Today looks to be a bumpy, with futures deep in the red as European stocks took a header on "a weaker dollar and prospects for higher interest rates."
In the U.S., Wal-Mart’s same-store sales for the month of May came in at the bottom end of its range — a 2.3% increase, with high gasoline and utility prices getting the blame.
We have previously discussed the "bifurcated nature" if this recovery cycle (more on this in the near future) — but it is apparent that high gas prices are having more impact in some consumer asegments than others.
Over the weekend, the NYT had a column Gas Prices Aren’t Deterring Summer Travelers. That suggests that some strata of consumers are not yet feeling a significant pinch from $3.50 gasoline. To Upper Middle income and higher, its a minor annoyance. As we noted last year, to those in the lower economic strata — thats Wal-Mart’s key demographic — there is more pain felt, and a lowered ability to substitute other products or juggle finances around. There is also a "more pronounced pay cycle." The WSJ describes this as customers who "appear to be living paycheck to paycheck and clustering their spending around paydays on the first and 15th of the month."
The Journal further observed that:
"Wal-Mart, of Bentonville, Ark., previously forecast an increase in same-store sales — or sales at stores open at least a year — of 2% to 4% for May. For the fiscal first quarter ended April 30, the retailer had reported early success in several campaigns to bolster its operations, such as cutting inventory costs and reining in labor costs, but its executives warned that they noticed early signs that soaring gasoline prices were hindering sales."
This has been a long time in the making. Since last Summer, there were early warning signs — but many economists denied the potential slowing of the American consumer.
Without a drop in fuel prices, I expect to see more pressure on low income consumers as the year progresses. And depending upon rates and the real estate market, this slowdown will move further up the economic scale, and begin to slow down the middle class. Plasma screen sales? I suspect they may begin to slow sometime over the next few quarters.
Of course, none of this matters, because there is no inflation in the core rate . . .
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Sources:
Wal-Mart Sees Tepid Rise in Sales
By KRIS HUDSON
May 30, 2006; Page B4
http://online.wsj.com/article/SB114876995753065238.html
European Stocks Fall, Led by BMW, Diageo, Financials, Utilities
Alexis Xydias
Bloomberg, May 30 2006
http://quote.bloomberg.com/apps/news?pid=
10000006&sid=aLEE1y9b8Rag&refer=home
Opening Bell: 5.30.06
Oil Prices Rise As U.S. Enters Summer (AP) Inappropriate determinations of causation are rife in AP articles on the economy, but these are our absolute favorites. Memorial Day weekend is the start of something called, get this, the ‘Summer Driving…
Many premium global consumer brands are cratering as well. The wealth of the privileged few is created off of the backs of the many. No one will be spared the knife. To the contrary, economic instability has a tendency to put socioceconomic pressure on the wealthy as the poor suffer disproportionately as we see historically. What happened to premium NY real estate post 2000? Premium San Francisco real estate post 1990? The nobles when the bourgeoisie allied with the proletariat re the French Revolution?
Sorry, but gasoline is not in core inflation, hence, no one pays for it, so how can it affect the economy?
Oh boy… things must really be grim if “B” is making reference to the French Revolution.
B’s comment reminds me of a pattern that David H. Fischer illustrates again and again for each long-scale (80 to 180 years) inflationary cycle in his 1996 book, The Great Wave. Beginning in 1180 Fischer traces each wave from its barely perceptible beginnings, to growing energy, food and shelter costs, to accelerating growth in money supply, to decreasing real wages, to rising pessimism and societal breakdown, to crisis and social rupture, usually initiated by an event that a society in earlier stages could have shrugged off.
I recall Jim Jubak wrote a column about this awhile back but although I snipped a couple quotes from the column and later bought the book I can not find the reference. In any case, here’s my snip from that column…
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…we don’t know where we are in this price wave. If it started in 1896 and lasted 80 years — the minimum for the waves Fischer studied — it would be over by now. If it lasts 180 years — the maximum for previous waves — it will end in 2076.
I think this price wave still has years to run, and when it ends and how it ends depends not on some mechanical theory of history but on the decisions we make now. As Fischer points out, the collapse of the French monarchy, the bloodbath of the French revolution, and the world war unleashed by Napoleon were by no means preordained.
Fischer writes: “By 1787, Europe’s most powerful government (France) was on the edge of bankruptcy. … Ministers tried desperately to balance their books. Economies were enacted. The king himself, Louis XVI, set an example by reducing his household expenses from 22 million livres to 17 million, largely by consolidating the royal stables. … The financial ministers of Louis XVI pleaded desperately for more revenue, and were refused. The possessing classes refused to accept new taxes. Many demanded more privileges and exemptions. This combination of public need and private greed was fatal.”
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Do many Wal-Mart stores not have gas stations attached? That should represent a small hedge against gas prices. Maybe that’s how they made it over 2%.
I do believe things are potentially grim. I’m becoming very sour until we see how some of this is going to play out. I’m especially sour on global dynamics. We just have to wait to see what happens. I have been a cycle fan for as long as I’ve invested. I was quite confident from the early stages of this recovery we were in an early 70s redux. Now I’m not so sure.
There are also many similarities to what happened in 1921 and 1929 to today but in reverse. And now, I wonder if we are more closely aligned to 1936-37 or even 1929 with a twist as odd as that might sound since we had an equity crash six years ago.
What is the old saying? Something like there is a fine line between genius and insanity or something like that. Well, I believe there is a fine line between inflation and deflation. And many of the same dynamics create both. I really do hope Ben Bernanke is well versed in stopping post 1929 because I fear both 1974 and 1929/37. And right now I fear 1929/37 more. The worlds’ greatest investor of all time, Livermore, stated that there is nothing new on Wall Street. What has happened in the past will hapen again and again because human nature never changes. We divine the future from the past.
RW, if you are a cycles enthusiast, I’m sure you are familiar with Kondratieff’s gaining momentum. If not, there is a tremendous amount of work out there as well as his original work. I have his original work somewhere if you would like to see it and might not have it.
http://faculty.washington.edu/modelski/IPEKWAVE.html#characteristics
Now, I loved Fischer’s book, mostly for the scope and breadth of his amassing the data and for his entertaining writings and thinking. That said, take it with a grain of salt. A long and informed critique is at http://eh.net/bookreviews/library/0146.shtml This essay has its own flaws, but put it together with the book and you have a much more evenhanded analysis, which I argue will stand you in better stead as you look forward and place your bets in the market.
Truly premium properties do no worse than others in declines, ceteris paribus. My worry about the property market isn’t that rich people’s houses will be worth less, it’s that the end of cash-out refinancing will compress consumption.
On topic, I am happy with today’s market. Then again, I hate the dollar and worry about the consumer.
-Truly premium properties do no worse than others in declines
Really? So, in 2000 when NY penthouses collapsed, do you think the moderately valued house in Indianapolis fell in the same percentage terms? Of course, we could put it in other asset terms as well. The premium equity property in 2000 was Cisco, Oracle, etc. Did they go down any more in percentage terms than the moderately valued properties in 2000 like United Healthcare? Or, in today’s terms copper is the premium property. $4 a pound after it has spent the start of every business cycle in the last fifty years at 60 cents or less. Do you think it might go down more than, let’s say wheat, another moderately priced commodity at the end of this business cycle?
There is no such thing as ceteris paribus when a shock of significant size unfolds. That is a paradox. And you should be concerned about everyone’s house, because if they fall significantly in value, so will your wealth regardless of where you have it stored.
B, how funny is it that you and I are switching roles here. Not in a big way, but at least a little.
Paulson in at treasury–that should cheer some folks up neh? The powers-that-be have just gotten a little more savvy in terms of how to play the reflation game… Japan has to know, too, that they can’t run their monetary policy in a vacuum. Or at least they’ll grok that pretty soon, now that we’ve got Hank to explain it to ’em. And China’s financial interests are still joined at the hip with American interests.
I guess one could say I’m not so much less bearish at this point as more respectful of backroom deals. If there’s anything them Goldman boys know how to do, it’s deals. My pessimism is being somewhat tempered by my cynicism, if you will. Gentle Ben may be in over his head, but he gots some powerful peeps at his back.
The trillion dollar question: You can’t fool all the people all of the time, but can you fool enough of them to matter for a good long while? And exactly how long is a good long while anyway? If they can avoid the bang and opt for the whimper, can they also stretch out the whimper over a period of months or even years?
Guess we’ll find out.
The data now supports a slow down. I always said 1974. Now, maybe low odds but………….with the retards pushing hard assets higher and higher, I worry about deflation. The game changes so the outcome potentially changes.
And, you are or were very bearish on America. Weren’t you moving to New Zealand or some small island? I am super bullish on America and very bearish on emerging markets WHEN we get the next positive cycle. I am convinced more than ever America will lead that cycle in a very dominant way. All of this built up government spending and national debt doesn’t bother me in the least. Historically, we had some of the best bull markets when American debt was at levels significantly higher than today. It is not a good indicator of equity performance. Frankly, you could argue human behavior’s response to large government debt and it could be bullish for stocks. And, I don’t worry about consumer debt either. I worry about housing and only housing. Everything will respond to what housing does. Commodities, the economy, the consumer, the global economy, emerging markets, the next cycle, etc. Btw, any very negative outcome will simply cement our posture even more that America will emerge as the clear leader IMO because the more negative the outcome, the more emerging markets will suffer and be less of a threat the next cycle as they spend time repairing the damage created this cycle. Historical precedence for that? Yep.
B, you were talking about “[p]remium San Francisco real estate post 1990,” to which I responded; I’m comfortable with my assessment. How you get Indianapolis and Manhattan penthouses from that, much less copper futures, eludes me. Constructing straw men tends not to advance the discussion.
If you think the Bay Area residential property market from ’89-’92 was “a shock of significant size,” what do you call a real dislocation?
Interesting… my long-run skeptical perspective on America isn’t so much tied to debt levels as it is to innovation trends.
I am as impressed with the Apples and the Pixars and the AMDs of the world as anyone… the problem is that America’s hotbeds of innovation are grafted on to an aircraft carrier of potential stagnation and protectionism imho.
In my view, the future–meaning the distant future–favors small and nimble entities over large and bloated ones. The only successful large entities we see out there today–Wal-Mart, Exxon, and Citibank to name three–are the ones who have mastered a significantly greater level of complexity than their peers. Their skill at managing complexity gives them the privelege of being big. It is not the other way around–any entity that is big without good reason to be big is going to get downsized. Any entity that had a reason to be big, but lost that reason, is going to get downsized.
Wal-Mart, Citibank and Exxon are buys because of the skill of their proceses and the quality of their management. America is a long term sell for that same reason, in my opinion–the deteriorating quality of management. The Chuck Schumers of the world are only going to get louder over time.
Are you familiar with Richard Florida’s “creative class” argument? I think that argument can be applied to long run trends on a larger scale. The type of countries that will do well in the future will be the ones that actively attract talent, not the ones that milk existing talent in support of a decaying infrastructure. This is a big reason why I’m bullish on those “small islands” twenty years out. As technology and communication continues to improve, those small islands lose their location stigma and increase their competitiveness in terms of quality of life and quality of work environment.
So, I’m not your standard gloomer who thinks we’re doomed because of all the debt piled up to our waists. I am skeptical, however, that we are going to get a decent return on our investment for all the debt we’ve accumulated. The whole pro-America argument hinges on the notion that all this debt we’ve accumulated will be paid off by future innovation. Anyone bullish on America’s prospects for the next ten or twenty years must assume that America is going to get back out in front of the innovation curve–in terms of the economy as a whole, not small pockets of it. I’m not sure that’s happening. If we had spent all this borrowed money on ways that would contribute to long run innovation, I would be a lot more optimistic. But we haven’t. We have basically run up the credit card for war, handouts, and “stuff,” none of which confers a long-run competitive advantage.
So, just to clarify in my typical long-winded way. I am not some knee-jerk anti-debt Calvinist. But nor do I think the case for America’s future innovation domination is rock solid. The periphery isn’t as important at the center. If the center becomes a black hole of legacy costs, political demagoguery and decaying infrastructure, then the innovators at the periphery become even more tempted to pack up and leave for greener pastures. Imagine if you were a small, innovative division of GM and you knew your exciting ideas, and the profits from those ideas, were simply being thrown into the gaping maw of losses on an organization-wide scale. Wouldn’t you be tempted to spin off, pack up and leave?
I don’t rule out a return of American dominance. But my attitude there is “show me the money.” If we are about to take back the innovation and efficiency throne on a country-wide scale, and not just in small pockets of the periphery, we sure aren’t acting like it. We’re acting more like a GM in my opinion, putting out successful models here and there but sinking into the muck on the whole.
I’m not wishing for this to happen or rubbing my hands with glee. But the innovation optimists need to justify why big is better than small in this new age, and they need to demonstrate how and why America is suddenly going to get so much better at implementing efficiency and managing complexity on an economy wide scale. Otherwise, the long run forecast is for breakup.
sorry, that’s innovation and efficiency throne, not “thrown”
now back to your regularly scheduled commentary
One final comment about China and emerging markets. I just love to talk about this doom and gloom to America stuff. And I haven’t hidden my disdain for communist China and their likely impending doom. Which, btw, is similar in inflection to Japan in 1987. People should worry less about the stock market comparison to 1987 and more to the macroeconomic issues surrounding 1987. Uh, Plaza Accord? Uh, Plaza Accord II unfolding today? Remember Japan’s economy for the next 17 years? Nikkei from 40,000 to 7,000? Real estate bust? Banking implosion? Just as they were ready to rule the world after soaking our economy with exports as they repeatedly deferred reform of their own economic miracle.
Well, let’s see. China versus Japan in 1987. China has the most rudimentary of financial markets in the semi free world. As part of that mess is the fact that all of the banks have all of the corporate debt parked in them. Ain’t no such things as bonds or other financial instruments used to raise capital or issue debt as we are used to. The Banks are saddled with all of the debt. And who owns the Bank? Well, Uncle Red, the Master Communist Planner of course.
So, today, after a tremendous real estate bubble in China funded by the American consumer buying Barbie Dolls made in China, we have a little situation.
(Remember, it ain’t new innovations spuring the economy. Real estate, heavy industry such as steel, copyright/patent infringement and CHEAP manufacturing by American companies who keep the profits in the good ole US of A. Innovation? Patents? Phooey! China, as an example, has created something like 100 new drugs in the last 100 years. Oh, I know, but it is changing. Uh huh. )
China’s banking system is insolvent by western definitions. Real Estate and inefficient government owned business driven. ie, By American standards the system is insolvent. Or put another way, their entire system is built on an empire of Enrons. The insolvency is because of the tremendous nonperforming BUSINESS loans. Loans cut to crooked business owners and state owned institutions which got their loans approved because someone greased some palms.
(The Chinese bureacracy called the government is larger in size than the entire population of the United Kingdom so there are alot of palms to grease.)
What is keeping the banking system from collapsing is continued government infusion of money made by selling us Barbie Dolls. Because remember, the government owns the banks. Oh, and one other thing. The Chinese citizen’s life savings are all stashed in those banks because they aren’t allowed to take savings out of the country. So, IF America, either voluntarily or involuntarily or through market forces or recession or whatever quits funding the real estate and Barbie Doll boom what happens? What’s that game where everyone runs for a chair and there aren’t enough chairs? Or, as economists like to put it, ever heard of a run on the banks? It’s a game that is even more fun. Now, no one ever said China needs to end up like Japan did, but we punished those poor bastards in Japan for f&cking with us. After blathering for a decade to reform their economy to stimulate their own demand, rather than send all of their shit over here, we finally cut their balls off. They paid dearly. They paid for 17 years. All you doofus’s still think this is the Asian century? We are holding the bag and China is going to eat our lunch. F*cking right. NOT!!!!!!!!!!!!!!!
http://en.wikipedia.org/wiki/Bank_run
Of course, it doesn’t need to end this way. But really, the experts say buy what China needs. Buy commodities. Buy heavy industry exporters. BUY BUY BUY. (That’s me pushing the Mad Money buy button.) Maybe. So far so good. But, do you really want to keep your money invested in economies reliant on this freaking mess? Not to mention most of them aren’t much different in the way they operate than China. You have a heart attack when we have an Enron? These economies are alot like the wild west. They have no rules and regulations and consumer protection and investment laws and robust SEC, etc. They just don’t have a plethora of Enrons. THEY ARE ENRON!
So, how about a little more Russian Roulette? Maybe some more investing in Russia? China? Indonesia? Malaysia? Mexico? GO FOR IT!
I agree with you that China is a big mess beneath the surface. Bad loans galore, shoddy to nonexistent financial infrastructure, serious political problems, domestic unrest, killer pollution, rings of corrupt bureaucracy as far as the eye can see, and so on. Meanwhile, Russia is looking more and more like a mafia-run kleptocracy, Mexico a codependent basket case, and so on.
But I’m not sure how any of that translates into long run bullishness on America. “Nowhere else to put your money” just isn’t all that compelling an investment thesis in my opinion.
Maybe we are getting the question wrong. Maybe the whole point is that markets of the future are fragmenting and decentralizing more than we realize. Call it the new rise of micro: a cross-section of companies in a given economy doing well while the rest of that economy stagnates, or one small country doing while while its neighbor struggles. The notion of “emerging markets” as one lump sum always seemed way too generalist anyway. It’s high time investors upped their general level of sophistication in terms of nuanced analysis.
I still think this long-run slugfest between America and Europe primarily benefits the little out of the way countries who aren’t directly in the ring. They get all the benefit of technology gains and multinational services without the burden of military spending and social welfare legacy costs. It’s like running a small company with minimal overhead and sweet profit margins; who cares about gross being small if your net is huge.
Dammit… slugfest between America and CHINA, not America and Europe. Typing too fast again.
Well,
We are both prone to long oratories. So, Tell me where the global innovation and growth is going to come from? And, don’t confuse my stance on market returns with American leadership. That said, I do think we will have a period of resetting and it will be a once in a lifetime opportunity to buy stocks………..unless we return to the dark ages.
If I had to guess, I’d say the path of future growth and innovation will be more diffused, i.e. less traceable to a single country or region.
It used to be the vast majority of millionaires, not counting dictators and drug lords, were in developed western countries. Now they are popping up in all kinds of odd places. Maybe we’ll see a similar seeding of growth, less conducive to color-shaded areas on a map.
Could also be we’re entering a different phase of growth, a sort of consolidation / catching up period that is boring and unstimulating for those of us used to dramatic change. Maybe the rich world stagnates for a while while the developing world works on domestic demand one bank account at a time. Maybe developing world institutions get a leg up with the help of the Wal-Marts and Citibanks and P&G’s, and we go through a Bueller phase where the big caps grind it out and the flashy little guys do nothing for a while. Why couldn’t equities go dull as dishwater for the next five or ten years? That’s a possibility too.
Not predicting that of course… My strongest conviction is that whatever comes next will be significantly different than what came before. I’m skeptical that the old models for global economic dominance will work in future, for the same reason that the MSFT and DELL business models, so successful in the past, are floundering today. I worry about America’s future because her politicians, and her people, seem so stuck on past glory days and so resistant to constructive change. And then there’s the nagging question posed by Christensen in “The Innovator’s Dilemma.” Maybe all large organizations are congenitally vulnerable to disruptive upstarts. Maybe great successes ultimately drive the creative destruction process. Maybe that’s just part of the deal.
If seeds of innovation do take hold around the globe some day, it will certainly be to America’s credit, even if innovation diffusion ultimately contributes to America’s long run decline.
Hmmm……I have the Innovator’s Dilemma on my bookshelf. I see no correlation to the American economy or America’s economic pre-eminence. To the contrary, the companys inheriting the mantle so far are mostly American. And the innovation still shows no signs of transferring elsewhere. At all. I mean not at all. Europe, Japan, Israel and the US/Canada. Maybe a little of Korea joining the fray.
It could change but it shows little sign of abating. Muddle through? I could see that economically but not as far as innovation. That is, again, unless we return to the dark ages. Even during awful economic times this century, innovation persevered.
I don’t know the future but I do know innovation is less about our genius and more about our model of success including our culture. That has not shown alot of transferability or rapid adoption.
The haves are increasing their lead on the have nots globally. ie, It is a perception that the developing world is catching up. As Americans, it is our problem to solve so as not to leave behind our have nots as our haves continue to rumble along. Leaders? Politicians? Stuck in the past?
Well, leaders reflect our needs of the times. Their characterisics change with the collective psyche of the masses. So, those trends too change and they take care of themselves. Our economic success has little to do with our political leaders. They don’t worry me. When they screw up too much, we just elect the other extreme and they get nothing done, which is good for economic growth. We’ll likely get a kinder, gentler Jimmy Carter type after our bellicose Samurai Bushson. We might get a Reagan type but I tend to think Carter comes first for a reason.
I just don’t see the stuck in the past comment. At all. First off, Dell and Microsoft are no different than any other $50 billion company that fights self destruction. They’ll readjust and survive or thrive or be broken up just like has always happened. That has nothing to do with America. Look at GE before Welch. IBM before Gersner. Chrysler before Iacocca. I see more innovation in policy, educational initiatives, grass roots efforts at change and people stepping up to force change while our politicians are mired in bureacracy. That’s why America, with all of its warts, will continue to lead. That cannot happen in China because those freedoms and the take-charge mindset don’t exist. The government stifles its people. And it won’t happen for cultural reasons in Japan. Nor because of corruption in Mexico. I like to keep it simple. We don’t have to be as great as I would envision greatness. We just need to be better than anyone else. And, it ain’t even close.
Well, all things considered B, I hope you’re right and I’m wrong on this one.
Your well-argued viewpoints have lit a candle of cautious optimism in my dark and cynical world. I’ll try to keep it alight… :-)
I was feeling mighty optimistic myself because of B’s commentary until I remembered that the USA will soon be the US of Mexico, due to intense flooding of illegals into our country. Exactly what will this new wave of techno illiterate, aggressive, entitled majority do to your ‘Innovative America’, aside from the fact that there isn’t going to be an ‘innovative America’ to turn to in the future.
I think the majority of the ‘creative class’ will buzz out of here in seconds flat if they think their lifestyle will be impacted by this rising wave of illegal peasant class. While not an exact parallel, look at the situation in Los Angeles public schools. The only kids who go to public school in LA are the poor. The middle and upper class have found more and more private enclaves to shelter their biggest investment as public education declines.
Do you think their behavior will change regarding their own lifestyle if that is threatened? Let me explain, crime, kidnapping, threatening and bullying are part and parcel of the new illegal peasant class in LA, as are the general lack of standards…leaving open soiled diapers on the ground in public park instead of walking that 5 feet to the trash. The creative class you are both counting on to produce an economic recovery of sorts, will take that for so long before they realize that they can live better some place else and they pack up and leave. After all, who wants to go to a public park Jazz Festival and see someone pistol whipped and kidnapped in broad daylight while your kids are with you? Not me, I fled LA for a reason (I am six figures where I am and happy to live without drug addicts, prostitutes and gang members, but every year I see changes in my new demographic, more Mexican flags and piece of sh#t cars clutter up my streets here in my safe haven). As the numbers of illegals grow throughout the US bringing crime and poverty to every street and neighborhood, how will the middle, creative, and upper class respond? They will beat cheeks out of there. So then what happens?
They are going to flee this country so fast your head will spin. I know I am right because I am the innovative creative class you are hoping to have bail you out and I am already looking to other countries to see what I can get out of them or where I can land and get the most benefit. So what then? What can we expect for America?
I know I am not alone. My generation has probably seen more of the world and jet setted around than any other generation in history, we know that there are options for us that will provide us with the lifestyle we are accustomed too…so what if it tanks here…we will be in demand anywhere the money can lure us.
What can either of you say to that? When you factor this rising peasant illegal class into your financial analysis what do you see? I am struggling to be as upbeat as you seem to be having lived through the exodus once, the next time I leave it will be for good. I am tired of having to share my wealth with people who believe I am racist just because I have struggled and WORKED my ass off to get what I have. Have another beer Pepe, I am tired of having to pay for free medical care for Consuela 15th child. How will sentiments like these affect your economic viability?