What these CEOs didn’t realize was that their expansion plans were based on lies and frauds. If they had advisors who could give them a reality check, they could have avoided the massive downsizing that awaits them. Their hubris didn’t leave room for a reality check. The population of the US has grown from 281 million in 2000 to approximately 308 million today. We’ve had a 10% population increase in 10 years. Consumer expenditures have grown from $6.7 trillion in 2000 to $10.3 trillion today. This is a 54% increase over the course of the decade. Amazingly, real average weekly earnings have only gone up by 6% in the last decade.

The chart below tells the story that retail CEOs have been ignoring for a decade. Consumer credit has advanced from $1.5 trillion in 2000 to $2.4 trillion today. This 60% increase in consumer debt has allowed workers who have barely increased their earnings to spend like they made a lot more money. This debt-fueled consumption binge led major retailers to expand in order to keep up with the delusional consumers.

Retail America has run directly into a brick wall. Below are charts detailing the expansion history of four of the most admired retailers in America. Lowes grew their store count from 600 to 1,700 over the course of the decade, a 183% increase. Wal-Mart grew their store count from 4,000 to 8,500, a 113% increase. Target grew their store count from 1,000 to 1,750, a 75% increase. Kohl’s grew their store count from 300 to 1,050, a 250% increase. Same store sales are the true measure of a retailer’s health. When comp store sales are +5% or better, retailers make substantial profits and confidently build new stores. As the charts below clearly show, comp store sales have been in a substantial downtrend since 2006. The new stores that have been built in existing markets are over cannibalizing their existing stores.

Lowes has 500 more stores today than it had in 2005, $4 billion more sales, and $1 billion less profits. Target has 340 more stores today than it had in 2005, $12 billion more sales, and the same profit. Kohl’s has 240 more stores than it had in 2006, $1.6 billion more sales, and $100 million less profit. Only Wal-Mart has kept the profits flowing, mostly due to its international expansion. The tough times have only just begun for these retailers.

The American consumer is still heavily indebted. Much of the retail spending in the last decade came from mortgage equity withdrawals. Using your home as an ATM is history. Home equity is at an all-time low and 25% of homeowners are underwater. Home prices are destined to fall another 20%. There are 15 million people unemployed. Consumer expenditures still account for 70% of GDP. In order for the US economy to achieve equilibrium, consumer spending will need to regress back to 65% of GDP. This will require an annual reduction in consumer spending of $800 billion. The CEOs of these retailers have not grasped the implications of this coming adjustment in our consumer society.

There are three major errors that have been committed by every retailer in America. They failed to recognize that the spending per household was 30% over-inflated due to debt-financed demand. They then extrapolated the spending per household using a 5% to 10% growth rate. Lastly, they ignored the fact that their competitors had the same strategy. There are 1.5 million retail establishments in the US. Thousands of these stores are going out of business every year.

Lowes, Wal-Mart, Target, and Kohl’s have yet to recognize their predicament. They are still blinded by their hubris. The point of recognition will occur within the next year. Each of these retailers will be closing hundreds of underperforming stores in the next two years. Time for a reality check.

Regards,
Jim Quinn
LewRockwell.com
Whiskey & Gunpowder

September 13, 2010

Major Retailers Hurt By Collapse of Consumer Debt-Spending was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

“FEAR, Mr. Bond, takes gold out of circulation and hoards it against the evil day,” as 007 learns from a Bank of England officer in Ian Fleming’s Goldfinger (1959).

So “in a period of history when every tomorrow may be the evil day, it is fair to say that a fat proportion of the gold dug out of one corner of the earth is at once buried again in another corner.”

Evil-day gold buying really motored since the credit collapse began in August 2007. Soaking up investment dollars worldwide, in fact, new allocations to the metal – whether trust fund or owned outright – swelled by 38% during the first quarter of 2009 compared with total demand between Jan. and March 2008, according to marketing-group the World Gold Council (WGC).

Within that figure, what the GFMS consultancy (who supply the WGC with its data) calls “identifiable investment” leapt 248% compared to Q1 ’08. And gold ETFs made the headlines once more, sucking in “another quarterly record” as new inflows required 465 tonnes of metal to back them, thus dwarfing the previous record of 149 tonnes set in the third quarter of last year.

That doesn’t mean the world’s investors are now all in, however. According to the World Gold Council’s Marcus Grubb last month (using we-don’t-know-which data), current gold investment allocation stands at less than 0.6% of total global wealth.

It makes a nice pie chart, and it offers a useful snapshot of different asset classes vs. each other. But we also think the idea’s worth refining. Because this estimate both over-states liquid assets in toto and under-estimates the stock of gold available to investment flows – whether retail or wholesale.

First, note the scope for double-counting between pension, mutual and insurance funds. I’m not saying the WGC’s data trips up on that error, but you can see how likely it seems given the end-allocation categories applied. For instance, “hedge funds” are stripped out separately (as are REITs and private-equity), even though institutional allocations via funds-of-funds will be counted elsewhere under the broader “funds” title.

Similarly, but more pertinent, the outstanding quantity of “gold – investment stocks” underplays the true volume of metal held as a store of wealth. Simply counting the “investment” volume excludes fully 84% of the above-ground supply, as another chart from the WGC’s presentation shows.

Why not also include “official sector” gold hoards? Sovereign wealth funds and FX reserves were included on the other side of the ledger, after all.

More crucially still, why not include jewelry? Trying to split out the volume of trinkets held for aesthetics alone might feel easy enough to a Western analyst just back from window-shopping at Mappin & Webb. But across south-east Asia, and most particularly in India – typically the world’s No.1 destination for physical gold each year – large, chunky necklaces and bracelets make for “investment jewelry”, acting as a store of wealth in the absence of any formal banking network.

Still, the point is well made, we believe. Gold remains but a slither of investable wealth – albeit a fast-growing slither as the value of other assets has dropped.

“Gold [has] been deprecated and reduced as a financial asset,” as Jeffrey Christian of the CPM consultancy put it earlier this year. “In 1968 gold may have represented 4.5% to 5.0% of the world’s wealth…By the 1990s it was down to 0.2% of the world’s wealth. Not that gold was falling in value so much as the other wealth – stocks, bonds, paper assets, government bonds, corporate bonds, bank deposits – were exploding once the tie to gold was severed.

“In 2006 gold represented 0.2% of world wealth. At the end of 2007, it was about 0.4%. Depending on what you think about wealth destruction in 2008, it may have been 0.6%.”

That figure just about matches the WGC’s estimate of 0.7% (perhaps they used the same inputs and excluded the same volumes of central-bank and jewelry gold?). It also contrasts with our own Estimate of Gold as a Proportion of Investable Wealth at nearer 2.7% by the close of 2008.

Either way, gold is fast-attracting attention – both from nay-sayers, retail investors and new die-hard bulls amongst the professional institutions. Regulatory filings show legendary hedge-fund manager John Paulson took his position in the SPDR Gold ETF to 30% of his portfolio during the first quarter of 2009. Paulson & Co. now owns 8.7% of that paper – as well as significant chunks of the Gold Miners ETF (GDX), Kinross Gold (KGC), Gold Fields (GFI) and AngloGold Ashanti (AU) – if not any actual bullion itself.

Does that in itself make gold a buy? Of course not. But compared to the evil days of 1930s depression – or the fearful inflationary panic of the late 1970s – the world’s wealth remains very under-invested in metal right now.

Regards,
Adrian Ash
BullionVault

May 21, 2009

The World Gold Council Wrong About Gold was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.