It’s the little headlines creeping in that keep it in the back of one’s mind that all is not well.
Not just here in the UK. But around the world.
Let’s start at home and this BBC headline from yesterday…
“Mothercare confirms 50 store closures”
I’d have thought selling baby and maternity clothes and all the things that new parents need was a solid business to be in.
There’s certainly no shortage of new potential customers as far as I can see…
The high streets around where I live are often rammed with baby buggies, sometimes two abreast.
You’ve got to step into the road to let them pass!
(Anecdotally, I was talking to an elderly woman in the bakery yesterday who was buying doughnuts for two of her granddaughters’ children. “There’s loads of them – and more on the way!” she laughed.)
The point is, I find it hard to imagine Mothercare running out of customers any time soon.
But the fact is, it’s not just Mothercare that’s in trouble.
Collapse of the retailers
In the last 12 months other big retail names have collapsed.
There’s electronics shop, Maplins, which owes creditors £150 million and is shuttering stores left, right and centre.
The UK’s largest toy shop chain, Toys ’R’ Us, went into administration in February when nobody wanted to buy it. (My son is gutted!)
Carpetright is closing a quarter of its UK stores and has entered into a company voluntary arrangement or CVA to try to avoid liquidation.
There’s also trouble at Claire’s Accessories (a favourite of my daughter and her pals), whose American parent company is facing bankruptcy.
And a whole bunch of other retailers which have failed in 2018, including clothes retailer, Bench, household goods seller, Kleeneze, Warren Evans the bed and mattress shop. The list goes on…
So really, Mothercare is just the latest in a long line of failing businesses in the retail sector.
Fact is, it’s tough times out there for ANY high street retailer right now.
According to a new report from credit card company, Visa, April was a shocker…
Worst high street shopping numbers since the 2009 recession
Spending in physical shops was down 5.4% for the month compared to April last year. March was also 2.9% down on the previous year.
And separate research from retail data cruncher, Springboard, confirms the trend by looking at numbers of people visiting the high street.
Apparently, it’s not been this bad since the aftermath of the Global Financial Crisis…
“Not since the depths of recession in 2009 has footfall over March and April declined to such a degree, and even then the drop was less severe at 3.8 per cent.”
Of course, you could dismiss these figures by blaming it on the foul weather we’ve had these past couple of months.
Indeed, the British Retail Consortium (BRC) did say that the rain in April had had “a dampening effect on visits across the UK’s shopping locations” (their spokesperson’s pun, not mine!)
And I’m sure there’s also a link to the ongoing shift in consumer buying behaviour from high street to online…
It’s not just about the internet…
I for one would much rather splurge my hard-won earnings via Amazon rather than taking up valuable time heading into town…
Especially when the kind of shops I’d want to buy stuff in are few and far between.
No doubt about it, retailers need to up their online game if they want to survive.
But surprisingly, 80% of purchases are still happening in bricks and mortar stores, according to industry site, retailsector.co.uk.
So, there’s more to these dismal retail figures than just the miserable British weather and the internet.
It’s about people feeling the pinch and stopping spending on things they don’t need or can get somewhere else cheaper.
They sense that they need to keep that money back for the things they need: food, bills, car fuel.
The Independent reports that “consumers have been squeezed by a cocktail of stagnant wage growth and a jump in inflation as a result of the tumble in the value of the pound since 2016’s Brexit vote.”
I’ve read in the news about inflationary pressures on us Brits subsiding as the value of sterling stabilizes.
But I’m not so sure.
Why inflation is just getting going
Have you seen the oil price lately?
It’s doing its best to keep inflation roaring… and that could come and bite in the months ahead.
Ever since Donald Trump announced the US was bailing out of the Iran Nuclear Deal, the cost per barrel of the black stuff has been surging.
That move puts a major squeeze on oil supplies – and that’s on top of restrictions OPEC has already had in place with other oil producers.
Now European oil companies fear heavy penalties from the US if they keep doing business in Iran.
So, companies like France’s Total are starting to pull out. That’s another supply side stimulus for the oil price.
Up… up… up…
Oil at three-and-a-half-year highs
The US WTI benchmark crude oil price is now at its highest level in three and a half years. It’s now above $72 – up 70% in the past 11 months.
And North Sea (Brent) oil yesterday broke through $80 a barrel.
Let’s not go over old ground again. But just think about what happens when oil prices continue to rise…
Here’s how Michael Hewson, Chief Market Analyst at CMC, put it in a tweet yesterday:
Sooner or later those high oil prices are going to feed through to fuel prices. Both what we put in our cars and what we use to cook and heat the water.
Not only that, but it adds to the costs of transporting raw materials and that means rising costs in pretty much everything.
That’s inflation.
Back in the 70s there were various oil crises that caused the price to jump from $3 to around $40.
And the upshot of that was that inflation as measured by the Consumer Price Index (CPI) more than doubled.
Ok, no one is suggesting the oil price is going to multiply by 13 times any time soon…
But in the last couple of days I’ve seen analysts from Morgan Stanley predicting $90. And Bank of America Merrill Lynch is calling for $100 oil next year.
And that guy I told you about in Monkey Darts the other day who’s predicting oil at $300 a barrel in the next couple of years.
It’s not going to be enough to cause the CPI to double.
But surely, it’s got to have a significant upward effect on prices, right?
And all of this when the global economy is starting to look weak all round.
An ominous threat on the horizon
Another (controversial) headline you may have seen earlier this week…
“Bank of England deputy warns UK economy entering ‘menopausal’ phase”
Ben Broadbent’s choice of adjective was odd. Ridiculous, even. And totally inappropriate.
But his overall point is important.
The UK economy is not right.
The good times are over, we’ve passed ‘peak productivity’, he says.
And now it’s a case of waiting for “the next big breakthrough” to spur the economy into a new growth phase.
As the Guardian reports:
“Britain’s economy slowed to a virtual standstill in the first three months of 2018, the weakest period of activity in more than five years.
Office for National Statistics figures showed a sharp contraction in the construction sector, weaker manufacturing growth and a squeeze on consumer spending power contributed to GDP growth of 0.1% in the first quarter.”
As a net energy importer, these rising oil prices can only make things worse.
And it’s not looking any better over the other side of the Atlantic…
The US economy grew by 2.3% in the first quarter. That’s down from 2.9% in the first quarter last year.
And when you consider that in 2017, the US had two consecutive quarters of 3% growth, it’s hard to avoid the conclusion:
The US economy is losing momentum – no matter what Warren Buffett will have us believe.
Meanwhile, what’s this in the money markets? MarketWatch has the headline:
“US Treasury yields near seven-year high”
“This week has seen recharged inflation expectations drag Treasury yields higher, with borrowing costs on forward rates also joining the party. That means Main Street is preparing for inflation to ‘normalize’, maybe even overshoot over the next few years,” said Ken Odeluga, market analyst at City Index, in a note.”
This is a terrible cocktail we’re looking at here…
Falling growth rates and rising inflation.
We’re not there yet, but there’s something ominous on the horizon.
That’s when you combine economic stagnation with inflation.
Better known as STAGFLATION – surely the nightmare bogeyman of any central banker or political leader.
Business Insider is on the case:
“To the extent that higher oil prices stokes inflation, it could spur more aggressive action from the U.S. Federal Reserve. More rate hikes would drag down the economy, making the cost of borrowing more expensive. It would also strengthen the U.S. dollar, hurting export industries.
“Citi economists warned that if oil prices rise even further, there could be a “particularly hostile environment” for global investors in the coming months. The investment bank said that President Trump’s decision to withdraw from the Iran nuclear deal “constitutes a major geopolitical shift,” that could bring on “stagflation,” consisting of weak economic growth and higher inflation, spurred on by higher oil prices.”
And Danielle DiMartino Booth, former adviser to the president of the Dallas Fed, writes on Bloomberg:
“Investors better wake up to the growing risk of stagflation. The coming weeks promise to deliver the verdict on how they should be positioned.
“By all metrics, inflation is heating up. But it’s not clear the same can said for underlying economic activity.”
What does it all mean for your money?
Well you could argue that stocks are a good hedge for inflation. Companies can usually pass on rising input prices to consumers. That means stock markets can often keep pace with inflation.
Trouble is, the growth side. If investors start to worry about stagnation, they could rush for the exits.
With stock markets still not far short of all-time highs, the risk is high for a substantial correction.
I’m more interested in the prospects for gold and silver.
They’ve both taken a bit of a hit in the past week as the US dollar index has been rising due to expectations of rising US interest rates.
But if stagflation really does become reality, there’s no way the Fed’s going to be raising rates. They’ll be rushing to cut them!
As traders figure that out, it could knock the wind out of the dollar’s sails…
And that could mean a new surge for metals.
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