The Bear Is Done Hibernating

With No Solution Economies Worsen

I would love to have more time to write and take my thoughts and put them into your head but that’s not the case. I’ve talked about there being no solution to the problems we face. There isn’t. I’ve talked about one stock in particular that I have my eyes on, Dollar Tree (“DLTR”). I’m patient but what I’m looking at is bigger.

No, we do not have an easy way out of the troubles we’ve caused. Interest rates are going to have to come down as people are losing their jobs left and right. All at once they are going to stop spending, then what? Is AI the true benefit or culprit of all of this? No matter how you cut it, like the Music Man, we got trouble my friend and there is no way to avoid it.

Dollar Tree Has Troubles

Dollar Tree's latest earnings report offers a very grim reflection on the state of the American economy. What we are witnessing is not just a minor fluctuation in retail performance, but a broader indictment of an economy that, under the stewardship of Joe Biden and Kamala Harris, has manifestly lost its way.

For those unacquainted with Dollar Tree's dual audience, its Family Dollar stores cater to lower-income households seeking everyday necessities, while its namesake brand draws in middle- and upper-income shoppers for affordable party supplies and seasonal goods. What makes this earnings report notable is the revelation that even households earning over $125,000 per year, once thought immune to such cutbacks, are now tightening their belts and shifting from “buying for want” to “buying for need.”

Inflation has continued to negatively impact households, with more than 60 percent claiming they have had to sacrifice on purchasing necessities due to the higher cost of those items. With customers paying more for expenses such as rent, utilities, and health care, there's not much left over for retail goods. When inflation eats away at household budgets, even middle-class and wealthier families have to reconsider their spending.

The retailer’s same-store sales grew a paltry 1.3 percent last quarter, far below the expectations of Wall Street, and Family Dollar’s sales dipped as well. Dollar Tree’s net income has fallen by one-third, a far cry from the 14 percent increase analysts were predicting. These numbers are not signs of poor management or shifting consumer tastes. They mostly reflect the economic reality under Biden and Harris.

The health of the basic consumer is particularly important at this moment because household spending has been one of the few sources of growth in the economy. In the second quarter, it contributed around two percentage points of the three percent growth rate. The manufacturing sector has contracted in 21 out of the last 22 months, according to the Institute for Supply Management (ISM). The overall labor market is weakening, as the larger-than-expected decline in job openings showed on Wednesday.

The Biden-Harris administration may continue to trumpet its economic successes, but the facts tell a different story. The American consumer is voting with their dollars, or rather with their lack thereof. And no amount of political posturing can obscure the reality that inflation has badly eroded the purchasing power of families across the country. The administration’s policies, driven by a combination of ill-considered fiscal expansion and an unending regulatory attack on business, produced an environment in which even dollar stores struggle to maintain growth.

To watch Dollar Tree’s stock plunge is to watch, in real-time, the unraveling of the economic mythology that Biden and Harris have been preaching for the past four years. The consumer-based economy, long thought to be resilient, is fraying under the weight of inflation and uncertainty. The middle class, once the engine of American prosperity, is now forced to cut back on even the simplest of purchases. This is not the robust recovery that Kamala Harris and Joe Biden tout on the campaign trail—it is the slow but steady erosion of confidence in their leadership.

Tariffs Don’t Work Either

Margins are important. Again, neither candidate has the answer but at least Trump can see the big picture. Drill baby drill along with regulatory reduction is a solid way to increase margins. Applying tariffs, especially with a declining Dollar, and yes that is going to happen, is not. Inflation is here for the next twelve to eighteen months and regardless of how much interest rates decline, the consumer is tapped out.

I wish I saw things a little differently than I do but I do not. The stock market is too high and bond prices are too low. I’m still buying higher dividend stocks but more importantly, I’m buying six to nine-month VIX call options. The worst is yet to come and I’m ready for it. Are you?

R.E.M. is probably getting more air time today than when it came out. I’ve never had a lot of faith in data especially when it’s offered by an administration with its fingers on the trigger. Unemployment numbers have been flawed my entire life and they are not going to get much better by this weekend. Hold on to your hats folks, there is no way out of this problem. It’s time for a real recession. Act accordingly.