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August 2016 Vice Index: Is Vice Spending Slowing?

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August 2016 Vice Index: Is Vice Spending Slowing?

The Vice Index indicates a sharp downturn in retail spending… beginning in the fourth quarter (October.)

Regular Moneyball readers know the Vice Index is the best way to gauge the American consumer. It’s proprietary research I conduct to track discretionary spending in real-time.

And the Vice Index is telling us that retail spending is about to drop off sharply. That’s only likely if wage growth slows sharply. After all, retail spending is determined mostly by wage growth (You can see how retail spending is positively correlated with wages.)

Wage & Retail Spending

Wage growth is currently at 4.4%. Could it drop a full 1% or more (economists measure increases or decreases in terms of basis points. 100 basis points = 1%)?

It just did.

Compensation dropped 80 basis points (0.8%) in the last three months alone. It dropped from 5.2% in March to just 4.4% in May.

And the biggest driver of wage growth – payroll growth – is slowing. Whether the second half payrolls of 2016 averages 200,000 per month, or a more likely 150,000 per month… it means the same: significantly slower growth.

Slower payroll growth means slower wage growth.

nonfarm payrolls 200k


nonfarm payrolls 150k

To underscore our point, Moneyball Economics S&P 500 hiring data shows sharp drops in hiring by consumer services and consumer goods companies. These industries know growth is slowing.

And the Vice Index is reflecting what consumers are already sensing… that the economy has peaked. And it’s time to prepare for rainier days.

The Business Cycle

The business cycle is actually pretty basic.

As money flows into the economy, businesses will hire more and invest more. That kicks off a virtuous cycle where more business investment leads to more spending which leads to more growth. There are a lot of ways to get money to flow. The traditional way is through hiring: that boosts the aggregate level of wages. If there are no other sources of money, then spending has a ceiling established by incomes.

Starting in the 90s, the government found ways to expand the money supply.

First came the 401K.  This mechanism offered employees a pension-type savings account wherein tax benefits encouraged them to save into a 401K. Companies also topped off the savings under various matching grants. Bottom line: money flowed to the stock market. A wealth effect began. That’s a huge part of what enabled the “Dotcom” boom and the silly stock valuations.

Another way to boost the money supply is debt.

Following the “Dotcom” bust in 2001, Alan Greenspan as the Fed Chairman created a regime of cheap money. People borrowed and spent. Until the whole thing collapsed.

Without access to debt, the economy shrank because people had to live within their incomes. (And the aggregate income level shrank because of huge layoffs.)

People didn’t learn.  The credit bubble is back and even worse.

Revolving credit

Credit Bubble Burst 2.0: Another House of Cards

There are two types of debt: the kind that gets paid soon (revolving credit) and the kind that lasts for years (non-revolving credit).

Revolving credit is essentially credit cards. Non-revolving are home loans, auto loans and student loans.

Household credit card debt (consumer revolving credit) is back to pre-Recession levels. (Note: credit card debt soared in the recession partly because banks dropped rates and people spent like mad, and partly because people had no money and used credit cards to get by.)

More frightening: non-revolving credit has doubled since the recession.


The first concern is size: it is almost three times the size of revolving debt. The second is that the quality is terrible. Remember that the entire house of cards collapsed last time because of subprime lending aka bad quality lending. Well, it’s going on again. Auto loans are defaulting fast and the quality has dropped.

Here’s the real dirty secret: student loans.  Student loans are almost as big as credit card debt.  It has grown $1 trillion since the recession in 2009.

Student loans

The problem is that it’s not earmarked for tuition. That $1 trillion has been going to…cars and other spending.

In other words, we now have an even bigger credit bubble underway and with the same level of poorly qualified loans. Our entire economy is built again on a massive wave of debt.

And the peak has been reached. As spending growth slows, companies slow hiring.  That virtuous cycle turns into a vicious cycle of less hiring, less spending, and then layoffs.

Leveraging the Economic Signals from AirBnb, Uber, and Prostitution

There is nothing new under the sun.

What do I mean? To be honest, AirBnb and Uber are one step up from being gimmicks.

Let me explain.

They didn’t create the products they sell. For eons, people have been renting rooms in their homes or offering rides. They didn’t create the software. Their digital marketplaces are combining pre-existing standard software utilities.

What they are bringing to the table is that they are applying digital tools to pre-existing pockets of the underground economy and that’s allowing for consolidation and streamlining

The same is true of prostitution. It’s been around for thousands of years. And has moved online to achieve the same objectives as Uber and AirBnb. To broaden the customer base and enable peer-to-peer (P2P) communication, security, and payments.

The common thread across these businesses is that they convert a personal asset (houses for AirBnb, cars for Uber). With prostitution, the asset doesn’t get any more personal.

Meanwhile, by streamlining the process, AirBnb and Uber have expanded the business by making it easier for buyer and sellers to join. After all, flexibility is the selling point of the on-demand economy. That’s an important common point shared by the three businesses. Most service providers participate on a part-time basis as a means of augmenting income.

A major website for escorting is (SA.) Technically it’s a dating website and not an escort service… but functionally it is an escort service. It specializes in helping women find men to pay them “allowances” in return for “companionship.”

And like Uber and Airbnb, SA has created an exchange platform that provides communication, security, and breadth. In SA’s case, college students are a major source of supply.

Which all goes back to the appeal of the on-demand (or gig) economy: Flexibility, part-time work, and safety.

The point: These businesses qualify as key consumer spending indicators for several reasons.

  • Users are typically individual consumers
  • Breadth of coverage: Uber provides 1 million rivers per day. AirBnb will book 79 million room nights this year. And SA has over 5 million users
  • Consumer-centric spending: These are typically forms of luxury spending (Although Uber slightly less so.)

Cyclical, Counter-Cyclical, or Both?

It’s too early to use Uber and AirBnb as economic data points.

For starters, they are still growing their user bases. Secondly, we haven’t seen their behavior for a full business cycle.

It’s also not clear if they are cyclical, counter-cyclical, or both. For example, when times are tough and income needs boosting, more people resort to offering escort services (supply increases.)

Uber and AirBnb will likely behave the same way.

More rooms and drivers will become available. Especially drivers because people out of work also have the time to drive. Like escorting, supply increases as people do what they need to in order to stay afloat.

But they may be counter-cyclical to some degree.

Escorting also sees supply increases during boom times. Demand surges. Prices rise. And there are more opportunities to increase incomes.

The same can be AirBnb. Personally, I know several examples of individuals buying properties specifically to target the AirBnb traveler.

Without the extra income, they couldn’t meet the cash flow. This means supply growth is speculative and stems from boom times.

Follow the Pricing

Supply is not always driven by demand… but prices are.

Selected Cities

In 2014, The Economist analyzed data from an unnamed, but well-known escort website.

They found that rates varied greatly depending on the city. But they couldn’t explain why. After all, bigger cities will have more escorts… and more supply means more competition.

The answer may be simple.

Hotel room rates.

  • The low-end: Tokyo. Hotel costs are relatively small. It’s easy in Japan to rent rooms by the hour. (They are called Love Hotels.)
  • The high-end: San Francisco. San Fran hotels are limited and very expensive.

I conducted a survey of escorts at the beginning of the year. Prices had recently been raised to offset higher hotel room rates. But, in general, further hikes weren’t expected.

Prices Also Point to Consumer Demand Issues

In the first quarter (Q1), I reported that prices were moving up again. And not necessarily for margin management reasons. But for opportunistic reasons.

Higher-end escorts were raising prices because they could. They raised prices in response to market forces. Demand was strong enough to absorb higher prices. Most importantly, the price hikes have held.

However, recent signs show that escort business may be stalling.

Business remains strong heading into the second half of the year. There are no discussions in various chat rooms and boards about slowing business conditions. (There are discussions about using AirBnb as an alternative way to paying high hotel prices. But that’s basic business practice. And another example of the ways in which the sex industry always seems to leverage the latest technology.)

But there are signs that escorts are having to drum up business more than usual.

One example is the emergence of new special services… like cuddling. Another is for the escorts to travel to other cities for business.

This is usually a big warning sign. Why? Because travel costs eat into their profits.

KEY TAKEAWAY: Overall, there is nothing definitive. Just some interesting anecdotes. But they do all seem to trace back to stagnant business growth.



Andrew Zatlin

Editor of Moneyball Economics

P.S. Recently, Bloomberg ranked me the 8th most accurate forecaster of US private payrolls.

These benchmarks matter. The stock market moves on them. The Federal Reserve is making their decisions based on them. And I regularly beat consensus almost every time.

I beat Citi. JPMorgan. AND Credit Suisse. 

On top of that, our Moneyball Trader keeps outperforming the market and every other advisory out there.

Our hit/success rate is north of 70% – meaning more than 70% of our calls have yielded positive returns.

Our cumulative returns are over 70% since inception.

Go to the big boys if you want to pay the big fees. Or you can just check out The Moneyball Trader to get your actionable insight for just $99 (this discounted price is for a limited-time only). Click here for more information.




Jobless Claims Trend: It’s 2007 All Over Again

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Jobless Claims Trend: It’s 2007 All Over Again

People looking at jobless claims think the economy is getting better…

But that’s because they don’t understand the ebb-and-flow of layoffs.

Sure, we’re seeing lower jobless claims this year compared to last year. Also, the trend has been falling jobless claims – from 277,000 this past May to about 254,000 in July.  That is definitely a sign that the economy is still expanding and demanding more workers (the #1 reason for fewer layoffs.) Even better, the number of claims is hitting extremely low nominal levels.

Except there’s a different reality at work.

First, that recent drop to 254,000 was a quirk that has already passed: claims this week moved back to 269,000. That quirk comes from the seasonal adjustment related to July: factory workers tend to get laid off in July when factories undergo re-tooling. For example, Michigan’s Jobless Claims (not seasonally adjusted) more than doubled from June to July: from 25,000 to 54,000.

The result being the report overcompensates and sends jobless claims down more than necessary. It is why, with July over, claims shot back up… And that year-over-year gap has faded. Claims are now running higher than the same weeks last year.

This means that the economy has stopped growing.

Initial jobless claims


In fact, the decline in jobless claims is following the exact same cycle as the ones in 1989, 2000, and 2007.  A bottom gets hit and then claims rise and then surge.

Each time it followed this cycle… it led to recession.

You see, there are four basic stages of labor demand during every business cycle.

1) Recession Job Cuts: In a recession, supply (people looking for work) sharply exceeds demand (businesses hiring.) Layoffs surge as businesses cut inventories of people and goods.

2) Post-Recession Restocking: After the recession, job cuts slow. Some labor demand even starts to creep back in as businesses were too lean and now need to restock. The jobless claims year-over-year (yoy) is sharply negative

3) Mid-cycle Inventory Expansion: The business cycle shifts from being backward looking (i.e. less about restocking lean inventory) and turns forward looking (i.e. investing for expected future demand.) The initial claims yoy metric starts to move up because of unfavorable comps: initial claims are still falling but at a slower rate. (The pace of expansion is slower than the previous year’s pace of restocking.) The yoy rate bubbles up.

4) Pre-Recession End of Inventory Expansion: An equilibrium in labor demand has been reached and existing staff levels meet expected demand. Layoffs pick up as employers look for profit growth and production efficiencies. Claims yoy rise 100%.

This pattern repeats itself every business cycle… with some secular twists.

Today’s secular twist is better inventory management.

Thanks to the internet, businesses have much more efficient inventory management. This allows tighter visibility so companies know actual end-user demand.

Take a look at the ISM Manufacturing Inventory Index since 1948:

ISM manufacturing inventory

It’s easy to see the internet era has stabilized inventory management.

Better inventory management means a longer, yet less volatile business cycle. The longer business cycle happens for a few reasons.

Businesses are less surprised by shifts in demand. They are no longer surprised by sudden shocks to inventory… whether it’s ramping up or down.

Reduced manufacturing means less capital expenditures. The industrial base’s share of the economy shrinks, so spending on factory equipment takes a smaller share of the overall gross domestic product (GDP.)

Businesses enjoy flexibility when it comes to big ticket IT software. Instead of spending millions all at once… they rent it through the cloud from companies like Amazon and Microsoft.

Businesses also enjoy flexibility with labor. Unions have lost power… which allows businesses to easily hire and fire almost at will.  So, like inventories of goods, companies don’t have to stockpile workers, but can ramp up or down (hire or fire) as needed. The traditional pattern is for claims to rise gradually and then suddenly surge. Because of the less volatile business cycle, the rise in claims may last longer but it will happen. And so will the surge.

KEY POINT: Claims are ticking up. By September, they will be well above last year’s levels. I call out September because another reason for low claims has been a strong California harvest season that has kept farm workers around longer. But the season winds down in September and instead of a trickle of farm worker layoffs, it will be a sudden flood. We saw the same exact cycle play out in 1989, 2000, and 2007. Far from being a sign that all is well, jobless claims are telling us that we are approaching the recession



Andrew Zatlin

Editor of Moneyball Economics

P.S. Recently, Bloomberg ranked me the 8th most accurate forecaster of US private payrolls.

These benchmarks matter. The stock market moves on them. The Federal Reserve is making their decisions based on them. And I regularly beat consensus almost every time.

I beat Citi. I beat JPMorgan. I beat Credit Suisse. 

 On top of that, our Moneyball Trader keeps outperforming the market and every other advisory out there.

Our hit/success rate is north of 70% – meaning more than 70% of our calls have yielded positive returns.

Our cumulative returns are over 70% since inception. 

Go to the big boys if you want to pay the big fees. Or you can just check out The Moneyball Trader to get your actionable insight for just $99 (this discounted price is for a limited-time only). Click here for more information.

The Market Is Surging Like Never Before

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Where the Market is Headed From Here

The market is surging like never before…

So far this year, the S&P 500 is up over 7% (as of August 2.) It’s risen almost 6% since the United Kingdom’s vote to leave the European Union June 23 (“Brexit.”)

The reason: the Federal Reserve (Fed.)

Take a look at the annual returns of the S&P 500 since the Fed dropped interest rates to near zero… And bought $4 trillion worth of U.S. Treasury bonds.

S&P 500 Annual Returns:

2010: 16%

2011: 2%

2012: 15%

2013: 20%

2014: 12%

2015: 2%

2016: 7.1% year-to-date (12.6% annualized)

The gains we’re seeing this year don’t add up.

This business cycle is long in the tooth. We just started the 7th year of the cycle. Not only is the stock market’s growth slowing, the slowdown is accelerating faster than any other year since the recession ended.

Wait – maybe it does make sense. This is almost exactly what happened right before the Great Recession. The market surged one last time before collapsing.

Check out the previous business cycle prior to the Great Recession:

2003: 35%

2004: 5%

2005: 9%

2006: 13%

2007: -4% (but was up 8% before plunging starting in October)

The last cycle behaved as normal: up strong as the economy regained its footing – about 10% per year. Then it dropped 4% in 2007.

However, this cycle is moving to a different beat… And the drummer is the Fed.

For instance, note the size of annual growth in this cycle – on pace to have five double digit return years in a seven year cycle (about 11.3% per year.)

You can thank the Fed’s easy money.

But notice the abrupt drop in 2015. The Fed ended its quantitative easing policy by the end of 2014. And raised interest rates December 2015.

The spigot got turned off by 2015… and it resulted in just 2% gains.

This year’s gains – up over 7% (12.6% annualized) – defies both underlying fundamentals AND the Fed’s loose monetary policy.

First, growth was already artificially driven by the easy money.  Second fundamentals are terrible: revenue growth is low and has declined for four straight quarters. Meanwhile, global economies are slowing. Talk about divergence.

The S&P 500 price-to-earnings (P/E) ratio is now at 25, the highest it’s been since the recession.

The Schiller P/E – which averages the P/E ratio over the past 10 years – is at 26.  It previously peaked at this level in early 2015.  The market stayed at that level before plunging 8%. 

Immediately before the last recession, it hit 27 and then the recession started.

KEY POINT: The market is richly valued.  Every time the Schiller P/E reaches these highs, the market stalls… and eventually drops. Given the lack of growth factors (outside of a Middle East and Asian arms race), this divergence won’t last. I expect the market to begin falling by the end of the third quarter (I’ll explain why in a future post.)


Andrew Zatlin

Editor of Moneyball Economics

P.S. Recently, Bloomberg ranked me the 8th most accurate forecaster of US private payrolls.

These benchmarks matter. The stock market moves on them. The Federal Reserve is making their decisions based on them. And I regularly beat consensus almost every time.

I beat Citi.  JPMorgan. AND Credit Suisse.

On top of that, our Moneyball Trader keeps outperforming the market and every other advisory out there.

Our hit/success rate is north of 70% – meaning more than 70% of our calls have yielded positive returns.

Our cumulative returns are over 70% since inception.

Go to the big boys if you want to pay the big fees. Or you can just check out The Moneyball Trader to get your actionable insight for just $99 (this discounted price is for a limited-time only). Click here for more information.

Did China Just Buy One of the World’s Most Important Companies?

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Did China Just Buy One of the World’s Most Important Companies?

This company holds the keys to the future of electronics.

It’s not hyperbole.

Like a spider sitting in the middle of the web, this company sits firmly at the heart of the future of electronics.

I’m talking about ARM Holdings (ARMH).

ARMH’s microprocessors power more than 95% of the world’s smartphones. They have a 65% share of the computer accessory market. And a 90% share of the hard drive and SSD market.  Their reach and dominance extends far beyond the world of the internet. For example, they have a 95% share of the auto processor market. (Full disclosure: They are also the only stock I still own.)

ARMH‘s business model is simple: they specialize in the design of microprocessors and they license the designs to other semiconductor companies. For $10M a year, any company can go through the ARMH library and choose any of ARMH’s designs. The advantage of being a design house means that everyone uses them: Samsung, Intel, Apple.


It has been said that ARMH is the biggest consumer product in the world. 

I agree: In 2015, 20 billion chips shipped using ARMH technology. Their designs are the core of the critical components of virtually all consumer electronics: smartphones, tablets, TVs, and so on. For example, most of today’s tablets and phones run on Qualcomm chips: they did $26 billion in sales last year. These chips re-package ARMH designs.

And it is for this reason SoftBank offered to buy ARM Holdings for $32 billion last week (July 18) – a 42% premium to its previous day’s closing price.

Meanwhile, Softbank’s acquisition of ARMH will deliver a huge blow to Intel (INTC) for two reasons.

Intel was interested in buying ARMH. And in this post-PC world, Intel is struggling.

Their first problem is that they have the wrong type of products. Intel specializes in large, powerful and power-hungry semiconductor chips. But the future lies in small, application specific, energy-thrifty chips. 

The second problem is that Intel does everything in-house and they don’t “play well” with others. 

Compare that to ARMH which deliberately makes their technology available to anybody.

The easy solution was to buy ARMH. ARMH would’ve been its life preserver. And a way to buy their way back in. Unfortunately, anti-trust issues were likely a major factor preventing Intel from purchasing ARMH.

It might not be game over yet. With ARMH in play, perhaps Intel will field an offer of their own. Or, as I will discuss in a moment, Intel may be part of the ARMH deal after all.

But the real question is: Who is Softbank?

Who is Softbank?

One thing stands out when reviewing Softbank’s business… there is absolutely no synergy between the two companies. That is exactly the point.

Softbank comes out of the 1990s Internet boom. Its history is long… 

Based in Japan, they started as a mobile phone telecom company. They then bought the big annual computing conference COMDEX. And also partnered with Yahoo! to establish Yahoo! Japan.

Using massive debt, Softbank then embarked on a series of investments, mostly focused on the telecoms and internet space (They recently bought Sprint.) 

Today, they carry $89 billion in debt… and have always had cash flow problems which affect their ability to pay off that debt.

However, one of the investments was to a start-up by Jack Ma – called Alibaba. Leveraging the Yahoo! partnership, Softbank and Yahoo! each took a 1/3 share of Alibaba.

Softbank’s investment in Alibaba is where things get interesting. 

Today, Softbank’s stake in Alibaba is single-handedly saving them from bankruptcy.

Why? Because Alibaba isn’t just an “internet company.” It dominates China’s internet economy. They’ve spent approximately $35 billion in various (mostly Chinese) companies in the last two years alone. Investments ranging from e-commerce to travel to shipping.

Alibaba is everywhere.

Alibaba didn’t get to dominate the internet economy today because it is the “best.” It dominates the internet economy because it got China’s official blessing.

If you know China, then you know relationships matter.

And where Alibaba dominates the Chinese economy, Softbank is behind the scenes as a controlling shareholder.  Softbank may be based in Japan, but it is absolutely a Chinese company.

It is a clear indication that hardware and semiconductors are no longer a part of Softbank’s current business focus.

The China Angle

I believe that ARMH is China’s way to become a dominant semiconductor player.

You see, semiconductors are a major capital outflow (expense) for China. China spent approximately $100 billion last year on semiconductors. And it’s a major capital inflow for South Korea and Taiwan, whose economies are driven by semiconductors. Beyond economics, semiconductor strength enables national security strength (think: super computers). And it’s also a point of pride: developed economies tend to have strong domestic semiconductor industries.

The Chinese government want to bring that in-house. It has made the development of a domestic semiconductor industry a major strategic goal.

It used its leverage as the major customer of semiconductors to squeeze semiconductor designers and manufacturers into doing more business in China. It has even earmarked $10 billion for intellectual property development.

But the fastest path to become competitive with its Asian neighbors is through acquisition.

Last year in July, a $23 billion offer was made by Tsinghua Unigroup to buy Micron Technology (MU). Micron sells memory (DRAM) which is, like ARMH processors, a fundamental product used everywhere. The U.S. government blocked the offer for national security reasons.

Of importance is that Tsinghua Unigroup is a semi-government entity – set up and funded by the government as part of the drive for building a semiconductor industry. And speaking of Intel and Tsinghua, Intel just invested $1.5 billion in Tsinghua for a 20% stake. (I’ll come back to this very important point in a moment.)

So let me paint the picture. The Chinese government has an industrial policy to jump-start a domestic, world-class semiconductor capability. They have – through shell companies like Tsinghua – been putting their money where their mouth is.

Having tried to buy a major core semiconductor company and been rebuffed, buying ARMH (through a state-owned enterprise) would’ve struck a nerve. Buying the crown jewels of the internet would’ve ruffled feathers with the Western world.

It also would’ve come at a hefty price.

So instead, it used SoftBank as its proxy.

SoftBank = China

Recall that SoftBank specializes in telecommunications and the internet. Same with their key asset, Alibaba. Why would they want to buy a major semiconductor company? Why, with $89 billion in debt, is Softbank adding another $31 billion? And who would be willing to lend them that type of money?

The answer: Softbank is not buying ARMH for themselves.

One possibility is that Softbank on its own is front-running a bigger China budget. That $10 billion budget is not even table stakes at the big tables. Perhaps, with its strong insight into the Chinese business and political world, Softbank is anticipating that more funds will be made available – which they want to be able to take advantage.

Or perhaps Softbank was tapped to be the buyer, but not the ultimate buyer. After all, who is lending them the $31 billion to close the deal? Especially when they can’t come close to servicing their current debt load. 

The Chinese banks have the money.

Softbank will earn a lot of political credits for doing the Chinese government a favor in its effort to ramp-up a semiconductor company.

Don’t be surprised if we see an announcement in a year or two that ARMH is up for sale and the buyer is a major Chinese company.

This was a brilliant move by the Chinese. They are making a play to buy the most important company in the world.

It is a death-blow to Taiwan. Literally. 

If ARMH goes to China, Taiwan’s semiconductor economy will rapidly unwind because China will have all the leverage to force more on-shoring (domestic business.)

How to play this: This deal likely won’t happen. Far too many players in the ecosystem want to block it.  While ARMH is based in the U.K., Silicon Valley has a strong and vocal lobbying group.  And given the impact on Taiwan’s future, perhaps the Ambassador to the U.K. is meeting with his counterparts to review the deal. (Which will be interesting in and of itself – whose leverage is strongest with the U.K.)

This sets up two possible and opposing scenarios:

1) ARMH price drops because the deal gets blocked. Or;

2) ARMH price surges because a competing offer gets placed.

Personally, I am selling and booking profits now.  Any counter-offer will be only slightly above Softbank’s whereas there is a real risk of watching the whole deal fall apart.

KEY POINT: China is making a stealth play for ARMH – one of the most important companies in the world. It is using SoftBank as a proxy to catch up to its Asian neighbors – Taiwan and South Korea – to compete in the semiconductor industry. Don’t be surprised if ARMH is up for sale in the next two years… and a Chinese company sweeps it up. But it is also likely that the deal won’t go through in the first place. Too many “players” are at risk if the Chinese get hold of ARMH.


Andrew Zatlin

Editor of Moneyball Economics

The Consumer is Weak… But You’d Never Know

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The Consumer is Weak… But You’d Never Know

If Retail sales are a proxy for consumer spending, then it’s being overstated.

Not by a little… but by a lot.

Retail Sales figures are mistakenly including a thick slice of non-retail corporate business.

You see, non-store online retail sales (aka Amazon) began to accelerate in July. Meanwhile, big-box (aka Nordstrom and Macy’s) store sales fell.

The casual reader would assume that this was just another step in the cannabilization of brick-and-mortar stores.  From one pocket to the other.

But something much different is taking place. Retail sales include Amazon.

Instead of swapping one sales channel for the other… they’re mixing apples-and-oranges.

Consider Amazon’s cloud services business (Amazon Web Services or AWS.)

Thanks to achieving the highest level of federal security clearance, AWS has picked up over 2,300 government agencies using its cloud services. Amazon’s AWS business is increasing its share of the government’s $70 billion annual budget for IT spending.

On top of that, there is the basic business use of the AWS offerings.

Business is booming:


Amazon’s AWS sales (monthly avg.)

2013:  $260 million

2014:  $390 million

2015:  $650 million

2016 (Q1): $900 million

Amazon is on track to do about $12 billion in annual cloud services – $5 billion more than last year.

That is likely being included in Retail sales, although it is essentially government and business spending.

Now factor in Microsoft’s cloud service sales (approximately $3 billion per year).

You can see Amazon and Microsoft are distorting the retail sales figures.

Retail vs Nonstore

Simply remove non-store sales from retail spending and the annual growth in spending falls from 2.5% to 1%.

However, it’s impossible to really isolate out how much cloud services contribute to non-store retail sales. The Census Bureau only goes by a company’s reporting. So if the Census Bureau includes Amazon in the survey, they’re surely including its AWS revenues. (Its probably safe to say Amazon is included considering its the biggest contributor to U.S. non-store retail. And today, all retailers now have a strong online presence while mobile shopping is no longer a novelty number.)

Based on this adjustment, the already mild consumer spending growth is barely positive.

To net it out, the addition of Amazon and Microsoft’s cloud services overstates the consumer spending numbers… by billions of dollars.

Lots of retailers cater to both business and consumers: Costco, Office Depot, and so on.

But very few have added ~$5 billion in annual revenue that is essentially corporate spending on IT.

With U.S. gross domestic product (GDP) and retail spending already anemic, any interest rate increase or uptick in inflation will significantly hurt consumer spending. 

KEY POINT: The consumer is weaker than reported. They’re not spending as much as perceived. Once consumer spending contracts (which we see it’s beginning to), businesses will forego investments. And even cut jobs. We’re close to that inflection point. A main reason it hasn’t happened already is because retail sales include “cloud services.”


Andrew Zatlin

Editor of Moneyball Economics