The Almost Daily 2¢ - Nouvell Monstre

Longish-time Paper Economy readers will recall that I have, with great interest, covered various events and details surrounding the Nouvelle at Natick, an unusual “luxury” condo-retail hybrid development attached to the new Natick Mall in Natick Massachusetts (read here, here, here and here).

My fascination with the project might be a tad bit overkill but I suspect in time my initial sense will be borne out and all will judge the Nouvelle project as a crescendo of sorts… a final and lofty heave into the realm of delusional consumerism and pop-marketed luxury lifestyle and faux culture and elegance that will, in all likeliness, stand as testament to and a cautionary lesson on the risks inherent when mob-fantasy meets market speculation.

But rather than criticize the project yet again, today I bring you grim news that all is not well with its builder, General Growth Properties (NYSE:GGP), leading Natick town officials, concerned with tax revenues, “mall mitigation money” and ultimately the fate of the mall project itself, to believe that bankruptcy is in the offing.

Without digressing too far into the dirty details let it suffice to say that GGPs stock has lost 99% of its value in the last 12 months as investors, concerned over its enormous debt burdens and clear solvency issues, capitulated to its consistently collapsing share price.

But what does this failure say of the larger economy?

Although the specter of a GGP bankruptcy is obviously very unlikely to spur on any kind Washington bailout scheme, its collapse is no less systemically important in the sense that it both reflects the epic changes taking place in our rapidly decelerating culture of over-consumption and represents the plight of so many corporate entities that, after having spent the last eight years bounding far out on the limb of ultra-leveraged hyper-speculation, now face the harsh reality of being severed from the trunk with no means of escape.

GGPs predicament allows one a peek into one of the least recognized yet most destructive elements of our current predicament… the debilitating impairments that resulted from the prior era of speculative delusion which simply cannot be remedied.

You see, GGP is not a young company… it has been in continuous operation for over 50 years and effectively under the control of members of one single family.

Up until the year 2000 it would have looked just like any other consistent, dividend paying commercial REIT … safe and sound, not too high flying but income yielding and family run to boot… what more could one ask for?

But in the era of “easy money” GGP apparently found itself awash in possibilities, not for sound steady income, but for aggressive growth competing for the fruits of phony prosperity and the attention of “aspirational” nitwits.

Traditional malls and retail commercial real estate were no longer enough… in the era of competitive affluence and aspiration-through-consumption you must think BIG… you must build residential… you must marry residential and retail… living and shopping… luxury, exclusivity, consumption and lifestyle packaged into a conspicuous and smarmy convergent stew peppered with top-shelf retail brand identity, stainless steel appliances and granite countertops.

Or so it seemed.

The Nouvelle at Natick is a Frankenstein of its age.

A mad creation built in the likeness of the ideals of its time yet larger and more menacing and bearing all the telltale defects of a restless and overreaching mania.

Now though, the monster (along with other comparably atrocious projects) has turned on its maker and no amount of pleading or back-peddling can prevent the inevitable.

Question of The Day?

With all the emphasis on luxury living in recent years will a pullback to more modest, affordable and lower quality of life and consumption (home, travel, discretionary items etc.) prove to be demoralizing?

Conspicuous Correlation: Retail Sales July 2008

Yesterday, the U.S. Census Bureau released its latest nominal read of retail sales showing a decline of 0.1% from June 2008 and 2.6% increase above July 2007 on an aggregate of all items including food, fuel and healthcare services.

Discretionary retail sales including home furnishings, home garden and building materials, consumer electronics and department store sales, on the other hand, experienced another decline falling 1.17% compared to July 2007.

Further, adjusted for inflation, “real” discretionary retail sales declined 6.14% since July 2007.

On a “nominal” basis, there appeared to be “rough correlation” between strong home value appreciation and strong retail spending preceding the housing bust and an even stronger correlation when home values started to decline.

The following charts show the initial analysis plotting the year-over-year change to an aggregate series consisting of the primary discretionary retail sales categories that I termed the “discretionary” retail sales series and the year-over-year change to the S&P/Case-Shiller Composite home price index since 1993 and since 2000.


As you can see there was, at the very least, a coincidental change to home values and consumer spending during the boom and then the bust, but as home values have continued to decline, retail spending has remained low but has not continued to consistently contract.

One problem with this initial analysis is that both retail sales and the S&P/Case-Shiller Composite index are reported in “nominal” (i.e. non-inflation adjusted) terms and thus result in a somewhat skewed view especially for the retail sales data.

In fact, the year-over-year change to “nominal” discretionary retail sales has been positive for seven of the last eight months while the year-over-year change to “real” discretionary retail sales has been negative for twelve straight months (see the following chart).

The key point here is that although inflation (as reported by the CPI) has been relatively stable in recent years it is always a factor and in light of the latest surprise increases to the CPI results as well as many anecdotal reports of producers now passing through increasing energy prices to the consumer, it’s important to adjust retail sales (and home values) in order to fully understand its direction.


As you can see from the above charts (click for larger version), adjusted for inflation (CPI for retail sales, CPI less shelter for S&P/Case-Shiller Composite) the “rough correlation” between the year-over-year change to the “discretionary” retail sales series and the year-over-year S&P/Case-Shiller Composite series seems now even more significant.

The Almost Daily 2¢ - The Resilient Consumer

Resilient
re•sil•ient (rĭ-zĭl'yənt)
adj.
1. Marked by the ability to recover readily, as from misfortune.
2. Capable of returning to an original shape or position, as after having been compressed.

It appears that the word "resilient", when used in the context of describing American’s consumption habits, is somewhat misleading and in some sense reveals its true nature as a slogan.

As we all know, the US economy has grown considerably during the last five years, and short of the restricted, albeit not insignificant, business investment led recession of 2001, the last sixteen years has been both prosperous and transformational.

True resiliency, as its definition suggests, would be a response that resulted from a significant test of our current circumstances.

Now don’t get me wrong, I’m in no way attempting to imply that the American “individual” is not resilient.

One need only recount the collective response of our society after the 9/11 attacks (and ensuing mayhem… think Anthrax attacks, DC sniper etc.) to see that Americans are resilient and can doubtlessly recover from general misfortune.

But the start of the dot-com recession predated 9/11 and it appears that, in economic terms, the response to the attacks (i.e. dramatically lower interest rates and government spending in the preparation and implementation of the wars in Afghanistan and Iraq) served to boost our economy back to growth.

The point is, after many years of an almost unbroken growth economy, we seem to be plagued by the trappings of the good times to an extent that we describe resiliency, not as an ability to overcome a downturn, but as simply the consumer’s ability to spend more than last year.

As history shows us, our economic circumstances can, at times, become vexing as an economy that seemed transparent and obvious during an expansion becomes enigmatic and hard to control during a contraction.

Showing a strong degree of economic resiliency may inevitably be an accurate description of the response of American’s in time, but as for today, the real challenges still lay ahead.