The other side of the ‘positive’ retail data The McDonald’s fortune founded on real estate Our modest contribution to the ‘sh*thole theory’
By Shae Russell in Albert Park The new year has gotten off to a good start. The Aussie dollar is dancing around the 80 US cent mark. The S&P/ASX 200 is above 6,000 points, flirting with 6,100. And the retail industry saw sales jump 1.2% in November last year, bringing sales growth to 2.9% annually, up from 1.8%. So far so good, right? Perhaps not… ..............................Advertisement..............................
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It’s true that the broader Aussie stock market is doing well. However, I suspect the recent surge in the Aussie market is down to 17 months of inaction by the Reserve Bank of Australia (RBA). Investors want returns. So if the RBA won’t do something about interest rates, investors will move into stocks and chase high-paying dividend stocks…ideally picking up a little capital growth along the way too. Then there’s the Aussie dollar. It began the year with a bang. But, as I pointed out yesterday, that may be more cyclical than investors believe. And the current rally may not last much longer. What I didn’t mention yesterday is that some news outlets suggested the ‘bumper’ retail sales for November were behind the Aussie dollar’s push higher. The Australian Bureau of Statistics noted in a release that that incredible increase came down to one thing: the iPhone X. As Ben James, Director of the Quarterly Economy Wide Surveys, said: ‘In seasonally adjusted terms, rises were led by the household goods (4.5%) and other retailing (2.2%) industries. Seasonally adjusted sales in both these industries are influenced by the release of the iPhone X and the increasing popularity of promotions in November, including Black Friday sales.’ I don’t buy this line of thinking. A jump in retail sales may make for a good headline. But a month of good news doesn’t fix a struggling industry. The sudden rise in spending has excited too many people that the Aussie retailing industry is picking up. However, December retail sales data is what really matters. December is the month in which people lose all sense of financial prudence, spending money with reckless abandon. Retailers rely on this trading period. The money that flows through the tills in December tides them over in the slower months of January and February. The problem, however, is that December could be much worse than we realise. The Australian Industry Group releases its own economic indicators each month — the Australian Performance of Services Index (PSI). Its retail trade index — which comes out before the ABS data — suggests punters shouldn’t get their hopes up. Take a look: Australian PSI — Retail Trade Index Source: The Australian Industry Group [Click to enlarge] The Australian PSI retail trade index shows a drop to 44.5 in December. Anything below 50 indicates a decline in trade, and anything above that indicates industry growth. At 44.5 — well below 50 — don’t expect bumper statistics from the ABS regarding retail spending in December. More important than this even is the bigger picture forming here. According to the Australian PSI, the retail trade index has been below 50 points since early 2017. In other words, we’ve got an industry in decline. Andrew Spring, a partner with insolvency agency Jirsch Sutherland, reckons 2018 will see even more local Aussie retailers collapse: ‘We’re hearing from accountants and business advisors that the retail sector is really struggling. ‘Many of those who are not selling consumables are having a particularly tough time. We’ve already seen a number of high profile retail brands collapse in 2017, including 80-year-old brand Oroton — which paints a gloomy picture for other Australian retailers. ‘We predict that we haven’t seen the worst of it, and that the new year will see many more homegrown brands go into insolvency.’ Over the past three years, we’ve seen brand after brand crumble — without even mentioning retailers in receivership. That there’s more to come according to Spring shouldn’t come as a huge surprise. 2018 may be the year that Aussie retail finally falls flat on its face. But there’s enough evidence to suggest that it tripped over a long time ago. Kind regards, Shae Russell, Editor, Markets & Money ..............................Advertisement..............................
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The McDonald’s Fortune Founded on Real Estate Terence Duffy, Lead Researcher, Cycles, Trends and Forecasts Warning: Movie spoilers ahead. Released to cinema audiences in 2016, The Founder is the story of McDonald’s. It has grown from humble beginnings as a single hamburger joint into a global behemoth. In 1954, hapless salesman Ray Kroc was fascinated by the innovation at a fast-food eatery run by two brothers, Richard and Maurice McDonald. They were affectionately known as Dick and Mac. Dick and Mac put their success down to a few main factors. They made the decision to cut non-profitable sales items and limited their menu to products with good margins: burgers, fries and milkshakes. They introduced a production-line style of preparing food. Each staff member focused on a particular part of the process. The cooking area was designed for efficient output. Work areas were placed close enough for staff to assist one another. But they were separated far enough for workers to stay out of each other’s way. The McDonald brothers were fastidious about the production process. Each burger patty was cooked for exactly the right time. It had two pickles and just the right amount of sauce. Ray Kroc was impressed. He hatched an agreement to franchise the operation. Dick and Mac agreed, provided they could maintain full control on quality. The focus of the movie is on the combination of Ray’s ambition, persistence and ruthlessness. This provides entertainment and makes the audience feel empathy for the brothers. But I found a particular part of the story more compelling. The initial deal meant that Ray would receive 1.4% of the profits. He had a whole bunch of restaurants creating revenue but not much of it trickled down to him. Having put up his house to start the business, he fell months behind on mortgage repayments. There was an argument with a loan officer at the bank. A fellow bank customer named Harry Sonneborn listened in. He approached Ray, telling him that he may be able to help. Harry suggested the problem with the franchise contract was revenue stream based on other people’s profits. It’s difficult to keep costs down without total control. Revenues were high but profits low. And here’s what grabbed my attention. Harry asked about the land on which the restaurants were built. I should have seen this coming. We hear so much of it from Phil Anderson at Cycles, Trends and Forecasts. I immediately knew Harry would come up with a simple way for Ray to make money. It’s all in the land! Ray explained that franchisees find land in a prime position, take out a lease, and borrow funds for construction. Harry suggested they should be in the real estate business. Ray should buy land where restaurants are built. And make it compulsory for franchise operators to lease the land from him and pay rent. This would set up a revenue stream in addition to a portion of the profits. Regular payments from every new restaurant would provide security for finance to buy even more land. The capital raised would allow new franchises to open all over the country. The new business model would also give Ray the important element of control. If the franchise operators didn’t maintain the required quality, he could cancel the lease and kick them out. Soon, Ray appeared on the cover of Restaurant Business Monthly magazine as the founder of McDonald’s. And the rest is history. Who’d have thought the founder’s success in getting started came not from the sale of burgers but from the value in the land on which the burgers were made? We don’t quibble about the success of McDonald’s. It’s proven its business model over many decades. Yet we reckon McDonald’s may have done even better had it known about Phil Anderson’s Grand Cycle Theory. Phil understands the value of economic rent. And he can show you how it drives the global cycle of long-term booms and busts. The Grand Cycle Theory is the perfect tool in forecasting market moves, especially real estate and global stock markets. Phil Anderson sums up his theory in a picture that’s worth a thousand words: Source: Cycles, Trends and Forecasts [Click to enlarge] This removes any niggle of doubt about the property market moving in cycles. Phil has used his theory to accurately predict market moves time and time again. Imagine the benefit of having such foresight. Back in 2004, Phil warned of the ‘winner’s curse’ phase that was about to unfold. This proved to be the final couple of years into the peak of the cycle. It was when real estate buyers were leapfrogging each other, chasing higher and higher prices into the peak in 2007. All of it financed by reckless lending from the banks. Maids were able to borrow $1 million without any hope of being able to repay. Importantly, Phil also forecast the best time for buyers to step back into the market to buy real estate and stocks. Years ahead of the event, he said real estate prices would bottom out in 2010/2011. And that the stock market would bottom out a year or two beforehand. History proves this foresight was remarkable. Go here to see how you can use the theory to predict market moves. Regards, Terence Duffy, Lead Researcher, Cycles, Trends and Forecasts ..............................Advertisement..............................
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Our Modest Contribution to ‘Sh*thole Theory’ By Bill Bonner in Baltimore, Maryland We recently had our DNA checked. Unsurprisingly, it showed that we are what we thought we were — Irish, English, and Scottish. But we are something more. In addition to the Irish riffraff, English aristocracy and Scottish bagpipers nesting in our family tree, there are, apparently, some Moors in there, too. ‘North African’ is how Ancestry.com describes it. ‘Where did that come from?’ we asked no one in particular. ‘Some sh*thole country!’ came the answer. Here, developing like a photo in a darkroom tray, is our modest contribution to Sh*thole Theory. All over the place When we first caught wind of President Trump’s ‘sh*thole’ comment, we were outraged. We thought he was talking about our hometown. A family friend came to Baltimore for a visit last week: ‘I couldn’t believe it. You roll up your windows and lock the doors. And drive as fast as you can. There’s just block after block of boarded-up houses and padlocked stores. It doesn’t look as though anyone lives there. I don’t see how anyone could live there.’ We were, of course, relieved when we realised that our president was referring to foreign sh*tholes…not those in the USA. But that’s the problem with sh*tholes: They’re all over the place. And they don’t stay put. Ireland was a sh*thole for about 400 years, after Oliver Cromwell’s army laid waste to the country. It was considered such a woebegone, poor, benighted backwater — and the ‘wild Irish’ so disagreeable — that efforts were made to keep them from immigrating to the US. Now, Ireland is not so bad. (We’re on our way back there at the end of the month.) China was a sh*thole when we first visited back in the 1980s. Nothing seemed to work. The roads were horrible. The people stared at us as though they were starving and we were a plump puppy. But when we went back a couple of years ago, China didn’t seem like a sh*thole at all. In many ways, it is more advanced than the US — with more skyscrapers, luxury autos, and super-high-speed trains. Same goes for Russia. A depressing place back in the early 1990s, Moscow is now considered one of the most dynamic and cosmopolitan cities in the world. Visit to South Africa One of the nice things about being from Baltimore is that we know a sh*thole when we see one. On our first visit to South Africa, many years ago, we visited the country’s largest ghetto, Soweto, expecting to see a real sh*thole. This was during apartheid. Soweto had gotten a reputation as a murder zone; young black gangsters called ‘tsotsis’ attacked passers-by…and often killed them. But we have our tsotsis in Baltimore, too. Gangs of youths — including young girls — have a go at people for no apparent reason. In a recent incident, they went to work on a young woman with a baseball bat, leaving her unconscious on the street. The surprise was that Soweto was relatively cleaner and more prosperous than the ghettos of Baltimore. With little help from the white-minority government, it looked as though the people of Soweto had taken it upon themselves to look after their homes, their families, and their township. Here in Baltimore, they wait for a federal program. Awful place? Sh*thole Theory suggests that there are some bad places with bad people we wouldn’t like to have as neighbours here in the US. But like all ‘public knowledge’, it lacks specificity. A recent study, for example, suggests that when African immigrants move into an African-American community, the crime rate there goes down. And in London, African immigrants tend to earn more and get more advanced degrees than the native English population. But we do not live in a ‘country’, or know ‘the people’ who live there. Instead, we know specific individuals and families in specific communities. We’ve been visiting Nicaragua for nearly 20 years. The second-poorest country in Latin America after Haiti…and ruled by a socialist government…it would easily qualify as a ‘sh*thole’. Sh*thole Theory suggests that it is an awful place. But in our experience, it’s just the opposite. The people are among the nicest you’d meet anywhere. And the quality of life on Nicaragua’s Pacific Coast can be the highest in the world. One of the most felicitous scenes we’ve ever witnessed was in Nicaragua. Children had tied a rope to a tree leaning over a river. They swung out over the water and jumped in. No computers. No big screen. No admittance fee. None of them had any money. None had modern appliances (most houses had dirt floors…or, for wealthier people, concrete). None of them were likely to go to college…or end up with a fat sinecure working for the Deep State. Would we want to have them as neighbours? Sure, why not? We could use a cheap gardener. Regards, Bill Bonner, For Markets & Money ..............................Advertisement..............................
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