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Walmart’s Ominous Stock Market Signal

Companies like Walmart and McDonalds’s have made their investors rich by squeezing costs and cutting prices. But it turns out that low-cost means low-wage, and as this model spread it contributed to the now-impossible-to-ignore migration of income and wealth from workers to owners of the capital and symbol manipulation skills that such a system demands.

Now these internal contradictions have come home to roost. Workers who were forced down to bare subsistence can’t afford to buy what American companies are selling. But they can demand a bigger piece of the pie via the ballot box and direct action. In May, for instance, McDonald’s headquarters was swamped by protesters demanding $15/hour starting pay.

And raising the minimum wage in general has become a political winner. Here’s the current administration’s take on the subject:

In the 2014 State of the Union address, President Obama called again on Congress to raise the national minimum wage, and soon after signed an Executive Order to raise the minimum wage for the individuals working on new federal service contracts.

Raising the minimum wage nationwide will increase earnings for millions of workers, and boost the bottom lines of businesses across the country. While Republicans in Congress continue to block the President’s proposal, a number of state legislatures and governors, mayors and city councils, and business owners have answered the President’s call and raised wages for their residents and employees.

Meanwhile, forcing the 1% to share the wealth via higher taxes is back in vogue. In the most recent Democratic party presidential debate, everyone on the stage promised new social programs to be financed by insisting that the rich “pay their fair share.”

Broadly speaking, this is normal and natural. Resources are limited and there will always be give and take over who gets what. It’s also poetic justice. The corporate/political class ignored the obligations that come with aristocracy and is now paying the inevitable price. Markets, over long periods of time, work these things out.

But in the near term, anyone buying US equities based on the hope that the past decade’s surge in corporate profitability will continue is in for a shock. If workers are going to get higher wages, then the rest of the pie — comprising corporate earnings — is by definition going to shrink, leaving less for shareholders.

Walmart’s recent massive earnings miss is, then, a sign of things to come rather than a company-specific hiccup. The following chart (compiled by friend and DollarCollapse reader Michael Pollaro) shows US business sales (red line) already falling towards recession levels. Combine this ongoing trend with sharply-narrower profit margins as wage costs rise, and the result will be a few years of consistent earnings disappointment. Hardly the kind of thing that fuels a bull market.

Business sales 2015

9 thoughts on "Walmart’s Ominous Stock Market Signal"

  1. Blaming Wal-Mart and McDonald’s for the disparity of wealth in America is nonsense. Those industries naturally rely on low skill people who naturally are paid what low skills are worth. It doesn’t take a lot of skill to stock groceries or flip hamburgers.

    If you more want income, learn more advanced skills. Isn’t that what your parents and teachers told you when you were a kid? Mine did. That’s the way a free market works.

    Paying low skill workers more than their labor is worth is what goofy liberals in California do with their $15 minimum wage law just passed. As a result more businesses are leaving California because they can’t afford the high labor costs and fewer people will find work because employers can’t afford to hire them. Paying low skill autoworkers in Detroit 2 or 3 times what their labor was worth due to their government enforced union contracts is largely what destroyed the U.S. auto industry and turned Detroit into a crumbling ghost town.

    If Wal-Mart and McDonald’s paid their employees $15 an hour they would have to raise the costs of their products to cover the higher labor costs. Thus fewer people would shop at Wal-Mart and McDonalds, their profits would suffer even more and fewer people who need the work wouldn’t be hired to work there.

    I thought an alleged free market Austrian School believe like Mr. Rubino understood it is best to let the free market set wages and prices. I guess Rubino is turning into an air-head liberal like Jerry Brown or Barbara Boxer and other liberals who think it’s smart to pay hamburger flippers $15 an hour.

  2. Wall-mart will fire those who cost more

    they are already doing this to get their cost structure back in line

    a dollar an hour pay raise has it’s costs

    boycott wall-mart

  3. Low wages, low prices…higher wages, higher prices. Isn’t that what even the wage earners expect?

    And then the Fed’s coveted price inflation will manifest so interest rates can rise too.

    Another example of the more things change the more they stay the same, as they should if nothing fundamentally (hint: productivity) changes.

  4. If the wages go up so do the earnings as people are able to purchase more goods and more revenues for the corporatists and their stockholders. Maybe at first a slight downward trend but then an upward tick and history proves it.

    1. As wages go up, and people get laid off, and their jobs get automated away…. then they will go on welfare and purchase more goods than ever before.

      Sorry, I sort of lost the thread of the story midway. Higher wages must lead to higher profits. There are no limits. Infinite wages must lead to infinite profits. The math all works out.

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