Whether intentional or not, we are living through a great experimentation in economic theory. It is believed that recessions are nothing more than depressed psychology, so much so that an extension of that theory posits that an intense and widespread counter-effort may in fact allow for their elimination. If I tell you, as someone in position of “economic” authority, that the economy is getting better and will definitely do so in obvious fashion very soon despite all appearances and evidence otherwise, then you are expected to act on that “instruction” and cease and desist all pessimism whatever your own sensibility. The “bunker mentality” of orthodox lore is supposed to be vulnerable to what is really a logical fallacy – the appeal to authority.
Coincident to that, we have the nefarious “wealth effect” that is certainly having an impact on those very closely associated with asset prices only. Aggregate demand proponents, which include all the modern monetarists, proclaim that it doesn’t matter that the result of this redistribution is concentration of paper wealth and income because the “trickle” of spending from the asset inflation beneficiaries will foster more spending, and so on. It is the long-argued idea that just getting someone, anyone, to spend more will lead to economic revival.
So right at this moment we see the confluence of both theories in reality, striking up against the obvious rebuke from the first quarter. Clearly, given that the contraction in GDP in the first three months was worse than the entire 2001 recession, there is much to be decided about this mainstream academia. The Fed and the entire orthodox “profession” has been stating exactly what I alluded to above, that we should just ignore the contraction because the future is serene and bright. At the same time, we see the practical side of asset inflation driving spending in the bartender skew of jobs (assuming that there is still any statistical relevance in those figures to begin with).
Will it “work”; the constant drone of positive reinforcement of perceptions, bolstered by the “trickle” of spending?
In May 2013, Wal-Mart CEO Mike Duke reported that revenue took a major hit. He then went on to decry the state of snowfall:
And though no one likes to talk about weather, it was a real factor across the United States. In fact, right here in Northwest Arkansas, we had the latest snowfall in the history of Arkansas reporting.
Exactly one year later, Wal-Mart US President Bill Simon noted:
A number of severe winter storms negatively impacted us during the quarter. A solid start to spring and a strong Easter drove positive comps in the back half of the quarter.
Despite the appeal of winter roads thwarting willing shoppers who would otherwise fill the coffers of the retailing sector, that won’t fly as an excuse anymore. With that in mind, the tenor of Wal-Mart’s expectations has taken on a hue or note of cyclicality balanced with structural deficiency (both of which argue exactly against the academic theories above):
Simon said Wal-Mart’s lower- and middle-income customers appeared to have made a number of changes to their shopping habits that were “not the best thing in the world for a retailer,” splurging on events like back to school and holidays like the Fourth of July, but pulling back spending in between…
In May, Wal-Mart Stores Inc said its profit fell nearly 5 percent in the first quarter and forecast weaker-than-expected second-quarter earnings, citing among other things the continued financial struggles of its lower-income customers.
If he is right, this time, then it would add to the growing sense that consumers are exhausted fully, from the short spike in revolving credit recently to the “bizarre” box office results of 2014. Consumer behavior is not conforming to “expectations” about the assumed economic trajectory.
“People think we do better in a down economy,” Simon said. “We don’t. We do better when the GDP is growing, when the economy’s good and we really need that in the long run for the business to improve.”
That doesn’t sound much like the mainstream narrative where the first quarter was an aberration, an odd combination of purportedly one-time factors. Simon even went so far as to note that the retail industry has had a rough run during the “recovery”, but that something is different, “in the last year particularly.” It certainly sounds as if there is far more than a temporary bump on the road to full and promised recovery.
It will be some months before we know for sure, but I continue to suspect that the grand experiment of managing economic expectations with blanket and repeated assurances of economic efficacy, bundled with concentrated trickles of spending, is going to end up very far from where it was envisioned.
My guess is that we will see some pickup as we get into the second half of the year, but the longer we go without getting the 3% growth that many people had in their forecasts, the more concerned you have to be that there are other things going on that we hadn’t fully appreciated,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview Thursday [May 2014].
Click here to sign up for our free weekly e-newsletter.
“Wealth preservation and accumulation through thoughtful investing.”
For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, contact us at: firstname.lastname@example.org