Summary

• The cigarette industry is seeing a slow but steady decline. And employment is falling.
  • Also in the number of employees.
• Check your eggs.
• Nike’s customers are under continued pressure.
  • As is Nike’s share price.
• The wisdom of crowds requires at least one very important condition.
• Financial Ructions:
  • Japan: Too many holes in the dyke?
  • The U.S. vs. the E.U. cage match.
  • The Bank of Canada worries about capital being misallocated.
    • While they and other central bankers have been the main perpetrators of malinvestment for at least twenty-five years.
  • Productivity growth in Canada has tanked.
  • U.S. exceptionalism
    • And no, reckless government spending is not justified by giving hedge funds a place to park their money.
  • U.S. unexceptionalism
    • Insider trading.
  • A look at tariffs.
    • And Brexit.
• Book Review:
  • We finish our review of Howard Schultz’s great book on Starbucks.
  • And I highly recommend it but especially for anyone looking to start their own business.

News

9,000 Jobs Go Up In Smoke

British American Tobacco was founded in 1902

Their goal is to transition their customers to smokeless products such that by 2035 only half of their sales will be from cigarettes:

• Products:
  • Cigarettes
  • Vapour
  • Heated Tobacco: vapour caused by heating rather than burning.
  • Modern Oral: white pouches with nicotine (no vapour or spitting).
  • Traditional Oral: chewing tobacco.
• Cigarette brands include:
  • Dunhill
  • Lucky Strike
  • Pall Mall
  • Rothmans
  • Camel
  • Craven A
• In the 1960s they joined the conglomerates craze and bought cosmetics and food companies.
• 1970s they bought Saks Fifth Avenue.
• 1999: Merged with Rothmans.
• 2017: Buys Reynolds American

The company recently announced that as part of its A.I. efficiency program it will:

• Let go of 5,000 employees
• Outsource another 3,500
• Total jobs lost: 9,000.
  • 20% of their workforce.
• No jobs lost in their U.S. operations.

World’s top cigarette markets:

1. U.S.
2. Germany
3. Japan
4. Romania
5. Brazil
6. Mexico
7. Pakistan

The company expects that global cigarette volumes will fall 2.5% this year.

British American Tobacco share price:

• 1yr: +30.5%
• 5yrs: +63.2%

Egg Swap

• Some people in U.K. supermarkets are swapping out more expensive free range organic eggs from their container and putting them in a regular egg container and paying the lower price.
  • Of course, that means that someone who thought they were buying free range organic eggs was in fact getting cheaper standard eggs.
    • See TikTok video here.

Nike

• 1964: Founded in Oregon by Phil Knight and Bill Bowerman as Blue Ribbon Sports.
  • Knight was a runner and took care of the business end of things.
  • Bowerman was a track coach and designed the shoes.
    • One he made with a waffle iron which became known as the Moon Shoe.
      • In 2019 a pair sold at an auction for over $400,000.
    • Apparently, he suffered severe nerve damage in his legs from inhaling fumes from glue and solvents when designing the shoes.
    • He coached Steve Prefontaine who had set a number of distance records in the early 1970s.
      • Tragically he was killed in a car crash at the age of 24: He had a few to drink.
    • There’s a biographical film about Bowerman and Prefontaine called Without Limits starring the late Donald Sutherland.
• 1971: Nike founder Phil Knight paid a graphic-designer $35 for the swoosh logo.
  • One of his employees came up with the name Nike (in a dream).
    • Nike was the Greek goddess of victory.
    • There are two opinions as to where the Adidas name came from:
      • From the founder’s name Adolf Dassler (middle name Bobby).
      • From “All Day I Dream About Sports”
  • Phil Knight wanted to call the company Dimension Six.
• 1980: Nike had 50% US market share.
• Logos:
  • 1971-1978
  • 1978-1995
  • 1995-Present
• 1985: The first Air Jordan was released.
  • There’s a movie about Nike and Michael Jordan called Air.

Adjusted sales by quarter:

• 2Q/2023: +27%
• 3Q/2023: +19%
• 4Q/2023: +8%
• 1Q/2024: +2%
• 2Q/2024: -1%
• 3Q/2024: 0%
• 4Q/2024: 0%
• 1Q/2025: -8%
• 2Q/2025: -9%
• 3Q/2025: -7%
• 4Q/2025: -11%
• 1Q/2026: -1%
• 2Q/2026: 0%
• 3Q/2026: -3%
• 4Q/2026: -4%
  • 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/Latin America: -1%
• The company cited:
  • An increasingly challenging operating environment.
  • Sell-through remains challenged.
    • PM: This is how quickly inventory is sold to the end customer.
  • Seeing added pressure on traffic and discretionary spending.
  • By mid April in North America they were seeing a deceleration in sales.
  • Their consumers are under pressure around the world.

Nike share price:

• 1yr: -42.3%
• 5yrs: -72.4%
• The share price is flat over the last twelve years.

Wisdom of Crowds

In a Financial Times article, Stuart Kirk discusses when the wisdom of crowds works and when it doesn’t.

• He cites the example of a fair in England in 1906 when 800 people guessed the weight of an ox.
  • The guesses were all over the place.
  • But the median (middle) of all of the guesses was only 0.8% away from the correct weight with most of the errors on either side of the correct weight cancelling each other out.
    • PM: I talk about this in my book only it was guessing the number of jelly beans in a jar.
• The wisdom of crowds is also referred to in the book Why Socialism Struggles by Dr. Doug Cardell.
  • He talks about the show Who Wants to Be a Millionaire.
    • Contestants are given three lifelines:
      • Phone a friend
      • Remove two incorrect answers
      • Poll the studio audience.
    • The first two lifelines would get the right answer 65% of the time.
    • Polling the audience was successful 91% of the time.
• But the wisdom of crowds only works under certain conditions, the most important of which is that people must be making independent decisions i.e. not influenced by Wall Street analysts.
• And so, believing that the wisdom of millions of investors is correctly valuing stock markets today is a dangerous assumption to make.
  • Many are reading the same research/headlines.
    • And most stand to benefit if stocks continue to rise.
• Kirk concludes with:
  • The Wisdom of crowds has never lain in the consensus.
    • It lies in the disagreement.
  • Once everyone thinks alike, crowds are error-prone.

Financial Ructions

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

Japanese Yen: Testing Resolve

• Whenever the JPY would approach 160 to the US Dollar the government would intervene to strengthen the currency.
  • However, this time they are staying on the sidelines (so far) as the Yen reaches 161.7.
  • Since pre-COVID, the Yen has declined precipitously.
    • Dec/2019: 108.7
    • Jul/2026: 162.3
      • Down 49%
    • And note this only represents the value that the yen has lost vs. the US Dollar.
      • The US Dollar itself has lost around 30% of its purchasing power since Dec 2019.
      • So, the purchasing power of the Japanese Yen in terms of U.S. inflated goods is even worse.
    • Assume a bike in the U.S. costing $1,000.
      • Back in December of 2019 it would cost JPY108,700
      • With cumulative inflation of around 30% in the U.S. since 2019, that bike would now cost $1,300
      • And with the weaker exchange rate it would cost JPY210,210.
  • 93% more than six years ago.
    • The last time the Yen was this weak was in 1986: 40 years ago.
• And inflation is still an issue in Japan.
  • Yes, the official inflation number has fallen from the highs of 2025.
    • But that is due in part to government subsidies which started in December of 2025.
  • Japan monthly inflation:
    

    Month	Inflation
    Oct/2025	3.0%
    Nov/2025	2.9%
    Dec/2025	2.1%
    Jan/2026	1.5%
    Feb/2026	1.3%
    Mar/2026	1.5%
    Apr/2026	1.4%
    May/2026	1.5%

  • Inflation is still showing up in producer prices:
    • Feb/2026: 2.0%
    • Mar/2026: 2.6%
    • Apr/2026: 4.9%
    • May/2026: 6.3%
      • However, with falling oil prices much of this pressure will ease.
• Of course, those subsidies increase the government’s fiscal deficits and debt.
  • Debt to GDP:
    

    Year	Debt to GDP
    1990	55%
    2000	135-150%
    2010	200-220%
    2019	236%
    2025	249%

  • Leading to higher interest rates;
    • Japan 10-Year bond yield:
      • Dec/2025: 2.07%
      • Jun/2026: 2.70%
  • Back to where it was in 1996.
• PM: Note that these are worrying signs of the government losing control.
  • But of course, the real issue is that the government should not have been trying to control things in the first place.
    • When market forces deemed Japan’s government spending to be reckless investors balked at funding that profligacy.
    • The sensible response would be to get your fiscal house in order
    • Instead, like all other developed economy governments, the response was to take the easy and ultimately destructive way out.
      • The Bank of Japan stepped in to buy those government bonds with newly created money to cap rates.
  • Short-term control at the expense of the long-term health of the economy.
    • It won’t end well but no one has any idea when and how bad.

U.S. vs. E.U.

An article in Money Week talks about how the U.S. economy has pulled far ahead of the E.U. since the GFC in 2008.

• In 2008 the GDP of the E.U. was larger than that of the U.S..
  • But by 2024, that had flipped:
    • U.S.: $29.2 trillion
    • E.U.: $16.4 trillion

PM: Looking at things on a GDP per capita basis the growth trajectory has been similar, with the U.S. still far ahead on an absolute basis.

• GDP per Capita, current prices (PPP): IMF
  • 2008:
    • U.S.: $48,500
    • Canada: $40,400
    • U.K: $38,700
    • E.U.: $35,600
  • 2025:
    • U.S.: $90,000
    • Canada: $67,000
    • U.K: $65,500
    • E.U.: $65,300
  • Growth in GDP per capita from 2008-2025:
    • U.S.: 86%
    • E.U.: 83%
      • France: 75%
      • Germany: 71%
      • Spain: 66%
      • Italy: 61%
      • Poland: 182%
    • U.K: 69%
    • Canada: 66%
  • Growth in GDP per capita from 2015-2025:
    • U.S.: 58%
    • E.U.: 63%
      • France: 57%
      • Germany: 23%
      • Spain: 55%
      • Italy: 60%
      • Poland: 106%
    • U.K: 51%
    • Canada: 45%

The article points to a number of advantages that the U.S. has:

• Continental scale
• Vast natural resources
• World’s reserve currency
• Single language
• Deeper capital markets

While Europe’s disadvantages were not new in 2008:

• Incomplete single market
• Multiple languages
• Competing national interests
• Different tax and legal systems

But note that those advantages and disadvantages had been around long before 2008:

• And the E.U. had been growing faster than the U.S. over the previous eight years:

And note in the above numbers that it is more the emerging countries in the E.U. such as Poland that are providing most of the growth.

Also note that since 2015 Canada’s growth is relatively weak.

• Despite our vast natural resources.

De Gaul

While in Paris, Bank of Canada Governor Tiff Macklem had the gall to complain about excessive cross-border flows distorting asset prices: Globe and Mail.

• He complains about:
  • China’s overreliance on exports
  • Europe’s weak levels of investment.
    • PM: But no mention of Canada’s weak levels of investment.
• Next, he says that capital flowing into the U.S. could be misallocated.
  • PM: On this he is correct, but so what?
    • As long as the Fed doesn’t bail out Wall Street.
    • And no one has done more to cause capital to be misallocated and stock markets to be overly stretched than central banks.
  • Also, in the Globe and Mail was an opinion piece by Thomas Caldwell about why investment in the U.S. is booming and not so in Canada.
    • The U.S. “nurtures, encourages and celebrates entrepreneurs. It also supports the ecosystem to raise the funds for new business.”
    • After being an entrepreneur for 60 years, Caldwell says that he can “unequivocally state that Canada is the antithesis of the U.S. in this regard.”
    • Successive governments have:
      • Imposed growth restricting taxes.
      • Onerous and unnecessary regulations.
    • And that governments continuously raising taxes and increasing deficit spending in order to buy votes must stop. PM: Cue laugher.
    • The best thing the government can do is “get out of the way.” PM: Good luck with that. Their egos won’t allow it.

Unproductivity Growth: Canada

Labour productivity growth has flatlined in Canada due to a lack of investment.

• Lack of investment is due to:
  • Uncompetitive tax regime
  • Red tape/bureaucracy/regulations/policy uncertainty

Average annual labour productivity growth: Stats Canada

• 1981-2015: 1.3%
• 2015-2026: 0.4%
• 2022-2026: 0.1%

U.S. Exceptionalism

In an opinion piece in the FT, Liz Ann Sonders makes the case for the U.S. and why it is attracting far more capital than any other country or region:

• The deepest financial market plumbing.
• Global reserve currency.
  • Despite its weaponization.
• Institutional credibility:
  • Contracts are enforced
  • Courts are independent, most of the time.
  • Decent accounting standards
• Innovation ecosystem
  • World class research universities
  • Large and flourishing venture capital and private equity markets.
    • PM: On shaky ground of late.
  • A cultural tolerance for failure: See book review below.

I only disagree with her on one point.

• She rightly points out that the U.S. Treasury market is deep.
• However, saying that a deep treasury market is necessary so multibillion dollar hedge funds have somewhere to park their capital without moving the price is a flawed way of looking at things.
  • In other words, she’s suggesting that we need governments to be increasingly spendthrift and run up the debt bill to make life easier for hedge funds.
  • And as a reminder, when you buy a government bond it is not an investment. The vast majority of the capital you lend to the government is consumed.
    • Government salaries.
    • Defence spending
    • Social security
    • Healthcare
  • Yes, you own an asset but it is not backed by capital that’s invested.
    • It’s backed by a future tax liability on the next generation.

U.S. Unexceptionalism?

Taking a different view to Sonders (in the same edition) is Gillian Tett: FT.

• She despairs at the billions of dollars that President Trump is making while in office.
  • And that the investments hardly seem to be at arm’s length.
• And she quotes the great and former Citi analyst Matt King of Satori:
  • We’re stuck with this seemingly structural slide towards lawlessness.
• The Bertelsmann Transformation Index says that there is a weakening globally in:
  • Rule of law
  • Political freedoms
  • Fair competition
• A Pew poll shows a marked decline in trust in government:
  • Sixty years ago: 77%
  • Today: 17%
  • This lack of trust encourages voters to embrace a strong man or woman who claims that they need to ignore laws to get things done.
• And that in a more lawless society, lenders to the government (including hedge funds looking for liquidity) may not get their money back.
• PM: Of course, this sort of stuff has been going on for decades with members of Congress from both sides of the aisle allegedly making millions on inside information.
  • Not cracking down on it encourages even more of the same.

Tariffs

According to an opinion piece in the Globe and Mail by Jamie McGeever, Trump’s tariffs have had more bark than bite.

• That’s because the actual tariffs have been lower than the statutory rates.
• 57% of imports are still entering the U.S. duty-free.
  • Including the vast majority of goods from Mexico and Canada.
• It’s estimated that the net impact of tariffs on the U.S. economy has been minus 0.1% to positive 0.1%: statistically insignificant.
• The U.S. consumer pays 90% of the tariffs.
• A Federal Reserve paper says that the inflation that resulted from the tariffs is now over: a one-time price move.
  • PM: This is as we said it would be, but still, people are paying higher prices even if the tariffs are no longer sending those prices even higher.
• Government revenue raised from the tariffs in 2025: $264 billion.
• Since tariffs were introduced, they’ve been changed more than 50 times.
• PM: As you may recall I’ve had a go at McGeever a few times and he was doing quite well in this article until the very end.
  • That’s when he goes full establishment.
    • He correctly warns that the real harm from tariffs may be yet to appear.
      • But then compares them to Brexit and how at first the economy was fine and then it wasn’t.
  • And that there is “broad agreement that the economic damage has been profound.”
  • No, there is broad agreement amongst those who warned against Brexit.
    • Many assessments are politically motivated.
    • And are based on speculative counterfactuals.
  • Here’s the other side of the story:
    • GDP Per Capita growth since the U.K. left the European Union in 2020: IMF
      • France: 24.7%
      • Germany: 26.0%
      • U.K.: 41.1%
    • And on a purchasing power parity basis:
      • France: 33.7%
      • Germany: 24.6%
      • U.K: 34.5%
  • PM: This is only one measure of course and one should expect negative consequences for both the U.K. and the E.U.
    • But it’s a small price to pay to eliminate the influence of a bunch of technocrats in Brussels.
    • And trade within the E.U. is not free in that Brussels wants control over your local laws and regulations.
    • All countries would be well advised to follow Hong Kong’s example of free trade that comes without the arrogance of policymakers wanting control.
      • And free trade does not mean no regulations or standards.
        • It does mean respect for sovereignty.
• A few notes from Ambrose Evans Pritchard of the Telegraph:
  • Britons had decided to be governed by their own parliament, laws and courts rather than be dictated to by Brussels.
  • The U.K. outgrew the Eurozone in four of five years since Brexit.
  • And is ahead of trend growth since 1993.
  • Growth since 2016 (Brexit vote): OECD
    • France: 11.9%
    • Germany: 8.0%
    • Italy: 9.2%
    • U.K.: 13.2%
  • Productivity growth in the U.K. has outperformed that of the E.U. since 2016.
  • He estimates that the Brexit cost was around 2% of GDP.
    • A “one-off divorce cost.”
      • PM: Without the alimony (remember the alimony).

Book Review

Onward: How Starbucks Fought for Its Life without Losing Its Soul.

Howard Schultz

2011

Chapter 23: A Galvanizing Moment

“People want to do business with companies they respect and trust.”

• PM: And how companies treat not only their customers but also their employees matters a lot.
  • Too many executives seek respect from Wall Street by demonstrating how quickly they can cut costs (fire people).

Chapter 24: Nimble

“Yet we were silent. It infuriated me. We have got to get on the offensive I said. Not on the attack. But proactively define ourselves, find our voice and express the personality of the company.”

• PM: The personality of the company can only be expressed passionately if you firmly believe in who you are and what it is you are doing.

Chapter 25: Plan B

“…refuse to surrender our core values.”

“Sorbetto”

Not everything we try will necessarily work. We need accountability, but only as a tool for learning. People can’t be afraid to be creative. Can’t be afraid of failing.

• PM: Some people delay making decisions until they are absolutely sure they have determined the absolute best course of action.
  • They do this in part because they are in a poor corporate culture i.e. mistakes will be used against them.

Chapter 26: Stay the Course

“Still, we had to do something for our core customers. As Costco’s Jim Sinegal had advised us earlier in the year, we could not let them slip away. Giving them value at almost any cost would be much less expensive than trying to win them back.

• PM: Notice how he keeps coming back to the customer.
  • And not how much debt their balance sheet could handle for share buybacks.

Chapter 27: Innovate

“Celebrate, learn from, and do not hide from mistakes.”

“But over the years Starbucks deviated from its once unquenchable desire to innovate truly innovate…was it laziness. Fear of failure. Perhaps, but failure often leads to great things.”

“In short, a new idea’s execution had to be as good as the idea itself.”

“So instead of asking “why” I asked, in true entrepreneurial fashion “why not”

• PM: I’ve experienced this many times in many different settings.
  • Some people will not be on board with an idea unless they’re the ones who came up with it.
    • Anyone else’s suggestions are met with myriad reasons as to why it won’t work.
      • This was also the case during the Great Financial Crisis where Wall Street, the Fed and Treasury all shot down anything that wasn’t a direct bailout.
  • Of course this was all about Charlie Munger’s “Show me the incentive and I’ll tell you the outcome.”
  • Those making the decision had the most to benefit from a bailout.
    • And it was a financial bailout as well as a reputational bailout.

Chapter 28: Conviction

“…there were many people who wanted no part of it…but I refused to allow dissenters to derail my conviction.”

• PM: You have to get rid of those people who are not team players.
  • Yes, express your dissension, but once a plan is chosen, get on board, or leave.

Chapter 29: Connecting Dots

“Exploring an imperfect idea can often lead to a better one.”

• PM: Success is rarely perfect right away and is almost always iterative.

Chapter 31: Conscience

“As Starbucks now knew all too well, growth for growth’s sake is a losing proposition.”

“Growth, we now know all too well, is not a strategy. It is a tactic. And when undisciplined growth became a strategy for Starbucks, we lost our way.”

• PM: This goes for economies too.
  • Some countries, like Canada, strangle growth through taxation and burdensome regulations.
    • And try to offset the lack of productivity driven growth by opening the floodgates to immigration.
      • The country’s infrastructure can’t handle the population surge and it prices the next generation out of the housing market.

Conclusion

PM: And that does it for our review of Howard Schultz’s great book on coming back and reviving the Starbucks customer value proposition.

• Much of what he stands for reminds me of Steve Jobs.
  • I’ve posted this speech by Jobs a number of times: Here.
    • Start with the customer experience and then work back to the technology.
• And I’ve seen this attitude in many successful entrepreneurs and large corporations over the years.
• This book is a must read for anyone wanting to start a business of their own.

That’s It:

• For Paulitical Economy® Post 374
• 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.