Three cheers for retail's creative destruction
EDITOR'S NOTE
There have been some head-spinning moves in retail-land this year.
Just this week, we've had Target shares surging like Beyond Meat's used to, up almost 20% yesterday after strong earnings--up 59% now year-to-date! But then there's L Brands (Victoria's Secret's parent), down 8% today and more than halved from its 52-week high.
The list goes on. On the plus side add Walmart, Lowe's, Home Depot; on the minus side, Gap, Kohl's, and Macy's.
What's all this telling us about the consumer? Not much. We already know that consumer spending overall has been strong this year, while old-fashioned retail concepts are falling out of favor. It's what this tells us about the dynamism of the American economy that is really key.
One of the major risks of ultra-low interest rates is the "zombiefication" of the economy, meaning bad businesses stick around way past their due date because they can borrow cheaply to keep things going.
We're in the 37th quarter now (or nine-plus years) of having nominal GDP growth higher than the 10-year interest rate--the longest such stretch on record, per economist Joe LaVorgna. It means financing costs are "artificially low" and likely to keep widespread corporate defaults at bay. That's risk number one.
Risk number two is that ironically, super low rates aren't spurring a wide swath of business start-ups. The U.S. economy "is less dynamic than it used to be," warns Deutsche's Torsten Slok, noting the continued slide in both business entrants and exits (chart below). That's also a red flag for rising monopoly power, something already on regulators' radar.
Put this together and you can see the long-term hazard looming over the U.S. economy. So while I'm not exactly cheering for companies to go out of business, I'm at least relieved that the market is still doing its necessary dirty work of separating the wheat from the chaff in retail right now.
As Schumpeter wrote in coining the term "creative destruction" over seventy years ago, the process of "industrial mutation" that "incessantly revolutionizes the economic structure from within, incessantly destroying the old one...is the essential fact about capitalism" (page 84).
In fact, Gap--whose shares have also been roughly halved from their recent high--reports earnings after the bell today. Stay tuned! And I'll see you at 1 p.m.,
Kelly
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