Its been awhile since I have brought up the economy (OK.. a month or two..) but with all my prognosticating about the economic future I think I finally got one right that was worth mentioning.
A couple days ago I was looking to adjust my asset allocation to match my targets I have set. I noticed I was overweight on Bonds and REITs, and was going to re-balance. Coincidentally, word on the street is the Fed was going to raise rates in June and bonds are dangerous at this level as increasing rates will lower their value. However, I made a conscious decision to wait until after today’s job report to re-balance and re-evaluate, as my thesis is that the Fed won’t raise rates because of worldwide economic weakness, even in the face of zero or below interest rates.
In comes today’s jobs report – and I got this one right. It came in way weaker than expected, and now everybody is saying the June rate hike is off the table. Bond prices are going up as market rates are falling.
What was my reasoning for my conviction? Recent retail sales numbers. If you have been following Macy’s or Nordstrom’s, you have seen sales fall off a cliff. I think the economy has something to do with this, but I think this is just a harbinger of the acceleration of online retail sales. Clothing is the biggest online sales category, and you are now seeing its impact on malls and stores.
In the first quarter of 2016, online retail sales percentage is just under 8% of total retail sales. As baby boomers age, and millennials take over the shopping demographics, this has to accelerate. Not to mention demographically millennials seem to buy less ‘stuff’ in this technology age.
So to make a long story short – I think we are at the point where online retailing is making an impact on the economy. Not necessarily in a bad way – the efficiency of shopping online is reducing the cost of getting goods and services to the consumer – but at a cost of jobs. Jobs of retail salespeople, cashiers, and soon to be bank tellers and office workers. If online sales doubles to 20% of total retail in the next 5 years – how will it impact the malls and shopping centers? I am guessing they will be a lot quieter.
So short to medium term, I think the story of the day is deflation caused by increasing sales efficiency. Thus, 30 year T-bill rates will creep to under 1% (and be more in line with other developed countries). So I am OK with being overweight in Bonds. Interestingly I am not sure what to think about Real Estate (REITS). My current thinking is that people will drop money in income producing properties as rates drop – however – as storefronts go dark -some REITS are going to have a lot of empty properties with no rent. So for now I am overweight in REITS, but have a nervous trigger finger.
Medium to long term I do agree bonds are a dangerous place to be. Governments are fighting an uphill battle to try to inflate their way out of debt, and some corporations are trying to grow their way out of debt. So on Bonds I also have a nervous trigger finger – but more concerned about credit quality than inflation. I also agree with many of the economic bears that we may see a recession later this year – and if that’s the case, being in the wrong credit markets could be a disaster.