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animal spirits
The Bezos Recession?

Since we at Via Meadia are always alert to the ways things could get worse, we read with interest this Financial Times dispatch about the possibility of a retail crash brought about by the disruptive impact of e-commerce companies like Amazon:

For a small band of hedge funds that slapped down prescient bets against the tottering US housing market, the financial crisis was the biggest money-spinner in generations. Some investors think they have now found the next “big short” in the retail industry.

The reshaping of how Americans shop by the internet is accelerating. The US retail industry faces a growing headache, with 10 companies pushed into bankruptcy already in 2017, according to Standard & Poor’s. Even Sears, a once mighty department store chain founded in 1886, is now tottering.

“We think the magnitude of this short could be bigger than subprime,” says Stephen Ketchum, the head of Sound Point Capital, a hedge fund that manages more than $13bn in assets.

As the article notes, there is a possibility that a retail collapse could spill over into the commercial real estate market—a somber second-act to the residential housing crisis that is now almost a decade in the rear-view mirror.

The Wall Street Journal‘s Greg Ip wrote earlier this month: “If you drew up a list of preconditions for recession, it would include the following: a labor market at full strength, frothy asset prices, tightening central banks, and a pervasive sense of calm. In other words, it would look a lot like the present.”

So even as the bull market keeps running and solid jobs numbers keep coming in, it’s important to remember the economy’s potential vulnerabilities in this time of technological change. And if a recession does strike, our political vulnerabilities will be exposed as well.

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  • Isaiah6020

    less indicator of a recession, more indicator of persistent deflationary pressures.

  • seattleoutcast

    Except the subprime crisis was greed, cronyism and graft. The retail recession is simply a shift in market distribution.

    • Isaiah6020

      subprime credit was about the whole world writing credit puts thinking it will be some other sucker that’s gonna foot the bill. So when it went bad, and everybody had to pay, the crisis happened. Now the same genius politicians who pressured banks into giving loans to bad borrowers are selling the single payer myth. Everybody gets to believe that somebody else is that single payer. Wait until they get the tax bill…..

  • LivingRock

    Pardon the anecdotal economics here. The internet is surely disruptive to the model of shopping at a physical store, how that will ultimately get at the commercial real estate market remains to be seen. In places where the commercial real estate market is currently very strong (growing urban areas) due to lower supply and high demand, e-commerce use is also growing quickly indicating that there may be room for both. Commercial real estate also includes multi-use and multi-family development, and we know what the demand for housing is in some of these urban areas is like. Zoning laws are actually changing in some of these areas to encourage more commercial/residential multi-use development that’s very attractive to developers and investors. The commercial real estate market in the stronger areas may be diverse enough to withstand disruption from the decline of strip malls and shopping malls. Also, did the “shopping/strip mall” bubble burst already? Retail developments that have sit vacant and under used for the past ten years are currently getting redeveloped.

  • Suzy Dixon

    Brick and mortar stores or online, both selling mostly foreign goods is the more substantive problem. Walmart is the largest retail operation on the planet, and it acts as a primary conduit bringing foreign goods to fuel the US deficit.

  • Angel Martin

    Retail is part of Commercial RE. But for the whole sector, prices peaked a few months ago.

    http://static3.businessinsider.com/image/593996e5bf76bb25008b456f-960/us-commercial-property-index-greenstreet-2017-05.png

  • FriendlyGoat

    There is something fundamentally questionable about bettors who don’t even own a stock making big money on its downward slide in market value. Oh, some economists can make a supposed argument for the “necessary role” of short selling in vibrant markets, but nearly no one who loses houses or jobs is cheering the wise guys who may be sparking greater-than-justified volatility just because we allow them to sell borrowed shares.

    Consider the effect of the last “big short” in residential real estate on shares of Bank of America. As late as 11/28/08 we saw the stock at $16.25, then down to $3.95 on 2/27/09, then back to $17.59 by 8/31/09. Kinda nuts, no? I sometimes think that for the same kind of goofy reasons we chase drunk drivers after selling alcohol in gas stations, or race to put out fireworks-induced fires, we endure too many exacerbations of market volatility in part because of too much shorting.

    • ——————————

      There’s nothing wrong with shorting. I have been doing it since I started trading my own portfolio in the mid 90’s. It is a basic trading strategy, has been done since markets were created, and adds liquidity to the markets. Why only make money when stocks go up?? What about all those who made money buying B of A when it createred, and rode it back up? There are losers on the wrong side of a trade, but there are winners on the other side.

      Everyone has the opportunity to learn how to manage their own investments. There is plenty of information available to learn how…I learned many years ago.
      Don’t blame those who took the initiative, instead of wasting time watching TV, sports, or other similar trivial pursuits….

      • FriendlyGoat

        I understand shorting and have for a long time. When we hear people speaking of another “big short”, however, we might want to pay attention. The last one rattled the world, nearly melted the entire world-wide financial system, threw the central banks into panic mode from which they have not recovered by normalizing their balance sheets , threw people out of work for years, caused millions of foreclosures, sent interest rates to near zero for a decade, and contributed to enormous federal deficits. We may be playing with hydrogen bombs when we ought to be using mere dynamite. That might be because we need some better limits on who shorts and by how much, and we may not know that we do.

        • Anthony

          Something definitely worth a look (make time, not a quick read): https://www.city-journal.org/html/trouble-trump-county-usa-15257.html

          • FriendlyGoat

            Thanks. Quite a dive into a typical local situation. From the “off-the-wall” department:

            1) I wonder if the medical community failed us by not telling healthy people they can usually get pretty-good pain relief from taking over-label amounts (like double or more) of an NSAID such as aspirin, especially for temporary conditions such as dental work. I have done it many times in my life and am “still ticking”. I can’t recall ever getting or using a prescription med for pain. (For terminal conditions like cancer, of course, I support ANY level of dope for the hospice-type care, but that’s for the extreme situations.)

            2) We have to wonder whether Rodrigo Duterte will make any headway with his “just shoot ’em” approach to addicts and drug dealers. No, I don’t endorse that tactic, BUT with Duterte, we are seeing an example of where social frustration CAN go. So, down the road, will others be saying “Look at Duterte. That’s the way to go.”(?)

            3) It is my weirdo opinion that early-life vasectomies are better than “out-of-wedlock” babies (or even too many children IN a marriage). The world population situation going forward has to mean that some of the guys must voluntarily consider just not ever fathering any—-maybe some of the guys in places like Scott County. It’s not to “save the earth”. It’s because reduced numbers of men can possibly be responsible fathers in many places for lots of reasons, some merely economic. I am looking forward to this becoming a topic of polite conversation. We may need a few people just deciding to forego procreation for their own sake and to avoid putting any kids in any mess.

            (I warned you I’m off the wall ahead of time, right?)

          • Anthony

            “Off the wall” occasionally is good; some call it thinking outside the box!

            The medical community may not have failed us (there is a profit motive still) as much as we may have failed ourselves (commonsense ain’t common as my late grandmother used to say).

            Duterte answer may be pretext for other motivations. I struggle to see advanced government sliding there but stay vigilant.

            Children, family, marriage are all tough social arrangements and even more so today. I was told as a lad to remember one of the consequences of sex is children and to remember that – as well as my responsibility thereto. Fathering (and mothering) is lifelong and that messaging we’ve managed to subordinate.

            Now regarding the article, you’re welcome. And there are Scott Counties all throughout the country (how they fare next several years will reveal much about America’s interests).

          • FriendlyGoat

            Yes, I’m getting ads. Yes, I wrote “off the wall” to take a little break from our normal political subjects. Yes, we have more Scott Counties than anyone thinks. Yes, if I was a kid today, I hope someone would tell me to be a tad scared of socioeconomic trends. And yes, thanks, as always for sharing your sources and thoughts.

        • ——————————

          But the last financial crisis was caused by everyone who could breathe being able to get a mortgage…or even multiple mortgages if they wanted to buy multiple rentals, thereby overheating the housing market, etc., etc…not by shorting. Shorting may have caused some additional downward momentum, but those additional ticks down also had winners on the correct side of the trades.

          I don’t know enough about the intricacies of the markets to have an informed opinion as to whether or not tinkering with shorting in the way you suggest would help more than it would hurt….

          • FriendlyGoat

            Well, I don’t either really. Shorting has been around a long time, more and more sophisticated, and I don’t see much wrong with individual investors making legal bets on some stocks or other instruments going down as well as up. Today we have ETFs dedicated to it in certain sectors, some even x2 or x3 in impact using leverage. BUT—–I still wonder about what big plays can bring on. Somebody like George Soros or Carl Icahn or some fund starts selling and then the selling becomes a trend that was maybe gets overdone, (IMHO anyway).

    • Angel Martin

      The “big short” in commercial real estate, if it happens, is in credit (bonds), not the stock prices.

      In the financial crisis, the fall in the bank stocks was late in the game. Speculators had been shorting the mortgage backed securities since 2006.

      As for Bank of America, the reason for the price “volatility” wasn’t stock shorting. The gov’t bailed them out and prevented them from going to zero like Lehman Bros.

      I’m a lot less enthusiastic than other market-oriented types on the supposed stabilizing role of shorting.

      For example, when the hedge funds were shorting mortgage backed securities in the 2006-08, for every MBS they shorted, they created a synthetic MBS ( when you short a bond, you pay the interest on the bond).

      When the supply of actual MBS dried up in 2007, the people selling MBS didn’t have anything to sell so they started selling the synthetics created by the guys shorting MBS !

      That made the defaulting mortgage market much larger than the “Subprime is contained” numbers that Bernanke was looking at.

      • FriendlyGoat

        Yes. I know the original short was bonds—–but the panic spilled to other asset classes. I’m glad you question shorting, at least somewhat. The question is not whether to disallow it altogether, which is not practical or necessary . The question is limiting who can do it and how much of it can be done at a time. We simply do not know what electronic trading can do in a chain reaction.
        Hedge funds which act as blasting caps are not our social friends.

        • Angel Martin

          Shorting does have an important hedging function. It is also hard to stop because their are multiple ways to synthesize a short position.

          For example, put-call parity: Tbills + call = stock + put

          Any of those (long or short) can be synthesized from the other three.

          Same with the mortgage back securities:

          tbill “=” MBS + Credit default swap + interest rate swap

          • FriendlyGoat

            Think of derivatives as like fuses at the gunpowder store.

  • Anthony

    Thought problem (disruptive impact): how will AI figure into markets and social volatility going forward/ “The odds are strong that AI is coming, and between 2025 and 2955 it will steadily take over every job currently performed by humans.” See: http://www.motherjones.com/kevin-drum/2017/07/mass-unemployment-starting-in-2025-believe-it/

  • Jacksonian_Libertarian

    The “Mall” business plan is dying. The “Anchor” department stores are in terminal dives. They’re called “Anchors” for a reason, they’re “Prime Real estate”. The “Market” will decide the worth of this “bricks and mortar”. The buyer saves money by shopping online, that’s the bottom line. Video Stores are gone, can Music stores and Bookstores be far behind? The value will have to fall, so that repurposing can occur. I bet you could fix up a department store as a grandiose, 60,000 sq/ft man cave! Yeah! That’s the Ticket! If the price was “Right”!

  • Andrew Allison

    Oh, please! Take a little time out from looking for the ways things could get worse to recognize the overwhelming benefits of creative destruction to the populace as a whole.

  • ——————————

    Come on TAI, what’s with this alarmist nonsense? There isn’t going to be a retail collapse. At least not anything even near as dramatic as the housing collapse. They are two totally different situations. There will just continue to be a slow transition to even more e commerce, until there is a balance. There will always be brick and mortar. Many things just need to be held, felt, tried on, etc., before they are bought.

    And Sears (SHLD), has been “tottering” for years….you make it sound as if this is recent news. I shorted it a few years ago already…..

    • lurkingwithintent

      The irony is that Sears is the store that is struggling when they should have been thriving in this business climate. They were perfectly set up to be in competition with Amazon in terms of being a catalog oriented business and internet would have been the ideal means to move along with their traditional way of doing business. They missed the boat and it is killing them.

  • D4x

    Human nature wants to hunt and gather. Retailers who adapt will continue to thrive. Big retailers are heavy into e-commerce, e.g. Home Depot, Wal-Mart, Target, Bed Bath & Beyond. Some offer free pick-up at a brick&mortar location, or direct home delivery, and, easy returns. If they get smart, they will add a Help Desk in the B&M store, to help the consumer place the order.

    I have resisted Amazon for years. Finally caved last week, including the free two-day delivery with a subscription to Amazon Prime, for a very specialized product ONLY sold through Amazon.

    The B&M chains have the advantage: easier returns. Fortunately, this product sold/fulfilled only by Amazon is as good as it seemed online, so I will not have the annoyance of a return-by-UPS return.

    The retailers who are struggling, like Sears? Lost their way at retail some years ago.
    Don’t get me started about Wayfair’s website…

    • rheddles

      The B&M chains have the advantage: easier returns.

      You’ve got to be kidding me.You’ve only used Amazon once. Wait till you have to make a return. It beats driving to the store again, standing in a line and being interrogated about why you don’t have the receipt.

      In fact, Amazon has made returns so easy that people order several products, particularly in fashion and apparel, select the one they want after trying them on, and return all the others. Return rates are as high as 40%.

      B&m will survive, but it’s going on a big diet and lots of malls will be available for alternative uses.

      • Deserttrek

        buy from amazon and you are supporting the far left

        your choice

  • Pait

    Recessions do not happen because of technological advances. Investment in technology increase productivity, and displaces some workers, but creates work elsewhere. There is no record of it causing recessions, nor a theoretical model of how that could happen.

    Recessions do happen either because the Fed needs to cool down the economy to curb inflation, or because of overinvestment and the subsequent retrenchment by the private sector.

  • Deserttrek

    buy from amazon and support the left wing … simple
    add in the taxpayer subsidies via the postal service and it proves amazon is destructive

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