Cubans Can’t Spend and Americans Won’t Spend

  • Conspicuous consumption in Cuba: Havana’s first luxury mall
  • Retail apocalypse claims a new victim
  • The perils of a record-low VIX
  • U.S. wheedles an invite to China’s big party after all
  • Weak Treasury auction: Can a weaker dollar be far behind?
  • A reader’s “macabre spark of intuition”… second thoughts on Mandarin as the new global language… Ghostbusters fans arise… and more!

Nothing like a little capitalist decadence come to communist Cuba.

Havana’s first luxury mall is now open for business. Armani, Versace and L’Occitane? They’re all there, and their availability isn’t limited to the Castro family and a few elite commissars, either.

Report on Business tweet

Of course, availability is one thing and affordability is another. “In a city where salaries last year averaged under $30 a month, tourists will be able to find Bvlgari watches worth about $10,000,” says a story from WPLG-TV in Miami — a city where Cuban news is local news. (Another sign of the changing times: Earlier this year WPLG opened a Havana bureau.)

All of which brings to mind a story that’s probably apocryphal, but too good to resist telling as the weekend approaches…

It goes like this: Many years ago, Angela Davis — one of the leaders of the Communist Party USA — ventured to the Soviet Union to give a speech about injustice in her homeland. “In America,” she thundered, “the rich have new cars and the poor have to settle for used cars!”

A murmur went up through the crowd: “Poor people in America have cars?”

Speaking of capitalist consumption, it’s still running subpar here in these United States.

The Bureau of Labor Statistics regaled us this morning with the April retail sales report. It wasn’t bad, up 0.4%… but it wasn’t as good as the 0.6% increase the typical Wall Street economist was counting on. After a super-weak first quarter, they were really hoping for something better.

“Consumer confidence may be through the roof but retail sales, and consumer spending in general, has been stuck on the ground,” Bloomberg sums up.

It’s that pesky disconnect again between “soft data” like confidence surveys and “hard data” like dollars-and-cents sales.

Meanwhile, earnings season for the big brick-and-mortar retailers isn’t getting any better.

After Macy’s and Kohl’s disappointed yesterday, it’s J.C. Penney’s turn today. Its losses were less than analysts expected… but revenue fell way short of their estimates. And same-store sales tumbled 3.5% — five times what Wall Street’s best and brightest figured on. As we write, JCP is down 9%.

Yesterday, retail was one reason the main U.S. stock indexes had their worst day in a month. David Stockman expects the next major wave of the “retail apocalypse” to hit the Street next Tuesday. And he’s devised just the strategy to transform Wall Street’s losses into huge gains for you. It’s still not too late to get in — watch his updated video right here.

In the meantime, the main U.S. stock indexes are adding to yesterday’s losses, though not by much. The S&P 500 rests at 2,389. Gold is up a touch at $1,229.

In addition to the aforementioned retail sales, we got the consumer price index this morning — up 0.2% for April. Year-over-year inflation has eased a bit to 2.2%.

As always, any resemblance to your own cost of living is purely coincidental. The real-world inflation rate from Shadow Government Statistics is 10.0% year over year.

But no matter how you measure it, inflation’s been decelerating for two months now — not that it’ll dissuade the Federal Reserve from raising interest rates again next month.

The oh-so-low market volatility we mentioned earlier this week is so low that two of our more bullish editors are taking notice. This morning it’s worth taking a deeper dive.

From our income specialist Zach Scheidt: “The CBOE Volatility Index (VIX) — pronounced ‘Vicks’ — measures the expected volatility of the U.S. stock market. This index is based on the prices option traders pay for call and put contracts. When stocks are expected to be more volatile, traders will pay more for options. And when stocks are expected to be calm, prices for options decline.

“This week, the VIX hit its lowest level in many years, an indication of just how calm stock markets have become.”

When is calm too calm?

“The low VIX level,” Zach goes on, “is a clear sign that most stock investors are becoming complacent. This type of calm typically shows up before markets trade sharply lower. Notice how the VIX chart was low before the 2008 crash, before the 2011 pullback and before stocks briefly traded lower midway through 2015.”

“The drop is even more remarkable considering the political volatility we’re witnessing — here and abroad,” chimes in our small-cap specialist Louis Basenese. “Historically, political unrest and unpredictability can spook investors. Not this time.”

Which means caution is warranted: Louis points to a “Macro Risk Index” compiled by Citi. It’s fallen six straight months to an extreme low. Previous episodes have typically been followed by higher volatility, a stronger dollar, rising bond prices and falling stock prices.

Louis’ takeaway: “Don’t panic. But don’t be oblivious. Speculators should consider going long the VIX. It’s only a matter of time before volatility returns. As for everyone else? Make sure you have trailing stops in place to protect your profits in the event of any sudden and severe market sell-offs.”

As for Zach, “I’m not calling for a full-fledged market crash,” he told readers this morning. “But with stocks hitting new highs, now is a good time to take some of your traditional profits off the table and protect your wealth.”

Lookie here: The United States just wrangled an invitation to China’s big party on Sunday and Monday.

As we mentioned two days ago, China’s government is hosting leaders from 28 countries at a “Belt and Road Forum.” On the agenda is the Middle Kingdom’s grand plans to recreate the Silk Road trade routes of olden times — with extensive sea, road, rail and pipeline links to central and south Asia, the Middle East and Europe.

The United States is not among the 28 nations represented — a fact Jim Rickards called “one more sign of the coming decline of U.S. power and the U.S. dollar. China would happily conduct commerce with no dollar intermediation at all. China cares only about its own currency… and gold.”

The story took a twist late yesterday with word of a new trade deal between the United States and China…

There’s both more and less to this agreement than meets the eye.

Under the terms, China will lift its ban on U.S. beef imports. The U.S. will lift its ban on precooked chicken from China. And so on.

Our favorite component of the deal is this: U.S. credit rating agencies can start doing business in China. Won’t that be fun? Just wait till S&P, Moody’s and Fitch start giving investment-grade ratings to China’s skeevy “wealth management products” — just as they did with U.S. mortgage-backed securities a decade ago!

We caution here that this deal is anything but final. Previous presidents have come to terms with China like this before, only to watch it all fall apart. The joint statement this time even specifies that the end of the Chinese ban on U.S. beef is conditional on “one more round of technical consultations.”

So the real story isn’t the trade deal but the timing of its announcement just before the Belt and Road Forum. The Wall Street Journal tells us “the U.S. had originally planned to send a low-level Commerce Department official, but now plans to send Matthew Pottinger, the White House’s top Asia expert, according to a person familiar with the matter.”

That news was buried in an article about the trade deal. In contrast, it was the lead story this morning in an hour’s worth of Belt and Road coverage on China’s state-run CGTN…

Linking the future

How far we’ve come in four months from the president threatening to brand China a “currency manipulator” on Inauguration Day….

Suddenly the buyers are drying up for U.S. Treasury debt.

“This week, the U.S. had 10-year and 30-year Treasury bond auctions, and both of them were awful!” says our friend Chuck Butler at EverBank Global Markets. For the 30-year bonds, the “bid-to-cover ratio” — a measure of demand — was the weakest in six months at 2.191. Anything above 2 is considered a success, but that’s cutting it a bit close.

The Federal Reserve stopped buying Treasuries en masse 2½ years ago, and now foreign buyers are starting to disappear as well. “China, Russia and Saudi Arabia have been pulling away from the auction window,” Chuck goes on, “and just when the U.S. is increasing its deficit spending, which requires funding from the sale of Treasuries. Uh-oh!”

What’s it to you? “When the U.S. has boatloads of Treasuries to sell, but there aren’t enough buyers, the U.S. has two choices,” Chuck explains. “They can raise the yields on the bonds they need to make them more attractive, but that would cost the country oodles of extra cash in bond servicing (interest). Or the U.S. could devalue or just jawbone the dollar much weaker, thus making the purchase of the bonds at a discount, with the cheaper dollar.”

Which do you think it’s going to be — the one that causes pain for Uncle Sam (higher debt service), or the one that causes pain for you (a dollar with less purchasing power)?

Of course they’ll opt for the weaker dollar, which lines up with Jim Rickards’ outlook for the rest of the year.

Let’s put it all together: Volatility is set to spike soon — not right away, but perhaps after the next Fed meeting in mid-June. The stock market will swoon and the dollar will strengthen — temporarily. The Fed will then engage in “forward guidance” — some sort of jawboning about how it might ease policy if economic conditions continue to weaken. That will send the dollar down and gold up.

At least that’s how it all looks right now on the 12th of May…

“I had a macabre spark of intuition as a result of David Stockman’s analysis,” a reader writes after both yesterday’s 5 and Daily Reckoning.

“David goes into great detail about how the FAANGs are propping up the stock market. Also, he reminds us that Alphabet is the parent company of Google.

“What I find interesting is that these five majors are in some shape or form tech stocks. Is there a theme somewhere harking back to 1999?

About my intuition — it goes like this: Substitute the Alphabet acronym (A) for Google (G). Now you have FAANA. Rearrange the letters to spell the acronyms as FANAA. Well, according to the Quora website, fanaa is an Urdu word which variously means to destroy, annihilate or meet one’s end.

“I don’t know how prescient all of this is, but others can keep the ‘Oracle of Omaha.’ I’m just hoping next time to be invited to one of David’s Ouija parties.”

The 5: Heh. Yes, David would be the first to point up a resemblance to the “Four Horsemen” of the dot-com crash — Microsoft, Dell, Cisco and Intel.

“To the chap who in Thursday’s 5 commented that English will be replaced by Chinese as the international language by year 2035, I say: Not so fast, there. You overlook some considerations.

“It would be almost impossible to change the language used worldwide for air traffic control to be anything other than English, and I should not expect air travel to go away by 2035.

“Having lived and worked in several Southeast Asian countries, I can tell you that there can be huge resentment toward Chinese minorities in that part of the world. I will not go into the reasons why, but I fully expect this resentment to follow the Chinese to other parts of the world as well.

“Furthermore, not only is air traffic control enshrined to the English language, but English is already widespread in commerce and industry. Just as daughters in Singapore learn Chinese, my daughter in Vietnam speaks Vietnamese as well as English, which is my native language.”

“After that quote from Ghostbusters, I heard nothing else,” reads another reply to yesterday’s episode. “That was awesome! Gonna have to go back and read the China thing now — ha.”

One more: “Love The 5 and particularly the quote from Ghostbusters. Here’s a challenge.
How many Fletch and Fletch Lives quotes can you use in one episode?”

The 5: Uh, we’ll take that under advisement…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. We nearly forgot: Nordstrom’s (JWN) stunk up the joint when it released earnings numbers after the close yesterday.

Nordstrom managed to deliver a “beat” on both earnings and revenue… but oh, man, same-store sales tumbled 6.4%. As we write JWN shares are down 9.4%.

It’s been a good week for David Stockman’s premium subscribers, with their bets against the retail sector. But the opportunities aren’t over yet: Click here and see why David says you’ll want to be in position before next Tuesday.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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