francisco. Office vacancy rates are over 35% and capital values have crashed.
Ken: “You only need to look at how many Starbucks have closed here. It’s all you need to know”.
See’s Candies was doing reasonable trade but then people will travel for these, wherever you put them.
– In an otherwise empty downtown, See’s Candies were doing reasonable business. See’s is a Berkshire Hathaway holding. Source: James Spence
On flight UA1370 back to Florida, I sat beside Jose Gonzalez. Jose has had a lifetime career in beer, most of it with Anheuser-Busch.
Jose:” Beer’s tough. It’s the RTDs (Ready to Drink formulations). That what the kids like these days.”
In the Walmart in Tampa, a shop as big as an airport terminal, the shift in consumption is clear enough. The section of energy drinks is larger than the selection of alcoholic drinks.
– A quarter of a mile of energy drinks, Walmart. Source: James Spence
In the Publix store in West Tampa, the craft beer shelfs are as big as the main branded beer shelves and they are a lot more interesting to look at.
A chance encounter with a Capital fund manager in a San Francisco locker room.
“Hey James, did you hear Mississippi has a higher per capital income than the UK?”
JS: “Well, if true, that’s a devasting statistic”
“Not that I have anything against Mississippi, and I prefer London”
JS: “Well, we can’t just be a hotel, a shop, a museum and a few palaces”
“Europe is done. I was in Denmark and they’ve given away all their missiles to Ukraine, Not some of them, all of them”.
This echoed throughout the trip. There was a marked lack of interest in the UK and Europe.
Back in the UK, MP Jeremy Hunt was imploring his successor as Chancellor not to be so negative.
The folks at The Atlantic are poking with a stick with this one:
Breakfast on 18th December. The East Coast markets have been open for 90 minutes. Rob works for Goldman Sachs. Scott’s a restructuring expert who serves on corporate and charitable boards.
Rob: “Market’s takin’ a tumble. Powell on Rates”
Scott: “He’s saying interest rates may not fall as much as the markets expect next year”.
Rob: “Ten years not liking it”.
US yields have been rising since September and it’s beginning to cut in on equity markets. At what point will Trump start gnashing on this?
– Source: Bloomberg
In a banner year, it was a flat month for the US indices. The markets want to take all the possible good from the incoming administration, especially any drive to deregulate whilst ignoring the more chaotic elements of a Trump administration. And whilst the US economy has been measurably stronger than other developed economies, there has been a de-linkage between the economy and the listed asset markets.
The last night in San Francisco was spent in a club. A steward pushed a daily digest under my door. It featured extracts from that day’s New York Times. A newspaper of record delivered 2,600 miles away from its creation and in the same language. A country as big as a continent. The USA.
Investment thoughts based around the trip
Whilst the overall sense, based on the last trip made in 2022, was that America was not going to have a recession, the writer experienced a more stratified environment this time. The wealthy are fine. More than fine, in fact. It is estimated that the number of billionaires in the US has risen from 500 12 years ago to over 2,500 today. However, the bottom 30% of the income class (perhaps a larger percentage than that) are, to varying extents, struggling. Sticker shock is a real thing. Incoming President Trump who promised to “slash prices and end inflation” will, in this writer’s view, fail to deliver on these promises.
Of the various paths for the US economy, we have the high line that US equity markets in the 4th quarter of last year have been aligning for: big deregulations, tariffs more bluster than real, America first delivering on its slogan. Baser outcomes would be governed by the chaotic actions of a vengeful President: deploying the state apparatus to hound opponents, big miscalculations on the international stage, tariff waivers as a conduit to meaningful corruption and Elon Musk going full crackers.
Valuations in the US equity markets are challenging. Last year’s return was more predicated on valuation expansion than growth. Long run multiples (such as the cyclically adjusted price earnings ratio or CAPE) now reside at the sort of levels that presage poor returns.
There is also the sense that the rise of crypto has become more significant to the behaviour of traditional financial assets. If the growing class of crypto investors can recycle their gains into other assets, then that helps to support those assets. Strength in prices in the crypto complex is helpful, as long as it lasts.
For now, both professional and retail investors in the US have sparkling returns to savour and wish to stay in markets. The consensus is widely positive and in investors who wish to challenge this consensus are having real problems, at this time, mounting their arguments. That could change. It has been very noticeable how rising US bond yields are beginning to tell on equity markets.
The interaction of extreme weather, insurance and property strongly suggests that homeowners who live in a marginal area for either fire or flood should consider selling up. As insurance becomes more troublesome, governments can help, but only to an extent. These comments were written before the fires in Los Angeles took hold.
Although wine prices have been falling for two years, this market-place looks challenging.
The consumer sector looks like an increasingly tough neighbourhood in which to do business. It has become so competitive. The notion that big brands can control shelf-space through distribution holds but not to the extent it did in the 20th century. This has been an active area of debate within the investment team at Cerno Capital and there are obvious flow-through consequences for a small number of consumer names within the Cerno Global Leaders portfolio.
With respect to international tensions and defence, there are sections of the US military that envisage a high probability of a world war. We see tension between the general Trumpian reflex to retract US from overseas actions and the particular interplay of threats bearing down on the world.
Lest that appear too grim a set of observations, it should also be stated that America continues to impress this writer, as it has done throughout his working life, with its economic vigour, its willingness to embrace change and the drive for betterment. According to this writer, it remains the best country, within the best system at generating value, corporate and personal. As a firm, we remain fully engaged, particularly in identifying US companies beyond the ones already owned in portfolios.
A note of thanks to the friends, old and new, who took me out and took me in. Special mentions to Debra and friends in Tampa and to Ken & Akiko Freeman with whom I stayed on their vineyard in Sonoma. They have been making great red Pinot for 15 years and Akiko is an up-and-coming star in the world of Chardonnay. Their UK distributor is Uncorked https://www.uncorked.co.uk/producers/freeman. Final mention to Kurt who put up three golfers in his house in Carmel and he and his fellow members at Monterey Peninsula CC, Ricky, George, Nick & Erik.