The Fed’s Biggest Nightmare; Retail Gets Real; WeGiveUp
Is the U.S. Economy Going Stag?
I saw an ugly word pop up over the weekend.
No, not that word … or that word, either. Seriously, you kiss your mother with that mouth?
The word was “stagflation,” and it’s the word that the U.S. Federal Reserve fears most of all.
Now, stagflation is traditionally defined as a period of high inflation, high unemployment and stagnant economic demand. None of these things currently describe the U.S. economy, right?
Demand remains robust, if a bit soft in certain areas (what’s up, Forever 21?). Unemployment is at multiyear lows, and inflation is largely nonexistent — otherwise the Fed wouldn’t be able to cut interest rates.
But an article on CNN over the weekend raises the specter of stagflation, making the case for rising prices — i.e., inflation. The report cites two key factors that could bring this all to a head: rising oil prices and tariffs.
“The biggest concern right now is how any oil price spike might work its way into GDP. Any additional shocks from trade and tariffs could be stagflationary as well,” said Matt Forester, chief investment officer of BNY Mellon’s Lockwood Advisors.
I don’t believe that the drivers for this situation need much explanation. Certain Saudi Arabian oil production facilities, once thought impregnable, were attacked last month, cutting global oil output by 5%.
And, well, you already know the story on U.S.-China tariffs.
This dynamic duo of stagflationary pressures have helped spur a bit of a panic on Wall Street.
Oil prices have remained higher, even after resumption of Saudi oil production. Gold prices are just shy of multiyear highs. And momentum stocks have taken a nosedive in the past month.
Investors are clearly a bit worried. After all, the last time we saw stagflation in the 1970s, we had a decade of negative returns.
Nobody wants that again.
While the CNN piece offers some good points, it’s largely … what’s the word? Sensationalist.
In fact, many articles preceding the CNN article had already debunked the idea of a return to stagflation, such as this one from Business Insider.
As investors, we don’t need sensationalism. What we need is a return on our investments. We need income. In short, we need yield.
When interest rates were rising, finding yield wasn’t a problem. But the days of Fed rate increases are but dreams now … at least until U.S.-China trade relations are figured out.
Low interest rates and low rates of return have a death grip on the market right now. And with the bull market struggling like Homer Simpson on a Peloton … you need someone to point you in the right direction.
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The Good: Get Real
We all know that one of the classic blunders in life is fighting a land war in Asia. But only slightly less well known is this rule: “Never bet on teenage shoppers when fashion is on the line.”
It’s a lesson that Forever 21 learned the hard way. The trendy-teen retailer filed for bankruptcy this weekend, forcing it to close thousands of stores. I’m sure you saw many of the “retail apocalypse” headlines over the weekend surrounding the Forever 21 story.
But what if I told you there is no “retail apocalypse?” What you are actually seeing is a paradigm shift away from mall-based, brick-and-mortar retailers to online shopping.
And it makes sense, especially with fast-changing teen fashion. Fashion whims change so quickly these days that only nimble online retailers are having any meaningful success. Seriously, I just found out about this “VSCO girl” trend from my daughter…
I have no idea what it is, and at this point, I’m afraid to ask.
You want to know who has cracked this code? The RealReal Inc. (Nasdaq: REAL). Not only is RealReal an online powerhouse, it also only sells luxury consignment goods. It doesn’t design fashions, it just resells them. And by focusing on luxury goods — which almost never go out of style — it stays on top of the game.
REAL shares rallied more than 15% following news that Forever 21 folded. Clearly, investors see this as an opportunity for the consignment shop.
The Bad: TD Overturned
Like the Cincinnati Bengals and the Miami Dolphins, online brokerage firms are getting rocked this week.
TD Ameritrade Holding Corp. (Nasdaq: AMTD) — yes, that was a long way for a poor touchdown (TD) intro — is leading the decline, followed by E-Trade Financial Corp. (Nasdaq: ETFC) and Charles Schwab Corp. (NYSE: SCHW).
The ironic thing is that Schwab kicked off this entire mess. This morning, Schwab announced that it was getting rid of trade commissions. As of October 7, the broker will offer zero-fee online trading for U.S.- and Canada-listed stocks and exchange-traded funds.
It’s Schwab’s answer to the ever-escalating game between online brokers … one quarterbacked by discount broker Robinhood. This may seem like the correct call for Schwab, as it increases competitiveness in the market and allows customers to free up more cash.
However, this move could significantly impact Schwab’s bottom line. Trading fees are a significant part of any brokerage’s bottom line. This is why the rest of the group is falling alongside SCHW. They will now be forced to play the extreme-discount-broker game just to remain competitive.
The Ugly: We Give Up
Has it been “a while” yet?
Last week, Great Stuff did a final take on beleaguered office-space rental firm WeWork. I thought it would be the last I’d hear about it for a while. Turns out, “a while” isn’t as long as I thought it was.
Yesterday, WeWork withdrew its S-1 filing and pulled its initial public offering (IPO).
“We have decided to postpone our IPO to focus on our core business, the fundamentals of which remain strong,” said WeWork co-CEOs Artie Minson and Sebastian Gunningham.
Focusing on the core business is good after the fiasco of former CEO Adam Neumann. But strong fundamentals?
Personally, I wouldn’t call reports of a potential WeWork bankruptcy “strong fundamentals.” Nor would strong fundamentals come up in conversations where your company is set to run out of cash in early 2020.
And if that wasn’t enough, Zero Hedge reports that “WeWork is already the single biggest tenant in New York City, as well as Chicago, Denver and central London.” In other words, if WeWork goes down, rental real estate in some of the biggest markets is going to take a major hit.
This story is far from over. I was naïve to think I’d seen the last of it for “a while.”
The Charles Schwab story generated quite a bit of conversation among the Banyan Hill experts this morning. Some pointed out that since Schwab was a full-service brokerage, “Robinhood can’t compete with that.”
Precision Profits editor Michael Carr quipped:
Finally, Insider Profit Trader editor Brian Christopher had a largely positive takeaway from the news:
At the grocery store, cereal boxes continue to get smaller, though prices don’t.
Health insurance rates are going through the roof.
So, I don’t begrudge those who are incredulous when they “get a deal.”
Technology has a hugely deflationary influence on all of our lives. Sure, your iPhone costs more than $1,000, but it has more computing power than most of the laptops we carry around. And it’s getting cheaper.
This Schwab story is one of those happy stories. One we don’t see every day.
And did you know that Schwab — and many other brokers — already offered some commission-free trades on certain ETFs and mutual funds?
I am optimistic that an increase in no-fee trading will bring more people to investing.
After all, what’s their alternative … 0.1% on their savings account at the bank?
Indeed, Brian. Sitting on that cash is not doing you any good at all. But Brian has a plan to help you turn that cash into triple-digit gains — every 90 days!
Great Stuff: Haiku Contest!
You only have two days left to submit your Great Stuff haiku for the contest!
I’ll be posting my favorites in this Thursday’s edition of reader feedback.
So, if you want to see your witty poetic prowess immortalized like only Great Stuff can, get those submissions in now!
Send your Great Stuff haiku to GreatStuffToday@banyanhill.com.
Or just drop me a line. I can’t answer or publish everything, mind you. I get a lot of strange comments … you guys are seriously weird. But I’ll do my best to answer/publish what I can.
Until next time, good trading!
Great Stuff Managing Editor, Banyan Hill Publishing