Practical analysis for investment professionals
04 April 2016

The C-Suite Speaks: For Low-Income Earners, the Recession Never Ended

The C-Suite Speaks: For Low-Income Earners, the Recession Never Ended

Each week our team at Avondale Asset Management reads dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts as well as other forums.

US Federal Reserve chair Janet Yellen gave an emphatic speech last week that advocated slower increases in interest rates. Despite the fact that asset prices have recovered, according to Yellen, risks remain elevated from where they were in December.

It’s clear at this point that the Fed’s “data dependence” is primarily focused on asset prices. But higher asset prices only benefit a small segment of the population. Dollar General’s representatives made a compelling presentation that the company’s consumers never really exited the recession, and in fact, their situations have gotten worse. Inflation is outpacing wage growth for these low-income earners.

While the Fed doesn’t see inflation, these are the forces that are contributing to an angry electorate and what Lennar’s CEO called a “God awful” election season. The top candidates may be awful for capital, but their populist messages resonate with labor. If you’re betting on the Fed keeping asset prices high, beware: The Fed may be independent, but the president is still the most powerful person in government and can even force changes at the Fed.

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The Macro Outlook

Coincident economic commentary is relatively positive. Lennar is not observing any indications of a looming recession.

“We do not see the telltale signs of recession.” — Lennar (LEN) CEO Stuart Miller (Homebuilder)

“We saw good sequential improvements throughout the quarter, December being the lightest and clearly February being the strongest month, pretty much spread across every operating territory that we’ve got.” — Lennar (LEN) president Rick Beckwitt (Homebuilder)

3M’s markets are less negative than initially forecast.

“In January . . . we stated that we are expecting first quarter organic growth to be . . . down slightly. And as the quarter is progressing, we are seeing four of our five businesses tracking either at or above what we were expecting at that time.” — 3M (MMM) SVP and CFO Nick Gangestad (Conglomerate)

But the Fed isn’t raising rates any time soon.

“The committee anticipates that only gradual increases in the federal funds rate are likely to be warranted in coming years. . . . Reflecting global economic and financial developments since December . . . the pace of rate increases is now expected to be somewhat slower.” —Fed chair Janet Yellen (Central Bank)

Yellen is concerned that expectations for inflation over the long term have been falling.

“Since [the 1990s], measures of longer run inflation expectations . . . have been remarkably stable. . . . Lately, however, there have been signs that inflation expectations may have drifted down . . . It is still my judgment that inflation expectations are well anchored, but as I will shortly discuss, continued low readings for some indicators of expected inflation do concern me.” — Fed chair Janet Yellen (Central Bank)

And it’s easier to raise rates if need be than to lower them.

“Caution is especially warranted because, with the federal funds rate so low, the [Federal Open Market Committee] FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric. If economic conditions were to strengthen considerably more than currently expected, the FOMC could readily raise its target range for the federal funds rate to stabilize the economy. By contrast, if the expansion was to falter or if inflation was to remain stubbornly low, the FOMC would be able to provide only a modest degree of additional stimulus by cutting the federal funds rate back to near zero.” — Fed chair Janet Yellen (Central Bank)

The Fed is not out of ammo though. If the situation deteriorates and rates fall again, the Fed could still deploy the same arsenal it used throughout the financial crisis.

“Even if the federal funds rate were to return to near zero, the FOMC would still have considerable scope to provide additional accommodation. In particular, we could use the approaches that . . . we used effectively to strengthen the recovery from the Great Recession, and we would do so again if needed.” — Fed chair Janet Yellen (Central Bank)

Have such policies really worked though? Not for low-income consumers.

“Our core customer continues to live in a recessionary environment. . . . Our customers face much stronger headwinds in this economy than tailwinds.” — Dollar General (DG) EVP and chief merchandising officer Jim Thorpe (Retail)

Six out of 10 Americans have less than $1,000 saved. They have not received a direct benefit from rising capital markets.

“This has resulted in the majority of Americans living on the bubble of economic uncertainty. 60% of Americans don’t have a savings safety net of $1000 and 20% don’t have a savings account at all. So as you will see, our customers simply haven’t received the benefit of the economic recovery. Households earning less than $52,000 have experienced negative wage growth . . . Only households in the top fifth quintile have seen any real income growth since the recession and most of that’s being driven by the top 5% of earners. So you can see that our core customers who were financially strapped before the recession are even worse off today.” — Dollar General (DG) EVP and chief merchandising officer Jim Thorpe (Retail)

In fact, Fed policies have arguably stoked inflation in key areas that disproportionately impact low wage earners.

“Inflation is simply outpacing total wages. . . . There were no cost of living increases this year and that particularly hurts our SNAP and Social Security recipients especially hard. And health care costs and rents continue to rise, which also impacts our customers more than higher income households.” — Dollar General (DG) EVP and chief merchandising officer Jim Thorpe (Retail)

Yellen’s attention appears to be elsewhere.

“Core PCE inflation . . . was up . . . somewhat more than my expectation in December. But it is too early to tell if this recent faster pace will prove durable.” — Fed chair Janet Yellen (Central Bank)

But these are the forces that are creating an election that’s awful (for capital).

“There have been some questions raised . . . about the implications of a God-awful election season in the United States. . . . Well, they say that America always gets to the right answer right after we’ve tried all the wrong ones. We’ll see.” — Lennar (LEN) CEO Stuart Miller (Homebuilder)

And the Fed chair effectively serves at the pleasure of the president. Others have been removed before.

Question: ‘Mr President, what prompted you to replace Mr. Eccles with this Philadelphia Republican?'”
President Truman: ‘That is my prerogative. I decided to make the change without anybody’s request or influence. . . . The president has a right to do that if he wants to do that.'” — President Harry Truman, January 1948 (after deciding not to reappoint Fed chair Marriner Eccles for raising interest rates)

There are signs that the pendulum may already be starting to swing away from capital in favor of labor. Restoration Hardware a weakening developing at the top.

“I think that we still feel that there’s a general softening at the higher end of the market.” — Restoration Hardware (RH) chairman and CEO Gary Friedman (Home Furnishing)

Labor markets are tight in homebuilding.

“Land and labor shortages will continue to constrain supply and constrain the ability to quickly respond to growing demand.” — Lennar (LEN) CEO Stuart Miller (Homebuilder)

Wage inflation should be 3%–4% at restaurants thanks to minimum wage laws.

“We experienced wage inflation of approximately 3% during the fourth quarter, primarily due to the higher minimum wage rates in both California and New York. As we look ahead, we are projecting wage inflation of approximately 3% to 4% in 2016, which is higher than the 2.5% experienced in 2015.” — Dave and Buster’s (PLAY) SVP and CFO Brian Jenkins (Restaurant)


There’s a belief that economies follow a pre-set path of development.

“As you know, in all economies, you have the evolution of infrastructure coming first, followed by manufacturing, after that, safety coming in place, then you have retail and then finally health care is the evolution of all economies, and it’s true for all economies around the world. This is the way it goes.” — 3M (MMM) chairman, president, and CEO Inge Thulin (Conglomerate)

Urbanization continues to be assumed to be a demographic megatrend.

“Every day 180,000 people move to urban areas. By 2050, cities will be home to 2.5 billion more people than today, generating a need for more apartment buildings, airports, and mass-transit systems.” — United Technologies (UTX) president and CEO Greg Hayes (Conglomerate)

Governmental change has improved economic sentiment in India.

“As I had mentioned last year, the decisive mandate in the general elections was a very positive development for the economy. The immediate impact was felt in the form of a strong improvement in sentiment. . . . Over the last year, the government has taken a number of important steps. There has been a focus on improving governance; enhancing the ease of doing business; creating a conducive environment for investment by both international and domestic participants; and adopting a stable and prudent fiscal policy. At the same time, the government has sought to bring about the engagement of more and more people in the economic mainstream. While the impact of these measures will be seen over the medium term, the steps taken are clearly in the right direction.” — ICICI Bank (IBN) director and CEO Chanda Kochhar (Indian Bank)


The Fed is pleased with the way markets are reacting to information.

“Financial market participants appear to recognize the FOMC’s data-dependent approach because incoming data surprises typically induce changes in market expectations about the likely future path of policy, resulting in movements in bond yields that act to buffer the economy from shocks. This mechanism serves as an important ‘automatic stabilizer’ for the economy.” — Fed chair Janet Yellen (Central Bank)

Yellen acknowledged that real interest rates are already negative.

“The evidence on balance indicates that the economy’s ‘neutral’ real rate — that is, the level of the real federal funds rate that would be neither expansionary nor contractionary if the economy was operating near its potential —is likely now close to zero. However, the current real federal funds rate is even lower, at roughly minus 1-1/4 percentage point.” — Fed chair Janet Yellen (Central Bank)

Americans are increasingly choosing to rent rather than buy homes.

“Relative to the empty nesters rethinking their living conditions, there has been some movement in the direction of rental versus homeownership there as well. So we’ve seen that the rental option, the reduction in homeownership rate. is something that is broader than just affordability. It reflects also appetites and desires that have evolved since the recession. And we think that some of those trends will continue.” — Lennar (LEN) CEO Stuart Miller (Homebuilder)

Torchmark has repurchased nearly 80% of its outstanding shares over the last 30 years.

“We have been conducting our share repurchase program for 30 years now. During that time . . . we have spent $6.5 billion to repurchase 78% of the outstanding shares of the company.” — Torchmark (TMK) co-chairman and CEO Gary Coleman (Insurance)


Malls are shifting their emphasis from shopping to entertainment.

“Malls are not dead. Actually our mall stores are performing well. . . . I think that mall developers are pivoting towards a bit more entertainment as they are going after trying to replace these folks.” — Dave and Buster’s (PLAY) director and CEO Steve King (Restaurants)

“When you combine quality grocers and off-price retailers with many of our service-oriented tenant businesses, including medical services, restaurants, fitness centers and other e-commerce resistant uses, you have a winning formula.” — Kimco (KIM) chairman Milton Cooper (REIT)

Grocery and off-price concepts drive traffic to malls.

“The grocer has by definition an advantage over a traditional retailer of discretionary items. . . . A quality grocer will generate consistent traffic in any economic cycle. Similarly, off-price retailers with their constantly changing merchandise and appeal to treasure-hunting consumers, dominate the retail landscape today and drive traffic to our centers.” — Kimco (KIM) chairman Milton Cooper (REIT)

There is a large supply of real estate for big box concepts.

“There is a lot of sites available right now especially for our size. . . . There are things . . . Sear’s coming online and saying they are going dispose 100 stores . . . Some Macy’s have come online. Sports Authority declared bankruptcy. So there is a lot of real estate coming online in our size.” — Dave and Buster’s (PLAY) director and CEO Steve King (Restaurants)

Campbell’s is shifting its media strategy towards digital.

“In fiscal 2016, we plan to spend nearly 40% of our overall media budget on digital media. We also remain focused on growing our e-commerce capabilities, as this is becoming increasingly important to our consumers and our customers.” — Campbell Soup Company (CPB) president and CEO Denise Morrison (Packaged Food)


Micron said that PC markets are still weak but others are stronger.

“Relative to PCs, yes, it continues to be weak. We think maybe down mid single-digits for the year. . . . But once you get outside of PCs . . . and mobile growing maybe right around the market supply for DRAM. You’ve got all these other segments that we think will outstrip supply growth servers, automotive, etc., etc.” — Micron (MU) CEO D. Mark Durcan (Semiconductors)

Alexander Graham Bell invented wireless telephony in 1880.

“Bell once said his ‘greatest invention’ was the photophone, patented in December 1880. Six months earlier, he had used this device to transmit a voice message between two buildings . . . wirelessly!” — BCE (BCE) Annual Report (Canadian Telecom)

Materials, Energy

The Texas economy hasn’t exactly improved.

“Just on the Texas question . . . our fourth quarter, we were positive. It was not 6% positive, it trailed the overall change but it was still . . . I would not say that trend has improved.” — Dave and Buster’s (PLAY) SVP and CFO Brian Jenkins (Restaurants)

Renewable power generation is pushing utilities to transform electric grids.

“There is a shift towards renewables, which is accelerating despite the low oil price. . . . In power generation, renewables are transforming the energy mix . . . and dramatically increasing grid complexity. The future grid will be far more complex, with multiple feed-in points from traditional power plants to large-scale renewables on the supply side, and a coexistence of traditional demand patterns and microgrids and nanogrids on the demand side. Managing this complexity will require intelligently automated, digital power grids that can anticipate demand and supply patterns, while routing and transporting power to the ever-increasing number of consumption points of electricity.” — ABB (ABB) president and CEO Ulrich Spiesshofer (Electrical Equipment)

Miscellaneous Nuggets of Wisdom

Tough times create tough companies.

“I believe that strong companies are often built during downturns and our approach is to view this difficult period as an opportunity and a challenge.” — Suncor (SU) president and CEO Steve Williams (Integrated Oil)

There’s value in simplicity.

“Simplification has made us more transparent and easier to value. First off, we have fewer properties overall. These properties are higher quality, are located in major US metro markets, and are managed by Kimco. Moreover, by reducing both the number of joint ventures and assets under JV [joint venture] control, we have unlocked considerable value in properties that some analysts and investors viewed as ‘encumbered’ and ascribed discounts to their value.” — Kimco (KIM) chairman Milton Cooper (REIT)

Don’t make the same mistake twice.

“It is often said that those who ignore the errors of the past are doomed to repeat them. As the economy shows signs of decelerating, our strong balance sheet will be the foundation upon which Kimco can act on opportunities rather than sit idly by.” — Kimco (KIM) chairman Milton Cooper (REIT)

There is no perfect plan.

“By the way, any plan in my entire career I’ve ever been associated with or developed is some degree of wrong. So we expect to be some degree of wrong and that’s why we have a lot of ‘What if?’ scenarios and kind of backup plans in place.” — Restoration Hardware (RH) chairman and CEO Gary Friedman (Home Furnishing)

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Scott Krisiloff, CFA

Scott Krisiloff, CFA, is the CEO of Avondale Asset Management, an independent investment advisory firm located in Los Angeles. Krisiloff is the author of the firm's blog, Company Notes.

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