I’ve always looked at publicly-traded retail companies as being an important bellwether of the overall US economy.

I sort firms into rough categories by who their typical customers are and how much things cost. From most expensive to least, they are:

–super luxury, which is basically invisible

–luxury goods

–specialty retail

–Costco

–clothing stores

–Target, Walmart

–fast fashion

–dollar stores

–sub-dollar-store, which is also in stealth mode as far as stock market presence is concerned.

It’s possible to segment each of these categories further, like dividing dollar stores into Dollar General, Dollar Tree and Ollie’s Bargain–each serving different segments of the dollar-store market, but that’s more detail than I’m usually interested in.

It’s also important to recognize that luxury goods companies typically charge much more for their wares outside the US than here, so even modest sales increases in places like China (where the opposite is the case right now) or the Middle East can move the needle a lot.

The basic idea is that consumers trade up and down in sync with the economic cycle. In bad times, the specialty retail customer trades down to Walmart, the Walmart customer to the dollar stores, and the dollar store customer to venues that aren’t publicly traded. …and vice versa.

So, where are we now?

The dollar stores are a mess. Walmart is booming. Target is finally putting its aggressive pandemic-era overstocking of consumer electronics, but is not growing as fast as Walmart. Luxury in general is struggling. (I don’t pay much attention to this segment any more. My impression, though, is that the collapse of the Chinese property market is the main culprit …and that so-so sales in the US and Europe are a much lesser issue.)

Overall, this is not a picture of economic strength. If we put Walmart to the side, it would appear that lower income domestic consumers are still struggling and that a reversal of the typical cyclical trading down has yet to begin.

What about Walmart (I bought shares starting early this year, when I realized that WMT offered camera stuff online that was much cheaper than anywhere else)? Three factors are involved, I think. In what I’m guessing is the order of importance, from most to least important, I think they are:

–management seems more interested in making market share gains than in defending the status quo

–it’s online business has become a more effective competitor to Amazon, although its recent discontinuing its Walmart credit card may well be a serious mistake

–it has been unusually successful in holding on to customers who would have begun to trade up in previous cycles

–political pressure from already-established merchants has limited Walmart’s presence in California, and late arrival in the Northeast has made finding prime locations relatively difficult. I don’t have a strong opinion, but being out of these two areas may have been a plus this year.

the stock

WMT is up by over +60% so far in 2022 vs. +24% for the S&P 500. For now, I’m content to hold what I have but don’t feel a strong need to buy more.

The fate of post-WWII China was determined when Mao defeated rival Chiang-Kai-shek, who fled with his army to take control of Taiwan. This established the Chines Communist Party (CCP) as the ruling force on the mainland.

A seminal Maoist idea was that the economy should not be led by private companies but rather controlled by state-owned enterprises run by high-ranking members of the CCP and following the dictates of central planners in Beijing. This created an unholy mess.

In 1978, the then head of the CCP, Deng Xiaoping, announced a new direction for the economy which he called “Socialism with Chinese Characteristics.” No more central planning. The economy would be led by private sector entrepreneurs, as the state-owned enterprises were gradually shrunk. Put another way, this was US-style capitalism. And the result was an explosion of growth.

This renaissance lasted more or less until Xi Jinping became the head of the CCP in 2012. Xi, apparently scandalized by the fact that considerable power had shifted away from the CCP to the private sector, launched the return to Maoism that continues today. Not surprisingly, a lot of oomph has gone out of the economy.

This is why I think the apparent wild enthusiasm for China on Wall Street continues to be misguided. It’s still dangerous to be an entrepreneur there, so why take the risk. Without this spark, however, China has revered to being a rapidly aging, slow-growing economy. In addition, the less healthy business environment + import restrictions are causing manufacturers of goods for foreign consumption to shot elsewhere in Asia.

There’s a second issue: the property market. Three reasons:

–People in China don’t trust the banks as places to store their wealth. More lucrative and safer to own property, where wealth will be less visible to the CCP and the chances therefore lower of being hauled in for interrogation or having the assets seized

–All mayors, governors and other civic officials are members of the CCP. Promotion comes from showing strong economic growth. One simple way of “manufacturing” growth is for a mayor to get a loan from the local bank, whose president will be a lower-ranking CCP official and so won’t look too closely at feasibility, and build something–an industrial park, say, or a gigantic residential suburb. The mayor will hope to be promoted and long gone before anyone finds out whether this was a good idea or not. Very often it’s not.

–the sale of residential apartments in China has an options market-like aspect to it. People typically stand in line to make a down payment on a flat that may be completed 18 months or so later. Buyers commit themselves to additional progress payments and a large final installment on taking possession. At least some intend to sooner or later sell their place in line at a profit to a third party. Developers also leverage themselves financially, partly to pay for construction expenses, partly in an effort to make a higher profit on the equity they’re committing to the project.

This is a little like the atmosphere in the US during the mortgage loan fiasco in the US in 2006-07. And, like the US two decades ago, the speculative bubble formed in China has also burst. A real–and huge–financial mess.

This is why I’ve been bemused at China bulls in the US encouraging global investors to dive right in. Yes, a huge rally since late September has brought the index into positive territory for the year, but…

A related issue: I was actively involved in the Hong Kong stock market for over two decades starting in 1983, when China was in the early stages of reopening to the West. The beauty of Hong Kong back then is that, like Taiwan, it too had been a destination for Shanghai residents fleeing Mao. Once Deng opened the door to better relations with other countries, the financiers in Hong Kong began to reestablish personal and business ties with friends and relatives on the mainland–and to list the higher quality corporate names in Hong Kong. The city soon became a wealth of knowledge about the good and the bad of the mainland–that was not available anywhere else. That all ended when Xi reneged on the agreement to a 50-year transition period, starting in 1997, for the return of Hong Kong to mainland rule, when he began to impose mainland legal/political control about a decade ago. That basically cut off the information flow–and created the risk that securities analysts could be jailed simply for writing sound fundamental analysis.

I’ve always been leery of investing based on politics. In fact, the greatest use I’ve ever found for politics-based reasoning is that it usually signals the poverty of thought of the political pundits.

The Trump “drill, baby, drill” mantra is a case in point. The former and soon to be again President is doubtless a brilliant politician and reality show host. And he and his family have a deep background in the property business. But oil?

Two big issues in the petroleum domain (for what it’s worth, I was an oil analyst for most of a decade) are: –the overarching question of when we reach “peak oil” (which in today’s world no longer means when demand structurally exceeds supply, but when demand falls below supply once and for all), and

–figuring out the profit maximizing strategies of the big oil companies.

The second may well mean that the oils hold back production to keep prices high rather than produce flat out. There was a clear instance of this behavior during the oil crisis of the 1970s, when world oil prices skyrocketed. Washington passed laws setting the price of crude oil discovered before the 1970s at a low price, with a considerably higher one for output from newly discovered fields. As I confirmed after the crisis had abated in the early 1980s, American oil companies simply stopped producing “old” oil, making the domestic problem worse.

My guess, and “guess” is all it is, is that we’re already at peak oil–meaning peak demand–partly due to slow population growth in the major industrial countries, partly because of technological change–like EVs or high-mileage internal combustion engines–are reducing demand, partly because global warming means less use of heating oil in the winter.

Arguably, then, “drill, baby, drill” isn’t the best advice an oil company can get. And, if form follows true, the big oils may not drill so much even with sympathetic legislators encouraging it.

I was reading, post-election, an issue of the New York Review of Books that came out just before the voting began in earnest. I was struck by an essay by an Irish professor. Writing about NYT interviews of potential voters, it reads in part:

“These good people sound small and lost and poorer than they used to be. None of them mentions the fact that Trump is deranged, and this, in its turn, seems crazy to me. I am hypnotized by their denial, blinded by their inability to see. What is the secret, maddening wound that sets their minds spinning away from the obvious problem here?” 

The author has similarly unflattering things to say about Democrats.

This reinforces something I’ve been thinking a lot about recently, which might be summarized in Jean Baudrillard’s observation that the fantastical media interpretation of experience, the hyperreal — ultimately becomes to be seen as more real than reality itself.

There’s a stock market analog to this, in two ways. We’re in very confusing times economically, one’s where the loony ideas of media personalities (think stock market TV/radio, as well as the internet) are taken as the truth …and move stocks.

How to deal with this?

The most straightforward stance for equity investors is to have holdings that mimic the index, typically the S&P 500, or the NASDAQ for more adventurous souls. And the reality is that professional managers in the aggregate chronically underperform these benchmarks, even before collecting their management fees. So it’s hard for me to imagine that collective result being better in confusing times.

The way we as individuals have the best chance at outperforming is to have one or two individual holdings that we know extremely well, and the rest of our money in index funds. The standard for the active holdings should be high–we should have a reasonable belief that we know relevant stuff that most others don’t. Yes, we’re aided by performative media actors who pretend to be securities analysts as they opine, who are mostly clueless, and who muddy the waters. Still, outperforming is difficult.

In times like these, we should either be super-sure or have a heavier weighting than normal in index funds.

I haven’t done a lot yet to change my own portfolio. I have noticed that sort-of-broken value stocks and defensives seem to hold a lot more appeal for me today than, say, a year ago. I’m reading the recent strength in bitcoin as at least in part preparation for capital flight. And I think that the imposition of tariffs and/or deportation of workers would be a signal to become ultra-conservative. Hard to believe that all this is happening in the US.

The defeat of the Democrats in last Tuesday’s election was profound enough (Kamala appears to have moved the needle in her direction only with white women and over-65s; every other group shifted toward the Donald) that the outcome was apparent by early Wednesday morning.

The major stock indices are all up by one or two percentage points since then.

The most eye-catching, to me, were the moves in cryptocurrency-related things. Bitcoin, for example, is ahead by 30% or so, meaning it has just about doubled, year to date. And Tesla, though fading today, leaped by a similar amount.

Both are good news/bad news stories:

–bitcoin and other cryptocurrencies will likely receive more favorable regulatory treatment under Trump. On the other hand, a major use case for them, as far as I can see, is to facilitate flight capital

–the good news for TSLA is that, given the large amount of money Elon Musk has contributed to the Republican cause and the substantial influence he appears to have with Trump, Wall Street thinks the chances are high that Washington will block the cheap, stylish Chinese-made EVs that have swept through Europe from entering the US.

tariffs, workforce contraction and deficit spending

–I had been seeing tariffs from the point of view of an American, as well as from the experience of the Trump soybean tariffs that enhanced Latin America as a competitor to the US. These raised no money for the government, after payments to domestic farmers to offset the financial damage that tariff imposition caused.

The attitude of investors in Europe, for the moment at least, seems to be that while tariffs may cut US economic expansion from, say, 3% yearly to 2%, these same tariffs may kick their economies into reverse. So money is flowing into the US so far, not out. That’s also despite the fact that the real US economy expanded by about +10% during Trump’s first four years, which was considerably worse than the +28% during Biden’s or the +16% during Obama’s last four, with similar differences in stock market performance.

It will be interesting to see how long this lasts.

–even I get tired of writing this, but…a simple but useful way of looking at economic growth is that it comes from either having more workers or worker being more efficient. The latter springs either from better tools or better education (either through school or in the workplace). The domestic workforce is growing at about 0.5% yearly. Add maybe 1% in productivity gains to that.

About 20% of the workforce consists of immigrants, about a quarter of whom are here illegally. Want a straightforward way, in addition to tariffs, to derail economic growth? Deport 5% of the workforce. Disbanding the Department of Education might be another way to attack productivity gains.

the dollar

The Reagan/Thatcher revolution begun in earnest in the 1980s was based on the idea that the private sector could, and should, offer services that were at that time provided mostly/entirely by the state. The trigger to start the process was to reduce taxes, especially for the wealthy. Two hopes: private sector actors, now richer, would invest in ventures that would displace alternatives from state-run firms; and renewed vigor in the private sector would generate higher overall tax revenue, gradually closing any government budget deficit that the early tax breaks would create.

It’s now over 40 years later. Other than for three years around the turn of the century, the government has been in deficit the entire time. One can read the chart of deficits as saying that the deficit was beginning to stabilize, and even shrink–until the Trump tax cuts of his first term. The pandemic made the situation worse, as did Trump’s pandemic denial.

Suppose we get another set of tax cuts for the wealthy. It’s possible, in theory at least, that potential buyers of US government bonds will begin to worry that Washington will be unable to repay them in full. This could play out either through a decline in the currency or an increase in the rates that need to be offered to attract buyers (making the deficit worse) or both.