Let retail burn

The MSM is full of shock and awe at last night’s David Jones profit warning. Farifax and News are as bad as one another.

Of course, this is absolutely NO surprise to MB readers, who have known all year that retail is in the gun.

The question now is should the sector be bailed out by monetary stimulus? My answer is an emphatic “no”.

Look at the above chart of monthly retail sales dating back to 1984. There is a clear trend break upwards around the turn of the millennium. It doesn’t take Einstein to equate this with the take off in the housing bubble and associated credit boom. If we are returning to the pre-bubble trend, good.

That is Australia’s old economy now. The new economy is Quarry Australia, with all of the structural adjustment that that entails. As we’ve heard from both the government and the RBA at length, resources must be freed up for the resources boom. To date, it has been manufacturing that has born the brunt of this adjustment through the high exchange rate.

That retail is suffering in this context is a good thing, to my mind. If the retail sector’s proportion of the economy can shrink to accommodate booming resources investment, that’s a good trade in my book. We’ll be giving away a debt-driven problem of overspending in exchange for a larger productive export sector.

With any luck that will take some of the heat off manufacturing exporters by preventing future rate rises and keeping the currency from appreciating further. They too are productive, external earners.

Markets may be anticipating rate cuts now, and if the Western powers go to the wall again or house price depreciation turns disorderly, sure, all bets are off. But faltering retail is no reason to cut rates.

Houses and Holes
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  1. Come to think of it, did the RBA have the mandate to cut interest rates during the GFC. I.e. did inflation go below the 2% band?

    • Yes it went under 2% Jun & Sep 2009. See http://www.rba.gov.au/inflation/measures-cpi.html

      Also, so far as I am aware the RBA mandate is for inflation to be within 2-3% over the medium term. So they can take steps now to avoid any movement higher or lower notwithstanding the current rate might be in the sweet spot.

      So I’d say yes, they had the mandate.

      • Thanks for that. But now, with inflation hovering near the upper band, they surely can’t say there is a medium term risk of inflation falling below 2% and hence their mandate would not support a rate cut.

        But all this is moot – would the banks pass on a rate cut!! I think not.

        • I agree. It’d be pretty hard to argue the case for a rate cut given what Glenn et al have been saying all year.

          Would the banks pass on a rate cut? Not sure. I do think they are passing on a cut of sorts by stealth – all these deals that are in the market to entice customers from eath other would seem to me to be a negative sum game.

  2. Freeing up resources for the resources boom is all well and good, but what retail workers are going to be able to get a job in mining?

    Are we expecting 25% of the DJ’s workforce to leave the checkouts, go get a welding ticket and move to Moranbah to live in a donga?

    I don’t see that there’s actually that much employment available in mining. Big dollars yes, but only for a select few.

    • Point taken. But surely the same argument applies to manufacturing. And besides, the adjustment crew point to the growth in associated industries such as engineering, accounting etc…

      • I think that employment growth in a capital-intensive industry that employs a tiny fraction of the workforce will have to be nothing short of remarkable to offset a significant shrinkage of one of our largest sectors by employment.

        • +1

          Not to mention that a deflating (or inflationary backed by funny money) global backdrop will also cause a decrease in the rate, if not the level, of resource-focused capital, also; so I would expect some of the projected resource projects to be delayed or even cancelled, should things even get a bit (GDP) slower, globally…

          Just reinforces for me how I scratch my head when people keep talking about the massive effect that resource construction will have – compared to the Old (Housing debt injection) Economy, it’s still pittance.

          …and even if it was as “big” as all supposed, why then also suppose that people will spend (and thus dsitribute) all this wonderful extra money? If sentiment keeps changing at anything like the rate it has, and in the manner it has (disleveraging, turning into deleveraging), then people will be using the money to extinguish debts and save, not spend like they used to.

          Those days are gone.

          My 2c

    • I do resource research for investment, and currently in Australia there are roughly 11,000 open positions; here is one of the sites with the open positions.


      So your right it’s a small selective employer. There are lots of jobs now that don’t require mining engineering, or geologist qualifications, but small compared to retail so comments so far on the blog are spot on.

      The other thing to note is that during the GFC most of the professional miners lost their jobs. I meet with mining MD’s monthly and get a feel for what’s going on in the industry.

    • The connection is not between retail and mining but between retail and housing.

      Spending boomed when home ATMs were open and credit easy, the good times, we all felt wealthy, could spend up big and thanks to our property values increasing forever, could only get wealthier. Spend Spend Spend.

      Then the fairy tale for retail ended. House prices stagnated, interest rate rises threatened, global doom perforated, Aussie gloom engulfed and we stopped spending or we sought cheaper product on line.

      Retail is simply the end recipient in terms of the global credit boom. And its future for some time will be more subdued, with the advent of online, perhaps terminal decline in some product (books).

      Nothing to do with mining.

      • Totally agree 3d1k on your point, but I was responding to Phil’s “I don’t see that there’s actually that much employment available in mining”. And if retail did tank, all those people who loose jobs can’t be accommodated in mining jobs. That’s assuming the mantra is full employment as much as possible.

        • I suspect there will be some rise in unemployment figures, unavoidable if consumer sentiment remains as is.

          And you’re right – not many jobs in mining, lots in related infrastructure construction though, albeit often on a project-by-project basis.

          • Employment is a puzzle.

            Apart from Mad Adam pretty much everyone agrees retail, manufacturing and tourism are experiencing a significant downturn, and yet, employment remains strong.

            If you dig into the numbers the Victorian employment market is strong, but NSW is weak. The strongest sector is social services and welfare. Mining employment is growing strongly (percentage-wise) but because its such a small employer its impact is minimal. As Fanboy points out there are plenty of jobs in construction for those who are willing and able to drop everything and move to North West WA, but not everybody can do that for family reasons etc.

            The employment numbers just don’t seem to fit the picture of the two-speed economy, and the other economic data we’re seeing. Perhaps it because its a lagging indicator. Perhaps its because Mad Adam is right. Who knows. Anyone got any ideas?

    • “I don’t see that there’s actually that much employment available in mining. Big dollars yes, but only for a select few.”

      You have heard of a “Jobless recovery” taking place in an economy.

      Now is the time for a “Jobless (Future)Boom!”

    • When you earn $20ph in retail or $100ph in mining. It doesn’t matter if they don’t want to work in mining – at the end of the day, money and salary will talk.

      • Not many earning $100ph. Even half of that. The dollar comes from the amount of time spent at work.

        I quite often tell others that if they worked as many hours for Davo back home, they’d earn the same dosh. Self-delusion and the mining industry go hand-in-hand.

      • You don’t need to be an accountant to see that. It’s pretty clear, and you can easily confirm that by looking at the monthly rate of change. There’s no statistically significant difference between pre- and post-2000, and post is actually lower.

        John Cage made a good point about inflation. This series is nominal, so it would be interesting to normalise this to both inflation and household disposable income.

        • I was being a smart-ar*e. It was more a statement about Suzi Wong’s collective posts that I have seen in the last month or so using MacroBusiness.

          This post is typical of her. I suggested she may be an accountant, perhaps an auditor or some such.

          The use of nominal sales was a mistake. “Burn him!”

          Retail is forked.

          • I just did the calcs myself (H&H beat me to it) and in real terms the home ATM claim looks robust.

            But no need to hate on Chris Joye, woops I mean Suzi.

            I think her contributions are an important leading indicator for the economy, the state of the housing ‘market’ and the growing influence of MB.

            When the captains of the ‘Politico-Housing Complex’ are bothering to white ant this forum, its clear desperation is setting in.

    • Suzi. If you have a point to make, make it. But please resist from using comments like “Ummm – clear?”. It is downright rude and aggressive. Try showing some tact for a change.

        • ..yet it’s fine and dandy to accuse, as Alan L has, a poster of being someone he is not, to try and insult a poster of being a member of the Politico-Housing Complex which he is not and to accuse a poster of white-anting the forum.
          You guys are simply intolerant of other views and data which rock your beliefs in the demise of Australia, and are determined to keep this place a private doom and gloom club, whatever the facts.
          To be attacked for writing “Umm – clearly?” reveals the extent of your one sided intolerance, sensitivity and lack of confidence in your own positions.

          • Nope. I’m with UE – it is incredibly tedious for the debate wind down into snide nips. If you have a valid viewpoint that takes a different tack put it down politely and let the debate move forward.

            If you want to test your wit by being narky (yawn) go cut it up with Zero et al. and we’ll find you in the morass somewhere down on page 23 of the comments.

          • I am with you Suzi but I think Macrobusiness bloggers do not wish in the demise of Australia unlike most of the MSM economists ,investment bank economonist and House data provider economists. Most of the bloggers do not want to see further financilization of the Australian economy and wish the economy move towards a more creative / technology focussed industries.

          • Just letting it be known that I think Suzi Wong is a great contributor and keeps everyone on their toes. While she’s blunt at times, that’s fine sometimes that’s necessary so that the point is not lost in a wordy comment. I’m sure many others are often just as blunt (myself included).

    • Good point. I think H&H might have missed the discussion about graphing and log scales etc.

      Changing the scale would actually make the downturn of the last 18months appear even more severe.

      My calcs are
      5/1982-4/2000 – 6.5%
      5/2000-4/2008 – 6.3%
      5/2008/5/2011 – 3.6%

      So the growth in retail in the last 3 years is about 60% of the average over the past 20 years.

      • Hmmm, yes, looks like you guys have caught out my pre-dawn chart.

        Would make the point, though, that these are nominal sales not real, and inflation averaged roughly 5.5% from 1982 to 1999. From 2000, it was more like 3% (both guesstimates).

        There are myriad other factors at work too. Productivity in the nineties and not afterwards,rising incomes and population from 2004 etc.

        I’ve oversimplified the chart but the argument stands.

  3. Looks to me like retail spending doubled from 5000 million to 10000 million in the 12 years from 1986 to 1998, and doubled again in the following 12 years to 2010, to 20000 million. So no change in the trend rate of increase.

    Might be one of those cases where using a log scale would be more appropriate.

    That said, I agree with your headline and main thrust of your argument.

        • Torchwood1979

          Thanks for those real figures. Makes for a much clearer picture. With real growth over 2% for 17 years it’s high time the consumption driven economy is brought back to reality.

          • I’ve followed up this post with a real per capita graph and a few growth figures to compare the past three years to historical norms.


            “The peak of this real per capita index is Dec 2007 (dotted line), and is down about 0.35% since that peak. You could say that each persons retail spending has been flat for three and a half years after more than two decades of consistent growth. In the deacde prior to this peak per capita real growth in retail was 3.5%pa.

            From an industry perspective, real turnover has grown at 1.7%pa since that peak, whereas in the decade prior, real total turnover grew at 4.9%pa. That is quite a shock to that sector, and I hope that it stimulates some overdue competition and innovation in retailing in this country (as I have previously discussed). “

    • PMGOLD still looking ok …

      Seriously, my idea of JBH is that they sell tangible things (CDs, DVDs) which take up space I don’t have in my rented apartment. I’d rather own virtual copies. It’s analogous to Leith’s article about “the case against home ownership”.

      We are moving to a world where intangibles have more value, like the conclusion to Doug French’s book “Walk Away” … available free online http://mises.org/resources/6029/Walk-Away-The-Rise-and-Fall-of-the-HomeOwnership-Myth

    • MYR is much better value than DJS atm imho, though i wouldn’t purchase either. JBH is the better bet out of the three. DJS has had a sterling run. It has considerably outperformed the market year on year for a long time. This shouldn’t surprise anyone given people have been using their equity to splurge on TV’s, designer clothes, celebrity chef cookwear, miele appliances etc etc. As MB has pointed out (very astutely) the drop in housing tunrover was eventually going to burn companies like DJS. Wouldn’t be surprised to see it underperform the market for the next five years.

    • Agreed JC.

      I think JBH will be good value for dividends alone – even if they suffer a slump in spending, they are the best of all the retailers to position themselves fiscally.

      The div yield is 5.1% or 7.2% grossed up (based on last year payout) at current prices.

  4. One of the interesting things about the current environment is that it feels just like the lead up to 2008 but this time the storm cloud ‘vibe’ is infecting the general population and not just those who had been keenly watching events since the dot com bust back last century ( hmm that is really starting to feel a long time ago ).

    In 2008 and 2009 it wasn’t too hard to get the consumer and house buyers excited by cash splashes and plummeting interest rates as they had not been very worried to start with.

    Now they are much more suss and busily deleveraging as fast as

    However, I have complete faith in the government and the RBA to repeat their GFC performance and open the sluice gates as soon as some overseas event provides a panic pretext.

    Whether the population responds to the party punch like last time is another question.

    The excessive household debt message might be entrenched.

  5. I remember reading a blog from Argentina about life post currency collapse and what caught my interest was that dvd cd’s and games were in high demand as most people stayed indoors as much as possible to avoid the lawlessness on the streets.
    Long JBH ?
    Great blog btw.

    • I have read about that too – the other idea is that non-home buying Gen X/Y/Z’s, who rent instead (and thus save about 30-50% of their income doing so), can use that money for discretionary spending. I doubt they will actually “save” it.

      The empirical evidence is from Japan as well.

  6. El Zorro Dorado

    How can you even suggest the possibility of a bail-out? Through some sort of further silliness of a spending bonus? The retail sector is in the gun because it’s grown like topsy in the face of unrelenting mis-priced credit over the past two decades; from the Taj Mahal Westfields to the suburban strips around the country, there is a plague of shops selling the same products which are only relevant at times of extravagance and illusionary property wealth. Check out any mall and identify those shops which sell items which might be needed in less affluent times. There aren’t many. And so it goes with the Harvey Normans and the chains…all the way down to the ubiquitous nail and perm dens sprinkled around the burbs. The 2011 Aussie retail sector is a perfect example of the fruits of long-term, gross mal-investment. The unfortunate thing is that so many small businessmen are in the process of going to the wall: most would be secured by mortgages based on false values as well.In the past, the sector would have been progressively and regularly sorted by the cycle, but the perpetuation and on-going stimulus of the economy through FHBG, gifts and vote-buying schemes, mis-priced money and the hubris of RBA, Treasury and pollies, has left this sector and the economy as a whole out to dry.

  7. David Jones CEO joining the witch-hunt blaming carbon tax for struggling retail. I have a bad knee, probably carbon tax something to do with it. No mention in the media on private debt levels or the fact that household atm called ‘equity’ is slowly but surely running out of cash.

  8. Sorry for changing tack, but I would like to further explore the role of mining in all this (the credit explosion and all that goes with it). I am of the (uneducated) opinion that the mining boom provided the capital for the credit explosion (+) to happen. We don’t have the de-regulated, financially engineered banking system. We’ve all seen the evidence of the banking sector’s reliance on offshore funding. Did the confidence in the mining story not underpin that funding? That, and the deluded perception that our ‘robust’ banking system allowed us to side-step the credit crunch?

    • Mining went backward during the GFC, with widespread job retrenchments. It jolted back to life on the huge demand injection from the stimulus packages of the Asian giants. China alone passed a stimuls package around two-thirds the size of the entire Australian economy.

    • I know a few people who had no problems borrowing 100%+ for investment properties. Owner occupiers can also easily get a loan with only 5% deposit. That’s not very regulated banking in my view.