What’s this? Your regular editor returns from a nasty throat virus to find that the inflationists have been reappointed at the Fed to complete their destruction of the U.S. dollar. And in the meantime, the retail and commercial property markets in Australia show signs of fatigue.
But first, we apologise for being away the last few days, although we can see our shoes have been ably filled by Money Morning editor Kris Sayce. Some sort of tonsil/throat virus has been making the rounds here at the Old Hat Factory. It’s nothing a course of antibiotics can’t wipe out…in addition to wiping out all the natural bacteria in your digestive tract.
However we feel cleansed. All the toxins in the system have been sent packing. From here, the road to recovery begins with yogurt. Maybe we’ll send a note to Fed Chairman Ben Bernanke, who has been nominated for second four-year term by U.S. President Barack Obama.
Why is the biggest story of the day? Because Ben Bernanke is a well-intentioned arsonist. Bernanke inherited an American and global economy built on an upside down pyramid of debt, with a very small asset base. When the entire edifice began to collapse in 2007, the Fed Chairman was slow to react.
But by the end of 2008, the Fed had expanded its balance sheet to over $2 trillion. It accepted toxic collateral from banks in exchange for U.S. Treasury bonds and notes. It set up new liquidity and credit facilities to keep over-leveraged financial firms afloat. And it began monetising mortgage and Treasury debt by creating new Fed money to support the U.S. housing market and the criminally reckless spending policies of the U.S. government.
Everything else in the financial markets flows, in one way or another, from the Fed’s actions. Commodities first inflated, then deflated, and are now slowly inflating again as the U.S. dollar is systematically weakened by the Fed’s actions. Investors are forced to speculate as well.
If there’s one good result from the Fed’s campaign to save housing by destroying the dollar, it’s that investors have begun to realistically evaluate their alternatives outside the greenback and dollar-denominated assets. Emerging markets? Maybe. Energy? Probably. Precious metals? Definitely.
What about commercial property or retail stocks? Probably not. Scratch that. Definitely not!
Property group and retailer Westfield announced a $708 million net loss for the first six months of the calendar year. The good news is that met expectations by analysts. The bad news is that it doesn’t really matter what analysts expect: that’s a $708 million net loss.
If Westfield were married to America, it would ask for a divorce. Nearly one third of its revenue comes from its 55 U.S. shopping malls. But the company said sales per square foot at its U.S. properties fell by 6.2% from the same time last year. Conversely, sales at its Aussie properties were up 5.1%.
The company also took a $2.9 billion write down on asset valuations. Par for the course. Many of the assets purchased with debt at the height of the credit boom are deflating. It could have been an even larger write down, but the company booked a $932 million gain on financial instruments. We’ll investigate just what those were and get back to you on it.
Retail is a terrible business to be in during a recession. Australia, backed by $50 billion energy deals and a committed faith in property, sports a lot of consumer confidence. That backs retail sales. But don’t forget the primary economic and social trend right now: people are reducing their debts. They are cutting back, becoming more frugal, and learning to live within their means.
Of course, we think this is happening. But it could be totally wrong. Maybe the credit cards are finding their second wind and consumers are gearing up for one last credit bender. But our suspicion is that you are in the middle of a generational/cyclical shift in the attitudes toward debt and that this is generally bad news for retail stocks.
By the way, a few readers wrote in claiming your editor had it all wrong about Costco. Costco treats its employees well, sells at a fixed mark-up to its wholesale price, and operates on much different principles than, say Wal-Mart. Enough people wrote in that we thought we should mention this.
Fair enough. Our point wasn’t to disparage the Costco brand. The main point was that massive retail outlets with bulk goods are only possible in a world with cheap energy and cheap labour. Maybe it’s sustainable. But we have some serious doubts. Still, it looked like an awful lot of people queued up last weekend.
That’s it for today. Good luck Ben Bernanke. “There’s a lot of ruin in a nation,” Adam Smith once quipped. Four years is not much time in the scheme of things. But the Fed can ruin a lot. Watch it try.
for The Daily Reckoning Australia