Stealing From Tomorrow
Most of the nation’s major retailers are now open on Thanksgiving, providing a convenient excuse for millions to get away from that irritating relative or family friend that you see only on holidays. You still have to put up with their bad jokes, their insistence on starting family debates about politics or religion and stories you’ve heard a million times at previous family gatherings but once the turkey has been reduced to something that looks as if it has been attacked by hyenas, you can escape that Uncle who isn’t really an Uncle by running down to the local mall and getting a jump on the Christmas shopping. Retailers may have never done a greater public service.
Kmart is the leader in this trend having opened on turkey day for the last 22 years but every year we see more and more stores joining the Black Friday fray on Thursday. This year Macy’s did it for the first time. The thinking behind the early openings is pretty simple. Shoppers tend to buy the most from the stores they visit first. That may be because they go to the stores that have the things they know they want first or it may just be a matter of their wallet getting slimmer as the day wears on. The problem for the retailers is that the more stores that start their Black Friday sales on Thursday, the less of an advantage they have. Eventually I guess we’ll see Black Friday sales starting on Wednesday and then Tuesday and so forth until we’re all the way back to the day after Christmas last year.
What these early openings do not do is increase overall sales. Some of the people who would have shopped on Friday now shop on Thursday (from the WSJ):
Traffic climbed 2.8% on Thursday and Friday, bumping sales up 2.3% to $12.3 billion over those two days, according to preliminary results from market researcher ShopperTrak LLC. The jump was more pronounced on Thanksgiving after many chains lengthened their hours or opened their doors for the first time during the holiday.
Black Friday, meanwhile, lost out, with traffic dropping 11%, while sales fell 13%, ShopperTrak said, as more customers got a jump on their shopping in stores on Thanksgiving or online.
The best marketing minds in retail managed to accomplish nothing more than increasing sales on one day at the expense of the next. These marketers should find solace in the fact that they’ve accomplished at the micro level exactly as much as the Federal Reserve has at the macro level. And they didn’t even have to resort to complicated economic models.
When the Fed artificially suppresses interest rates, the main effect is a shifting of consumer preference for today over tomorrow. If mortgage rates are reduced because the Fed is buying every mortgage security being issued, someone can afford to buy a house today rather than being forced to wait and save and buy in the future. That might sound like a good thing but one can’t help but wonder what the Fed will do when Black Friday arrives. Just as the shopper who buys on Thanksgiving doesn’t go shopping on Black Friday, so too the home buyer of today won’t be shopping for another one tomorrow.
A similar effect is seen in the investment markets. The Fed’s policies have pushed down the return on risk free and low risk investments creating a reach for yield as investors move to riskier assets to escape the negative real returns created by the Fed. This pushes up the price of these riskier assets today but only at the expense of tomorrow. There is a finite number of investors willing to take on this extra risk and once they’ve bought today, they won’t be available to buy tomorrow. At some point, we are back to waiting on an accumulation of savings to fund those future purchases. In addition, the allure of buying today diminishes over time as the price of risk assets rises. At the extreme, the future return of the risky asset will equal the future return of the risk free asset and there will be no reason to take on the extra risk.
The Fed believes that as asset prices rise, investors will feel wealthier and go out and spend part of their windfall. It seems that what the Fed is really counting on is that these investors will borrow to fund these purchases since selling to fund them would be counterproductive to the Fed’s plans for higher asset prices. Based on margin debt levels and a newfound supply of and demand for home equity loans, the Fed might be right, at least for now. They better hope though that nothing comes along – a black swan to use the popular term – that knocks down asset prices because brokerage firms are not known for their forbearance when it comes to meeting margin calls. As for the house as ATM, we’ve already seen that this method of financing current consumption has its limits.
Many of the deals on Black Friday are nothing more than illusions created by clever marketers. A few true bargains with limited supply are used to lure shoppers in so they can sell them items with higher margins when the bargains are all gone. The illusion of bargains benefits the retailers at the expense of the shopper. The Fed creates a similar illusion by distorting the price of credit. The house that looks cheap based on today’s monthly payments may be quite expensive if (when) interest rates rise and you need to sell. The stock with a 3% dividend looks cheap today only in comparison to CDs that pay next to nothing. And just like the retail marketers, the Fed’s illusion of bargains benefits the retailer (Wall Street) at the expense of the shopper (Main Street).
Really smart shoppers don’t buy during the holiday season. They avoid the frenzy of holiday shopping when others get caught up in the artificial hype of days like Black Friday. Really smart investors don’t buy during the height of a bull market. They avoid the frenzy of buying that comes with rising prices and dreams of new eras when things are different this time. The old saying that one should buy straw hats in winter equally applies to gift buying and stock buying. There will be another, real Black Friday (or some other day of the week) on Wall Street someday and that is when investors should be shoving strangers out of their way to buy something. Until then, you’re probably better off, as painful as it is sometimes, spending more time with your family.
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