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

The Corporate Bond Market: Binge-Borrowing

The Corporate Bond Market: Binge-Borrowing, Danielle DiMartino Booth, Money Strong, Fed UP: An Insider's Take on the Why the Federal Reserve is Bad for America

Celery and raspberry? Marathon miles of Sudoku and crossword puzzles? Extra reps at the gym? Binge away.

‘Tis the season after the season, that other most wonderful time of the year when it’s a challenge to get a machine at the gym and resolutions are resolute, at least until February or a more intriguing deal comes along. What better way to make amends for that huge holiday hangover that crescendos with so many a New Year’s Eve bash?

Some of us chose to ring in 2017 in a substantially more subdued manner that nevertheless entailed binging of a decidedly different derivation. Enter Netflix. Yours truly must confess that closet claustrophobia was the culprit in keeping this one indoors coveting the control, confining the choices to richly royal romps. It all started innocently enough, with a recommendation to catch The Crown, which has just won a Golden Globe. The devolution that followed began in Italy, with Medici, stopped over in France, with Versailles, and round tripped back to England, with the epic saga that kicked off the modern day, small screen genre, The Tudors. At some point hallucinations began to give the impression that all the series’ stars had British accents. Wait, they actually did.

Thankfully, at some point, bowl games snapped the spell and reality rudely reared its redemptive head before anyone’s else’s head rolled (those royals were a bloodthirsty lot!). Sleep and sanity followed.

Sadly, the same cannot be said of borrowers of almost every stripe these days. For those tapping the fixed income markets, the borrowing bingefest is conspicuous in its constancy. Not only did global bond issuance top $6.6 trillion last year, a fresh record, sales are off to a galloping start thus far in January.

In the lead are corporate bond sales, which accounted for $3.6 trillion of last year’s super sales. To not be outdone, investors ran a full out sprint in the new year’s first trading week, “shattering,” not breaking records, in the words of New Albion Partners’ Brian Reynolds. In the first three trading days of the year alone, investors bought $56 billion of new corporate bonds. Some context in the context of what’s been one record-breaking year after another in issuance:

“An average month in recent years would see investors buy about $130 billion of corporate bonds,” noted Reynolds. “Investors just bought more than 40 percent of that monthly average in just three trading days!”

For those of you who have ever had the pleasure of a good, long visit with Reynolds, he is anything but prone to using exclamation points. (!)

In any event, waves of heavy issuance often coincide with big deals carrying ‘concessions,’ or enticements in the form of higher yields than what the issuer’s existing bonds offer. Despite 2017’s already extraordinary deal flow, a good number of issues stood precedence on its head, coming out of the gate with negative concessions. “It’s as if corporate bond buyers are rabid, as if there are not enough corporate bonds to go around, even though there is a record amount of corporate bonds!” added Reynolds.

The kicker – there always is one when fever sets in – is that issuers are earmarking proceeds as generically as they can, for “general corporate purposes.” In other words, they can use the sales proceeds for whatever they desire, including share buybacks.

But wait! (Can exclamation points be contagious?) Haven’t we just learned that buybacks took a nosedive in the latest Standard & Poor’s data release? That quarter-over-quarter share repurchases had fallen by 12 percent and tanked by a stunning 25.5 percent over 2015’s third quarter? What superb sleuthing you’ve done, Watkins!

And right you are, except this one little thing. The pre-election world is so passé.

What are the odds share repurchases reaccelerate under the new administration? In one word ‘growing,’ fed by two springs. The first is mathematically driven. Calpers, the country’s largest pension, recently announced it would be “gradually” lowering its rate of return target to 7.0 percent from 7.5 percent. In the nothing-is-free department, estimates suggest taxpayers will have to cough up an additional $2 billion per year to make up for what the pension no longer anticipates in the form of pension returns.

(Suspend reality as the pension returned 0.61 percent in its most recent fiscal year ended June 30. We could ride off on a tangent but link to this if you’d like to hear more on pensions’ prospects http://dimartinobooth.com/will-public-pensions-trumps-biggest-challenge-2/)

The funny thing is California governor Jerry Brown just announced he anticipates the state will run a $1.6 billion deficit by next summer as the tax base continues to atrophy driven by – wait for it – rising taxes. And where are a lot of those tax dollars going? You guessed right again – backfilling that yawning pension gap. Will the exodus out of the Golden State continue, leaving only the uber-wealthy and economically immobile behind? You tell me.

Promise there’s a point here. Calpers will lead the way to other pensions also lowering their rate of return targets, which will in short order trigger more in the way of rising taxes and, it follows, more actual monies pensions allocate to fresh investments to thereby generate those fairy tale returns. To stay deeply deluded and convince oneself (still) high returns are achievable, the de rigueur investment is private equity credit funds in their many high voltage varieties. At Reynolds’ last count, pensions have voted a record dollar amount into credit every single month since the stock market panic of 2015.

And the momentum just keeps building. December 2015’s record pension credit fund inflows of $7.3 billion were blown to bits by this past December’s $10.6 billion – and that’s before any leverage is put to work. As we have hopefully learned, the credit machine feeds the buyback machine, and away we go. Tack on the prospects of a Republican Congress facilitating the repatriation of all that offshore cash and you’ve got the makings of a true buyback renaissance. Oh, and by the way, a seriously overvalued bond market.

Jesse Felder, president of Felder Investment Research, recently put pen to paper to quantify the value investors get today. What sets Felder apart from the crowd, in a good way, is that he factors in the backdrop of record bond issuance feeding what had, until very recently, been a record pace of share buybacks.

“When you look at corporate valuations more comprehensively, including both debt and equity, we have now matched that prior period,” Felder wrote in a recent report, referring back to peak dotcom bubble valuations. To arrive at this conclusion, he compares the value of nonfinancial corporate debt and equity relative to gross value added, an effective gauge of enterprise value-to-sales.

How does Felder calculate such a clever metric? With the help of some Federal Reserve data, no less, he incorporates the buyback bout to create a holistic valuation methodology to capture comprehensive corporate valuations. Because one frenzy, bond sales, has fed the other, the stock market’s historic run by way of share count reduction, it’s simply disingenuous to not marry the two. You can want to try, but it’s futile to examine bond or stock valuations in a vacuum.

“This has essentially been a massive debt for equity swap that serves to reduce the value of equity outstanding while greatly expanding the amount of debt outstanding,” added Felder. “Equity-only valuation measures fail to account for this phenomenon. This measure incorporates it.”

The point, though, is not that the current rally will necessarily buckle under the weight of bloated valuations. To the contrary, pensions’ sheer buying power, their trillions upon trillions of dollars of monies to be allocated, can indeed make it appear that we are now in 1999, or better yet, 1996. But don’t be fooled – you’re still paying a dear price to play with fire.

So stop yourself the next time you hear some talking head reassuring you that the price-to-earnings ratio on a trailing 12-month basis is dirt cheap. Fight the temptation to validate your sense of security by proclaiming, “Wow, that erudite expert has some set of lobes!” Don’t just move on to the next episode, hitting BUY on that equity ETF. Stop and ask yourself just how profoundly this deep thinker has probed into the true drivers of valuations in recent years. More to the point, ask yourself whether the source is clean or compromised.

If you need inspiration, look to some of the greatest lines ever penned in Politics and the English Language by George Orwell: “The great enemy of clear language is insincerity. When there is a gap between one’s real and one’s declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink.” And yes, Orwell was English. You can safely read his words aloud, with a British accent.

The Labor Market: The End of the Innocence?

One of the first of life’s lessons we all learned is that we need not rush life; it will do that for us and in the end against our will.

The inspiration for this wisdom could well have sprung from Ecclesiastes wherein we read these peaceful words: To every thing there is a season, and a time to every purpose under the heaven. Co-writers Don Henley and Bruce Hornsby embraced the spirit of this message as the 1980s were coming to a close. You must agree 1989’s The End of the Innocence, that haunting and mournful ballad, was just the coda needed to move on to the last decade of the last century.

“Let me take a long last look, before we say goodbye,” the song asks of the listener who can’t help themselves but to listen.

Many veteran investors, those who don’t need to be reminded about the Reagan era because they were there, may be feeling a bit more wistful as they peer over the horizon. They have lived through extraordinary economic times and maybe even recall the early 1970s, the last time initial jobless claims were at their current historically low levels. They know, in other words, this can’t go on forever, that we are nearing the end of our own innocence.

Federal Reserve Chair Janet Yellen has been adamant that economic cycles can’t die of old age. At the end of this month, we can proclaim to be living through the third longest expansion in postwar times. The parlor game occupying those on the Street these days entails devising scenarios that can push us into the second, or dare we dream, longest expansion of all.

The Wall Street Journal perfectly captures the infectious optimism, the yearning to keep that dream alive, by asking this in a headline: How Low Can the Unemployment Rate Go? Rather than keep you in suspense, the article’s answer is as follows:

“Assuming the economy adds around 200,000 jobs a month in 2017 and the labor-force participation rate stays relatively constant, the unemployment rate would fall to 3.9 percent by the end of the year, according to a model maintained by the Federal Reserve Bank of Atlanta.”

If we do get there, a big if, we are sure to be staring down the barrel of appreciably higher interest rates and a flat, if not by then, inverted yield curve. The only precedent is, you guessed it, that which occurred in 2000, when the unemployment rate hit 3.6 percent as the longest cycle of all time was finally flaming out. Economics 101 teaches one tenet above all – that the unemployment rate is the most lagging within the data universe.

A recent visit with Dr. Gates, that steel-eyed sleuth, corroborated this maxim. “The unemployment rate is the single, most visible economic indicator for households. It’s easy to understand, black and white. Up is bad, down is good,” Gates observed. “If we keep getting downside surprises, it will feed even more consumer optimism. That happens late in the cycle.”

What goes hand in hand with these late cycles guideposts? Since you asked, that optimism Gates cites tends to correlate with households overreaching their paychecks, which is exactly what we’re seeing.

When adjusted for inflation, credit card borrowing is up 4.5 percent over last year, a full two percentage points above wage income, which is up 2.5 percent over the same period. That’s a new high for the current cycle. At 2.9 percent, inflation-adjusted spending is also running ahead of wage income. These data are validated by separate data that shows state withholding tax collections are way off last year’s figures.

“Vulnerabilities in household demand don’t happen overnight; they take time to rise to the surface,” Gates cautioned. “Households aren’t overstretched yet, but they’re getting there. Just like corporations substitute debt for profits late in the cycle, households also are starting to do just as they ride the wave of Trump optimism. Eventually this will run its course.”

The bottom line is households are really happy about the Trump win and they’re showing it by spending beyond their means. If we haven’t yet seen the low in the unemployment rate – a big if – expect many among the reluctant to be emboldened to jump ship at the prospects of a higher paying gig.

Before rushing out to buy that new SUV, as we know countless millions of Americans have, it might be wise to make note of the recent run in the length of the average workweek. As The Liscio Report notes, at 34.3 hours, the workweek has drifted down from 34.4 hours the first half of 2016 and an average of 34.5 hours from 2014-2015. Their conclusion: “This suggests there’s not a lot of pent-up hiring demand.”

The marked slowdown in temporary hires in December would agree with their assessment as would the trend that’s emerged among retailers. Hiring announcements in the critical September to December period fell to the lowest level in seven years, coming in just a hair above 2009 levels when the economy was on its knees. The paltry 6,000 announced retail hires in December’s nonfarm payrolls report, a third of its long-term average, could be but a precursor to what’s to come in the wake of Macy’s and Sears store closure announcements.

The mirror image is transportation and warehousing, where 15,000 workers were added to payrolls last month, three times the norm. Call that the Amazon effect whose sales figures were in a word, ‘astonishing.’ Bezos & Co. dominated ecommerce holiday sales to such an extent that at nearly 40 percent, Amazon’s share of the pie was ten times that of the next closest e-tailer’s numbers.

The odds are it will come down to a race to the Hill to determine if it’s possible to breathe new life into the last gasp of the current cycle. Will the stronger dollar and tighter financial conditions overwhelm profit margins before tax reform legislation is passed and validates all of that cocky confidence? Good question. If Trump expends all of his political capital on repealing Obamacare and confirming his nominees, the economy could be in for a reality check.

And then there are the conspiracy theorists out there who have begun to spread rumors that Yellen could have a Trump card of her own up her sleeve. The market continues to tell itself we’ll be on the beach by the time the Fed first hikes rates come June. A surprise hike at the March meeting would thus send a loud and clear message that there is more 2017 tightening to come, more than any investor expects and spending bill could withstand if a yield curve inversion is in the making. But wait! Politically motivated maneuvers amount to less than ladylike behavior from the Fair Chair. Surely not!

Dr. Gates for his part expects 2017 to be the year of Red Swans. Come again? “Black Swans don’t happen first. Red Swans precede them,” he explained. “First comes the heat and then they burn out. What we’re left with is Black Swans.” Hey, don’t shoot the messenger on that one. He said it. Plus, the heat, fueled by more credit card spending, subprime car sales and higher wages for coveted skilled workers, feels good when the economy is threatened with catching a chill.

Look. No one wants to see the end of any prosperous era, even one that’s left so many behind. But die off every era eventually does, some quicker than others. To the bulls who refuse to acknowledge that even the best intentions cannot stave off inevitabilities, Henley invites you one and all to, “Offer up your best defense.” But we all know how the song ends right after that – “But this is the end. This is the end of the innocence.”

The Vanity of Central Bankers and the Common Sense Rule

The Vanity of Central Bankers and the Common Sense Rule

Some wedding gifts just keep on giving, even after the celebrated union upon which they were bestowed has failed. That would certainly be true in the case of Carly Simon and James Taylor, whose notoriously rocky marriage ended in 1983. The timing of her November 1972 wedding marked more than a vow to Taylor, it coincided with Simon’s gift to pop music and the release of “You’re So Vain,” which ripped to the No. 1 spot on the charts and still retains the ranking of 82nd highest on Billboard’s Greatest Songs of All-Time. What a generous gift!

But, was it for the duo? Might it just be possible this lasting gift bred some not so blissful turbulence in the marriage? At the time, speculation swirled around the obviously vainglorious but mystery male subject. Was it Warren Beatty, David Geffen, Mick Jagger, Kris Kristofferson, Cat Stephens or James Taylor himself? The list went on and on. As of November 2015, Simon has only divulged that Beatty was one of three the lyrics reference. Taylor is not among the remaining two mystery men.

It’s a safe bet that a Taylor of a completely different stripe is far from being a mystery man in Janet Yellen’s appreciably less torrid past. In fact, the roles might even be reversed in Yellen’s world, with a slew of economists lamenting her vanity in rejecting them. The eminent John Taylor would be first in line, given that no less than his namesake rule used for devising monetary policy has been so explicitly and publically snubbed by the Chair.

The Taylor rule debuted in 1993 and continues to grow in its appeal thanks to the simplicity with which it can be executed. Though Taylor engaged the mandatory calculus to build his model, the inputs are elegant in their straightforward real world ease of application. At the risk of being overly simplistic, the Fed should set interest rates based on targeted vs actual employment and inflation levels; an ideal interest rate is consistent with full employment which is theoretically in sync with potential economic output.

If inflation is above target or if the economy is running too hot, as in above potential, the Fed should raise rates. If inflation is too low or economic growth too slow, well then the Fed should lower rates to encourage growth. In a perfect world, inflation and economic output are neither too hot nor too cold. That just right Goldilocks place in the ether calls for a ‘neutral’ interest rate of two percent, where the fed funds rate has historically hovered.

Here, the situation becomes perplexing in that it is the very simplicity of the rule which renders it an abomination to the reigning elite. Their preference since the crisis broke has been to embrace overly complicated models and deploy obfuscation to drive interest rates to the zero bound and beyond with blind abandon.

To add insult to injury, Yellen herself has conceded that the Taylor rule has long since signaled rates were too low. This is what she had to say in a March 2015 speech:

“Even with core inflation running below the Committee’s 2 percent objective, Taylor’s rule now calls for the federal funds rate to be well above zero if the unemployment rate is currently judged to be close to its normal longer-run level and the “normal” level of the real federal funds rate is currently close to its historical average.”

How do you fix that if you’re a labor economist who just knows, knows in her bones, that zero interest rates will ultimately lure back permanently displaced workers? Why you change the assumptions, of course! And that’s just what she did.

In that same speech, Yellen went on to explain that if you substituted in her new and improved assumptions, the rule miraculously produced different results. She began with the supposition that despite how low the unemployment rate was, ‘significant slack still remained in the labor market.” She furthermore posited that it would be more reasonable to assume the historic equilibrium rate of two percent be replaced by zero based on the suggestion of “some statistical models.”

Shortly after the speech, Taylor criticized Yellen’s modifications, writing that “little or no rationale” was given to explain cutting the equilibrium rate to zero. “This is a huge controversial issue deserving a lot of explanation and research,” Taylor warned.

Taylor summed up Yellen’s approach of massaging the model as such: “This gives the appearance that one is changing the rule or the inputs to the rule to get an answer. I do not think that reason would go over well in Congressional testimony.”

And yet, so many of Taylor’s peers in the economic community continue to feed policymakers’ penchant for contorting the world into a fantastical one that only exists in those leaders’ dreams. Is it any wonder so many of today’s leaders in central banking sport God complexes?

Sadly, as has been the case so many times since the financial crisis broke, an opportunity has been squandered. A more aggressive path to normalization would have been appropriate as per Taylor’s rule and even Yellen’s own rule for gauging the fortitude of the labor market…then. Today it appears as if the current cycle has set sail for the history books. With interest rates grounded close to zero, the real question is what miracle can the Fed contrive for the attack on what’s to come?

Given anxieties are ratcheting up fast, it will be hard to comply with this next request. But try. Try to set aside those worries for a moment and look as far out into the future as you can see. Picture the following: the economy has weathered the next recession and hopefully lived to fight another day. Now ask yourself this: What lessons might we apply from today to the post-recession world of tomorrow?

As yours truly marks the one-year anniversary of her departure from the Fed this week, a new kind of rule comes to mind. Call it the Common Sense Rule. Its input is experiential in nature drawn from economies across the globe. Its deployment is simple to the extreme:

Raise the floor on interest rates to two percent and vow to never again breach that raised floor.

Will such a radical commitment ever come to pass? It’s impossible to say. But it would be a refreshing change from the norm that’s prevailed for near on 30 years. And wouldn’t it be a relief to return to a rules-based discipline instead of the smoke and mirrors of today’s undisciplined approach where contrived language, convoluted math and the always popular throwing spaghetti against the wall to see what sticks are employed with disastrous results?

Acknowledge that there is no single certainty in this world other than that of uncertainty. Or as Taylor himself wisely observed, “Uncertainty exists in the real world; you can’t ignore it whether you use rules or discretion.”

Waiting for the Godot of central banking has caused this nation undue harm by anesthetizing U.S. politicians and households to the inherent dangers of over-indebtedness. Period. End.

That said, with all deference to Ron Paul and his acolytes, the Fed does not need to be ended. We are not, nor ever shall be, a third world banana republic. Therefore, a central bank in some form is a given.

That is not to deny that the Fed is sorely in need of reform. In fact, a total re-engineering would seem to be in order, applying the same methods many of us learned in business school. Who said that in order to exact meaningful change, one must first create chaos? Let’s do just that.

Vanity has no place in central banking, nor should it. But that very weak and vainglorious predilection seems to have nevertheless crept into a group of leaders tasked with staying above the fray. We can hope that public outrage tempers the hubris driving our current monetary policymakers to such extremes. We can hold out for Common Sense ruling the day. Let there not be those among us “So Vain” that they believe it is all about them and not “We The People.”

FedSpeak: Lost in Translation

Bill Murray, who has never been one to be stumped for words, is considered to be a veritable master of improvisation. Few appreciate that the star comedian and accomplished actor has also proven himself to be a fair philosopher.

On July 25, 1980, exactly three months and 10 days after Jean Paul Sartre’s death, the comedy classic Caddyshack premiered. It was then that moviegoers nationwide first experienced Murray’s amazing gift for that renowned improvisation. It took all of six days for his character’s role to be filmed. One scripted line notwithstanding, every word Murray’s groundskeeper character Carl Spackler uttered was off the cuff. In one particularly memorable scene, Spackler came eye to eye with an infuriatingly fond and furry rodent and warned:   “In the immortal words of Jean Paul Sartre: ‘Au revoir, gopher.’”

When asked in a 1984 interview about his uncanny ability to think in front of the camera, Murray waxed perfectly philosophical: “I don’t believe that you can give the same performance every take. It’s physically impossible, so why bother? If you don’t do what is happening at that moment, then it’s not real. Then you’re holding something back.” Over 50 feature films later, the world is a better place for his never having held anything back.

At the opposite end of the spectrum lie Federal Reserve speakers, most of whom appear to be suffering from an inability to contain themselves to the detriment of their audiences. So damaging is FedSpeak, so to speak, that it’s become the Fed’s greatest liability, chipping away at what little credibility monetary policymakers have left in reserve.

Perhaps what is most disturbing about today’s stretch of FedSpeak is how it parallels with the months preceding the Great Recession. Over the last few weeks, Fed officials appear to be mystified at the tea leaves staring back at them from the bottoms of their cups despite there being no question of ambiguity.

The most recent spate of broadcast obliviousness began shortly before Memorial Day. San Francisco Fed President John Williams, Yellen’s protégé and confidante, remarked that he anticipated that 2016 would likely resemble 2015 with, “strong domestic growth, especially in the service sector (with) some subtraction from growth because of the strong dollar and weakness abroad.”

Williams’ Council on Foreign Relations interview ended with his opining that quantitative easing could be deployed once again in the event of recession as it had been successful in, “improving financial conditions and boosting the economy. So we could go back to that.” (The stock market must be woefully disappointed he won’t vote again until 2018.)

Next up, in a perfectly timed CNBC interview taped the Thursday before the May jobs report, Charles Evans, Chicago Fed’s resident uber-dove, observed that timing was not of the essence with respect to future rate hikes. As for the possibility of a ‘Brexit,’ he played it down: “I’m not sure it plays an important role in our policy making beyond us just monitoring the U.S. data and general global financial conditions and having confidence that things are still on a good track.”

Among the gems voiced in the wake of the disastrous data, Boston Fed President assured a Finnish audience that it was his, “expectation that economic conditions will continue to gradually improve, which in turn would justify further actions to normalize policy, continuing a gradual return to a more normal rate environment.”

As for the Chair herself, in the weeks that preceded the payroll report, Janet Yellen pushed up market expectations for a June 15th rate hike to 34 percent from 28 percent with assurances that it would be reasonable to raise interest rates in, “the coming months.”

Then, in what can only be described as a quick flip, Yellen summarily dismissed the specificity of a time frame conceding that the jobs report left policymakers “wrestling” with fresh doubts: “Is the markedly reduced pace of hiring in April and May a harbinger of a persistent slowdown in the broader economy?”

Step back for a moment and ask yourself one question: What data are this army of 1,000-plus PhDs studying?

There is nothing subtle in the marked deceleration in the run rate of job creation. Two years ago, monthly job gains averaged 260,000. By the time 2015 had ended, that average had slid to 221,000. Narrow it down to the last twelve months and gains slow to 200,000. And over the last six months? 170,000. Last three? 116,000 dragged down by downward revisions of 59,000 positions in February and March. As for the merry month of May, that would be 78,000 including the striking Verizon workers. P.S. Temporary jobs fell by 21,000 last month.

Set aside all of the unemployment rates in their various forms; they’re beyond misleading given the unreliability of the denominator used to calculate them, as in the ever shrinking and decidedly un-dynamic labor force. A rudimentary observation of monthly job creation tells you everything you need to know, no existential crisis necessary, no grappling gray area to wrestle. Period.

The alarming lack of acuity in gleaning trends confoundingly reaches much deeper when you consider the leading indicator data to which all Fed economists have access. It’s not as if they’re cut off from the same information that helps their private sector peers guide their clientele.

Take AIG’s Jonathan Basile. He’s a unique economist among economists in that it’s his express mandate to detect trends, as opposed to the dreaded one-month aberration, before they emerge onto the scene. As Head of Business Cycle Research, Basile literally dissects the entrails of data releases for relationships and signals. One would have to presume (hope?) that the Fed too had such an individual, perhaps even a few, also directed to detect emergent economic developments.

Back on March 29th of this year, Basile heard an alarm bell ringing in the distance. It had been seven months since survey respondents had indicated that jobs were easier to get than in the prior month. The next three to six months would thus present a test to the economy that could well be on the precipice of recession. His warning: “We’re going to get a downside surprise in nonfarm payrolls in the next few months, something in the double digits.”

In late April, Basile worried that something would have to give seeing as jobless claims were at the lowest level since Nixon was in office while expectations for rising unemployment, which have since receded a bit, were at a 26-month high. At the time, he added that the number of mergers being called off, coupled with the rolling over in announced deal size could well validate concerns about a rise in joblessness. “OK, so we haven’t seen a better streak of low jobless claims since 1973,” Basile concurred. “The way I see it though, the only way for jobless claims to go from here is up.”

And then we got the bombshell of consumer credit increasing by $30 billion in March led by households tapping their credit cards at the fastest pace since 2001. I raised the data point with Basile at the time, which in turn set off yet another alarm bell sending him back to a relationship that hadn’t flared up since the onset of the last recession. A quick look at the data verified that households’ income expectations six months out and credit card usage had indeed begun to move in opposite directions, a telltale sign of budgetary stress.

In mid-May, Basile noted a shift in the “pain trade” in jobless claims. Beginning in January 2015, energy states had been in the unfortunate position of suffering the largest annual change in jobless claims. But that run finally ended in May, leaving Michigan in the dismal driver’s seat though Michigan is hardly alone. Some 24 states showed initial jobless claims were higher than a year ago leading Basile to quip, “We haven’t smelled breadth this bad in some time.”

The final straw came down on June 1st with the release of the Conference Board’s May data on Help Wanted Online ads. After a flat March and April, May suffered a sizeable falloff in online job openings, which slid by 285,800 to 4.8 million, the largest decline since the Great Recession. The Conference Board’s chief economist Gad Levanon said that May continued, “a pattern of weaker demand in 2016,” adding that, “we are now seeing some clear signs of softness in labor demand.”

Corroborating the Michigan move, the data showed losses were widespread across all states and major metropolitan areas. The March and April weakness would also be subsequently confirmed by the downward revisions announced to March and April payroll gains. And finally, companies have stopped reposting help-wanted ads, a sign their balance sheets can no longer withstand the additional labor costs that they could have just a few months back, as clear an inflection point as any.

“More and more I’m convinced the Fed wants to raise rates so it has water in the tank to put out the next fire,” Basile worries. “That said if the Fed raises rates this summer, it will be a policy mistake.”

Add it all together and Yellen’s favored “kitchen sink” labor market indicator, the Labor Market Conditions Index (LMCI), says it all. The index of 19 job market gauges fell to -4.8 in May, sliding by the most since the 2009 recession. Meanwhile, March and April were – you guessed it – revised downwards, further into negative territory.

Do you see any gray area? Or do you instead worry that Fed officials are willfully blind when they run their mouths as if everything is going to be just right.

In an effort to describe how beyond clueless Fed speakers seem to be of the destructive power of FedSpeak, one can once again borrow from Bill Murray’s screen moments. To quote his Ghostbuster character Peter Venkman, “Why worry? Each of us is wearing a nuclear accelerator on his back.”

“With respect to the potential response from the Fed, we are seeing writ large how much they have bungled the exit from their extraordinary experiment,” warned Bookmark Advisors’ Peter Boockvar. But it goes beyond bungling. Not only has the Fed failed to act, its policies have actually created the very impediments to growth the economy now faces.

In the real words of Bill Murray from a 2012 interview, “It’s extremely powerful to say no; it’s really the most powerful thing to say.” It would be nice to be on the other side of Fed officials having long ago harnessed the power of the word ‘no’ rather than staring down the barrel of an abundance of acquiescence.

To borrow one more line from Murray, this time from his Lost in Translation character who finds himself struggling with the foreign culture of Tokyo’s nightlife, “What kind of restaurant makes you cook your own food?”

My slight variation on this question to Fed officials who remain woefully out of touch with the damage their policies have inflicted is, “What kind of central bank doesn’t have to eat its own cooking?”

Venezuela Burning

Venezuela Burning

Sometimes art imitates life. “I know it was you, Fredo. You broke my heart. You broke my heart!” So said Michael Corleone to his older brother just after gripping his face and delivering a kiss of death. The infamous scene was based on the real life events of January 1, 1959. The occasion? A New Year’s celebration in downtown Havana and the moment in history when Fidel Castro overthrew the dictatorship of Fulgencio Bautista. The chillingly memorable scene from the 1974 classic Godfather II foretells the retribution for Fredo Corleone’s ultimate deceit.

At other points in time, life imitates art. So it was with an inaugural speech on February 2, 1999, some 40 years after Bautista fled Castro and Cuba, when Venezuelan President Huge Chavez betrayed his predecessor, Rafael Caldera. Caldera had granted Chavez amnesty and released him from prison in March 1994 following Chavez’s incarceration stemming from a failed 1992 coup attempt sanctioned by none other than Fidel Castro himself. Now it was the traitor doing the kissing.

It is fitting that Caldera, who died in December 2009, did not live to see the Venezuela of today, a sad failed state reflective of the very man he helped bring to power. After all, Caldera had publically defended the unsuccessful coup attempt. In his words, “We cannot ask people with hunger to immolate themselves for a democracy that has not been able to give them enough to eat.” Those words, spoken February 4, 1992, would help to elect Caldera to a second term as Venezuela’s president in 1994. It had been 20 since the end of his first presidential term.

Today Venezuelan children are dying of hunger. Premature babies perish as electrical outages snuff the incubators critical to their survival. Those wracked with disease cannot receive the treatment they must have to battle their ailments; diabetics and cancer patients die unnecessarily every day. In the worst cases, as has been documented by numerous media outlets, hospitals have become menaces in and of themselves with operating theatres unfit for use. Patients die in pools of their own blood.

Such is the inconceivable reality of the politically-divided, drought-ridden country that rests upon the world’s largest oil and iron ore reserves. How has Venezuela spiraled so far out of control in the wake of the commodities supercycle that built modern-day China, one that filled the coffers of resource-rich exporters worldwide?

A bit of history helps explain how events have tragically aligned. As is the case with many regime changes, Caldera entered office just as financial crisis was descending. Banco Latino had failed before his term had even begun and was followed by the failure of 10 more banks. Deposits were lost and the government had to step in to provide aid to the financial sector.

The economic devastation that followed was severe. An exchange rate policy imposed by the government caused prices to skyrocket, rendering the necessary supplies to conduct business prohibitively expensive. More than seventy thousand small and medium-sized companies went into bankruptcy.

To staunch the deepening crisis, Caldera reneged on a campaign vow to never accept monies from the International Fund (IMF). Of course, no aid is granted without demands. Satisfying those demands planted the seeds for the rise of the Chavez socialist experiment and the inevitable crisis ignited.

The IMF’s requirements resulted in a 70 percent devaluation of the bolivar, the liberalization of interest rates and the continued privatization of the nation’s industries. On the flipside, fuel prices also rose by 800 percent, devastating much of the populace already reeling from inflation that had put the basic necessities of food and clothing out of their reach.

No doubt, the imposition of economic strictures in Venezuela laid the groundwork for the rise of socialism. The income divide was readily apparent to this Caracas resident in the summer of 1995. The occasion for said residency was an internship at Sivensa, a steel giant that happened to be on the receiving end of the push to privatize firms.

The drive into Caracas from the airport on Venezuela’s coast was unforgettable, and yet, as we neared the capital, unspeakable. Such was the unmistakable depth of wretchedness and poverty being endured by those many thousands who existed amid the squalor of makeshift slums barely clinging to the hillsides outside the city. Anyone seeing the stark contrast between the luxurious and carefree lifestyle enjoyed by the elegantly-dressed but impervious Caracanyan haves, who danced their nights away while living in the shadow of those Godforsaken slums, would have to question what was to come. The words, “This cannot end well,” came to mind.

Over 20 years later, things are not ending well, and they do indeed appear to be ending. One company after another has shuttered as the government has cut off lines to the basic foodstuffs needed to produce the goods that stock supermarket shelves. And airlines have been forced to pull up wheels and abandon their routes in and out of the country given the $5.3 billion in un-patriated airline revenues the government has effectively frozen via currency controls. Isolation is descending and fast.

The hope is that the rising opposition can prevail and effect a peaceful transition. In spite of that opposition’s multitude of imprisoned leaders, about half of the four million signatures required to oust President Nicolas Maduro are already in hand.

Amid all of this is the fear is that the government’s latest decision to satisfy the country’s debt obligations, at the expense of providing the needed funding to address the overwhelming humanitarian crisis, will throw the country into civil war. Foreign reserves are quickly dwindling to the $10 billion mark, one-quarter of what they were as recently as 2009. Meanwhile, PDVSA, the state’s oil behemoth, is said to be pursuing debt exchanges with its oil servicers, desperate measures designed to buy time that’s fast running out.

And yet, if Maduro’s government can stall the referendum vote to January 10th, current law dictates that the vice president can waltz in and replace him, no fresh elections triggered. So more of the same as opposed to a true change in leadership.

Some have speculated that a neighboring country could ride to Venezuela’s rescue. The chances of that benign outcome, however, are slim as noted by numerous Latin American economists. They cite the weakened economies of the region’s leaders, Argentina and Brazil, as impediments to a white knight scenario unfolding.

It must also be noted that Mother Nature has piled onto the devastation. Venezuela is a country that has traditionally relied on hydropower. That makes the historic drought ravaging the country all the more destabilizing as over two-thirds of the nation’s electricity is rationed.

Venezuela has not been completely abandoned. On May 29th, a shipment of emergency medical supplies to fight the Zika virus arrived courtesy of China, a country whose ties with Venezuela have strengthened since their status was raised to that of ‘strategic partnership’ in 2014.

China’s efforts notwithstanding, the severity of the unfolding catastrophe suggests nothing short of a full blown, coordinated international relief effort is needed. Both the United States and the IMF come to mind, both abominations in the eyes of the current leadership.

The time for politicking, though, has long come and gone rendering the intensity of Maduro’s resolve to remain alienated from the western world nothing short of traitorous. The president literally has the blood of his fellow countrymen and women on his hands.

Such is the result of corruption followed by the imposition of broken economic models followed by yet more corruption. At some point, as Margaret Thatcher famously predicted of all socialist regimes, Venezuela would simply run out of other people’s money to spend, which appears to be the case today.

And so it goes as the rest of the world looks on with the hopes that Venezuela follows in the footsteps of its neighbors to the south who have begun to reject similarly broken economic and political models rather than stand by and watch their countries burn.

As for Venezuela’s forsworn enemy to the north, judiciaries here should take note of rising U.S. crime rates and the potential for more trouble in our own streets. Idleness, whether forced or chosen, combined with entitlement, can lead to nothing good. You can only placate the masses with an ever-expanding welfare state and misguided monetary policy that fails to grow the workforce while enriching the haves for so long before things turn.

For us, there may not be an overtly dramatic crescendo of unrest, with Michael delivering to Fredo the symbolic kiss of death. But be that as it may, we’ve still been betrayed by those in power. Yes, perhaps a betrayal of the subtlest sort, but a betrayal just the same with an inevitable, still unknown, price to pay.

Retailing in America: Valley Girl (Interrupted)

RETAILING in America: Valley Girl (Interrupted), DiMartino Booth, Money Strong

Ah, the 80s. It’s safe to say many Generation X-ers have certain movies inexorably etched in their minds. 1983’s Valley Girl, featuring an as-yet-to-be-discovered Nicholas Cage as ‘Randy’ is surely one of them. While there is little doubt Director Martha Coolidge found inspiration in Shakespeare’s Romeo & Juliet, there is equally little doubt that the highly successful film’s most ardent fans never made the connection. The plot is simple enough: perfectly popular high school girl from the oh so right side of the tracks falls for the ultimate bad boy from the equivalent of San Fernando Valley’s oh so wrong side of the tracks.

In one particularly memorable scene, Julie, played by Deborach Foreman, approached her bizarrely former hippy father for guidance in navigating the closest thing to an existential crisis she’d ever experienced, as in falling head over heels for the taboo Randy. Before Julie can begin to explain said dilemma, her father cuts her off with, “That’s easy. Take it back and get the more expensive one. The expensive ones always fit better.”

No words could better capture the vapid materialism that put the 80s on America’s pop culture map. Teenage girls, armed with daddy’s Amex, lived to troll the malls and set the next fashion trend, self-actualization be damned.

It’s safe to say, mall owners and the stores within, pine for those halcyon days that preceded Amazon’s forever altering of the American retail landscape.

The dichotomy between the most recent batch of retailers’ earnings and the Commerce Department’s monthly retail sales data have set off a firestorm of a debate: Is the American consumer hitting a rough patch or have they embraced the world of e-commerce for good rendering traditional brick and mortar trends so yesterday?

As was widely lauded, April retail sales were so robust as to be characterized as “blockbuster” by the economists at Bank of America Merrill Lynch (BofA). Not only did headline retail sales jump by 1.3 percent, the so-called ‘control group,’ which excludes autos, gasoline and building materials and feeds into gross domestic product (GDP) math, “surged 0.9 percent.” In the, “But wait, there’s more! category,” the February and March data were revised up to such an extent BofA raised its estimate for second quarter GDP by a half a percent to 2.5 percent as well as that of the first quarter, to 0.8 percent from 0.5 percent.

For all of the strength in the data, prudent market veterans will remain skeptical until they see May and June’s data given the near consensus among retailers that spending slowed into the second quarter, the opposite of what the data suggest.

Of course, the weaker the consumer is, the more they rely on finding the lowest possible price for what they can buy. Enter Amazon. E-commerce sales rose 2.1 percent in April, building on a 3.7-percent gain in the first three months of the year, which itself was twice that of the fourth quarter’s pace.

Within the category of e-commerce, electronics sales reigned supreme at the expense of clothing sales, which major retailers across the full spectrum from Kohl’s to Macy’s to Nordstrom’s confirmed with their weak earnings reports.

But the full story goes deeper than weak brick and mortar sales. It comes down to a cultural paradigm shift best reflected in what today’s teens don’t say. Shrieking “Gag me with a spoon!” and so many other forgotten catch phrases has been replaced with rapid fire texting, “OMG!” And, gone too are the brands LIKE Calvin Klein and the long list of must-haves followers displaced by the next generation iPhone.

BofA does a great service every month, aggregating and reporting its proprietary credit and debit card spending records availing to those who read its research a bounty of insights. As subsequently validated in the formal data, BofA saw a smart rebound in overall spending in April. And it wasn’t just steeper prices at the gas pump; electronic sales surged while spending at restaurants held steady.

As for clothing, sales of wearables sank 2.9 percent last month. Dig in deeper, though, and you’ll see teen and young adult apparel were the weakest of the bunch, spending nosedived 9.2 percent. On May 5th, as if foreshadowing what was to come, teen retailer Aeropostale filed for Chapter 11 bankruptcy protection. It followed a slew of its competitors.

This type of news must come off as something of a mystery to Gen-Xers who can to this day still recite the lyrics of Madonna’s 1984 smash hit, Material Girl. No teen retailer on their watch would have dared had slumping sales, much less go belly up. How else did ailing (today) Gap establish itself as a powerhouse of (yesteryear’s) posterity?

As for what’s to come, the biggest question is whether the nascent signs of rebounding consumption in the formal data will have staying power. Leave apparel aside for a moment and consider reports from two retailers that have a birds’ eye view on nondiscretionary purchases, as in necessities.

Home Depot might not jump immediately to mind, that is until you factor in Americans staying put in their homes for appreciably longer than they historically have. That trend has translated into the need to maintain those homes, which has led to boom times for Home Depot and its competitors and their shareholders. It was thus with trepidation that the comparable-store sales decelerated to 4.3 percent in April from 6.7 percent in March and 10.2 percent in February.

Things weren’t much better down the road at Target whose same store sales growth of 1.2 percent was, well, off target. CEO Brian Cornell lamented the “increasingly volatile consumer environment” and the “slowdown in consumer trends.” The sum total of sales at the giant retailer amounted to 5.4 percent less than they did over the same three-month period last year. Say what you will about publically traded companies tinkering with their earnings; the top line doesn’t lie.

Depleted purchasing power certainly corroborates the most recent run of layoff announcements. U.S. companies announced 65,141 job cuts in April, according to Challenger, Gray & Christmas’ latest tally. That brings the total for the first four months of the year to 250,061, the highest since 2009 when the economy was still in recession.

Notably, it wasn’t just the oil patch. Retailers and IT firms have also been busily writing up pink slips. Though politicians are loath to accept the reality of the math, the imposition of new overtime rules on top of higher minimum wages can only lead to more bloodletting in headcount.

While undoubtedly speaking on behalf of its constituents in its capacity of a mega-lobbyist, it was still befitting that the National Retail Federation characterized the new OT rules as “a career killer.” Companies will quickly calculate the easiest solution to preserving margins, as in reclassifying employees as hourly from salaried. This evolving practice will enable employers to better track actual hours worked. And voila, incomes will take yet another body blow.

As if on cue, households report that they are increasingly discouraged about the prospects for rising incomes at exactly the same time as a separate data set reveals a spike in credit card usage. It’s no coincidence that these moments tend to occur when paychecks disappear, which the Challenger data seem to suggest is happening with greater frequency.

Evidence is mounting that the unemployment rate has bottomed for the current cycle. That can only mean one thing – voters will be angrier yet by the time Election Day arrives. As things stand, only those populating the tony top decile of earners have seen their incomes rise over the past decade. Rising unemployment will give new meaning to kicking the American worker while they’re still struggling to get off the ground.

As for the future of retailing in America against that troubling backdrop, it’s safe to say that Simon Property Group, which owns or has interest in over 230 high-end retail properties nationwide, has a solid take on what’s to come. In its most recent annual report, Simon noted that only three of its top 10 tenants of 1993 exist today in the same form as they did then.

The severity of the shift suggests something beyond the ‘Amazon effect’ is at work. The key is marrying stagnant wages to the cultural backlash against the conspicuous consumption glorified in the Valley Girl era and to varying degrees beyond. Do this and a clear picture emerges, one that explains why families still stroll the strongest malls but simply cannot spend well LIKE really I just have to have it LIKE. So they window shop, have a meal at the mall, and head home using their smart phones to buy what they can on Amazon Prime, of course.

Perhaps the missing link is what most Fed officials appear to not grasp, as in wage growth, or the lack thereof. It would be amusing if it wasn’t so sad.

Self FOOL-filling Prophesies

Self Foolfilling Prophesies

Edgar Allan Poe was intimately familiar with our deepest, dreaded fears. In Poe’s characteristically dark The Cask of Amontillado, the murderous main character Montresor, lures the inaptly named Fortunato to his death. Montresor believes he is exacting revenge upon his noble peer for a grave insult and entices the drunken Fortunato with the promise of a select sampling of a rare vintage Amontillado.

At one portentous point in the stumbling journey to the cellars, Fortunato, dressed in a jester’s motley, makes a secret sign of the “speculative” Freemason brotherhood. Montresor does not recognize the gesture but refuses to deny that he too is a Mason. Proof is demanded prompting Montresor to produce a trowel from beneath his robes, evidence he belongs to the original Freemasons, one in the same with those who built the medieval cathedrals. Shaken, Fortunato exclaims, “You jest!” but pride blinds him to Poe’s brilliant foreshadowing. You see, that trowel would soon be used to entomb a living and breathing Fortunato making Montresor a Mason in fact.

Who knew that Poe, best known for anything but jesting, gave us “Surely you jest!” to use at times when we need to express ironic incredulity? And yet here we self-described and deeply derided nattering nabobs of naysaying sit, peering into yet another recessionary reprieve. Thanks to recent dollar weakness, U.S. manufacturers appear to have caught their breath. That same decline in the value of the greenback, which has fallen in five of the last seven weeks, has placed a floor under commodities, which have rebounded smartly. The recovery, especially in oil prices, has unleashed joyous jubilation in the junk bond and stock markets. Are we last-standing contrarians being sent to our curmudgeonous corners?

Before getting ahead of ourselves, let’s consider what triggered this relief rally in the first place. That is, dollar strength, rocket-fueled by the currency war raging among our developed country peers and turbo-boosted by the Federal Reserve’s December rate hike. The resulting growth recession in profits and pullback in manufacturing persisted for long enough to infect the U.S. services sector. That last straw, along with some depressing retail sales figures, was sufficient to scare the Fed to the sidelines, which was what the markets were jockeying for all along.

So has the world economy avoided the foolish jester Fortunato’s fate? Blackrock, which reigns supreme as the biggest money manager in the world, certainly seems to think so. Sell your Treasury holdings now, Richard Turnhill, the firm’s chief investment officer, has instructed the masses, before it’s too late. Of course, Treasuries are perceived as the ultimate safe haven asset class, after gold of course. It stands to reason that if we have no recession to fear, there’s little reason to settle for Treasuries’ paltry returns.

Mr. Turnhill is not alone in his cocky confidence. The VIX, the so-called ‘fear gauge’ tracks the risk the stock market is sniffing out in the near term. It’s recently descended to its lowest reading since last summer. The lower the level, the safer the perceived investing environment.

Market pricing in junk bonds tells a similarly benign tale. The spread on high yield bonds, or the excess over Treasury yields investors demand for taking on incremental credit risk, has taken a fully refundable round trip. After peaking at 887 basis points (bps), or hundredths of a percentage point, spreads have settled back to where they ended the year, at 695 bps.

As Merrill Lynch’s Michelle Meyer pointed out in a recent report, the surest signposts that credit stresses are contaminating the real economy just aren’t there. For one thing, the decline in high yield new bond issuance has yet to manifest in curtailed bank lending. When capital markets freeze, strapped companies are forced to tap their unused lines of credit for relief. The fact that the size of credit facilities continues to grow, however, indicates the supply of, and demand for, loans remains healthy.

The second channel through which debt distress seeps into the economy is bankruptcies that mount to a sufficient extent to cause rising layoffs. Even with what have been splashy job cut announcements in the energy sector, initial jobless claims have been running below 300,000 for 54 remarkable, consecutive weeks.

As for China, which after all, originally catalyzed global market unrest last August with an unexpected depreciation of the yuan, the worst appears to have passed. The government announced a record budget deficit to lessen the blow of softening economic growth. In addition, down payment minimums in second-tier property markets have been eased and even margin debt to prop up the stock market is once again being encouraged.

Not to be left behind, Super Mario, as in Draghi, head of the European Central Bank (ECB), is doing his fair share to shore up confidence. The ECB has gotten clever in endeavoring to push liquidity into the system by effectively paying banks to lend. If that doesn’t work, what will?

If you note a vacant seat at the what-have-you-done-for-me-lately stimulus table, that would be the one not occupied by Japan. Fresh data confirm that a strengthened yen has pushed manufacturing into contraction. With new export orders at a three-year low, it’s only a matter of time before the Bank of Japan once again rides to its own economy’s rescue.

For all of these central bank exertions, this year’s April will likely bring more than one Fool’s Day, with the International Monetary Fund (IMF) expected to lower its forecast for global growth below the 3.4-percent level it was lowered to in January.

In a recent Washington speech, The IMF’s David Lipton tied the expected downward revision to the “sharp retracement in global capital and trade data flows” over the last 12 months. His prescription: a “three pronged approach” combining bold fiscal policy, structural reform, and of course, continued support from your local neighborhood central bank.

Of course, Lipton’s tone places him in the fast-shrinking minority. None other than Olivier Blanchard, the IMF’s former chief economist, was quick to refute Lipton’s pessimism remarking that the financial markets have overreacted. For good measure, he added, “the probability of another 2008 (financial crisis) is inconceivable.”

If Blanchard is right, the sea of humanity short the U.S. stock market is about to experience some serious discomfort. In fact, the only time since 1989 that shorts, who profit from market declines, did not get caught out was 2008, when markets would retest their lows and keep falling.

Compounding matters for the worrywarts is that companies continue to buy back their own shares with abandon. According to Standard & Poor’s latest tally, one-in-four firms in the S&P 500 index used share buybacks to reduce their share count by at least four percent in the final three months of 2015.

As S&P’s perennially pithy Howard Silverblatt observed, “The report of buybacks’ death was greatly exaggerated. For the eighth quarter in a row, over 20 percent of companies are buying their earnings per share via buybacks.”

Looking ahead, companies are sitting on near record cash levels while interest rates hover close to record lows affording firms the option of using debt to finance share reductions, a practice the current era of C-suite occupants has embraced with open arms. Companies have thus retained, “the ability to set record shareholder returns,” Silverblatt added.

But what if Lipton is right? What if slowing global trade does pose a true threat to a foundering recovery? There are some signs lenders are pushing back as they typically do late in a credit cycle. Lending terms for commercial real estate loans and leveraged buyouts have tightened markedly leaving riskier borrowers at the mercy of private lenders sure to demand richer terms.

At the risk of blaspheming, a recession sooner rather than later would be the better of the two outcomes given the current starting point. If the riskiest corners of the credit markets are on the verge of reopening to yet another round of go-go lending, the stock market will be reduced to a single point of historic comparison.

You see, a rally that extends into April crowns the current run a prince, second in line only to the longest in history. In other words, the bulls are collectively betting on a repeat of the party that started in 1998 and ended with a bang in March 2000.

The difference between then and now, though, is key. In 2000, a stupidly-valued stock market presented a clear and present danger. In 2007, it was U.S. residential real estate. If this discussion is still ongoing come 2018, fiscal and monetary policymakers alike will be challenged as never before with bubbles in stock, debt and real estate markets. There won’t be a three-pronged approach strong enough to effectively address this trifecta of thrice-pricked bubbles.

Like today’s investors, Poe’s Fortunato clearly did not want the revelry to end. Despite deadened taste buds, hubris drove him to partake of one more cherished chalice. But the promised rare vintage proved to be nothing more than a murderous mirage that left him moldering, insidiously immured in a newly-troweled wall.

The absurdity of the whole situation is that investors have become their own worst enemy. If there’s one thing that will put the Fed back into play, it’s a raucous celebration in the financial markets that all but double-dog-dares the very rate hike that would end today’s fetid fete. Such is the case with bad-news-is-good-news cycles. They inevitably devolve into self-fool-filling prophesies that prove lower for longer never makes us stronger.

Empathy for the Devil

Empathy for the Devil, dimartinobooth.com

Mick Jagger has credited Charles Pierre Baudelaire for inspiring him to write “Sympathy for the Devil”. The French poet wove gorgeous verses around darker subjects that refuted mankind’s inherent kindness; his advocacy of the diabolical was pure allegation. As for the Rolling Stones, the song is a platform from which to present mankind’s atrocities from the devil’s point of view – to allow the devil himself to play devil’s advocate on history’s annals of tragedy. The controversial but undeniably timeless hit bridges from the trial and death of Jesus Christ to the Russian Revolution and World War II. The intense lyrics peak with Jagger demanding to know, “Who killed the Kennedys?”

A recent enlightening listen to this classic among rock classics reminded yours truly of the dangers of confirmation bias, the quest to validate one’s views by rejecting others’. After nearly a decade inside the Federal Reserve, one could only conclude that this contrarian-minded thinker would have been damagingly brainwashed to not bask in the clean light of skepticism.

Nevertheless, the dangers of deriving incomplete conclusions necessitates you play devil’s advocate to yourself from time to time. Caveat lector: this is purely an exercise in introspection. The writer’s full loss of faculties is not the conclusion you should draw at the end of this piece. So, now that we’ve set the stage, knowing said writer’s tongue is firmly in cheek, let’s channel our inner devil’s advocate. Shall we?

Our advocacy may as well start with the stalwart U.S. consumer, who we’ve all learned might take a body blow from time to time, but is never knocked out. The January release of retail sales was all it took to send those who’d temporarily jumped on the bearish bandwagon scurrying for their caves. Forget 2015’s Polar Vortex that made for easy comparables; the 3.4-percent gain over last year was still the best in a year. And December was revised up to boot. Isn’t it plain to see that the $140 billion de factor tax cut at the gas pump (which apparently kicks in with a long lag) and buoyant wages are finding their way into the real economy?

As for the strongest component of retail sales, it’s not only subprime loans that are behind the 6.9-percent growth in car sales over 2015. Super prime auto loan borrowers’ share of the pie is now on par with that of subprime borrowers – each now accounts for a fifth of car loan originations. What’s that, you say? Can’t afford that new set of wheels? Not to worry. Just lease. You’ll be in ample company — some 28 percent of last year’s car sales were made courtesy of leases, an all-time high. For bigger ticket items, anecdotal evidence suggests that while Gulf Stream sales have hit the skids, financing for yachts can still be had for two percent, a song in and of itself. So why not live a little?

And while you’re at it – turn up the heat! Not only are lower heating and gasoline prices paying off in spades for all households, Ford 150 and Ferrari drivers alike. But the other side of the story, that of the damage inflicted by crashing energy prices on all those displaced highly-compensated oil patch workers, is set to finally abate. All we need is for the always-accommodating countries of Iran and Iraq to both agree to play nice in the diplomatic sand box for the greater good of the world economy. Russia has held out an olive branch. Why shouldn’t they as well?

While we’re pondering the innate kindness of mankind, perhaps the Chinese, with all of that excess liquidity on hand, would care to splurge on bailing out Venezuela before the unkindness of civil war takes hold.

If you harbor any doubts at this stage of our journey, look no further than the Atlanta Fed’s estimate for first quarter gross domestic product. Following the retail sales report, it was revised up to 2.7 percent which will send the dismal last three months of 2015’s anemic performance where it belongs – to statistical aberration-ville, economists’ answer to corporate earnings’ one-time charge-off.

That’s not to say that all of those energy firms will live to tell the story of the recovery that saved them. But here too we find a silver lining. The growing divide between the compensation investors demand to hold energy bonds and that of the rest of the market is irrefutable evidence that the bond market is not about to fall off a cliff. Energy junk bond spreads are trading at 21 percentage points above comparable maturity Treasurys. Net out energy, which after all only represents 14.3 percent of the junk bond market, and the spread all but collapses to seven percentage points. Absolutely nothing to see here, move on.

Did someone say manufacturing recession? Not only did the January Institute for Supply Management survey rise to 48.2, it remains well above the 46 level associated with recessions. Looking forward, new orders leaped upwards by 2.7 points to 51.5, solidly above the 50 line that separates contracting and expanding activity.

Spreading out to the rest of the world, J.P. Morgan’s Global Purchasing Managers’ Index, which combines survey data from the U.S., Japan, Great Britain, Germany, France, China and Russia, remains in expansionary territory; the index rose to 50.9 in January from 50.7 in December. The new orders sub-index came in at an even more robust 51.4, up from 50.8 the prior month. Forget that industrial production figures are foreshadowing more downside to come in Europe. Full steam ahead!

Closer to home, you’d best not lose any sleep over the fate of your local mall. Amazon has awakened and read the news that buyers spend more when they’re inside an actual store. Impulse buying, anyone? There’s a good chance they could get as many Sears locations as they’d like, maybe with a bulk discount as an added enticement.

Moving on to the stock market: Apple and IBM have called an official halt to the stock repurchase drought. Two of the biggest buyback barons have announced mega debt deals to finance the feeding frenzy which should feed this nascent rally. Apple alone will borrow a cool $12 billion to IBM’s skimpy $5 billion offering. As an added bonus, the fresh funds will quiet all of those nattering nabobs of negativity who’d started to suggest that investors were no longer smitten with reducing share count to juice earnings per share. It doesn’t matter how you get there; it’s the eventual destination that matters most. Right?

Look no further than Apollo Global for signs of life in mergers and acquisitions land. Just this week the private equity titan made it clear that amateur hour had ended with the announcement of their $6.9-billion leveraged buyout of security system provider ADT. The acquisition price was only 56 percent above the company’s pre-deal closing price, which purely reflected how beaten down the stock had become. Of course it did.

And anyway, why leave all the fun to Steven Schwartzman’s Blackstone when there’s so much dry powder to go around? Add it all up and there’s some $1.3 trillion of ignitable potential burning a big old hole in private equity’s pockets. Buy we must lest we disturb Smoky the Bear’s peaceful hibernation.

Blackstone alone has $80 billion it can deploy. And they’ve vowed to be just as disciplined as they’ve always been per a recent Wall Street Journal interview. How so? Don’t you know? By continuing to target the cheapest asset class around, that is, of course, real estate.

Prudent public pensions, for their part, are sticking with Mr. Schwartzman’s shrewdly sensible guidance. They too are shoveling money hand over fist into private equity real estate, which is recognized everywhere as the most appropriate investment for little old ladies.

New Albion Partners Brian Reynolds tracks these flows like a bloodhound on the trail. According to his latest trophy hunt, February has been a barn burner. Pensions have voted to allocate more money to credit than any February on record and that’s only two weeks into the month. Can we please get an exclamation point?!

A few cases in point are de riguer. The New York State Common Fund is snow-plowing $775 million into real estate funds as is the Ohio Workers’ Compensation fund, which is safely shoveling $225 million into the same asset class. Following in a close third position, the Texas Teachers’ pension has studiously allocated $198 million to, you guessed it, real estate funds.

Peering over the horizon, Reynolds notes that pensions continue to submit fresh queries about subsequent credit fund allocations, and with good reason: “Most major states have scheduled more money to come in from their contributors to try to address pension shortfalls.” What better way to address a shortfall than to pour fresh funds into buyout and real estate credit a mere seven years into an expansion?

And then there’s the sheer will of the markets. Who, after all, ever wants to be the first one to stop dancing? Party pooper. Besides, we all know that over the long term, stocks always rise. In most of our investing lifetimes, so do bonds. So what’s the big worry?

Look. If worst comes to worst, the central bankers have our backs. Not only are they better educated than we are. They’ve done their homework and always get it right the first time. They never have to play devil’s advocate to themselves.

Their conclusion du jour: negative interest rates are the single best possible weapon in their over-stocked quiver. Surely they know what’s best. Plus, it will finally rid Washington D.C. of the true dreaded devil, the bank lobbyist, once and for all. And who has sympathy for them?