Corporate Welfare - Walmart

"“Despite a holiday season that delivered positive comps, two factors contributed to lower comp sales performance for the 14-week period for Walmart U.S. First, the sales impact from the reduction in SNAP (the U.S. government Supplemental Nutrition Assistance Program) benefits that went into effect Nov. 1 is greater than we expected.



All forms of stealing are deflationary. Stealing cuts into the average citizen’s disposable income, it reduces how much he can buy. Because there are now fewer dollars chasing more goods, deflation is the inevitable result. Stealing is actually worse than a zero-sum game. Society loses more than the thief takes. In addition to losses from theft, a victim often has to spend more on security measures. Theft also has a chilling effect on capital investment and commerce in general

an update:

And the Explanation! 

"Walmart linked cuts in food stamps by the government, which took effect late last year, to a 1.6 per cent drop in food sales. Around 20 per cent of its shoppers are on low incomes and rely on food stamps, industry reports have shown."

Race to the Bottom, Defaults, and Devaluations

-QE is a mirage, and an excuse. When commentators say that more QE is causing the stock markets (especially US ones) to go higher or less QE will cause markets to implode, this is partially true but the cause/effect is not from the actual buying of $85 billion in treasuries/MBS but from the coordinated reaction of traders that believe the FED's actions are expansionary or tightening. The FED buying MBSs did reduce mortgage rates but this was not what caused a pick-up in house prices and activity--it was low interest rates. Hedge funds and speculators purchased homes etc in cash i.e. borrowed cheap then rented them out. As rents peak or begin to fall, this will not end well for hedge funds etc.

The true causes of asset inflation are because of negative real interest rates in the USA and China, and the search for yield. Low interest rates in Japan and carry trades there are also fueling bubbles.

-Low interest rates are what is fueling bubbles--especially Japan and the USA.

The reason emerging market countries are struggling has little to do directly with the Fed's actions or talk and more to do with China's collapsing credit, housing, and building bubbles--less demand for commodities hurts many countries.

President Xi's end of subsidies will burst this bubble & others in China

"President Xi Jinping is preparing to dismantle a web of subsidies that began under Deng Xiaoping in the 1980s. Result: higher prices for capital, land and water and swings in the cost of energy, potentially squeezing indebted state businesses." - Bloomberg

Unfortunately, this means central banks will be almost powerless in another crash (although fiscal policy may help and may provide the US congress/senate enough reason to stimulate economies)

What's playing out globally is a pump and dump scheme with cheap money that's playing out across the globe--this is hot money flows quick and easy. This is manifested through the investment vehicles for concentrated pools of wealth--hedge funds:

From Barron's: Money manager and pundit Barry Ritholtz is kicking off this year’s Big Picture investing conference with an explanation of why returns aren’t what they used to be in the hedge-fund industry: There are too many hedge funds with too much money, chasing too few opportunities.
They key point is that the industry has ballooned from about $120 billion in 1997 to more than $2 trillion this year, and it’s not as if investing opportunities have expanded at the same rate.
The issue is too much money chasing too few opportunities." Oct. 8, 2013

Increasingly the cycle below seems to play out

The beginning of the vicious cycle is a race to the bottom with debt as a way to maintain an unsustainable standard of living in developed economies:

Globalization-> lower avg. labor costs->lower real incomes in the USA->less spending &amp recession->low interest rates->increased borrowing-> increasing spending->temporary boost in GDP->high debt &amp no defaults -> debt overhang

The Vicious cycle we are in in 2012- 2014

less spending -> lower GDP->lower company revenues-> cut capex/opex-> lower capital spending and higher profit margins-> higher valuations and expectations-> more company buybacks-> more companies issuing debt-> worse debt overhang->lower real incomes->less spending & consumer borrowing

reach the bottom:
globalization slows (for whatever reason, Africa/frontier economies don't provide the cheap labor needed)->rise in real incomes->lower profit margins->more consumption->more capital expenditure and automation -> increase in revenues->increase in productivity ->increase in efficiency -> larger absolute profits but perhaps lower margins

painful reset:
defaults/devaluations->market crashes->top .01% loses capital that it couldn't find productive use for->governments and consumers debts are cleaner->increase in spending->fiscal policy has dry powder->rise in real incomes (from a lower base perhaps)->lower profit margins->more consumption->more capital expenditure and automation -> increase in revenues->increase in productivity ->increase in efficiency -> larger absolute profits but perhaps lower margins->high GDP growth rates

At the root of it all is that globalization has helped generate abnormal and unsustainably high profits for companies (and the top .01%) that's led to hoarding at an epic scale; it's hoarding because there's not enough productive opportunities to deploy that capital and it's not being spent. The flip-side of hoarding is malinvestment which you're seeing again in REOs in the USA and real-estate, infrastructure in China. To compensate for the consumer's decline in real incomes the government has taken on debt to fund the consumer (via SNAP $85 B a year is no chump change), to fund the military, pay for entitlements, and bail-out banks. As debt expansion has slowed the boost from government spending has contracted as compared to year ago periods. Without defaults this will result in lower spending and is deflationary in nature.

Why a painful reset is difficult to prevent:

"RE: accounting and real life. Sometimes they differ but over the long run they always synch up. For instance let's say a bank has a lot of quality assets but a liquidity issue. It will take that good paper to the Fed to get liquidity for the bank to get through the hard time (no write down required and it works out). On the other hand if the bank has a bunch of bad assets, it now has a solvency issue and not a liquidity issue (i.e. not marking to market does not agree with reality). Sure if CRE goes bad it can postpone marking it to market for a while but soon it has no cashflow and accounting does not matter because it cannot pay its bills, payroll or redeem demand deposits. The failure to properly mark assets to market will not save it and ultimately accounting and reality will re-synch."