As I write, the Dow is down another 5%. Shares of smaller companies have fallen even further. Oil prices continue to slide. Investors are starting to price in a long, sustained downturn.
Despite all the doom and gloom, as I look outside my office, there’s a lot going on. Road workers still have the street closed down as they repave it. People are still shopping. The restaurants are just as active as they were a year ago. It appears no one is saving every penny in case the world enters a prolonged depression. But I do notice some changes that must happen as part of a new reality we face.
Just outside my office building, there are two small locally owned coffee shops, one on each side of the street. About 40 feet down the street is a Starbucks on the corner. And just across the street from that Starbucks is another one.
This type of overcrowding cannot and will not last through a prolonged downturn. As part of the new reality we’re facing where consumers are cutting back and demand for everything is falling. I just don’t see how there will be room for four coffee shops all within a 200 feet of each other.
The new reality we face will mean fewer choices. The impact will be noticed in many industries. Frankly, the sooner we face the facts about the changes we’re going through, the earlier we can get prepared.
Just take a look at the auto industry. I don’t see too many ways out of that mess. The current recession will sort out the weak players (in spite of any government donations). A few Prosperity Dispatch readers stated their agreement by dropping me a note at editor@q1publishing.com after BNN (Canadian equivalent of CNBC) invited your editor on to discuss the impact of automaker bailout (view video here) recently.
Times like this make me think of the old saying, “You can’t jump across a 20-foot chasm in two ten-foot leaps.”
We’ve got a huge economic chasm ahead of us, we’re in the process of making one long jump across it, and we’ve got to be prepared for what’s on the other side. If we take action now, we can still get prepared.
As I noted in the interview, there are millions of unsold vehicles sitting outside factories in Detroit and at ship yards where they’re imported. There’s simply too much capacity. One has to, and will, go away.
Frankly, there is not enough room for six or seven major automakers in North America. Most of the financial world has already priced that in. GM’s market cap is less than $2 billion (compared to Toyota’s $93 billion) and one of them will have to go under, merge, or go into bankruptcy and hide there for as long as possible.
For the most part, the financial markets have already accepted the changes coming to the auto industry. Where it hasn’t been accepted yet is in the retail sector.
It has becoming painfully obvious this week there will be plenty more casualties when it comes to businesses that sell directly to cash-strapped consumers. A few weeks ago, we looked at the imminent aggressive competition that will be hitting the retailers this holiday shopping season (Red Friday, Coming to a Mall Near You).
It’s going to be a knock down drag out fight this year for every last dollar consumers are willing to (or have left to) spend. It’s the exact definition of a buyer’s market. They’re not waiting until Black Friday either. Most of the sales have already begun.
They’re fighting for survival. Not all of them, regrettably, will survive. They can’t. They won’t. And there will be a drastically different retail landscape in a couple of years.
Take a look at the electronics retail industry. For months now, we’ve talked about how Best Buy (NYSE: BBY, Stock Forum) will be one of the casualties of the retail wars. Despite one of Best Buy's leading competitors closing up shop, there’s still plenty of competition in a sector that used to be growing so quickly. And that’s the problem.
Ina long recession when demand falls, a town isn’t going to need five or six different places to go get a computer. After all, how many different places will be able to sell the same stuff? The leading electronics retailers all have very deep pockets. Wal-Mart (NYSE: WMT, Stock Forum), Sam’s Club, Costco (NASDAQ: COST, Stock Forum), and Sears (NASDAQ: SHLD, Stock Forum) are all selling TV’s and all sorts of electronics. Can a specialty store really last? Especially if Wal-Mart has already stated it’s going to compete aggressively when it comes to electronics?
There are just too many choices, too much replication to last through a prolonged downturn. It’s going to be a fight, but the losers this time around will disappear instead of fight few a through years of losses.
Think it can’t happen? Just look at what is happening in the auto industry.
There’s not enough room in the marketplace for six major auto manufacturers. Some of them will have to go. There are millions of unsold cars. There’s too much capacity.
While the entire markets seem to get pummeled day after day, I continue to recommend staying conservative. Our mantra for 2008, “It’s OK not to buy stocks today,” couldn’t be better advice.
But the doom and gloom will come to an end. I remain confident the world will be a much different place in a couple of years, but if you can manage to save some cash and invest prudently, these are the times you can make an absolute fortune.
It may not seem like it, but while Detroit’s Big Three is begging for cash, retailers are in freefall, and unemployment is on its way to levels not seen since the Regan Administration, the next boom is starting to form. It’s probably not where you’re thinking though. The next boom will have nothing to do with oil or alternative energy. It will actually benefit from the collapse of them. I’ll have all the details for you in your next Prosperity Dispatch.