Juggling Dynamite

Major retailers have noted a pullback in consumer spending, and same-store traffic is down across restaurants this year, particularly at sit-down chains. Most are ramping up discounts and promotions to lure customers. See, After years of Increases, Companies are Rolling Back Prices:

Retailers, restaurants and other companies spent years lifting prices. Now that consumers are closing their pocketbooks, some companies are turning to discounts to win back business.

Businesses that sell a range of products from IKEA sofas to Air Jordan sneakers have said in recent weeks that they have lowered prices this year. Many companies increased prices in the pandemic when supply chain and labor costs rose, and consumers were willing to pay more.

But demand for many goods that aren’t necessities, such as home furnishings or pricey sneakers, has fallen, leaving companies sellers in a battle for a larger piece of a smaller pie.

Price cuts and slumping demand compress corporate revenue and, finally, profits. US corporate profits, at 12% of GDP, are off all-time cycle highs (top panel below since 1960, courtesy of The Daily Shot) even as stock prices have continued to rise. Historically, corporate profits have reliably been mean-reverting, leading employment lower (bottom panel below) as they fall (unemployment rising, middle panel shown, with recessions in grey bars). Maybe this time is different.

The results of the easy money experiments from 2009 to 2022 are widely evident: they yielded record indebtedness and unaffordable housing. This was especially true in Canada, where the median household debt to income was 175% in the second quarter of 2024 from 156% in the fourth quarter of 2008. At the same time, the average home price soared from 3.3x the average household income in the 1980s to an impossible 9x since 2020 (the source for the chart below is unknown). The US median home price, at 7.2x the median household income, also touched a new all-time high in September, above the 7.1x recorded in 2022 and 6.8x at the peak of the 2006 housing bubble (chart below since 1945 courtesy of The Kobbeissi Letter). Home prices soared 50% in the last five years, nearly 3x the 17% growth in household income.
Statistics Canada reported last week that the gap in the share of disposable income between the wealthiest two-fifths of Canadians and the bottom two-fifths grew to 47 percentage points in the second quarter of 2024—the widest gap since StatsCan first started collecting such data in 1999.

While the lowest 20% of income earners saw a slight rise in their share of disposable income due to wage increases, the middle 60% saw a decrease.

In the second quarter, the top 20% of Canadians held more than 66% of the country’s wealth, averaging $3.4 million per household. By comparison, the bottom 40% of Canadians accounted for only 2.8% of Canada’s wealth.

StasCan noted that the extreme wealth gap driven by the top 20% of income earners was mainly due to investment gains attributed to higher interest rates. See October 10 Statscan Report:

While higher interest rates can lead to increased borrowing costs for households, they can also lead to higher yields on saving and investment accounts. Lower income households are more likely to have a limited capacity to take advantage of these higher returns, as on average they have fewer resources available for saving and investment.

Higher interest rates incentivize saving and rational investment while discouraging speculation, asset bubbles and excessive counter-productive consumption. The collapse in Canadian productivity (below since 1989) undermines our standard of living and demands attention.
As cries build for central banks to slash policy rates back near the lows and governments to resume “free” money handouts, sober analysis begs to differ.

This morning, US data showed a larger-than-expected increase in people applying for jobless benefits—258k for the week of October 5, versus 230k expected—a 14-month high.

There was also a .2% month-over-month increase in headline CPI, double the .1% expected by the consensus. Fewer jobs and a higher cost of living remain an increasing challenge for households that drive the bulk of spending in Western economies.

While governments have continued to expand debt and public sector job rolls, the private sector is focused on cutting overhead. US private job growth in September was -.4% year-over-year, a contraction only seen during recessions over the past 80 years.

In Canada, barely 50% of those looking for work in the last year found a job. The Canadian unemployment rate, at 6.6% in September, was the highest in three years, higher than before the pandemic and 180 basis points above the cycle low two years ago—again, a rate of change only seen during past recessions.

Small businesses drive the bulk of job growth in the economy, and the September NFIB small business optimism index showed that seventeen percent saw lower sales, which is the most pessimistic outlook since the pandemic (shown below since 2015, courtesy of The Daily Shot). With bankruptcy filings surging, the share of small businesses reporting uncertainty about their future is at the highest in at least 40 years surveyed (shown below since 1986, courtesy of the Kobeissi letter). At the same time, large-cap stocks have continued to climb, now at the highest valuations in history. In just one historically insightful measure, the so-called Buffett Indicator, the market price of US stocks as a ratio of US economic output (GDP) was 209% at the end of August, more than two standard deviations (68%) above the historical trend line since 1950 (as shown below, courtesy of Current Market Valuation).
There has never been a time when stock prices did not mean-revert well below their long-term average once valuations touched far above long-term norms—each correction period wrought capital destruction that took years to make back losses. Most who held at the cycle tops ended up liquidating near cycle lows and missed the eventual rebound.

The timeless irony is that capital risk is highest when asset valuations are highest and lowest when valuations are lowest. Today, asset valuations/capital risk have never been higher, yet the masses are mostly oblivious to this reality.

Most have little in the way of stored savings, and the widespread financial plan, aided and abetted by the risk-promoting financial sector, is a record weight in double or nothin’ bets with stocks at all-time highs (black line below since 1964, courtesy of Real Investment Advice within blue). Equity market exposure repeatedly peaks (red circles) at the onset of recessions (grey bars) and then tumbles as bear markets unfold. Today, the lowest level of cash held by investors in more than 25 years (below since 1999, courtesy of JP Morgan) further magnifies financial risk for households and the economy.