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Pop Goes the Retail Bubble

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That hissing sound you hear is the air coming out of the retail bubble. According to a recent CNBC report, nine retailers have already filed for bankruptcy in 2017. That equals the total number of retail bankruptcies in 2016 and puts the industry on pace for the largest number since 2009, when 18 retailers went belly-up in the wake of the 2008 financial meltdown.

The number of retailers on Moody’s distressed list is also at its highest level since the Great Recession:

“After years of low rates fueled a private equity ‘feasting’ on retail firms, the number of troubled chains has tripled over the past six years, and is now at its highest level since the Great Recession. Moody’s Investors Service says that 19 of these companies have ‘well over’ $3.7 billion in debt that matures over the next five years. Roughly 30 percent of that total is due by the end of next year.”

CNBC blames retail sector malaise on a shift to online shopping, and increased spending on travel and “other experiences,” but pins most of the blame on private equity firms and leveraged buyouts.

In a Facebook post, Peter Schiff pointed to an equally important contributing factor, which the CNBC article missed, or simply ignored:

“The article fails to point out how under-employed, income-deficient, overly-indebted consumers are a big part of the problem.”

Then there’s that bubble.

Last month, Urban Outfitters CEO Richard Hayne warned the bubble has popped. During a conference call, Hayne said there were simply too many retail stores.

“The U.S. market is oversaturated with retail space and far too much of that space is occupied by stores selling apparel,” he said. “Retail square feet per capita in the United States is more than six times that of Europe or Japan. And this doesn’t count digital commerce.”

The bubble began to inflate in the 1990s and early 2000s. Hundreds of stores opened. Monetary policy managed to keep the bubble inflated up until now. The Federal Reserve has held interest rates low for nearly a decade and engaged in other monetary policies meant to stimulate consumption. The goal? Keep consumers spending money. It’s worked. Americans have opened their pocketbooks and kept the retail blimp afloat.

“This created a bubble, and like housing, that bubble has now burst,” Hayne said. “We are seeing the results: Doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.”

Trade policy could provide the pin that completely ruptures the bubble. Republicans have proposed a border adjustment tax. Pres. Trump initially opposed the measure but reportedly has warmed to the idea. In simple terms, a BAT provides tax breaks to American companies that export products but takes away tax breaks from American companies that import goods from other countries.

Cowen and Company retail analyst John Kernan said a BAT would be “a total disaster” for retail.

“The sector would immediately go into a bear market. There’d be big, big time cuts to their earnings estimates. Retail – the sector lives off of super low cost imports from Far East Asia, so border adjustments equal big-time earnings revisions lower for pretty much the entire space.”

Investment expert Peter Schiff said he sees a looming bloodbath in the retail sector, which will ripple through the economy.

“Especially if a BAT is actually passed,” Peter said. “Big losers will also be pension funds and insurance companies that own the real estate. Their financing costs will be rising just as their rental income will be collapsing due to vacancies and bankrupt tenants. Of course banks are also on the hook for the loans, many of which will end up in default.”

Peter said the Fed will have to act in order to try to keep the bubble inflated. There has been discussion about “normalization” and interest rate hikes in the coming months, but Peter said he expects more aggressive Fed intervention:

“The March rate hike means nothing. The real questions are when will the Fed cut, and how soon will they launch QE4.”

This is yet another example of central planning run amok. Every intervention leads to unintended consequences that necessitate more intervention in a perpetual feedback loop. Your best bet is to insulate yourself from that system as much as possible with the wealth preserving power of gold and silver.


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