Holiday Jeer
Thank you for joining us for this edition of the NovaBlock newsletter. Here, we explore the intersection of technology, finance, politics, and of course, the crypto asset space.
Oh, the Holidays. A time for everyone to wind down, spend time with loved ones, and partake in the timeless traditions of gift giving, football, and apple pie. This holiday season, Americans are estimated to spend $729 billion on gifts for their loved ones, including hot items such as the new Apple Airpods, AncestryDNA kit, Disney+ subscription, or even this personalized face-printed heating pad. The holiday season annual expenditure represents an increase of 45% from the start of the decade.
Source: https://www.statista.com/statistics/243439/holiday-retail-sales-in-the-united-states/
The holiday season is a crucial time of year, buoying retail sales and generating significant activity for the US economy. Overall, holiday sales in November and December represent about 20-30% of annual retail sales every year. Additionally, holiday sales can drive higher profit margins for retailers due to increased sales volumes without significantly increasing fixed costs.
Between 2010 and 2017, an average of 629,000 additional employees were hired during the holiday season compared to the rest of the year.
Source: https://www.statista.com/statistics/243461/increase-in-holiday-employment-in-the-united-states/
However, this influx of new workers has been decelerating with a decrease of 31% in 2017 compared to 2013. I would expect this decline to continue as retailers increasingly automate the sales and checkout process and online sales become more prevalent. According to this report by Cornerstone Capital Group, 30-50% of all retail workers are at risk of losing their jobs once automation technologies are fully adopted. Retail employs approximately 10% of the total US labor force. As companies adopt mobile devices, self-checkout, digital kiosks, proximity beacons, and other technologies, roughly 6 million to 7.5 million retail jobs are in danger of being automated out of existence.
E-commerce has grown significantly over the last five years and currently accounts for 8.8% of total retail sales in the US. This represents an increase of 49% since 2014. Amazon is the dominant force in e-commerce, and the company will account for 52% of all US online sales in 2019, up from 38% in 2016.
Source: https://www.statista.com/statistics/955796/global-amazon-e-commerce-market-share/
Due to lower prices on final goods (fueled by lower production costs and higher profit margins), greater convenience, and larger selection, online shopping has squeezed traditional brick-and-mortar retailers. Major retailers such as Macy’s, JC Penney, Kohl’s and Nordstrom collectively shuttered hundreds of brick-and-mortar stores over the last few years as they faced headwinds in the traditional retail business model.
Poor performance is prevalent in the stock prices of these companies, which have been exhibiting strong downtrends.
Macy’s reached a peak of $72/share in mid-2015 and currently trades at $16/share, a decline of 78%.
J.C. Penney peaked at $11.50/share in 2016 and currently trades at $1/share, a decline of 91%.
As I’ve written about previously, the US economy is chugging along making new all-time high after all-time high, lifted by the easy money policies of the Fed. The US is firmly in the late stages of the business cycle, but the economy remains supported by consumption, which represents around 70% of GDP. Historically, consumer spending and employment growth remain positive into the late cycle, normally not falling until the start of the next recession.
On the surface, the economy seems to be doing just fine. Although it is a flawed metric, the official unemployment rate is currently sitting at its lowest level since 1969 at 3.5%. However, analyzing wage growth gives us a clearer picture as to how the average American worker is doing.
Source: https://fred.stlouisfed.org/series/UNRATE
Wage growth is one of the most important factors determining discretionary consumer spending and economic health. Higher wages directly translate to greater levels of consumer spending. Inflation may distort wage growth, so it is important to look at real wage growth, which is adjusted for inflation. In a healthy economy with consumer purchasing power increasing over time, we would expect the real wage growth to roughly match productivity growth. Productivity growth is measured using real GDP growth. Remarkably, over the last two decades the average annual real GDP growth rate was 2.0% and the average annual real wage growth rate was just 0.094%.
What happened to the difference of 1.9% you might ask? This is a loaded question to be explored in future newsletters. One thing is clear, the vast majority of productivity growth did not translate to higher wages for the average worker. Instead, I suspect a lot of this value was transferred to asset holders during the Great Financialization of the economy that transpired over the last two decades. Stocks, real estate, commodities, exotic derivatives, and other financial instruments and assets gained a disproportionate amount of value as financial markets became more prominent.
Although thriving financial markets are important to the development of modern economies, the US finance, insurance, and real estate sector (FIRE) ballooned to over 20% of GDP compared to only 10% in 1947. The FIRE sector is also the largest sector of the US economy.
Source: https://fred.stlouisfed.org/release/tables?rid=331&eid=211
As automation technologies mature and gain adoption, real wages will continue to stagnate for workers in many industries. Workers will need to reinvent themselves and learn new skills as the tide of new technologies makes low-skilled labor expendable. This trend is unfolding before our eyes in the retail industry, and we may soon discover that no industry is immune.
Quick Hits
Japenese e-commerce giant Rakuten now allows users to convert their loyalty points to cryptocurrencies. The supported assets include Bitcoin, Ether, and Bitcoin Cash. Rakuten is the latest to join the ranks of companies like Lolli, BlockFi, Pei, and others to enable consumers to accumulate crypto through cash back or rewards points. I would expect more companies, including both incumbents and start ups, to launch similar products, especially considering Honey was recently acquired by PayPal for $4 billion.
YouTube erroneously purged crypto education videos from its video-sharing platform this week but claims to have reinstated them. In spite of this, some YouTubers claim their deleted videos remain inaccessible. Chris Dunn, who runs an investment education channel with 200,000 subscribers, says the purge has actually gotten worse since he successfully appealed his deletions. Many content creators’ livelihoods are dependent upon the gatekeepers of centralized platforms like YouTube. Demonetizing and deplatforming individuals is a scary tactic that is becoming all too prevalent. Decentralized content-sharing platforms like Steemit and Peepeth may be the solution, but we have yet to see them gain any traction.
The SEC proposed an update to the accredited investor definition, expanding the definition to be more accommodative. The proposed amendments would allow more investors to participate in private offerings by adding new categories of persons that may qualify based on their professional knowledge, experience, or certifications. The accredited investor status has been implemented over 80 years ago and has remained largely unchanged. The law is outdated and does not take into account financial sophistication, but only applies a blunt income threshold to determine eligibility. This move is a step in the right direction, yet does not go far enough to enable wider participation of retail investors in private capital markets.