Holiday, Schmoliday

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\"Consumer\'sRetailers Must Hope for a Lot of Blind-Hope Consumers

It’s speculation season again, a time to hope that consumers will temporarily forget about the economic mess around the world, as well as in their own homes, and charge forth to spend like drunken sailors during the holidays.  Yes, retailers need hope. We all need the hope that consumers will not be able to connect the real economic dots, exercising blind hope that things are, and will continue to get better. Ironically, that requires a good deal of blind hope on the part of retailers as well, along with a dash of reality in the form of their record-breaking earlier and deeper discounting.  An even harsher dash of reality, which could turn into insanity, is the fact that some retailers could replace their clearance signage with the word “free.”

I’m not kidding.

The NRF (National Retail Federation) was out there early sprinkling its magic dust of optimism, predicting a 3.7 percent increase in holiday sales (although down from last year’s 4.1 percent growth). The ICSC (International Council of Shopping Centers) is betting on a 3.3 percent rise. And to pick another number that sounds more like a lump of coal, RetailNext, an analytics firm, estimates a 2.8 percent gain, primarily driven by a 16.2 percent jump in digital sales. The overall RetailNext number looks less like blind hope and more like reality as it lines up more closely to a rolling average GDP growth of 2 to 2.5 percent. Growth in the first half of 2015 was 1.5 percent, what Schroeders PLC defined as “virtually a stall speed rate,” meaning that almost any minimal shock could tip the economy into recession. At best, most economists are projecting third quarter GDP growth to be in the tepid range of 1 to 1.5 percent.

The Global Mess Brought Home

In addition to our own disinflationary economy, the deflationary pressures that are washing onto our shores from the recessionary, and near-recessionary economies throughout the world are so threatening that the Fed is unlikely to raise interest rates this year. Global GDP growth has declined to 2.5 percent from historic averages of between 3 and 4 percent, and is not expected to claw back any time soon.

This is largely due to China’s declining growth — GDP dropping to 6.9 percent in the third quarter, falling below its proclaimed commitment to maintain a 7 percent rate.  Worse, many economists believe China’s real growth is actually somewhere between only 3 and 4 percent. And since China accounts for roughly 15 percent of global output and close to half its growth, when it sneezes the rest of the world catches a cold.

Just add up the ingredients of China’s stock market and credit bubbles (driving incapacitating over-capacity), devaluation the Yuan, and its impact on lower global trade in general (imports dropped 20 percent this past month indicating weak consumer demand). Then factor in the specifically devastating impact on countries that were fueling China\’s growth by supplying raw materials such as iron ore from Australia, steel from Brazil and mineral fuel and oil from Indonesia, and we’ve got a potential economic tsunami that could wash over the entire globe.

Home Sweet Home

Our economy flies in the face of most economists’ observations that the bigger the recession, the bigger the comeback: the old V-shaped recovery theory, steep down and steep up. Yet this has been the weakest recovery since WWII, and has only benefitted the wealthiest 1 percent. As many economists point out, if we follow the cycle of recessions (one every eight years), we are certainly not prepared for the next one — which could be now. After creating trillions of dollars of essentially “free money,” and maintaining a near-zero interest rate following the recession, the Fed appears to be weaponless if another crash ensues. Of course the supposed “weapon” of shoveling free cash into the economy under the assumption it would be used to invest in growth sure turned out to be an erroneous bet, didn’t it? Our “casino traders,” used it to double down on stocks, driving the market into the stratosphere for the last six years. No real economic growth has come from this folly.

So with economic growth in the U.S. at its lowest in three decades, with wages rising at the slowest pace since the 1980s, even with slightly falling unemployment (only about 45 percent of working-age adults have a full time job), and finally, with an eye on the scary violence going on in the Mideast and our own crazy political season, consumers will enter the holiday season with great caution and likely to spend more on needs than wants. If the Chinese economy begins to unravel, or we have another government shutdown, or if technology’s bubble-land begins to pop, or whatever might cause major stock market volatility, the wealthy elite are likely to close their pocketbooks and then the luxury sector will surely suffer.

A final fly in the ointment for this season is the strength of the dollar. Supposedly a good thing during good times, it is a real bad thing during mediocre times, particularly for retailers located in tourist destinations.

On a macro-level, the strong dollar carries more ominous consequences. According to Raoul Pal, a former Goldman Sachs executive who produces the monthly financial report, Global Macro Investor, the most critical economic indicator (of the hundreds he follows) has been the “relentless upward move of the dollar against just about all emerging-market currencies.” It all began in 2014 when the Fed said it would raise interest rates.
He cites that the dollar’s strength “against currencies like the Russian ruble, the Turkish lira and the Brazilian real began to gather steam a year ago and that veterans of past emerging-market booms and busts will tell you that the party always ends — as it did in Latin America in the 1980s and Southeast Asia in the 1990s — when the dollar takes off against these monetary units. Suddenly, loans in relatively cheap dollars that financed real estate and consumption booms were no longer available and the ultimate result was always a growth slowdown.”

Déjà Vu: The Gas Price Bonus is an Empty Tank

Now hovering around $40 a barrel, and with the U.S. continuing to add to the oversupply along with Iran which is soon to be rolling more barrels into the global market, experts predict the price could reach lower numbers. Economists claim that the savings for consumers at the gas pumps will become what they call a “gas bonus;” savings that they will spend in other areas of the economy, thus generating growth.

The Robin Report proved this correlation to be false, period. The quantitative analysis of this ratio can be reviewed in the following article: The Gas Price Bonus is an Empty Tank. Furthermore, in this period of high anxiety, the gas savings will likely remain just that: savings.

Another Harbinger of a Tepid Holiday

Gary Wassner, CEO of Hilldun Corporation, a Seventh Avenue factor, was quoted in WWD and said suppliers are starting to get pressured by stores, pushing orders ahead. “They don’t want deliveries when they were expecting to get them. They’re moving them ahead because of their heavy inventory [position]. I attribute it to the promotional environment that the brick-and-mortar retailers have created,” he said. “The consumers are just sitting back and waiting a little closer to buy-now-wear-now.”

This push-back on inventory is given credence by a John Mauldin newsletter, which tracked recent transportation metrics and found that the index for final demand of transportation and warehousing services dropped 0.7 percent in August. The August decline is a diversion from the normal pattern seen at this time of year. Generally, retailers are stocking up for fall sales, so the August drop is a big red flag. More importantly he says that the transportation industry provides an early canary-in-the-coal-mine warning signal for the rest of the U.S. economy.

In fact, According to the U.S. Department of Commerce, in each of the past eight months, total retail inventories have grown faster than retail sales.

Retailers’ Blind-Hope

Understanding that there is no real organic demand growth and that the U.S. is over-stored, stealing share of market from competitors is the only path to growth. This leads to the path of least resistance: which is cutting costs and discounting. They become weapons of necessity. But again, at the end of the day (and I\’m getting really blue in the face), when consumers have more than they need, and see so more of everything new every day, no amount of discounting will peak their interest enough to buy more. Then add the uncertainty and anxiety about the future…and what do you get?  The answer is the opposite of inflation.

So retailers must hope, again perhaps blindly, that consumers across this great land, once again do not connect the dots on all the economic and geo-political horrors and potential horrors going on around the world, and that they ignore the negative economic “dots” in their own lives. They must hope that we all will once again find some ebullience and holiday cheer, enough so to open our pocketbooks to buy way more stuff than we really need.

Even so, I don’t see a growth number any higher than between 2 and 3 percent.

Cheers, The Grinch



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