Things are starting to break. Can we thank the Fed?
The reason is actually not important. What we have to take away is things are starting to look dire.
Over the past 18 months we warned of impending issues within both the United States and global economy. During that period, we covered unexciting topics such as inventory levels and yield curves to forecast what is coming up.
We are now at the point where things are coming to a head. Part of that is the retail apocalypse kicking into high gear.
It was a process that was started by Amazon and the rise of online shopping. Now, we are coupling it with a credit crunch along with a possible recession. Throw in still elevated prices stemming from the lockdowns and massive fiscal stimulus, and we see how we have a recipe for disaster.
There was a warning shot fired: Bed Bath & Beyond filed for bankruptcy.
This is the first of what is likely to be many retail establishments that find their way into bankruptcy court. We can add the likes of Sears to the list.
In addition to this, we have companies like Starbucks closing down 500 locations. Even Walmart is getting into the act with the closing of around 20 stores although much of that could be due to the shoplifting issues.
Either way, this is a sign of what is to come.
Commercial real estate has been struggling. It all started with retail in the US about a decade ago. It was around that time when I clued into this concept. By 2015, it was part of the mainstream. Unfortunately, it started back in 2010, right around the time Sears acquired KMart.
Amazon was putting a hurting on the physical chains. The efficiencies of online shopping simply was too much to handle. As more sales shifted away from the traditional model, revenues collapsed. This caused issues since many entities had balance sheets filled with debt.
Now we are in for another round. As retail locations go under, this creates more square footage on the market. Department stores are still back into a corner, a situation unlikely to change.
For many, bankruptcy will be the only way out.
It is odd that we think the good times will always last forever. Many are optimistic about the economy. This is an odd viewpoint considering the period of sustained upward moves. Leaving the sharp pullback due to the lockdowns, we have a strong decade plus relative to recession. Growth rates might not be stellar but the top line numbers were fair.
That is about to come crashing down. We are facing a credit crunch that is guaranteed to make life very difficult for most. This is all part of the business cycle which is, throughout history, undefeated.
Obviously, as we head down the path towards the trough, we will see those who are indebted taking the brunt of the impact. This is a time to be nimble and agile. Big box retailers are anything but that. Their balance sheets are a mess, only getting worse with tighter credit and increasing interest rates.
Ultimately, this feeds into jobs. Each store closure pushing a certain number of people out the door. So while the jobs reports paint a rosy picture, the reality in many areas is much worse.
What happens when, in addition to the technology sector, retail starts to see massive layoffs? Under that scenario, both the high and low end is getting whacked. The middle section could prevail in terms of retaining their jobs but we know this class hasn't been excelling over the last 15 years.
Rarely do things as big as economies instantly fall off a cliff. There is a build up. It is like an oil tanker: it takes a while to turn.
In December 2021, we start to issue the warnings. The LIBOR yield curve started to alert us of issues. This was backed up by US Treasuries the following Spring. While many discount the yield curve, they are ones who are usually issuing bad forecasts. When the long end of the largest market in the world is screaming like it is now, it is best to listen.
The Fed might have another raise in it. Nevertheless, there never has been a group of tone deaf people. They are running the same Phillip's curve nonsense that will push the economy into the ground.
Bed Bath & Beyond is just one of what will be the many in 2023.
Things could get messy.
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