Wayne Wile: Fed Fantasies vs. Retail Facts

Three weeks ago I wrote that retail sales were showing real signs of weakness. Now we are seeing the results in the retail stocks and the news is even worse than I expected.

Last Wednesday, shares in Macy’s (M)—the largest department store in the U.S. and an iconic American brand—plunged 15%. The next day, department store Kohl’s (KSS) fell 9% and on Friday, high-end retailer Nordstrom (JWN) joined the bloodbath, dropping 13%. This massive selloff—which the media is calling the “Retail Wreck”—was due to terrible first-quarter results.

This is the latest bad news in what’s been an extremely ugly earnings season. Companies in the S&P 500 are on track to record a 7.1% decline in earnings. That will mark the fourth straight quarter that earnings have fallen. And that hasn’t happened since the 2008-2009 financial crisis.

Macy’s reported a 5.6% drop in its same-store sales last week. Macy’s sales decline last quarter was its biggest since 2009. Kohl’s first quarter same-store sales fell 3.9%, its biggest decline since 2009. Nordstrom did a little better, reporting “only” a 1.7% decline in same-store sales.

Yes these three are bricks-and-mortar retailers but do not be fooled; all three are also big online retailers so this is not a question of one sector growing at the expense of another. These are bad numbers, plain and simple, because the consumer is tapped out.

When I was a stock broker in a previous lifetime, we used to say that many an investor had gone broke underestimating the strength of the American consumer. The shoe is now, finally, on the other foot. Investors are going broke believing that the U.S. consumer can continue to spend.

Today we got the FOMC minutes from their last meeting two weeks ago. The minutes claim to show that the Fed governors had a serious discussion about maybe raising rates at the upcoming June meeting. At least, that’s the way the market seemed to interpret them as the fed futures contract quickly priced in a 36% chance of a hike next meeting from less than 5% last week.

I think there is no way they raise rates in June. The retail numbers are emphatic. The economy is failing before our very eyes. Don’t listen to the Fed; look at what’s happening in the real world.

Wayne Wile, The War on Cash

Both Central banks and commercial banks have always hated cash. When you hold cash, the banks don’t have it. And the banks want it all. Money in the bank funds the bank. Cash in your hands takes you outside their system, empowers you and reduces their profit potential.

But now this natural antipathy to cash is getting more serious. New rules governing bank insolvencies and the emergence of negative interest rates as the new cornerstone of monetary policy together make it all the more important that banks keep cash out of your hands. So, welcome to the new war on cash.

Wayne Wile - Cash
Wayne Wile, “Welcome to the new war on cash.”

Starting with Cyprus in March 2013, central banks and governments have introduced so-called bail-in laws which enable the authorities to seize deposits held in insolvent banks rather than bailing out the banks with public funds. Bank failures will now be paid for by those who have loaned the bank money, and yes dear reader, your bank deposit is legally a loan to the bank, yes even in Canada. Bail-in regulations now apply here too.

By now, we all know that central bank asset purchases (known as Quantitative Easing or QE) have failed to boost the economies of all the jurisdictions that have done them—Japan, the Eurozone, Denmark, Sweden, Switzerland and the US. The new, more extreme central bank plan to spur economic growth is negative interest rate policy (NIRP). Europe and now Japan have implemented NIRP in a frantic attempt to push companies and individuals out of cash and into borrowing and spending. Nearly a third of the world’s sovereign debt—more than USD7 trillion—now costs money to own. You have to pay the borrower to own this stuff.

The sovereign debt market is not the only victim of NIRP. The central banks of the Eurozone, Switzerland, Sweden, and Denmark now charge interest on deposits they hold from commercial banks. Not surprisingly, these commercial banks are now beginning to charge interest on deposits they hold from their customers. Your best defense? Take out your money in cash.

So it should therefore come as no surprise that governments worldwide, as well as organizations such as the IMF, BIS and OECD, are actively promoting the idea that cash should be eliminated to cut off funding for terrorism and crime.

On February 15, 2016, the European Central Bank’s Governing Council voted to withdraw the 500-euro note from circulation. This note is the second largest denomination issued in Europe after the 1000 Swiss franc note. Of course, ECB president Mario Draghi insists that withdrawing the note has nothing to do with limiting your access to cash. Rather the decision is aimed at fighting crime because, as Draghi put it: “There is a pervasive and increasing conviction in world public opinion that high-denomination bank notes are used for criminal purposes.”

Meanwhile, hang on to your $100 bills. A new report by Peter Sands, former chief executive of Standard Chartered Bank, was recently released by Harvard’s Kennedy School. The report urges governments of the 20 largest economies to ban all high-denomination notes. According to Mr. Sands, such notes are the “currency of corrupt elites, of crime of all sorts and of tax evasion. They play little role in the functioning of the legitimate economy, yet a crucial role in the underground economy. The irony is that they are provided to criminals by the state.”

Mr. Sands should know criminal activity when he sees it. While CEO, his bank helped Iran evade US sanctions which led to criminal charges, major fines and other penalties.

So, dear reader, the war on cash has begun. You can look forward to having all your savings locked into the banking system where you will be charged whatever interest rate the banks think is appropriate. Gold anyone?