The death of retail: What do RadioShack and J.C. Penney say about the future consumer economy? Low wage retail work to take a hit.
RadioShack recently announced that it will be closing 1,100 of its 5,000 stores. Holiday sales were dismal and shares were pummeled dropping by 24 percent. The problem of course is that these 1,100 store closures will result in many Americans out of jobs in one of the biggest employment sectors in the country, retail. Yet this one company is indicative of a much larger trend in consumer buying. People are choosing to opt to buy from other avenues especially online via big giants like Amazon. However you do not need a large workforce when you have incredibly efficient supply chains as Amazon has in place. This will only create a greater divide on inequality in our nation since blue collar work has been gutted and even low wage labor is taking a hit. For example, Amazon generates about $600,000 in sales per employee. That is very hard to compete against. Even J.C. Penney’s recent run up in stock value does not reflect a longer term decent. At one point a few years ago J.C. Penney was trading at $41.55 a share while today it trades at $8.30 (an 80 percent drop). In a consumer addicted economy like the U.S. seeing retail take a hit signifies some bigger changes to our workforce. It also makes you wonder who will be buying all this stuff if more people are out of work or living day to day on smaller paychecks.
Household debt first increase in 4 years largely driven by massive increases in student debt. Auto loans showed increase volume in sub-prime loans.
In a recent post we discussed how personal income growth is having tough go at the current economy. However, with incomes largely stuck in the quicksand of a mediocre economy for the working class, we see that the elixir of spending is back at the table again. Debt spending is making up for the lack of income growth. Unfortunately major consumer debt growth with no subsequent increase in income is a recipe for disaster in the long-run. Yet people live for the short-run like a sprinter so the party goes on. That is why the recent Fed report on household and consumer debt is important because it shows a first quarterly increase in debt in four years. While this may be good for a consumer based economy it merely masks the underlying issues with income growth. Also, the media is running with the “consumer is back” meme yet a large reason why debt increased like it did was because of incredible jumps in student loan debt. We also saw that auto loans increased dramatically and our friend the sub-prime loan is now creeping back into the industry. I make no qualms that our economy is fully fueled by easy debt. Since the recession ended in 2009 much of the access to debt has been given to large banks and Wall Street finance. This has done a miraculous job boosting the stock market to record highs and also allowing for investors to crowd out households in the single family home market. It appears now, at an apex in the stock market that consumers are getting a bit of the nectar of easy debt.
Personal income faces first year-over-year drop since recession ended: As incomes collapse, spending via consumer credit begins to increase.
There is little doubt that our economy runs on access to debt. Not a tiny bit of debt. But Himalayan mountains of debt. The banking crisis was pitched to the public as one of liquidity but in reality, it was one of solvency. The difference? One is a temporary inability to repay debts while the other is a complete mathematical inability to support current debts based on income. The Fed has done everything to increase access to debt to member banks to re-inflate their balance sheets. Those that think inflation is non-existent need only look at housing values, college tuition, and healthcare costs and see how realistic that is based on their income growth. This leads us to our current article in terms of personal income. The latest reading shows that personal income had its first year-over-year drop since the recession ended. This further underscores the massive disconnect between the stock market and regular American households. A large part of boosting corporate profits involved slashing wages, benefits, and households making due with less. This has increased the wealth and income inequality in our nation as the stock market reaches a new apex. What is troubling is that now that banks are flooded with easy access to credit, they are starting to lend to cash strapped households in a fashion similar to our last credit bubble.
Comparing the inflated cost of living today from 1950 to 2014: How declining purchasing power has hurt the middle class since 1950.
Inflation has a subtle eroding effect that impacts entire economies. In the United States, we have been fortunate to have relatively stable rates of inflation for two generations. Even in times of high inflation like the 1970s, people were able to adjust unlike places that experience uncontrolled inflation like Argentina is currently facing. Also, wages rose in tandem which helped buffer the pain of higher costs. Today however, inflation has eroded the purchasing power of the middle class. Only when we look at longer periods of time do we see the large impact inflation has on our ability to buy real goods and services. People found a piece comparing 1938 and 2013 prices on various goods and items to be enlightening. Since our middle class did not fully emerge until the end of World War II, it might be useful to compare the price of items back from 1950 to where things stand today. Has inflation had a big impact on our purchasing power since 1950?
Why the stock market is a sham for regular investors – Based on historical price to earnings ratios the stock market is overvalued by fifty percent. Only half of Americans own any stocks.
The stock market is largely seen as a barometer of economic health to the US economy. Turn on any business program and they report market prices as if reporting on it being a sunny or cloudy day. The financial markets are fully juiced on our current debt based system. Unfortunately it is taking more debt to get minimal returns and the reality is the juicing of the market is simply causing more wealth inequality in our nation. Financial institutions have first dibs on the easy access of debt provided by the Federal Reserve. This is why the housing market is now largely dominated by investors and banks cutting out regular home buyers. Young Americans are competing for positions in the low wage environment that is subsequently created. Yet the stock market is largely a sham for most Americans. Most do not have access to high frequency trading techniques that favor quick trades over buying and holding and corporate profits are up largely up on the slashing of wages and benefits. When we look at historical price-to-earnings ratios, we find that stocks are currently overvalued by at least 50 percent.
When the housing market is owned by Fed banks: Federal Reserve went from holding zero in mortgage-backed securities to over $1.5 trillion.
There are significant consequences with the Fed continuing on course with Quantitative Easing. On paper, it may seem that all is fine on the home front. However, many regular Americans are finding it harder to purchase a home in spite of a low interest rate environment. The Fed has created perverse incentives where big banks are leveraging low rates to invest in single family homes. This used to be a staple of asset growth for Americans but that is now waning. American households are cash strapped and having a lower rate does very little if incomes are not growing. Yet banks suddenly have a giant interest in being involved in the housing market. Why stop at being satisfied with an inflated stock market? The ability to access debt has been key to the re-inflation of this bubble. If you look at the mortgage-backed securities (MBS) market you will clearly see that the Fed is now the major player in this segment of the market.
The global debt reckoning – Total global debt at $230 trillion. Total world debt over 300 percent annual GDP. There is no escape from a reckoning with debt markets.
Total global debt crossed a troubling event horizon by going past the $200 trillion mark last year. Given the latest figures we are likely well above a total global debt of $230 trillion based on a comprehensive study done by ING last year. The banking sector rummages for every possible way of accessing debt. Global central banks from the Fed to the ECB to the Bank of Japan are now fully engaged in a digital printing end game. It isn’t so much the startling debt figures that are presented but the GDP that is actually backing up this insurmountable level of debt. The latest data shows that total world debt is running above 313 percent of annual GDP. To put this into perspective the US meltdown occurred when household debt reached about 120 percent total debt to annual GDP. The only way to keep payments current is with a low rate environment. There is no choice. So central banks will do everything they can to print this debt into oblivion. In many ways this is a reason that we have seen a rush into assets from commodities, real estate, art, Bitcoins, and anything that isn’t just a bunch of 1s and 0s on a central bank computer easily changed by the whims of politicians and those connected to them.