I don't disagree with this. Obama won't either. Expect this rhetoric to start running full steam ahead into the perpetually bullish Wall Street narrative. McCain better have his chin strap on – debating Warren Buffett and Paul Volcker on the economy won’t be a no contact sport.
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Last night, Hanoi government officials reported 28% growth in inflation, and cut economic growth estimates to 6.5-7% from 8%. “Our goals are to achieve 7% economic growth, and inflation at 25%.” Gee guys, thanks for aiming high in the most stagflationary environment Vietnam has seen since the mid-1990s.
- The good news for the footwear and apparel industry is that exposure here is not huge – only 4% of US consumption is sourced in Vietnam. Not the case for Nike and Adidas, however. These guys have more diversified manufacturing bases, but source roughly 1/3 of their respective footwear in Vietnam (Nike is 33%, and Adi is 30%).
- This scares me big-time. And it’s got to be scaring the two largest footwear companies in the industry. This will pressure margins in calendar ’09, and more importantly, it will cause disruption for the little guys that they’re not currently planning for.
- Think about it… Nike wakes up one morning and realizes that it needs to pay an extra 20% to cover wages in Vietnam. Yes, it will make its partner there whole to some degree. But it will also find capacity in China, Indonesia and Thailand that is currently occupied by smaller competitors, and muscle them out of their space.
- This is bad for Nike and bad for Adi, but will not destroy their margins. This will take margins away from everyone else in the industry, who will try as hard as possible to push the pain off to the next guy in line. This is when marginal brands and retailers take a massive hit (Skechers, Brown Shoe, DSW, and even Dick’s), the big guys hang in there and print numbers that are ‘less bad’ than the group, and good brands with poor management teams get taken out (Timberland).
- This space is going to be fun…
This morning's unemployment rate was printed at +6.1%. This is a new 5 year high. No, this is not good - but it's not a new revelation to people who aren't living Wall Street's narrative fallacy that the global market contagion wouldn’t spill over to Main Street.
We are still early innings of an accelerating unemployment cycle. This isn't just about the "credit cycle". See the "Trend" in US jobless claims below. Math is hard to debate.