Danielle DiMartino Booth, Money Strong, Writing on the Wall

The Writing on the Wall

“Mene, Mene. Tekel, Parsin”

Appearing from nowhere came a disembodied hand. To the disbelief of a petrified King Belshazzar, the hand began to write words of unknown meaning on his wall. ‘Harried’ can’t begin to describe the king’s state of mind. He just had to know and promised the position of the third highest ruler in his kingdom to whom among his enchanters, astrologers and diviners could unravel the riddle of the seemingly indecipherable words. No such luck.

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Blinding Flash of the Obvious

Dear President Trump,

It’s conceivable you are not a regular reader of these newsletters. In deference to how busy you’ve been since last Friday, I’ll resist directing you to the full archive for the moment. Suffice it to say these missives usually begin with a catchy or sometimes kitschy cultural hook to draw readers in to such spicy subjects as bond market valuation, the prospects for monetary policymaking and one that’s near and dear for you — the state of the commercial real estate market.

But this week, in an open letter to you written in all humility, on behalf of myself and every patriotic American, I’d like to share with you the wisdom of one of our nation’s best and brightest military minds in the hopes you might adapt it to the economic issues you will be tackling during your time in office.

Lieutenant General John W. ‘Jack’ Woodmansee, Jr. served 33 years in the United States Army before retiring with the highest honors. Today, Lt. Gen. Woodmansee is the CEO of Tactical and Rescue Gear, Ltd., an 18-year old company that manufactures and sells goods to the Department of Defense, Department of Homeland Security and law enforcement markets. He’s a huge patriot if there ever was one and I’m sure you will agree we can all stand to benefit from his experience.

It is not uncommon to have mantras by which we live on our desks. When I was on Wall Street, I read and re-read mine every day, “Pigs get fat, Hogs get slaughtered.” That’s a good one, but perhaps better suited to your former day job. In your new role, which includes that of Commander in Chief of the Armed Forces, you would be better served to adopt the quotation Lt. Gen. Woodmansee uses as his guidepost to resolve “complex future requirements,” to borrow his words. (Get with me privately if you’d like to see Lt. Gen. Woodmansee’s Top Four Foreign Policy Priorities for National Security.) Without further ado, you may recognize these words as those of George Orwell:

“Sometimes the first duty of intelligent men is the restatement of the obvious.”

Let’s simplify that, military-style, in case you’re inclined to tweet this in the night. Call them Blinding Flashes of the Obvious that guide you — Bravo-Foxtrot-Oscar — to help sear the words into your memory bank. With that, what exactly are the obvious issues facing our economy? The Lt. Gen. narrowed his list to four, so I shall follow suit.

  1. The biggest challenge is what got you elected, that is the sense among millions of Americans that they’ve been on the outside looking in on the so-called economic recovery which technically started in 2009.

 

  1. Time is the second obvious element that is not on your side. Next Thursday marks the beginning of the third longest expansion in the post-World War II era. Recession will be a reality on your watch, and perhaps sooner than later.

 

  1. As you’ve recognized yourself, the financial markets are wrapped in bubble. You name it, they’re overvalued, some more than others.

 

  1. And finally, your central bank is, as my former boss Richard Fisher said, “a giant weapon that has no ammunition left.”

 

If only the solutions to what ails the economy were as glaringly obvious as what ails it. Patience and fortitude will see you through but you must prepare yourself for what’s to come. And though your initial actions do make it appear as if you believe economic prosperity can be signed into being with the whisk of an executive order, take it on faith that the country needs a lot longer than 100 days to get this economic party started.

That isn’t to say your energy industry actions aren’t to be lauded. Here’s for hoping exports are next. That natural foray accomplishes a national security aim as well. Foreign policy will be greatly strengthened if a certain egomaniac who lives east of Western Europe can no longer hold our allies hostage with the threat of their natural gas supplies being cut off in the depth of winter. Energy exporting and building those pipelines will also take us one step closer to energy independence, which is a foreign-policy and economic positive.

Then there’s the red tape that’s increasingly strangled our proud history of entrepreneurship. Please proceed to dump them at the nearest exit as you’ve promised to do. Let’s start-up and grow small businesses.

Afraid that sums up the low hanging economic fruit you can pick right away. Bringing bigly job growth back requires long term investment in educating our children in science, technology, engineering and math. Do you want to build the factories of tomorrow on American soil? Fine. Rip up the game plan and rebuild our education system, one community at a time.

If you won’t take my word for how critical this is, have a quick look at our literacy stats vis-à-vis other developed nations. As for the desire and wherewithal, Google that photo of single African-American mothers marching across the Brooklyn Bridge to retain charter school funding. Easier yet, pull up footage of this past Tuesday’s protest on the south steps of the Texas state capitol building – thousands of parents demanding tax dollars to help fund optionality in where they educate their kids. It IS broken and you’re not beholden to any special interests. Let’s fix education!

Fair warning: the recession inevitability thing won’t be easy on you. So why not bet on the come? Starting points do matter and, hate to break it to you Dorothy, but we are not back in Kansas circa 1980 anymore. Resisting radical central bank intervention will be a difficult test of your mettle. Helicopter money, negative interest rates, more bond purchases to grow the Fed’s balance sheet further, the abolition of cash. Just say no, which you can do via proxy, which we’ll get to shortly.

When it comes to recessions, we all know that discretionary spending is hit the hardest. That’s where those tax cuts and infrastructure spending you’ve committed to come in. They’re not perfect, but why not anticipate a crisis and simplify the tax code now – like tear it up and start from scratch? That’s called an uphill battle as your own party might not cotton to radical change. But you say you’re an artful master in the deal-making department. Go make one while the sun is still shining and what little time you have left remains on your side.

You’ll note that a purist’s approach to tax reform slaughters many sacred cows in the process. In the event this is intimidating, recall that thing about owing no one anything. Ask yourself a few questions. Will hedge funds, private equity firms and venture capitalists be destitute if you close the carried interest loophole? Do occupants of mansions really need the extra tax break afforded mortgage interest deductibility? And would it be better to bring a big chunk of those overseas profits back home? If you answered yes to that last question, ask around — there are ways to ensure those firms don’t simply plunk what’s repatriated back into share buybacks. We’ve seen how that stagnates economic growth, so why go there?

Tax reform will, by the way, go a long way toward dispensing with the searing criticism you face as you approach the desperate, and bonus, obvious, need to upgrade the country’s crumbling infrastructure. While you might like to have this be a purely privately funded scheme, it’s reasonable to assume that some public funding will come into play – think they call it ‘hybrid’ funding (call up your Australian counterpart for the specifics). The good news is that unlike tax cuts, which can be saved or diverted here or there, investment in bridges, tunnels, roads, schools, hospitals and the like is here to stay and keeps paying economic dividends in the form of the other business spending it induces around it. So, direct and indirect lasting economic benefits.

As for those bubblicious markets, they’re sure to be upset once they get the first whiff of that recession we just discussed. We can agree that letting the air out of the markets will be disruptive, and not in a good Uber way. There are no easy answers on this count. You might be faced with so few options that you’re forced to focus on the really heavy, preemptive, legislative lifting discussed above to mitigate the collateral damage. The best news that can be offered is that reasonably valued assets forge a natural pathway to future economic growth.

Finally, there’s the thorniest issue of all, the Fed. You may note the long road ahead is fraught with legislative barriers. To the extent financing is required, it’s always beneficial to contain borrowing costs. It would be nice to think you could rush into the Treasury market and issue a boatload of 50-year and 100-year bonds. But there are more than even odds that opportunity has been squandered by an epidemic of short-sightedness on the part of your predecessors. Let’s be magnanimous and say they didn’t appreciate the immense fiscal defenses that could have been built up against the backdrop of the lowest interest rates in 5,000 years. Deficit smoke-and-mirrors surely never came into play.

For the here and now, Fed officials seem intent on doubly tightening financial conditions by shrinking the $4.5 trillion balance sheet while raising interest rates. Knowing recessions are an inevitability should give you the resolve to offer the politically-driven doves-turned-hawks two words: “Try me.”

This done, back legislation to reduce the Fed’s mandate to minimize inflation. This will prevent future bouts of mission creep. Next, beef up bank supervision (note, never used word “regulation”) to stay one step ahead of nefariousness. And finally, fill those two open vacancies on the Board, and fast, with individuals who don’t think “no” is a four-letter word. Bring dissent back to the Fed by installing the best and brightest, who also happen to have uncompromising constitutions. Let the new kids on the block carry out your leadership of the Fed by proxy.

Tall orders, one and all? Without a doubt. But at least you’ve got hope, ebullience and inspiration on your side. Surveys of businesses and households suggest you’ve even got the fillip of an economic acceleration in the cards. So seize the moment and embrace the fact that you don’t require a lot of sleep to effectively lead. The hardest deals of your lifetime lie ahead. Don’t back down for all our sakes. And keep Orwell’s words in mind if wily politicians try to bog you down in the weeds. Bravo-Foxtrot-Oscar. An added bonus: it makes a great Tweet.

Sincerely,

We the People

 

PS – for a more detailed road map to upending the Fed, Click “Fed Up” – happy to chat in person at your convenience.

Retailing in America: Bricks & Torture

Retailing in America: Brick & Torture, Danielle DiMartino Booth, Money Strong, Fed UpFor those living under Chinese rule of law and inclined to matricide, patricide or simply high treason, their luck in sentencing matters took a decided turn for the better in 1905.

It was then that after 1,000 years as part of China’s penal code, Lingchi, or Death by 1,000 Cuts, was formally outlawed by the merciful order of Shen Jiaben. Consider this method of torture that eventually, emphasize that eventuality, leads to death, to be as far as opposite as can be from a mercifully speedy beheading by razor sharp sword. The good news, for history’s more squeamish voyeurs, is that we mere mortals can only endure so much pain and terror — the 1,000 cuts was probably an egregious exaggeration. Though accounts vary, in most cases, all that was required were a few well-placed, satisfyingly deep cuts and the condemned lost consciousness, missing the worst of their own cuttingly meted misfortunes.

As with many things throughout history, it would seem that necessity is indeed the mother of invention, even in matters of torture. In the case of Lingchi, we can thank dear old Confucius and some of his closely held ideals as they related to filial piety and the form of punishment deserved, if not fully observed. If you respect mom and dad, and your elders in general, you demand of yourself the highest standards. If however, you fail these most sacred of duties, you could not reasonably expect to arrive whole, as in intact, to your spiritual life, hence Lingchi.

As for being intact, after a messy holiday shopping season, some investors have begun to question how the physical retail body will survive Jeff Bezos’ answer to Death by 1,000 Cuts. The poster child for a slow death in retailing, Sears, kicked off 2017 with the announcement that it would close an additional 150 stores, bringing to 200 the total for the current fiscal year. That’s on top of the 78 shuttered last year and the more than 200 in 2015. By April of this year, the once-quintessential retailer will have fewer than 1,500 stores left standing, down from 2011, when it had more than 3,500.

Six years ago, it appeared that Sears might be the only icon to give new meaning to, “Anchors Away!” The reality today is that Sears has been joined by more than a handful of other names we once thought impermeable to the scourge of E-Commerce.

You would agree it’s been a rough go of it for bricks and mortar. Circuit City started things off a decade ago and was followed by Linens & Things, Blockbuster, Borders, and more recently, Radio Shack and Sports Authority. As is the case with the most recent fallen name, The Limited, many of these once-household names were invaded by private equity kingpins and saddled with untenable debt loads.

Outright bankruptcies, nonetheless, are not where the pain is most acute. That preserve is on reserve for a different kind of demise, an appreciably slower descent into irrelevance. At first, the disruptive power of E-Commerce appeared to apply only to things that could be read or viewed on a screen. More recently, though, any product that’s quantifiable at any level is fair game whether it be Jimmy Choo’s, a trip to Katmandu or Vintage Scooby Doo. Hence the frantic game of catch-up so many retailers are playing to raise their online visibility. The problem is catch-up can be costly. Just ask any retailer closing stores, one not-quite-lethal cut at a time, and they’ll set you straight.

On the other hand, as we well know, many nasty storms proffer a silver lining. Surely all of this capacity coming out of the standing retail universe invites opportunity in some form? Sorry to report this to all those investors looking to capitalize on bargain basement retailers, you can consider yourself warned. Not only is private equity sufficiently burned to steer clear of the sector, E-Commerce sales are not nearly as modest as what’s being reported. Wait a minute – “Modest??”

A brilliant, albeit perfectly private, analyst recently deconstructed the retail sales data, carving out auto, food and beverage and gasoline sales from the pool to arrive at what he calls Relevant Internetable Sales, or RIS. Of the roughly $1.2 trillion in annual retail sales, half can be classified as RIS, or the ‘fair game’ referenced above.

Don’t want to lose you here and shouldn’t even be running the risk as this is simple math. E-Commerce sales represent just north of eight percent of the total retail sales pie. Those are the figures you read about month in and month out. Narrow it down to the RIS half of the total retail sales pie, and lo and behold, E-Commerce’s market share rises to 15 percent of the halved pie.

In the event you think yours truly has fallen into an intellectual ditch, promise there IS a point forthcoming. If you examine the growth of RIS sales back to when the economy technically exited recession, in mid-2009, a distinct pattern emerges. The growth in E-Commerce Sales came out of the gate at a run rate of roughly a third of that of RIS sales. Flash forward to today and the growth rate of E-Commerce sales is half that of RIS sales and poised to soon overcome that of RIS’ sales growth. Looked at slightly differently, the growth rate of E-Commerce sales has risen to 15 percent year-over-year while that of RIS has meandered at a third of that rate.

The click, in other words, is in full cannibalization mode and intent on razing a mall near you in the near future.

It would be easy enough to trail off onto a tangent and begin debating how many warehouse jobs will be created even as traditional retail jobs disappear by the tens of thousands. Amazon, after all, just announced it would be creating 100,000 jobs in the next 18 months. (No, Virginia, a lifer retail sales associate cannot miraculously morph into a warehouse workhorse. But let’s not go there.)

Instead, let’s delve into the driving force behind E-Commerce eating into established emporiums’ empires. A gaggle of researchers from Harvard, Stanford and the University of California recently released the findings of a study that delved into the lifetime earnings capacity of different generations of Americans dating back to those born in 1940, one in the same with those who hit 30 in 1970. They then compared subsequent generations born 10 years hence – 1950, 1960, and 1970 – all the way through those born in 1980.

What, pray tell, did the fine professors find? In a nutshell, the impetus behind the exodus.

A neat 92 percent of those born in 1940 made more than their parents did, defining the American Dream, baseball and apple pie. Leap ahead to the baby class of 1980, though, and the legions of leap frogs dwindles to 50 percent. Do you recall that thing about necessity and motherhood and invention? What if, just say, Bezos was such a visionary he foresaw demographics and an atrophying economy necessitating the disruptive forces that manifested themselves in the form of E-Commerce and his brainchild Amazon?

OK – maybe that’s a stretch, even for me.

But Bezos, born in 1964, has been able to connect a dot or two since founding a company that back in the day committed the comparatively cordial sin of putting book stores out of business. That toll was tentative and tame compared to the devastating damage being exacted on countless contemporary chains today.

The fact is, pricing power is dead, having been tortured into extinction. Yes, yes….hallucinogenic harried housewives who’ve convinced themselves they’re busy could well give Alexa a run for their husbands’ money, barking out orders for everything from 52 Weeks of Flowers a Year to 50 Shades of Grey’s sequel’s sequel’s sequel (seriously?).

For the rest of us slaves to Amazon Prime, it could come down to affordability, or the lack thereof. Plan on the punditry assuring you in the months to come that the growth in credit card spending is as clear a vote of confidence in the country’s future as any out there. Consumers aren’t telling you they’re optimistic, they’re showing you, by golly!

While it’s true, that the plastic in peoples’ wallets has caught fire, the incendiary indulging has yet to catch up with still-inadequate income growth. The latest figures from November, lamentably reported with a lag, tell us that inflation-adjusted credit card spending is outpacing that of inflation-adjusted wage growth by 2.8 percentage points, the widest margin of the current expansion, and discernibly greater than October’s gap of 1.7 percentage points.

You tell me – are the rest of us confident or desperate to make ends meet?

Better yet, how much better or worse off will the collective ‘we’ be when tens of thousands of sales associates are shoved out of the workforce? These working folks are some of the last of the non-college-educated souls toiling away in our midst, grinding out honest livings. As things stand, the pay gap between degree holders and those who weren’t fortunate enough to study after high school is at its widest point on record. Wherever exactly do we go from here?

Few care to admit that most of the malls in America will disappear in the decade to come. For far too many, retail executives included, it’s a simple matter of not being capable of letting go of the past, which is understandable. Nevertheless, and as much as we’d like to believe differently, economic and demographic realities, and let’s face it, cultural shifts in shopping behavior, beg to differ. We do, though, have a choice: we can begrudgingly acquiesce into acceptance, by way of 1,000 blood-curdling cuts, or move on to what will be the next generation of retailing in America, as unrecognizable as she may be.

 

Click on one of the links below to purchase Fed Up:  An Insider’s Take on Why the Federal Reserve is Bad for America.

Amazon.com | Barnes & Noble.com | Indie Bound.com

With Great Pride, I Give You Fed Up

With Great Pride, I Give You Fed Up, Danielle DiMartino Booth, Money Strong

Dear Friends,

Today I am proud to announce that the book I have spent the last two years working on – FED UP: An Insider’s Take on Why The Federal Reserve is Bad for America – will be available wherever books are sold on February 14th.  Consider it a Valentine’s Day Forget Me Not to the country. FED UP is not only important to me, but it’s a critical read for every citizen of this country, especially now. As I stated in my Bloomberg piece last week, President Elect Trump has the opportunity to rebuild the Federal Reserve from the bottom up and reshape our economy in unfettered, uncompromised fashion.

In Fed Up, I pull back the curtain on the Fed and explain what really happened to the economy after that fateful December day in 2008, when interest rates were taken to the zero bound. I elaborate on how a cabal of unelected academics within the Federal Reserve made fatal policy decisions based not on the direct impact it would have on the average American household, but rather on their theoretical models that effectively muffled the voices of this country’s working men and women.

Please know that without the weekly Money Strong newsletter and your loyal support, there would be no book. Accept my humble gratitude for your undying encouragement with this gift of an early look at the book, before it hits the stands. For those of you who choose to order the book in advance, I’ll send you an early sneak peek. Please click HERE for more info.

I cannot tell you how excited I am to embark upon this journey with you and, as has always been the case, welcome your feedback.

All the best,

 

Danielle