Update

Hello everyone

I hope you had a nice weekend and a long weekend in parts of Canada. We’re back down in South Palm Beach and it’s very hot. Usually not too bad when there’s a nice ocean breeze but lately there’s been no wind so a lot of indoor activities like napping.

I was fortunate to join Scherrie Prince on her Play Big Faster Podcast and we talked about a lot of things including why I called my book Capital Offence: Why Some Benefit at Your Expense. I hope you get a chance to listen to it.

• 30-Year US Treasury yields are the highest since 2004.
  • And 10-Year yields are back to where they were in 2007.
• There cannot be a sustained increase in all prices (inflation) unless money is introduced into the economy and then the supply of that money constantly increases.
• With price fixing, resources are no longer guided to their highest valued uses.

Summary

• French luxury goods maker LVMH sees its strongest growth in over two years.
  • Watches, jewellery and Japan lead the way.
• Hermes also sees its sales accelerate but its share price tanked on the announcement.
  • And its shares are still very expensive.
• Tesla sales accelerate but profit sank 57%.
  • Shareholders weren’t impressed.
• Nike has now gone eleven straight quarters with no sales growth.
  • Over the last five years its share price is down an astonishing 75%.
• Luxury furniture company RH sales go negative for the first time in two years.
  • And its share price is challenging Nike for the worst performance over five years.
• Financial Ructions
  • 30-Year US Treasury yields are the highest since 2004.
    • And 1-Year yields are back to where they were in 2007.
      • Along with 30-year fixed rate mortgages.
  • Our favourite mainstream journalist is back and no, a strong economy does not require higher interest rates.
  • I dust off one of my old marketing slides to demonstrate how simply looking at annual rates of return for a mutual fund can be misleading.
• Book Review
  • We’re on Chapter 4 of Why Socialism Struggles.
    • We explore the danger of trying to fix prices in an economy.
      • Prices of goods or labor.
    • And we look at why technology and progress must be embraced.
      • Stopping progress might result in zero unemployment but we’d all be impoverished.

News

LVMH

LVMH is a France-based luxury products group that has acquired a number of luxury brands over the years and employs 213,000 people globally.

• Brands include:
  • Wine & Spirits:
    • Moet & Chandon champagne
    • Cheval Blanc (that wine in the movie Sideways)
    • Chateau D’Yquem
    • Dom Perignon
    • Hennessy
    • Glenmorangie
    • Krug
    • Veuve Clicquot
  • Fashion & Leather:
    • Christian Dior
    • Fendi
    • Givenchy
    • Louis Vuitton
  • Perfumes & Cosmetics
    • Guerlain
  • Watches & Jewelry:
    • Bvlgari
    • Hublot
    • Tag Heuer
    • Tiffany
• A look back in Post 272

Adjusted sales:

• 1Q/2024: +3%
• 2Q/2024: +1%
• 3Q/2024: -3%
• 4Q/2024: +1%
• 1Q/2025: -3%
• 2Q/2025: -4%
• 3Q/2025: +1%
• 4Q/2025: +1%
• 1Q/2026: +1%
• 2Q/2026: +3%
  • By category:
    • Wine & Spirits: +5%
    • Fashion & Leather goods: +1%
    • Perfumes and cosmetics: -1%
    • Watches and jewelry: +11%
  • By region:
    • US: +6%
    • Japan: +14%
    • Asia: +4%
    • Europe: 0%

LVMH share price:

• Year-to-date: -27.4%
• 1yr: +2.6%
• 5yrs: -33.3%

Hermes

• They employ 27,107 people.
• 1837: Thierry Hermes started making harnesses in Paris.
  • And wrought iron harnesses for carriages.
    • See my Post 307 for more.

Adjusted sales

• 1Q/2025: +7%
• 2Q/2025: +9.0%
• 3Q/2025: +10%
• 4Q/2025: +9.8%
• 1Q/2026: +5.6%
• 2Q/2026: +6.7%
• By Region:
  • Asia excluding Japan: +2.5%
  • Japan: +12.3%
  • Americas: +13.7%
  • Europe excluding France: +8.3%
  • France: +6.2%
  • Other (Middle East) -2.4%
• By Sector:
  • Leather Goods and Saddlery: +10.2%
  • Ready-to-wear: +3.6%
  • Silk and Textiles: +12.2%
  • Perfume and Beauty: -9.5%
  • Other (Jewellery and Home Universe): +4%

Sales have not rebounded as expected in China and the share price dropped on the results announcement.

For 2025 they distributed a bonus to each employee of €3,000

• A total of €81.3 million.
• Note that for the previous year it was €4,500 ($US 4,725)

Hermes share price:

• 1yr: -32.0%
• 5yrs: +16.0%

Note that just because the share price has dropped 32% over the last year doesn’t mean that it’s now cheap.

• Rather, it looks less expensive.
• Its shares have long traded at a premium to the market due to the uniqueness of its product, strong balance sheet and strong/steady sales growth.
  • It’s a very high quality business but 35x earnings, although its lowest multiple in years is still high for a business growing its top line at the mid single-digit rate.
  • Of course, but because the share price is expensive it doesn’t mean the price will fall.
    • Its price could soar and go back from being expensive to ridiculously expensive.
  • Valuation is not a timing tool but longer-term is usually pretty good and expressing future returns.
• And note that luxury companies like Hermes have benefitted from the fake wealth effect generated by the U.S. Federal Reserve’s quantitative easing.
  • Hermes annual compound share price performance:
    • Pre-QE (2000-2008): 11.0% (still pretty good)
    • QE era (2008-2022): 19.8%
    • Post QE (2022-2026): 5.1%

Tesla

Tesla Deliveries:

• Car deliveries by quarter:
• 1Q/2023: 422,875
• 2Q/2023: 466,140
• 3Q/2023: 435,059
• 4Q/2023: 484,507
• 1Q/2024: 389,810
• 2Q/2024: 443,956
• 3Q/2024: 462,890
• 4Q/2024: 495,570
• 1Q/2025: 336,681
• 2Q/2025: 384,122
• 3Q/2025: 497,099
• 4Q/2025: 418,227
• 1Q/2026: 358,023
• 2Q/2026: 480,126
  • Up 25% from last year.

Dollar revenue in the quarter was up 25.5%.

• Automotive: +23.1%
• Energy generation and storage: +12.5%
• Services and other: +50.4%

The company noted that:

• Production started in Texas for their Cybercab (autonomous EV).
  • Robotaxi is now live in seven major metros.
• Sales were strong in Europe
• It was the first time they generated over $100 billion in sales over a twelve-month period.

As a reminder, the company has stopped producing two of their luxury models that sold for around $100,000:

• Model X
• Model S

The production capacity for those models is now being used for Cybercab.

It is now focused on three vehicles:

• Model 3
• Model Y
• Cybertruck pickup

Tesla share price performance:

• Year to date: -29.9%
• 1yr: -3.8%
• 5yr: +34%

The drop in the share price is a result of a significant drop in profitability:

• Operating margin:
  • 3Q/2025: 5.8%
  • 4Q/2025: 5.7%
  • 1Q/2026: 4.2%
  • 2Q/2026: 1.4%

Nike

Adjusted sales by quarter:

• 1Q/2024: +2%
• 2Q/24: -1%
• 3Q24: 0%
• 4Q/24: 0%
• 1Q/25: -8%
• 2Q/25: -9%
• 3Q/2025: -7%
• 4Q/2025: -11%
• 1Q/2026: -1%
• 2Q/2026: 0%
• 3Q/2026: -3%
• 4Q/2026: -2%
  • By Brand:
    • Nike: -3%
    • Converse: -34%
  • By Category:
    • Footwear: -4%
    • Apparel: -1%
    • Equipment: -5%
  • By Region:
    • North America: +3%
    • Europe, Middle East, Africa: -6%
    • Greater China: -17%
    • Asia Pacific: -1%

Nike share price:

• 1yr: -43.8%
• 5yrs: -74.9%

Luxury Furniture

RH, formerly known as Restoration Hardware, is a luxury furniture retailer based in Corte Madera, California (San Fran area) with 75 locations in North America and Europe.

• 1980: Founded by Stephen Gordon in Eureka, California.
  • PM: Maybe that’s where people go when they have a good idea.
• 2001: Current CEO Gary Friedman joins the business.
• 2010: The company announces that they will now sell more high-end stuff.
• 2022: Opened their first hotel.

Business Description

• Brand concepts:
  • RH Interiors
  • RH Modern
  • RH Outdoor
  • RH Beach House (talk about niche)
  • RH Ski House (ditto)
    • PM: How about these suggestions:
      • RH Doghouse
      • RH Outhouse
  • RH Baby & Child
  • RH Teen
  • Waterworks
• Sofas can cost well over $10,000.

They like to say that:

“For the past 23 years we’ve heard others tell us what can’t be done, and for the past 23 years we’ve failed…to listen.”

• PM: I like the attitude of this management team.

Sales growth by quarter:

• 1Q/2023: -22.8%
• 2Q/2023: -19.4%
• 3Q/2023: -13.6%
• 4Q/2023: -4.4%
• 1Q/2024: -1.7%
• 2Q/2024: +3.6%
• 3Q/2024: +8.1%
• 4Q/2024: +10.0%
• 1Q/2025: +12.0%
• 2Q/2025: +8.4%
• 3Q/2025: +8.9%
• 4Q/2025: +3.7%
• 1Q/2026: -1.7%

Highlights:

• In the previous quarter the company had expected sales to fall in this quarter.
• But they expect 12% sales growth in the second half of this year.
  • Mainly coming from new concept growth (RH Estates)
    • This furniture has more of a classical design including hand carvings, artisanal finishes, elite designers and more customization.
      • Differentiating it from RH’s usual more modern look.

Investors are not impressed:

• Share price performance:
  • 1yr: -23.7%
  • 5yr: -75.5%

Financial Ructions

Note: ‘Financial Ructions’ is optional-to-read for those who are interested in taking a bit of a deeper dive…

Of Interest

The yield on the 30-year U.S. Treasury:

• Oct/2019: 2.38%
• Jan/2020 (low) 1.36%
• Jul/2026: 5.27%
  • Highest since 2004.

Recent highs in the 10-year Treasury yield are the highest since July 2007.

• Remember that the 10-year Treasury yield is the benchmark for the 30-year fixed rate mortgage.
• 30-Year Fixed Rate Mortgage:
  • Dec 2019: 3.74%
  • Jan 2021: 2.65%
  • Jul 2026: 6.66%
    • PM: Still lower than the years before the Fed’s fake wealth effect policy which started in the early 2000s.
    • Average 30-year fixed rate mortgage:
      • 1980s: 12.71%
      • 1990s: 8.12%
    • Note that the last year the 10-Year Treasury was yielding the same as today’s rate of 4.72%, the 30-Year Fixed Rate Mortgage was 6.73%.
      • So not far off of today’s mortgage rate.

He’s Back

Jamie McGeever of Reuters represents mainstream economic and stock market thinking: much of which is wrong.

• For instance, in a recent article he says that rising bond yields are not necessarily bearish if they are being driven by strong nominal growth and earnings.
• The idea being that if an economy is strong then that leads to inflationary pressures, forcing the Fed to raise interest rates.
  • But the higher interest rates are simply due to the economy being so strong.
• No, strong nominal growth does not mean that the economy is in good shape.
  • It means the money supply is increasing, and causing inflation: that’s why the Fed would need to increase interest rates.
  • An economy that is growing strongly in real terms does not result in higher prices and thus does not require higher interest rates to quell inflation.
  • In my book, Capital Offence: Why Some Benefit at Your Expense, I use an island economy example where one person catches fish, one collects coconuts and another collects water.
    • They all collect three items and then exchange one item with each other each.
      • The price of one fish is one coconut or one liter of water.
    • If they all doubled their production the price of fish would not increase to two coconuts and two liters of water.
      • And if there was a supply shock in the coconut industry, the price of coconuts could very well rise from one fish and one liter of water to two of each.
  • But that means the prices of fish and water both went down in terms of coconuts.
    • There cannot be a sustained increase in all prices (inflation) unless money is introduced into the economy and then the supply of that money constantly increases.
      • Or the amount of stuff produced constantly decreases.

The Path Matters

When I was marketing our mutual funds I used to explain how simply looking at annual returns can be misleading. For instance take a look at the following table:

	Year 1	Year 2
Fund A	+10%	+10%
Fund B	+40%	-20%
Fund C	+60%	-40%

Which Fund would you rather own?

All three funds have the same 2-year simple average rate of return.

• Add each year’s return up and then divide by two.
  • Fund A: 10% plus 10% = 20%
    • Then divide 20% by 2 and you get 10%.
  • Fund B: 40% plus -20% = 20%
    • Divide 20% by 2 = 10%

	Year 1	Year 2	Simple Average
Fund A	+10%	+10%	10%
Fund B	+40%	-20%	10%
Fund C	+60%	-40%	10%

But of course, the compound returns for these Funds are very different.

• So different in fact, that when a Fund grows 60% one year and loses 40% the next, it’s actually compounding at a negative rate every two years.

	Year 1	Year 2	Simple Average	Compound Average
Fund A	+10%	+10%	10%	+10.0%
Fund B	+40%	-20%	10%	+5.8%
Fund C	+60%	-40%	10%	-2.0%

Here’s how an investment of $1,000 looks like in Fund C

• Year one: Make 60%.
  • $1,600
• Year two: Lose 40%
  • 40% of $1,600 is $640
• Balance after two years $960 ($1600-$640)
  • $960 works out to a 2% annual loss on your original $1,000 investment.

Thanks to my friend and former colleague JB for reminding me of this with his great monthly newsletter.

Book Review

Why Socialism Struggles

Dr. Doug Cardell

2026

Chapter 4: What Is the Economic Value of Labor?

Value is set by consumers.

• And fixing prices in any way “robs consumers of their right to place value.”
  • PM:
    • Higher prices send a signal to:
      • Producers to produce more of that item.
      • Consumers to economize on their use of that item.
    • Lower prices do the opposite.
    • Resources are no longer guided to their highest valued uses.
      • Resulting in shortages of some goods and surpluses of others.
    • Innovation also suffers if prices are fixed as companies have no way of being rewarded for quality improvements.
    • The loss of stuff being produced is known as deadweight loss.
      • Related to Frederic Bastiat’s “that which isn’t seen.”
• Which makes it easy for policymakers to justify many of their economy destroying policies.
• People only see the visible and concrete impacts of policy.
  • And not the longer term now non-existent benefits that would have materialized if those policies had not been implemented.
    • Visible short-term policy benefits at the expense of much greater future benefits which will no longer occur.

DC likes to differentiate between work and creating value.

• You can work all day and not create any value.
  • PM: As you know I like to think of things in terms of the capital you are producing.
    • You then exchange the capital you created with others for their capital and we do it through the medium of exchange called money.
      • I provided investment management services for a living.
  • When I withdraw money through the ATM, I like to think of it as a portion of the value of the investment services that I have stored up in money.
    • So yes, I’m spending money, but what gave me the wherewithal to spend money was the fact that I created capital for which others were willing to exchange their capital.

DC also notes that we all value things slightly differently.

• Not only that but how we value things can change over time.
  • Which makes it impossible for any socialist central planner to effectively organise an economy.

Companies don’t set prices; prices are discovered in the market place.

If investors are not rewarded for taking on risk then less value is created in an economy.

• PM: Some socialists complain that the owners of capital are not contributing to society and can just sit back and make money on their capital.
  • Keynes wanted to euthanize this rentier class.
    • But no, by providing others with the hard-earned capital that you produced, they can put your capital to productive use to create more capital.

DC says that when minimum wages are set above what employers value, then those employers invest in technology so they don’t need to hire as many workers.

• An example is self check-outs at supermarkets.
  • This results in fewer jobs for people who want to work at the check-out counter.
  • Socialists counter this by saying we should all refuse to use self-check out lanes and force companies to hire more staff.
    • DC says that with this logic you might as well also get rid of the scanners as that would really boost employment.
      • Unfortunately it would also boost prices.
    • There is an old anecdote about Milton Friedman visiting some Asian country.
      • On witnessing workers using shovels instead of bulldozers and cranes to move earth, he was told that using shovels created more jobs.
  • He suggested if they wanted to create even more jobs they should replace the shovels with spoons.

DC says that “people protesting progress is as old as humanity.”

• The reason being that “every labor-saving device you see costs someone their job.”
  • Electricity put the whale oil lamp workers out of business.
    • And I would imagine a number of whalers.
      • But good news for the whales.
• PM: These people are often referred to as Luddites.
  • Ned Ludd supposedly destroyed machinery in the late 1700s.
    • And then English textile workers in Nottingham, Yorkshire and Lancashire started destroying machinery to protect their jobs.
  • Of course, change is no fun for those people who lose their jobs as a result.
    • But that is what taxpayer programs like unemployment insurance are for.
      • Give people the time they need to find or retrain for other types of work.
    • Of course, it’s no fun for those being negatively affected in the short-term but we can’t stop progress that benefits humanity from happening.
      • Otherwise, we’d be using spoons to build highways.

Importantly DC notes that while progress eliminates some jobs it creates other new jobs.

• The concept of creative destruction that we have discussed many times in previous book reviews.
• And he notes that the change happens organically and slowly which gives more people time to adapt.
  • But when change happens from government edict the impact is immediate and usually very disruptive.
• PM: I like his line “Progress is an experiment in human nature, and consumers must be the final decision-makers.”

Union membership in America has fallen to an all-time low.

• Percentage of workers who are part of a union:
  • 1940s: 34%
  • 2026: 10%
• More than half of union members work for the government.
  • And of course government workers don’t have to worry about the needs of the consumer.
  • He says he’s not necessarily anti-union, but short-term gains by unions often come at the expense of jobs for the next generation.
    • And that it’s important that people understand that trade-off and then act accordingly.

In a free-market capitalist system:

“All choices are honored. And choice is the beating heart of free-market capitalism.”

DC likes to view the free market as:

“a platform to exchange the value each of us generates, based on our unique talents and priorities.”

• This results in the strongest and most equitable free market for all.

That’s It:

• For Paulitical Economy® Post 378
• Until next time:
  • Be free
  • And do no harm.

Disclaimer

Note that Paulitical Economy® should not be considered investment advice, and I have not verified all of the sources of information. It is meant for general interest purposes only. Please consult an advisor if you plan on putting any of your hard-earned capital to work during these turbulent times.