-- Posted Sunday, 13 May 2007 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Monday, May 14, 2007
“Phenomenally accurate forecasts”
Here’s a headline in search of a story, from Friday’s edition of The Wall Street Journal: “Retail Sales Slide Fuels Concern.” We had to read the article twice before we were able to determine just who it is that is “concerned.” Not investors, for sure. With the Dow Industrial Average and other key indices hitting new record highs almost routinely these days, it’s clear that Wall Street is not much concerned about anything, let alone how the nation’s shopkeepers are doing. In fact, it would be empirically more accurate to say the Street is positively exuberant about the outlook for retailers, given that the Dow Jones U.S. Retail Index is currently trading within less than 2% of all-time highs (see chart below).
Nor do the retailers themselves seem fazed. Wal-Mart Stores, for one, didn’t even bother to field a spokesperson to enumerate the reasons for the apparent lull in shopping. Instead, with April sales at the chain off 3.5% -- the biggest drop in the 28 years monthly results have been reported – Wal-Mart (and the Journal) let unnamed shoppers do the talking: “Wal-Mart said its shoppers expressed concern recently about their personal finances, the cost of living and high gasoline prices.” Do we take the shoppers at their supposed word? I should think not, since they’ve managed to borrow and spend like crazy for the last ten years despite the absence of real income growth, turning the U.S. consumer economy into something like a rent-to-own furniture scam.
Buying Less Gasoline?
What about Joe Consumer’s supposed “concern” over high gasoline prices? Well, how about yourself? Are you personally buying less gas now that a gallon of regular has gone above $3.00? We might as well ask, is anyone buying less gas – except, perhaps, those who live in such redoubts of greenness as Boulder, Berkeley and Mackinac Island. Speaking personally, it would be very difficult for me to find ways to use significantly less than the 30 or so gallons of gas that I’ve been buying each week for two cars.
Meanwhile, the refiners have demonstrated that the usual laws of supply and demand do not hold sway in their business. In the parlance of the economist, demand for gas has proven to be extremely inelastic. So much so, in fact, that despite a 70% increase in gas prices in the last year, we are still importing record amounts of fuel. At what price will motorists start to cut back dramatically? Some think $4 gas will kick conservation into high gear. But I have my doubts and think consumers will simply grin and bear it, just as they’ve done so far.
Don’t Call It Inflation
But don’t call the soaring price of gas “inflationary,” because ultimately it will have just the opposite effect. My contention is that today’s price inflation is pushing us toward deflation simply because the higher prices of goods and services can no longer be passed on easily to the next guy. That means that when gas prices soar, we all wind up with less money to spend, and the fuel “surcharge” leaves the country to find its way into the pockets of foreign oil producers.
To the extent wages fail to rise with the price of goods and services, consumers have but two choices: cut back on consumption, or borrow more in order to consume at the same levels. However, with housing prices falling across the U.S., and therefore the value of the collateral needed to sustain a rapid expansion of credit, we find it hard to believe that a new borrowing binge sufficient to rejuvenate retail sales is likely .
Although the foregoing strongly suggests that the endgame is near for an economy that is 70% consumption-based, Wall Street remains blithely oblivious. Frankly, we think the money managers and leverageurs who have been driving stocks parabolically higher with OPM (i.e., Other People’s Money) are out of their minds. But it wouldn’t be the first time a rampant Dow Average masked grave structural problems in the underlying economy.
With each successive surge of stocks to new all-time highs, we leave sanity further behind.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2006, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Sunday, 13 May 2007 | Digg This Article | Source: GoldSeek.com
