Monday, March 15, 2010

The Wizard of Wall Street

Much like in Oz, the closer one gets to the seat of power the more bombastic the dialogue becomes and the more smoke filled the room. "Pay no attention to the man behind the curtain!" Do not pull back the drapes lest the origin of the booming voice and stentorian tones is discovered to be a charlatan at worst or more likely hopeful and biased.

My continued skepticism about the economic recovery and remarkable market drive of the past twelve months is grounded in the fact that the United States is an economy based on consumer spending. Approximately 70% of our economy is consumer driven and based on income, dissaving and debt. All of these factors have been, and continue to be severely constrained. Unemployment and underemployment is about 16%. Saving rates are rising back toward historical levels up from negative numbers. Finally, credit has fallen at dramatic rates as banks seek to repair their balance sheets and become solvent. This is a view. Let's look at the raw data that brought the financial writers to their collective feet last week to cheer.

The headline is that retail sales rose by a surprising, seasonally adjusted, 0.3% in February. One of the wizard's wands is the seasonal adjustment. It is a useful tool but can also be an obscuring one. To compare apples with apples let's look at how February normally behaves using the raw data. Eliminating the seasonal adjustment, sales actually declined by 1.6% from the previous month, rather than rose by 0.3%. This in and of itself is not meaningful. However the unadjusted sales when compared with each February over the past decade is not very promising. On average February unadjusted retail sales are down by 0.4% month to month. So compared with the past ten years of Februaries, sales were down 4x normal.

Pulling the numbers apart yet further, retail sales are equal to January 2006. The population is higher by 4.3% and sales are not. If we throw inflation into the mix, sales on a per capita basis are down to 1996 levels. Don't get me wrong. I don't see anything wrong with steady inflation adjusted per capita spending and I expect it to fall longer term as we move back to a sustainable spending level. But it does tell us that productivity gains have been illusion.

Stay cautious.

John Barnyak
Stonehouse Asset Management