A Troubling Fact About the American Consumer
A big denial from China... 'Fake news' or a quiet warning?... Good news for retailers (for now)... A troubling fact about the American consumer...
Maybe it was 'fake news'...
Yesterday, we referenced a Bloomberg News report that China was planning to slow or halt its purchases of U.S. Treasury bonds.
This morning, the Chinese government flat-out denied it.
In a statement published on its website, China's State Administration of Foreign Exchange said it is "diversifying" its reserves, but it has no intention to stop buying U.S. government debt.
According to the statement, the U.S. financial media got it wrong. "The news could quote the wrong source of information, or may be fake news," it read.
That could certainly be true...
But something else may be going on here. As news service Reuters noted this morning...
Trade tensions between China and the United States are expected to rise as President Donald Trump weighs potential trade actions against Beijing, including broad tariffs or quotas on steel and aluminum and an investigation into Chinese intellectual property misappropriation.
Chinese firms' business deals with U.S. companies – one involving Alibaba and another involving Huawei Technologies – have also recently hit stumbling blocks over national security concerns.
"We've noticed recently that protectionist voices have been rising in the U.S.," China's Ministry of Commerce spokesman Gao Feng said at a regular news briefing.
In other words, this false report could simply be a gentle warning to the U.S. government that China will not be bullied.
The reality is China is unlikely to do anything to intentionally roil the bond markets...
As the largest foreign holder of U.S. government debt, a sudden drop in Treasury prices would also hurt China.
So while we suspect China would love to "diversify" entirely out of U.S. Treasurys, it's not likely to happen anytime soon.
Regardless, as we noted yesterday, the biggest reason to avoid Treasury bonds in the near term isn't the fundamentals (which are terrible)... It's because "everyone" loves them today.
Switching gears, it seems American consumers were in a giving mood this holiday season...
A growing list of retailers are reporting strong sales growth between Thanksgiving and Christmas.
Overall, in-store retail sales increased about 5% compared with the same period of 2016, while online sales increased more than 18%, according to a recent report from Mastercard.
Department-store chain Macy's (M) and big-box retailer Target (TGT) are among several strong performers in what's shaping up to be the best holiday season in six years. Macy's said same-store sales increased 1% in November and December, from the same period a month before. Target's same-store sales rose 3.4% during that same time.
Even apparel retailers joined in on the action. Many of these firms have been struggling as consumers continue to turn online to do more of their shopping. Just this week, activewear maker Lululemon (LULU) and apparel retailer American Eagle Outfitters (AEO) were among those reporting better-than-expected holiday sales.
Other companies in the consumer-discretionary sector – like home-improvement chain Home Depot (HD), and entertainment giant Disney (DIS) – are also benefiting from increased holiday spending. As a result, these stocks – and the Consumer Discretionary Select Sector SPDR Fund (XLY) – are hitting new 52-week highs.
Of course, not everyone is benefiting...
Regular Digest readers know mall-based retailers have suffered the brunt of the so-called "death of retail." But a new study suggests the damage could be even worse than we knew. As Bloomberg reported this week...
As embattled retailers announce store closures at a record pace, some tenants are shrinking their footprints more quietly by choosing not to renew expiring leases, according to a report from property-research firm Green Street Advisors.
Of 2,468 in-line stores that closed in 2017 – a category that excludes department stores – 979 weren't announced, the report produced by the firm's advisory and consulting group shows.
"When leases expire, they just don't renew them, as opposed to breaking leases and doing something a bit more aggressive," Jim Sullivan, president of the advisory group, said in an interview.
Why does this matter? Because these smaller retailers account for an outsized percentage of revenue for mall owners. This is because large anchor tenants tend to pay lower rents or own their stores outright.
In short, the pain for mall owners likely isn't over yet.
We're also seeing signs that the recent rebound in consumer spending could be short-lived...
You see, as U.S. consumers ramped up spending over the holidays, the data suggest many of them turned to their credit cards...
Credit-card debt increased $11.2 billion in November, the largest monthly increase in a year, according to the latest Federal Reserve data. Consumers now own a mountain of credit-card debt in excess of $1 trillion – the highest level since before the 2008 financial crisis.
It's not surprising. According to data from investment adviser Hoisington Investment Management, consumer spending jumped 2.7% last year... Yet real disposable incomes rose just 1.9%.
Meanwhile, the savings rate for consumers dropped to just 2.9% as of November, versus nearly 6% just two years ago.
To put that in perspective, the only time Americans have been saving less than they are today was 1929-1931 – during the peak of the Great Depression.
In other words, Americans are borrowing more and saving less than virtually any time in history. How long can that last?
Of course, credit-card debt isn't the only thing that has been piling up...
Total U.S. consumer debt increased to $3.8 trillion in November – the largest monthly increase in consumer debt in 16 years. And student and auto loans rose to $16.8 billion in November, up more than 7% from the same period a year ago.
A huge number of Americans have borrowed more money than they can ever dream of repaying...
And as Porter has explained, this is an extremely dangerous situation. From the September 22 Digest...
What happens when the least educated, least "vested," and most violent members of your society (unmarried men in their 20s)... also make up the largest demographic block... and have the largest debts (relative to income) with zero ability to pay back these debts back or discharge them through bankruptcy?
Forty-four million people carry a student loan. Most of them can't afford these loans. Nor can they default. They can't restructure. They're stuck – many with $100,000 loans that absorb more than 100% of their disposable income.
What do you think they are going to do?
Regular readers know he believes the most likely solution will be a "debt jubilee." More from that Digest...
The jubilee is a Jewish economic tradition. It is part of the Old Testament. You'll find it described in the Book of Leviticus, Chapter 25. The idea was simple. At the end of 49 years, all debts would be wiped out and collateral property returned. It was a way of completely "resetting" the financial order, of making sure the wealthy didn't become too dominant... of making sure their economy didn't collapse... of making sure there was never a violent revolution.
The jubilee has started. You haven't seen it yet. But it's there. Mark Zuckerberg (founder of Facebook) recently toured all 50 states. His message: we should forgive all student loans and offer a guaranteed income to every American. Likewise, both the Hillary Clinton and Bernie Sanders campaign pledged to forgive student loans and make college "free."
In his new book, The American Jubilee, Porter details how it's all likely to play out... and explains exactly what individual investors need to do to protect themselves and their savings from what's coming. Click here to learn more.
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In today's mailbag: A subscriber wants to bet against bonds. Send your questions, comments, and concerns to feedback@stansberryresearch.com.
"I am wondering if there is a fund, or specific stock that could be purchased to benefit from the bond market insight, described in today's newsletter. Thanks." – Paid-up subscriber J.R.
Brill comment: As always, we're prohibited from providing individual investment advice. And Steve has not officially recommended shorting Treasury bonds at this time. As longtime subscribers know, he prefers to wait for a clear uptrend (or downtrend) before recommending a trade. While sentiment in Treasury bonds suggests lower prices (and higher interest rates) are likely, we don't yet have a clear downtrend in place.
That said, several exchange-traded funds ("ETFs") fit the bill. One option is the ProShares UltraShort 20+ Year Treasury Fund (TBT). This is a leveraged ETF that is designed to generate twice the inverse daily performance of an index of long-term bonds. In other words, if bonds fall 1% on a given day, TBT should rise 2%. But again, this is not an official recommendation from Steve or us, and we won't be tracking its performance.
Regards,
Justin Brill
Baltimore, Maryland
January 11, 2018