Monday, July 16, 2012
Thar She Blows
July is going to be worse. People were actually shopping in June.
I talked to a few people in Target looking at school supplies. They were writing down what they have. The women all said they are going to wait until school starts to buy the supplies because they know Target will put everything 50% off and then drop stuff to 75% a week later.
Nothing moved in summer seasonal until it was at least 50% off.
Reality is asserting itself. People don't have enough money to pay for the inflated prices of everything. Historical 20% profit margins will be coming back to retail. The consumer will no longer pay $20 for an item that was bought by the retailer for $7.
The problem is the immense overhead of big retail will destroy it with margins like that. Deflation is the only outcome when the population can't afford anything. At least when the free market allows it. Supply and demand says if nobody buys at price X, you must lower it until somebody does.
Mon, 07/16/2012 - 10:12 | 2620056 Abiotic Oil
Was in a local store this weekend. Huge summer clothing clearance sale. Talked to an employee who has been at the same store for 20 years and he said he has never seen so much summer clothing inventory left over or marked down as much as it was. It was finally moving at well over 50% off retail.
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Mon, 07/16/2012 - 10:30 | 2620120 Arnold Ziffel
July sales are dismal. Every store is nearly empty even with 60% discounts AND cash back rewards. I have never seen it so bad
I believe I mentioned regarding the last employment report that we appeared to be in a consumer recession, but not a manufacturing recession.
- 6 month YTD = +6.4%.
- May = +5.1%.
- June = +3.8%.
An even more depressing thought to ponder is that those presently in power on both the fiscal and monetary sides seem to have given even 10 seconds consideration to the possiblility that the continued stagnation is, at this point, irreversible without a supply side revolution in gov policy.
The business community, and also investors will not believe the US is a sound place to put money, regardless of expected return, until the consummate hostility of government towards business profit is completely abandoned.
This means, JUST TO START, the elimination ( to $0) of the US Fed budget deficit, and Obamacare, which, let's face it, are open-ended contingent liabilities on the balance sheet of anyone foolish enough to build or expand in the US. And nothing in any of Obama's announcements to date gives me any confidence that a 2nd term for the man will be anything but a death knell for US corporate profitability.
The slow economy will not go away until the present individuals pulling the levers of power go away. Most investors are not stupid people.
The US economy is heavily biased toward the consumer side. It is true that there is still pent-up demand, but it appears that a large portion of the population doesn't have the ability to buy. If they spend more in one area, they cut in another, and many are cutting spending in aggregate.
This inevitably has to work its way upward to higher income levels, and of course manufacturing is not helped by the external problems. I stsre at the picture, and I can no longer see where much growth can be generated. We're just very slowly sagging through the floor.
Neil, I have a brother who is also currently doing Defense contract work. I expect there to be a sharp contraction in Pentagon expenditures between two to four years out at the latest.
And I have to say, when I look at total government spending, I know this is not sustainable.
Two years from now, I'll probably be doing something different.
Looking at government spending, I'd tend to agree that there's going to be belt-tightening at the DoD. But my clients are looking at a worn-out F-16 fleet and a bunch of worn-out armor that is probably trapped in Afghanistan anyway. That equipment is going to get replaced somehow, even if the overall budget has to drop.
And most importantly, right now they're spending their R&D money with me!
Was wondering what you think about Arthur Laffer's WSJ column the other day, saying that the "tax cliff" is making 2012 look better than it really is? He's talking about the incentive to shift income forward to 2012 rather than take it in 2013. I'm thinking that might be making high-end consumer look better, but capital investment look worse.
That is for those for whom it matters. Corporate taxation is another matter entirely, so I doubt it is affecting much there.
I think expensing tax breaks granted in previous years have moved capital investment around to some extent.
I think anxiety over not knowing what will happen next year is slowing investment this year. I think the lack of clarity is the worst thing facing businesses. It has to make many of them more cautious.
Buzzwords, we need buzzwords. We no longer care whether it works or not - we just care about where it fits in our ranking of verbal categories as "good" or "bad".
If you can find a way to describe a good shipbuilding program as "green" and "sustainable", then it will be favored.
I can just imagine the next generation of aircraft carriers with windmills on the flight decks. They'll tip in bad weather, and of course they won't be able to carry aircraft, but damn, they will be glorious in EVERY OTHER WAY. Our enemies will die laughing.
We don't buy much anymore and we only buy what we need when it's on sale. Most of our friends new do the same.
Consider how many boomers are retiring now and in the future and when their incomes are cut in half or more as ours is ... the frivolous spending stops.
Retail is in trouble and that trouble is going to get worse.
Beans are still OK, but if the drought doesn't break in the next few weeks then soybeans will be an even worse situation than corn.
JH - Uh-huh. The retail structure in the US looks like classic Misean malinvestment on a grand scale. It must continue to "rightsize", and there's no avoiding it.
Higher retirements of boomers will eventually help employment, but only expanding the production/consumption ratio in the US economy can meaningfully raise real wages.
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