Disappointing July same-store sales figures from Wal-Mart and Target today point not just to the struggling consumer, but why this economic slowdown is just getting started, says Joshua Rosner, managing director at Graham Fisher & Co.
Recent slowdowns have been corporate driven, which Rosner notes are typically short and sharp as CEOs seek to slash costs (and jobs) in order to quickly "rightsize" their businesses.
In a consumer-led slowdown, like the one underway, slowing consumer spending first hit retailers, then manufacturing, then warehouse space, he explains. In such a scenario, rising unemployment is a lagging indicator, meaning the recent four-year high 5.7% unemployment rate is highly unlikely to be the peak.
As unemployment keeps rising, consumer spending will slow further, putting more pressure on corporate balance sheets, leading to more jobs losses (repeat ad nauseum).
That, in turn, will lead to defaults on commercial mortgage-backed securities (and related losses for their holders) on par with what's occurred in residential MBS, says Rosner, one of the first on Wall Street to warn of the looming crisis.
The timing remains uncertain but Rosner says it will come only after "capitulation" by the rating agencies and corporate executives, who he says are still playing "accounting games" and not really owing up to the severity of losses.