Re-Inventing Retail

From the Co-Founders of The Retail Owners Institute.
Tips | Tactics | Insights on the Business of Retailing.

Confluence of two troubling trends

On July 9, 2018 in From The Co-Founders by The ROI

Perhaps you too have seen those worrisome articles about the "yield curve" recently.

No, it has nothing to do with the World Cup, nor is it another baseball analytic.

Instead, it pertains to the bond markets. It is the difference between interest rates on short-term and long-term government bonds. When long-term interest rates fall below short-term interest rates, the yield curve becomes inverted.

Here is why that matters: According to research by the San Francisco Fed, "Every recession of the past 60 years has been preceded by an inverted yield curve."

In fact, they report that "Curve inversions have correctly signaled all nine recessions since 1955."

Nevertheless, do not panic! The yield curve has not inverted! And should it happen, the sky does not immediately fall. Historically, the onset of a recession has taken anywhere from 6 months to two years after the yield curve inverted.

But, it would have implications for "some of the decisions that are most crucial to the health of the American economy", particularly banking and the flow of lending.

Well, that provides some interesting context for this other worrisome trend identified the first weekend in July:

"Corporate America is drunk on easy money. U.S. companies, encouraged by a decade of unbelievably low borrowing costs, are sitting on $6.3 trillion of debt, according to S&P Global Ratings.

"That sum, which excludes banks, is more than before the Great Recession – or any other time in history."

And why does this matter?

"After years of extraordinarily low interest rates, borrowing costs are finally on the rise.

"That makes it more expensive for companies to refinance their debt when it comes due."

Have we suddenly become purveyors of doom-and-gloom? Absolutely not!

But the confluence of these two global trends is not to be dismissed. Instead, it is a sobering reminder of why to "Hope for the best, and prepare for the worst."

As one observer noted,

"It's hard to say what will cause this giant credit bubble to finally pop.

"Trying to figure out which is a fool's errand.

"Pretending it won't happen is folly."

---

see "What's the Yield Curve? A Powerful Signal of Recessions Has Wall Street's Attention." Matt Phillips, The New York Times, June 25, 2018.

see "The $6.3 trillion debt binge: American companies have never owed this much." Matt Egan, CNN Money, July 1, 2018

see "Beware the 'mother of all credit bubbles'", Steven Pearlstein, The Washington Post/Bloomberg, July 1, 2018

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Tagged With: retail, flattening yield curve, high corporate debt

About The Co-Founders

Pat Johnson and Dick Outcalt, The Co-Founders of The Retail Owners Institute^®, have been called "The Zen masters of retail finance!"

Since 1999, they have been assembling their proprietary content into a unique self-help website. The Retail Owners Institute is an unmatched resource that assists retailers worldwide with basic financial training, assistance and easy-to-use tools.

Their engaging and empowering how-to resources about the financial levers in retailing are informative, fun(!), and retailer-friendly. Their promise: "Everyone will 'get it'!"

Pat and Dick are recognized experts in strategic retailing. Working only as a team – Outcalt & Johnson: Retail Strategists, LLC – they have been consulting, publishing, and speaking professionally throughout North America since 1990.

They focus exclusively on retail, or wherever retail is involved. They work with CEOs, CFOs, boards and owners of retail operations, as well as manufacturers or wholesalers expanding into retail. And they also are Retail Turnaround Experts.

Since 1999, empowering retailers and store owners to "Turn on your financial headlights!"