Robert Loftus'  Instablog

 We've all heard about last week's dismal unemployment reports.  Unemployment numbers require more careful scrutiny than the media has given them of late as the adjustments made by the BLS have been pretty dramatic.  Last week's unemployment report included mention of 500,000 new unemployment claims, however, if we look at the unadjusted numbers, we see that "The advance number of actual initial claims under state programs, unadjusted, totaled 401,856 in the week ending Aug. 14, a decrease of 22,650 from the previous week..."  This adjustment, which had the effect of depressing markets by making the numbers seem more negative than they actually were followed a period of several weeks when seasonal adjustments reduced the reported number of unemployment claims by over 100,000.  During that period, when claims were under-reported by more than 100,000, media coverage of the economy was far more positive.  Granted, part of that 100,000 plus deduction in unemployment claims was likely to account for Census workers being laid off, but it seems the media made little note of that change until it came time to report the end of month jobs numbers.  Given that we are in a period of economic anxiety, anyone who follows economic figures should avoid the temptation to take the numbers given by commercial news outlets - which are notorious for not giving all of the details - and download the actual Department of Labor Employment and Training press release which is available every Thursday at: 

http://www.dol.gov/opa/media/press/opa/


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 There's a common sight in retail stores nowadays.  A store customer sees an item on a shelf, picks that item up and turns it around or looks at the tag; then either smiles and walks rapidly to the cash register, or (much more frequently) assumes a look of disgust and rapidly puts the item back down, then walks away without a second thought of a purchase.  Typically, the customer with the smile and heading rapidly for the cash register has found one of those few items with a "Made in USA" tag; while the customer with the look of disgust has seen another "Made in China" tag.  Recently the US/China trade deficit has increased significantly, but it is important to remember that just because some retail chains are continuing to import large quantities of goods does not mean that those goods will find eager buyers.  American consumers are disgusted by news of an increasing trade deficit with China and a national unemployment rate that hovers stubbornly above 9%.  It appears that many in the retail business are somewhat disconnected from the customers who frequent their stores and are not aware of the degree of consumer anxiety and Nationalism currently brewing.  Although some retail stores have reported increasing same store sales over the last few quarters, if you dig down into their press releases you'll often find that sales growth was achieved with the aid of closing under-performing stores.  While American consumers wait for a national retail chain to proudly feature US made goods, many are either putting off purchases entirely or resorting to second-hand goods purchased from garage sales or flea markets.  This creates an excellent opportunity for Bearish short-sellers and you can research companies with a few trips to your local big-box retailers.  Those firms that fail to adapt to new conditions of consumer sentiment by providing more American made products are likely to continue to see progressively declining sales.

Disclosure: No positions

 The stock market rallied Wednesday on positive news regarding upcoming earnings reports along with a report from the American Bankers Association that credit card delinquencies had fallen to 3.88%.  Credit card delinquencies have not been below 4% since 2002.  These factors, along with These are all signs that there is light at the end of the tunnel, and our economy may soon be moving into a period of more stable demand and higher employment.  Before I proceed with this argument, I must explain the concept of "Real Demand" and "Adjusted Demand".  Real Demand-as described here-constitutes demand for goods and services derived from that portion of the M1 money supply that is liquid and available to consumers; basically, that means wages, inheritances, dividend income, etc. Adjusted Demand constitutes total consumer demand and includes Real Demand along with demand that is facilitated by revolving credit and timed repurchase agreements.  It is important to remember that revolving credit and timed repurchase agreements incur certain costs, which I term "credit rents".  Credit rents is an umbrella term referring to all of the costs associated with exercising instruments of credit: interest paid, annual fees, transaction fees, etc.  

Adjusted Demand - Real Demand = Demand for goods and services subject to credit rents

 Adjusted Demand can become cannibalizing, as excessive levels of credit rents can result in a significant draw-down in overall consumer demand.  There is a critical point where too much of M1 derived real demand is diverted to maintenance costs associated with credit rents so that overall demand is compromised.  Quite simply-you can't keep charging up those credit cards once they are already maxed out and you're paying as much as you can to avoid over-balance fees.  The cannibalization of consumer demand as a result of an excess of credit rents-especially those rents derived from the sub-prime mortgage market-was a significant causative factor for The Great Recession.  Consumer Credit Card rates in excess of 20% may be cited as another culprit.  

 Demand equilibrium is defined here as the point where consumers use credit occasionally, but are generally very mindful of what they owe, and carefully manage their credit rents so as not to put themselves in the hole financially.  Demand equilibrium is an ideal that would help to return consumer spending to a level that can sustain higher than current levels of employment, but it is also terribly frightening for some, and would likely mean the end-or at least a significant contraction-of many firms.  Thrifty consumers are less likely to make impulse purchases, or to go for add on features or long-term service contracts.  Loss of revenue from these kinds of items and contracts will hit retailers sharply.  These changes in consumption habits and credit markets have significant long term implications for value investors.  This is a "melting iceberg" moment for the US economy and those firms that are able to adapt to these changes most successfully will thrive while those who stick to existing business models are likely to wither.  


Disclosure: No positions