Author Archives: nhoffmanandco

Shopping Madness

black fri

November 20, 2017

As the holiday season approaches, so does the time for our annual shopping binge. Whether we are big online shoppers, or prefer traditional brick and mortar stores, there is no denying that we spend a lot more money during the last six weeks of the calendar year.

Black Friday is the official kickoff of the holiday buying season in the United States. From that day through the end of the year, retailers generate somewhere between 30-40% of their annual revenue. Moreover, according to the National Retail Federation, over 136 million Americans are expected to shop during this Thanksgiving weekend alone. The days between Thanksgiving and Cyber Monday capture 20% of all holiday online shopping.

Given such large figures it is tempting to conclude that Black Friday and Cyber Monday are the world’s biggest shopping days of the year. Such a conclusion would be wrong. The award for the biggest one day spending splurge each year is now firmly in the hands of the Chinese.

You might have heard of “Singles Day” in China. This day is celebrated annually on November 11th. The “tradition” was started as recently as the 1990s as an anti-Valentine’s day for bachelor university students.  From such bizarre beginnings, Singles Day has morphed into a shopping extravaganza, with the considerable help of Alibaba, China’s equivalent of Amazon. To put the numbers in context, the 2017 Singles Day sales for Alibaba alone were $25.4 billion. This compares with combined Black Friday and Cyber Monday sales in 2016 of $6.79 billion.

What makes Singles Day for consumers so special? Well, it is not just about the 140,000 brands and 15 million products offered, it is also the enjoyment of the entertainment provided. Shoppers can use interactive apps to download raffle tickets, coupons, and gift certificates, and watch “See Now, Buy Now” fashion shows. This year’s festival included a star-studded gala with Nicole Kidman and Pharrell Williams. All this takes place in order to increase the excitement and expectation for the sales to begin. Daniel Zhang, CEO of Alibaba Group Holdings, has expressed his desire to take the event to even greater heights, including the possibility of expanding the gala beyond China’s borders. Singles Day is being re-branded as 11.11 Global Shopping Day, and looks set to remain comfortably the biggest shopping day on Earth.

The rapid growth of Singles Day is further proof of two clear trends relating to China. First, the continued rise of the Chinese economy. At current rates of growth, China’s economy will overtake that of the US in size by 2028. Second, China has developed a generation of consumers with views more associated with people in market based economies than in a country run by a communist party.

With all this talk of consumerism I must remind myself that the time we get to spend with our loved ones is far more important than anything money can buy. From our small NHCO family to yours, have a wonderful and blissful Thanksgiving.

Nirvanna Silva

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A Bit More, But Not Too Much

inflation

November 13, 2017

Inflation has been low for years. There are signs, though, that this might change. GDP has moved up to around 3%, unemployment is low enough to raise expectations of wage pressure, and the capital markets are priced for perfection. Many would argue that a bit more inflation would be a good thing, but everyone would likely agree that we do not want too much. There are many economic and political risks at present, including the Fed balance sheet wind down, a new Fed chair, and proposed tax law changes. This is no time to let the inflation tiger out of its cage.

An increase in inflation would stimulate a re-think of interest rates, and any changes there would impact not just bond prices, but the market overall. Just as important for people in or close to retirement, extra inflation will increase the expense of living. Even small changes in inflation have a big effect in the longer term. For example, an inflation rate of 1.5% increases annual expenses of $100,000 to $119,562 over twelve years, while an inflation rate of 2.5% take annual expenses to $134,489. In other words 1% more inflation increases that same expense level by almost $15,000.

This is probably a good time to have a good understanding of the inflation measurements we see in the media:

Consumer Price Index (CPI) tracks prices of a fixed basket of goods bought by “urban” consumers. The data is derived from consumer surveys, which are not always reliable, and has a heavy tilt to household related expenses.

Personal Consumption Expenditures (PCE) tracks prices of a dynamic basket of goods that are bought by all types of consumers. The data is derived from business surveys, so for example picks up a more complete cost for health care which is partly paid by employers. This measure is preferred by the Fed. Like CPI there is a “core” PCE which excludes food and energy costs.

Underlying Inflation Gauge (UIG) which is quite new and was developed by the New York Fed. The calculation of UIG is complex, and produces two metrics: “prices-only” and “full data set”. There is not enough space to try and describe the calculation here (there is a very academic Economic Policy Review article which does this if you are interested), but the key thing to bear in mind is that the UIG seeks to forecast inflation trends more accurately than the other measures. Time is needed to see how useful this measure is.

Here is the inflation data for the year through end September:

CPI  2.2%
CPI, Ex Food and Energy (Core)  1.7%
PCE  1.6%
PCE, Ex Food and Energy (Core)  1.3%
UIG Prices-only  2.3%
UIG Full Data Set  2.8%

If the UIG data really provides a better forecast then it looks like an increase in inflation of around 1% may not be so far away. What does inflation feel like at your house? You may have your own indicators. One thing is for sure: evidence that inflation is rising too quickly will unsettle the market.

Lloyd Flood

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