Weekly Research Briefing: Wheels Up

• At one point, Justice Neil Gorsuch, illuminating his own thinking, said: “The really key part of the context here…is [that] the constitutional assignment of the taxing power to Congress, the power to reach into the pockets of the American people, is just different and it’s been different since the founding.”
• Trump is using “power to impose tariffs on any product from any country in any amount for any length of time. It does seem like that’s a major authority,” Chief Justice John Roberts said. His “vehicle is imposition of taxes on Americans, and that has always been the core power of Congress.”
• Justice Elena Kagan said, “A tax with no ceiling, a tax that can be anything, that here the president wants, there an agency wants, would raise a pretty deep delegation problem.”

Navigating Trump’s ever-changing tariffs has made it hard for companies to make decisions and plan for the future. The tariffs are also a huge distraction from actual economic activity. Normally, businesses should be spending their time developing products, finding new customers, improving their operations, that sort of thing. Instead, they’re spending their time gaming out how to minimize their tariff burden.

“We have ordered and canceled and uncanceled and recanceled so many different times as the tariff rates went up and down and again,” Mac Harman, CEO of Balsam Hill, told me. Harman’s company sells pre-lit artificial Christmas trees, products that are just not economically feasible to make in the United States. He estimates he now spends about half his time optimizing around tariffs, which is both an economic and emotional drain. “I feel like I really can’t go more than six hours without following the news.”

In 2024, Harman says, his company paid $1 million in tariffs. This year’s tariff bill, by contrast, will be about $15 million. Which is painful enough. Even worse when you consider that it took an enormous effort to keep that tally from reaching $117 million, the maximum he says his company would have owed if it had mistimed its factory orders.

In addition to scheduling and rescheduling factory orders and shipment dates to adapt to the ever-changing Trump tariff rates, Balsam Hill has also had to line up more warehouses and trucks—and optimize when to move what where. It’s been a wasteful, goods-moving dance, what Harman calls the “Hokey-Pokey.” And even the Hokey-Pokey couldn’t fully mitigate the damage; this year the company also had its first layoff in its twenty years of existence, even as its markets are growing.

@SoberLook: US employers announced 153,074 job cuts in October, the highest October total since 2003.

@ernietedeschi: Beneath the hood of ADP: small (<50 employees) and medium (50-499) businesses payrolls are shrinking, large businesses are expanding (these are 3-month moving averages graphed).

The preliminary University of Michigan Consumer Sentiment index for November fell sharply to its lowest level since June 2022. The decline was primarily driven by the current economic conditions component, which plunged to an all-time low. Respondents cited concerns over the month-long federal government shutdown as the main reason for the deterioration in confidence.

The surprising resilience of the US economy this year is masking underlying weakness among low- and middle-income households, as higher-income Americans continue to drive growth.

This dichotomy between the haves and have-nots isn’t new, but the economic strain is now bleeding from the lowest earners to the middle class, creating an even starker divide that some economists say makes the economy more susceptible to a downturn.

The richest 10% of households are fueling nearly half of total US spending, thanks to a stock market surge that has boosted wealth and in turn propelled economic output this year. Meanwhile, lower-income families are pulling back in the face of tight budgets, still-high living costs and a raft of corporate layoffs.

Executives at companies like Chipotle Mexican Grill Inc., Hilton Worldwide Holdings Inc. and Ethan Allen Interiors Inc. have cited the trend in recent earnings calls, and Federal Reserve Chair Jerome Powell said officials are carefully watching signs of a bifurcated economy after the central bank lowered interest rates last week.

“In the U.S., we continue to see a bifurcated consumer base with QSR traffic from lower income consumers declining nearly double digits in the third quarter, a trend that’s persisted for nearly 2 years. In contrast, QSR traffic growth among higher income consumers remained strong, increasing nearly double digits in the quarter.” — McDonald’s (MCD) CEO Christopher Kempczinski

“I think if you think about the low income consumer and you think about the pressures that they face, I mean, right now, you’re seeing across the country, rents are at pretty high levels. You’re seeing food prices, whether it’s in restaurants or grocery, you’re seeing food prices are high, you’re seeing child care is high. There’s just a lot of things that when you think about nondiscretionary spend, there’s some significant inflation there that the low-income consumer is having to absorb. And I think that’s affecting their outlook and their sentiment and their spending behavior, not just in QSR, but across a number of other product categories as well.” — McDonald’s (MCD) CEO Christopher Kempczinski

“We do see more pressure on the lower-income consumer. We continue to see that in the third quarter, and we expect that to continue into the fourth.” — The Wendy’s (WEN) CFO Ken Cook

“Gen Z unemployment twice the national average. When we look at the data, it’s more that the younger cohort that 25 to 35 that Tricia noted in comments is that they don’t have the steam that they had last year in the way that they were visiting or their frequency of visiting. It’s not necessarily they’re so challenged with us. It’s just that they don’t have the vigor or the frequency of occasions that they did last year.” — CAVA Group (CAVA) CEO Brett Schulman

“All I would add to that is it’s still a difficult environment and inflation is proving to be sticky. I mean we’re expecting to see there’s going to be above average inflation next year. You’ve heard about others referencing what’s going on with beef prices. Certainly, we’re seeing very, very high inflation around beef prices versus what we’re used to historically. And so I think all of that just keeps putting pressure on the industry.” — McDonald’s (MCD) Chairman Christopher Kempczinski

“We see that the basket size of the consumer is really not increasing over the last 3 years. And as you can imagine, as prices have gone up, they’re being more squeezed on what they can buy within that basket. And they are tending to focus on what are the essentials. And as a consequence, snacking categories are not that essential for them, and we’re seeing that in our volumes.” — Mondelez International (MDLZ) CEO Dirk Van de Put

@ernietedeschi: The turkey in my freezer turns out to have been my best 2025 investment by far.

As part of their annual Thanksgiving traditions, WMT and TGT are offering Thanksgiving meals that are budget-friendly for families. Specifically, TGT is offering a <$20 meal that feeds 4 while WMT is offering a <$40 meal that feeds 10. In Exhibit 8, we compare the two meals along with their price points, and find that WMT's meal is slightly cheaper per person. We note that another differentiator between the two offerings is that WMT is providing free express delivery (usually ~$10) for first time Pickup and Delivery customers.

Big power bills are overlapping with rising food prices and inflation that remains persistently above the Federal Reserve’s target, frustrating Americans. Fall weather lightens electric bills as people stop using air conditioning, but a cold winter could hike bills again for those who rely on electric heat systems.

Retail power prices in New Jersey were up 19% in August from a year earlier, the latest state-by-state data from the U.S. Energy Information Administration show, on the leading edge of a 6% nationwide increase in the same time frame. There are several driving forces, including a rapidly growing number of data centers pumping up demand in some regions. The slow addition of new power generators, retirement of old plants and costly grid upgrades are also playing a role…

The National Energy Assistance Directors Association, a group that helps states manage low-income utility assistance programs, said costs are a rising hardship. The organization projects customer electricity shut-offs due to unpaid bills could rise to 4 million nationwide this year, up from about 3.5 million last year and 3 million in 2023.

Some of the biggest increases since last year are in parts of the Eastern U.S. where data centers are popping up, and where the grid is managed by operator PJM Interconnection. Wholesale prices—the price utilities pay for power—are rising, and can be passed on to the consumer with state regulatory approval.

“The pressure on peak electricity demand capacity will likely persist, potentially meaning unyielding pressure on customer utility bills,” the Bank of America Institute said in an October report. This will hit lower-income households disproportionately, the report said.

@LizAnnSonders: Used vehicle inventory is spiking ... as of September, data from ⁦@vAutoInc show inventories well above where they were a year ago @DataArbor

One of the biggest used car dealers in the US, CarMax just dumped its chief executive officer, slashed guidance for the third quarter and saw its share price tumble as much as 20% Thursday to the lowest since 2012. This debacle has its roots in the Richmond, Virginia-based company’s last earnings report. Those fell below expectations on a combination of declining retail sales broadly and CarMax having misread tariff-related impacts on sales to splurge on inventory. Worse, CarMax told investors in late September that the sales trend for the quarter was showing signs of improvement. Now it suddenly expects to report a drop in comparable sales of 8% to 12%. No wonder shareholders are running for exits.

“Overall, housing activity has remained lackluster this year with total starts hovering around 1.3 million units on a seasonally adjusted basis and single-family starts below 1 million units. Based on conversations with our homebuilder customers, the biggest issues continue to be ongoing affordability challenges and weaker consumer confidence. While mortgage rates have declined to the low 6% range, many potential homebuyers remain on the sidelines given elevated uncertainty about the economy, inflation and employment.” — Weyerhaeuser (WY) CEO Devin Stockfish

Shares of Trex plummeted Wednesday after the decking and railing company reported weaker-than-expected quarterly sales and earnings and slashed its 2025 and 2026 guidance…

The company lowered its fourth-quarter outlook due to continued weakness in its repair and remodel segment and expectations that distributors would reduce inventories. Full-year sales are now expected to total $1.15 billion to $1.16 billion, down from a previous range of $1.21 billion to $1.23 billion. Trex also expects gross margin to decline 250 basis points in 2026…

Sales have stagnated at Trex since the height of the post-pandemic housing boom in 2021. But the sluggish home-improvement and residential real estate markets are less of a concern to Wall Street than Trex’s specific challenges, including growing competition and a sudden drop-off in spending in the third quarter.

“We have not yet seen significantly competitive energy prices available for the long term in the United States. You know that globally, we would be shooting for energy prices between $30 and $40 a megawatt hour. We’ve not seen those available yet for long-term packages in the U.S. In fact, the opposite of that is occurring because some of the data centers and the AI centers are able to pay $100 a megawatt hour, whereas we’re looking for 30 to 40.” — Alcoa (AA) CEO William Oplinger

The furious push by AI hyperscalers to build out data centers will need about $1.5 trillion of investment-grade bonds over the next five years and extensive funding from every other corner of the market, according to an analysis by JPMorgan Chase & Co.

“The question is not ‘which market will finance the AI-boom?’ Rather, the question is ‘how will financings be structured to access every capital market?’” according to strategists led by Tarek Hamid.

Leveraged finance is primed to provide around $150 billion over the next half decade, they said. Even with funding from the investment-grade and high-yield bond markets, as well as up to $40 billion per year in data-center securitizations, it will still be insufficient to meet demand, the strategists added. Private credit and governments could help cover a remaining $1.4 trillion funding gap, the report estimates.

The bank calculates an at least $5 trillion tab that could climb as high as $7 trillion, singlehandedly driving a reacceleration in growth in the bond and syndicated loan markets, the strategists wrote in a report Monday.

Nvidia CEO Jensen Huang on Saturday said the semiconductor giant is experiencing "very strong demand" for its state-of-the-art Blackwell chips, as its appetite for wafers from TSMC grows.

"Nvidia builds the GPU (graphics processing units), but we also build the CPU (central processing units), the networking, the switches, and so there are a lot of chips associated with Blackwell," Huang told reporters at an event held by Nvidia's longtime partner Taiwan Semiconductor Manufacturing Co in Hsinchu.

TSMC CEO C.C. Wei said that Huang had “asked for wafers,” but that the number was confidential.

“TSMC is doing a very good job supporting us on wafers,” Huang said during his fourth public trip to Taiwan this year, adding that Nvidia's success would not be possible without TSMC.

OpenAI started an all-out sprint on models and distribution, but is still relatively early to infrastructure and especially to vertical integration. On the other hand, Google has been running the marathon since 1998, and is showing signs that they are not just ahead, but also that all of the running over the last 27 years has gotten them to a nice corporate VO2 max. They just have a lot of operating cash flow, compounding technical advantages, and talent to throw at the problem of winning the AGI race. It’s basically a high sharpe-ratio portfolio of AI bets, where they risk less from disintermediation than anyone else. If models are a commodity and customer count wins, then having a portfolio of billion-user products is great. If models are the limiting factor, Gemini is a contender. If it’s about compute, Google is very efficient at turning dollars into tokens, relies on very few external parties to do so, and will only get more efficient as it amortizes chip design R&D over more spending. They’re making all the economic bets at once.

“We are seeing a continued strengthening in the market generally. And we’re seeing it really across the board, really almost every sector that we cover seems to have real activity. The larger deals started earlier, we’re seeing midsized deals really build. And frankly, across the board in terms of the industry sectors large and small deals are being considered. The engagement level with Boards and management teams is very high. Our backlogs right now are as high as they’ve ever been. And clearly, as you look at the measurements, the CEO confidence index is building and quite high.” — Evercore (EVR) Chairman John Weinberg

Charles Schwab on Thursday agreed to buy private shares platform Forge Global in a deal valued at $660 million as Wall Street firms seek to meet growing investor demand for access to high-growth startups. Major financial institutions are expanding services that give clients access to private companies and liquidity in pre-IPO shares, seeking to tap rising investor demand for early exposure to fast-growing startups. The per-share deal value of $45 represents a premium of roughly 72% over the stock’s last closing price…

Some of the world’s most valuable startups are choosing to stay private for longer, raising capital in private markets rather than pursuing initial public offerings. Companies such as ChatGPT-maker OpenAI, Elon Musk’s SpaceX and TikTok-parent Bytedance now hold valuations that rival or exceed several major S&P 500 companies, narrowing the gap in influence between public and private markets. Investors are seeking exposure to these fast-growing companies, and financial services firms are moving to cater to that demand. Last month, Wall Street giant Morgan Stanley agreed to acquire private shares platform EquityZen, a rival to Forge Global.

Based on M&A data from FactSet (announced deals of publicly-traded target companies on major US exchanges), both the number and proportion of M&A deals that are leverage buyouts (LBOs) YTD are historically elevated at 27% of deals (though down from last year’s record share of 33%). LBO deal value YTD has increased y/y to its highest level since 2021and the share of total M&A deal value is tracking the second highest ever after 2007’s 46%.

The overconfidence, incaution, and inattentiveness that lead to unwise investments in good times also present the perfect conditions for fraudulent schemes. Risk tolerance, FOMO (fear of missing out), inadequate due diligence, and fevered buying provide fertile soil for financial scams. In heady times, rather than say, “That’s too good to be true,” people are more likely to ask, “How can I get in on that?”

The markets aren’t crooked per se, but they’re full of money, and thus they tend to attract crooks. And, intelligently, the crooks are most active in times when conducting due diligence is in retreat and loose change becomes more readily accessible. It shouldn’t come as a surprise in the years ahead if the last sixteen years of largely uninterrupted economic growth, rising markets, and profitable risk taking are shown to have produced a bumper crop of frauds.

Nowadays, I’m often asked whether the issues described above are “systemic.” In other words, are they “pertaining to the system” or “affecting the system,” as opposed to idiosyncratic occurrences that don’t say anything about the system. For an example of something systemic, consider the counterparty risk that arose during the Global Financial Crisis. Because financial institutions had entered into hedging transactions with each other, one bank’s weakness weakened the others, impacting the system overall. I think “hardwired into the system” is a good way to describe something that’s systemic.

I don’t think today’s issues are systemic in the sense that there’s something wrong with the lending system, or that they will trigger other defaults and lead to a breakdown of the system. In simpler words, there’s nothing wrong with the plumbing. But imprudent loans and business frauds often occur in clusters for the simple reason that people who make investments and loans are highly prone to error in good times. Investors and lenders are supposed to be risk-averse and thus exercise discipline and vigilance, but sometimes they fail in this regard. This isn’t part of the plumbing of the financial system but rather a regularly recurring behavioral phenomenon. So, it isn’t ‘‘systemic,’’ but it is “systematic.”

‪Tesla is launching a new car rental program out of its stores in the US, as sales are crashing due to the end of the federal tax credit.

It’s available at select stores in the US right now.

Tesla’s demand in the US, like that of most other electric vehicles, has crashed after the federal tax credit for electric cars ended last quarter, pulling forward a lot of demand.

With inventories piling up at stores and dealers across the country, Tesla has found a new way to use its inventory: it is now renting (not leasing) its vehicles from its stores.

The rental duration is a minimum of three and a maximum of seven days, starting at $60 per day and increasing depending on the model.

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