All Europe, All Week, Again!… The Greek tragedy continues! There was a surprise announcement that the Greek population would vote on austerity measures, but then it was rescinded. The prime minister resigned, but then didn’t, but did again. It is still about the banks.

What it means… There is no doubt – no matter what the talking heads say – that the Greeks would vote against further austerity. This would throw out the grand but fuzzy plans of the ECB from last week and cause the bailout to fall apart, leading to banks once again being the point of pain with their Greek debt being worth a whole lot less than the price on their books. It is getting very interesting once again!

Productivity Up, Income Down… Companies increased their output by over 3% using the same amount of labor, while unit labor costs were down 2.4%.

What it means… This reflects the cautious nature of businesses. If you can deliver more product with the same personnel, why wouldn’t you? At the same time, there are so many people seeking jobs that the overall cost of labor continues to fall. This is the same scenario we have talked about for years. With inflation up almost 4% and wages down, the thing that gives up ground is our standard of living.

1 in 15 Among the Poorest… 20 million Americans are living at or below ½ of the rate of poverty, meaning an income of $5,570 or less for a single person and $11,157 or less for a family of four.

What it means… With gas over $3/gallon and food prices rising, the implications are obvious, and daunting.

US Unemployment Down to 9%… Non-farm Payrolls came out with an increase of 80,000 jobs, which included 104,000 new private sector jobs and a loss of 24,000 government jobs. The sneaky statistic of birth/death adjustment, meaning guessed at jobs at small businesses, added 102,000. If this is removed, then the number of jobs created goes negative. Unemployment fell to 9% through very minor rounding.

What it means… TheUS is not creating enough jobs to put to work the roughly 125,000 – 150,000 new members of the workforce each month. Instead, we are barely getting any of the long-term unemployed back to work. This measure, viewed in conjunction with the statistics on the poor and the slide in wages above, continue to outline a slack economy. We are slogging through it, and it is no fun.

 (source: HSDent Publishing)

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All Europe, All Week (Almost)… Equity markets around the world staged massive rallies on the announcement of a preliminary deal to address the European debt crisis.

 What it means… The deal included a 50% reduction in value on Greek debt held by banks, and a call for a recapitalization of banks of about 106 billion euros, as well as the raising of almost 1 trillion in funds that will be backed by the euro zone bailout program (EFSF). Who will invest in European banks? Who will invest in the euro zone bailout fund? These unanswered questions are left for another day. The deal shows a mindset to address the problem, but the details show that a real solution is nowhere to be found.

Greek Pensioners in the Crosshairs… Following on the Greek Tragedy, the national pension system holds 35 billion worth of Greek government debt. This is about to be cut in half, courtesy of the aforementioned agreement.

What it means… There is no way to overstate the size of the problem inGreece and the growing issue in Italy. These economies are shrinking, not growing, and the turnaround plans of the region rely on the fantastical notion of budget surpluses in these countries through dramatic spending cuts with no resulting loss of tax revenue. How likely is it? Ask the nations that have already tried it –Greece, theUK,Italy,Portugal,Spain, andIreland. Close on the heels of this group is France, which is not in a death spiral, but is teetering on the edge of recession and just announced another round of austerity measures.

US GDP Up 2.5%… The 3rd quarter GDP of the US grew at a 2.5% annualized rate, which is better than many had hoped for over the course of the summer.

What it means… Many breathed a sigh of relief that the US moved away from recession instead of toward it, as 3rd quarter GDP doubled the rate of the 2nd quarter. In fact, GDP is now above its pre-recession levels. The problem is that in the 3+ years since the last GDP high we have added millions of new people to the economy, so on a per person or per capita basis, we are still about 3% down. Either way, our current growth rate will not add jobs, and wages have fallen, which is why personal confidence remains low.

No Population Movement… The Census Bureau and the IRS released data showing that the population movement of the US is at its lowest point since the measurement began in the 1940s. The sun states are not gaining, in fact NV and FL lost people, and the large cities of the Northeast staunched their losses.

What it means… If you cannot sell your house, and you are not gaining new employment, then moving is hard. In addition, the previously attractive states were in a feedback loop where more people meant more development which meant more jobs, which attracted more people, and so on. Now the feedback loop is negative, where fewer people mean less development, which means fewer jobs, which requires less people, and so on. Young people are hanging around major population centers hoping the size of the cities will lead to employment opportunities.

Home Prices Continue to Slide…The Case Shiller 20-city Home Price Index fell 3.8% year-over-year, and the median price of a new home fell 10.4% year-over-year.

 What it means… This is no surprise, of course. Housing is still in the dumps, and the main drivers – access to credit, earnings, and savings – are still suffering. Don’t look for a turnaround soon, especially with foreclosed inventory about to hit the markets.

 (source: HSDent Publishing)

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 Student Loans to Top $1 trillion…USA Today reported that the total amount of student loans outstanding will top $1 trillion this year, far outpacing the amount of credit card debt outstanding.

What it means…What is the only question asked of a prospective student loan borrower? “Are you a student?” OK, that’s simplistic and not true, but the point remains that based on nothingness we have a system that will provide tens if not hundreds of thousands of dollars of loans to those with the least experience in managing their finances – the young. What makes this so horrific is that student loans cannot be discharged by bankruptcy, and follow a person forever. So if a young person borrows too much at the start of his or her life, and then cannot find a job that affords the ability to pay it back, then he or she is simply stuck. Forever. This has the makings of a very bad situation.

No European Agreement This Weekend… Members of the European Monetary Union (EMU) which control the euro announced that there would be no sweeping agreement announced this weekend to deal with country defaults and thereby save the euro.

What it means…The issue is not that hard. When the euro was constructed there were safeguards put in place so that down the road stronger countries would not have to bail out weaker countries. Now that there is a real chance of bankruptcy of a country, the members of the EMU are desperately trying to find a backdoor that allows them to make the stronger countries pay for the weaker ones. German taxpayers should be angry and fearful.

Manufacturing Indices Mixed… The Empire Manufacturing Index missed expectations, but the Philly Fed Index beat expectations handily.

What it means…The economy has not fallen off a cliff. There is still economic activity, albeit not as strong as people might like. Our view for some time is that the economy will return to recession (indeed, never really left), but the big negatives won’t be until 2012. Look for some stronger numbers in the near future, but don’t think that the recovery is on track.

Consumer Price Index was Hot, and Producer Price Index was Hotter…The Consumer Price Index measure of inflation was up 3.9% for the year, while producer prices were up 7.0%.

What it means…Don’t be surprised as you begin your Christmas shopping to see prices that are much higher than last year. This continues the trend of paying more for almost everything, except real estate. The problem is that a household’s cost of shelter usually doesn’t change during the year, even though the measure of that cost might change. With wages falling, the continued rise in prices will be even more painful in the months and years ahead. All of this makes getting out of debt that much harder.

Chinese Allow Local Governments to Issue Bonds… The Chinese government is ow allowing local governments to directly issue bonds; this replaces the old way of local borrowing, which was through banks.

What it means…Taking a page from the Western world, China is using debt to solve a debt issue. Over the past several years local government bank borrowing has soared. As those bank loans come due, the local governments don’t have the money to pay them off. The solution? Borrow more, of course. This is just another step in the direction of a debt crisis in China, the only question is when.

 (source: HSDent Publishing)

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 Jobless Claims Hover Over 400k…Jobless Claims were reported at 404,000 for the previous week, remaining at an elevated level since April.

 What it means…Over the past four weeks we’ve seen a number of surprises in Jobless Claims. There were weeks above 420,000, and then the surprise drop down below 400,000.  Now we are back in the middle of the range. When the average is taken, the reality is clear – not much has changed. Unemployment is high, there are no clear “job engines” in the economy.

S&P Downgraded Just About Everybody…At least in European terms. From countries likeSpain to 10 different banks, S&P slashed ratings, citing sluggish GDP growth across the euro zone and the continued sovereign debt crisis.

What it means…Lower ratings mean higher borrowing costs, which cuts into the profits of banks and can even cause their spread to go negative, where their cost of borrowing exceeds what they can earn on lending. This becomes very important in an environment where central banks are doing their best to force down long term interest rates. With short term borrowing already difficult in Europe because of a lack of trust of bank balance sheets, these downgrades will not help.

 Germany and France Announce a Plan to Make a Plan, and the Markets Fly…Angela Merkel, the leader of Germany, and Nicolas Sarkozy, the leader of France, announced that they would announce a “big” plan for fixing the European debt and banking crisis. The announcement will be near the end of October because the plan isn’t finished. European andU.S. equity markets soared on the news.

What it means…The two leaders, now known as the combined name Merkozy (like Brad Pitt and Angelina Jolie who became Brangelina), are in both a tough spot and a good spot.  It is tough because the European debt crisis is not going to be eliminated through miracle growth in GDP or a simple return of confidence that over-spending countries will right their ships. It is a good spot because the longer it goes on, the more flexible the participants become.  Remember Summer ’11 when European banks had to agree to a 21% haircut to get the new round of bailout for Greece? Well, now the number for a haircut (or write down) for Greek debt is between 50% and 60%. This is much closer to reality, but it takes time to get people to agree. Now what happens to banks that take such a loss? They look to taxpayers to make up the difference, of course. It’s a bad time to be French or German, unless you really wanted to pay taxes to support banks that bought Greek bonds.

Earnings Season Kicked Off…Alcoa started the season, missing earnings and disappointing. JP Morgan followed suit, but then Google blew the doors off.

What it means…The divergence should continue. The industries (finance and commodities, for starters) that have to do with the basic functioning of the economy will show weakness, while gadget-oriented consumer fluff should soar. It makes us feel better, and might even extend the rally in stocks for a while, but it’s no way to either put people back to work or grow our underlying economy. One final note on JP Morgan, they used a nifty accounting trick to record $1.9 billion in earnings. This accounting trick says that if your own debt outstanding, meaning bonds or other things you have issued, go down in value, that you as a company can record a “profit” because if you bought back the bonds at a discount then there would be a gain. So, no money changes hands, and the debt of the company is worth less because the company is seen in less favorable light, but the company gets to record a gain. Amazing! This little accounting move was worth $0.29/share of earnings, when the company’s total earnings were $1.02. So this move was almost 30% of the quarter’s earnings, even thought it was nothing but air.

 Retail Sales Up in September… Retail sales were reported up 1.1% when they were expected up 0.8%, and excluding car sales the number was up 0.6% on expectations of 0.4%.

What it means…The US is not falling off a cliff. While these numbers are not huge increases, they are positive and they are more than expected. This gives credence to the notion that the US is not falling into another recession, at least not right now.

 (source: HS Dent Publishing)

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Now for some “retirement” perspectives…

Percent of households whose head is nearing retirement age that have 401(k)-type accounts:   60%     (source: Center for Retirement Research,BostonCollege)

Chance that such a household has adequate savings to maintain its standard of living into retirement:   1 in 10     (source: Harper’s)

Percent of baby boomers in 2010 who say they will “never” retire:   25%   (source: Associated Press – LifeGoesStrong.com)

Percent of those who said “never” who have no retirement savings:  100%   (source: Associated Press – LifeGoesStrong.com)

Percent of the 126 largest public pension plans that assume a rate of return exceeding 8% per year:   88%    (source: Wall Street Journal)   Note:  to say that this is unrealistic is a major understatement

Who owes how much…

Total revolving credit card debt owed by American consumers:  $826.5 billion    (source: Federal Reserve, FinAid.org)

Total outstanding student loan debt – federal and private:   $829.8 billion    (source: Federal Reserve, FinAid.org)

To rank in the top 2% of all US taxpayers required an adjusted gross income (AGI) level of at least $253,197 for the 2008 tax year (i.e., the last year that tax data is available).  This high-income group paid 46% of all federal income tax paid by individual taxpayers in 2008.  (source: IRS)

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 I often find these items fascinating, either because I’m weird, or perhaps because they can tell a story when you really think about what the facts represent.  Anyway, here are several.

Retail price, per gallon, of black ink in the average printer ink cartridge:   $2,701.52   (source: cockeyed.com)

Amount American companies lost to workplace fraud in 2008:  $994 billion   (source: Association of Certified Fraud Examiners.

Date the first woman acquired a seat on the New York Stock Exchange:   January 13, 1927   (source: NYSE)

Share of American eighth graders who agreed “a lot” with the statement, “I usually do well in mathematics.”   40%

Percent who qualified as advanced:   7%

Shanghai eighth graders who indicated similar high self-esteem in math:   18%

Percent who qualified as advanced:   44%    (source of the last four items: Brookings Institution)

How about some look at who is investing…..

Percent of white Americans who own stocks, bonds, or mutual funds:   49%

Of black Americans:   25%

Of Hispanic Americans:   16%    (source of the last three items: Kaiser Family Foundation)

What’s the best way to do business….

Percent of Americans in 2009 who believed the free market is the “best system on which to base the future of the world”:   74%

Percent of Americans who believe so today:   59%

Percent of Chinese who do:   67%    (source of the last 3 items: GlobeScan Incorporated,Toronto)

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“Taste for Fast Cars and Whisky Casts China’s Women in New Light”

Financial Times, July 5, 2011

The headline above will no doubt cause more than a few readers to do a double take.  Sports cars and expensive scotch tend to be the conspicuous consumption choices of well-to-do men in their 40s and 50s.  But  China is a place where Western gender marketing stereotypes simply do not hold.  Chinese women are major buyers of Scotch whisky and exotic cars, while Chinese men fancy high-end face creams and “man purses.”

The Financial Times reported that Johnny Walker is popular enough with Chinese women to alter the parent company’s marketing strategy.  Diageo, the British company that owns theWalker brand, is taking a “gender bilingual” approach.  Not to be outdone, Italian performance carmaker Maserati says that 30 percent of its sales inChina are to women, compared to 2-5 percent inAmerica andEurope.

At the same time, men represent 45 percent of the $1.7 billion market for luxury bags and accessories inChina, compared with 15 percent worldwide.  Chinese men are very particular about their appearance and consider proper grooming and dress essential to career success.

I bring up these little anecdotes to make a very serious point.  Consumer demand in theUnited States and Europe remains deeply depressed.  While the retail economy has improved markedly from the pits of the financial crisis, retailers still have very little pricing power.  They can move the merchandise, but only if they run perpetual sales.  

We can’t expect conditions to improve any time soon.  The primary driver of the world economy over the past thirty years—the American and European Baby Boomer generation—is now desperately trying to save as much as possible for retirement.  Their children, the Echo Boomers, will be a major economic force to be reckoned with—eventually.  But for now, they are still too young and their incomes are too low to compensate for the financial retrenchment of their parents. And no amount of fiscal stimulus, deficit spending, or quantitative easing is going to change this.

So what are we to take away from all this? 

Companies, investors, and professionals who want to be successful during these difficult economic times need to look beyond their traditional comfort zones.  Be prepared to try new techniques when the old ones that were reliable in the past no longer perform as expected.

The Western cosmetics and handbag companies who first targeted Chinese men—and the Scotch distillers and performance car makers that targeted Chinese women—were clearly operating outside of their normal comfort zone.  But in doing so, they found profitable new ways to grow their businesses in an otherwise difficult economy.

We can’t all sell our wares in China, of course.  But we can dip deep into that reservoir of creativity that makes the American capitalist system work.

 

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The U.S. Postal Service may be the butt of more jokes than they deserve.  They are seen as the poster child for government bureaucracy that is pretty much clueless about how much it really costs to run things, who the customer are and what they need, etc.

However, I recently read that the USPS is being “taken” by the rest of the big government as a cash cow.  In reality it seems that the USPS is a cash-generating machine, operating under duress of some fiscal mandates from 2006 and the Bush administration.  That year Congress passed a law, the Postal Accountability and Improvement Act, requiring the USPS to “pre-fund” all of the health care and retirement costs for all of its employees 75 years into the future. 

75 years in advance?  You’ve got to be kidding!

And they must have it done by 2016.  So the USPS is paying in an additional $5 billion per year because they have to.  Try doing that in your own business, paying for the unknown future 75 years out!

And it now appears that the actuaries have caused the payments to be too high, maybe as much as $50 billion too much.  Gotta come closer to the target than that I’d say.

So, where has all of this money gone?  Here’s where the government gubbers it up again.  The money has been “credited” to the U.S. Treasury, thereby reducing the budget deficit by the amount the USPS has paid in via these surpluses.  Is it really anywhere?  Of course not.  It’s just like Social Security, it’s there via an IOU for it.  Seems our government is on a borrowing binge everywhere you look.

So, from now on I’m going to cut the U.S. Postal Service a little slack.  Yes, it’s still a giant quasi-government bureaucracy, but maybe it’s not a messed up as I thought.

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Potato chips?  Yes, potato chips.  Let me connect the greasy dots.

There are very interesting demographic studies that prove to be very predictable when it comes to human behavior, especially concerning the buying habits of us all.

 On average, couples marry and have children at age 28.  Children consume the most food at age 14, especially potato chips and salty snacks. This fact is not lost on the food industry.  Therefore you can expect that the most potato chips and salty snacks will be purchased by a family household at age 42.  So the grocery stores in neighborhoods with a younger demographic will have more potato chips than a store in a more mature neighborhood.  At least that’s the theory, so I decided to test it out.

We went to the Bashas’ store onScottsdale Road at the western edge of Grayhawk and measured the linear feet of potato chips and salty snacks.  We also went less than 4 miles to the AJ’s  Fine Foods store at  Pinnacle Peak and Pima and did the same thing.  A note for those of you not living in the valley, these stores are owned by the same parent company, with Bashas’ being the more family oriented store and AJ’s Fine Foods targeting a much more affluent and older demographic market segment (and it is a smaller store).  Here’s what we found. 

The Bashas’ store had one major aisle for chips, a secondary area for them, and at least 4 end caps and several small displays all over the store.  The total linear feet of potato chips and salty snacks was over 900 feet.

TheAJ’s Fine Foods store had one shelf area and one end cap.  That’s it.  The total linear feet of potato chips and salty snacks was 270 feet.  Less than one-third the size.  Seems to prove out the theory.

 Believe me, if the older shopper at AJ’s Fine Foods was buying a lot of potato chips, they would have the shelf space to accommodate it.  But it’s the younger family that’s buying and the food industry knows it. 

 These very predicable ,demographic trends come in to play in many more obvious ways, and I’ll be elaborating on them in the weeks and months ahead.  And they are having a profound impact on our economy now and into the future.

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 ’Americans bemoan lack of financial willpower – but still planning swell vacations’. That’s the headline from Investment News  .

I vividly remember coming into this business many, many years ago and hearing the adage that people spend more time planning their annual vacation than they do planning their financial future.

 Well, what do you know?  That’s still the way it is.

 ”If you’re looking for one reason Americans can’t seem to stick to their financial plans, here’s one possibility: they spend too much.”

 Duh!!

Is there more information available today to the general public than there was 25 or 30 years ago?  Absolutely! 

Are people taking advantage of it?  Maybe to some degree. 

 Is planning for their future really a priority?  Yes, for a few. 

And the net result of this will be that society will bear the cost in the future for those that failed to take their own financial future seriously.  Remember the children’s story of the Little Red Hen.

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