News

Major Retailers File for Bankruptcy: A Deflationary Perspective

Here's a May 15 New York Times headline and sub-headline:

J.C. Penney, 118-Year-Old Department Store, Files for Bankruptcy

The chain's move came after J. Crew and the Neiman Marcus Group filed, and represented the biggest casualty amid retail closures tied to the coronavirus pandemic.

Yet, financial trouble was brewing in the retail sector well before COVID-19.

The May 11 Elliott Wave Theorist published before J.C. Penney filed for bankruptcy, however, the issue offers this deflationary perspective on Neiman Marcus and businesses which are drowning in debt. Here's an excerpt:

Why Businesses Are Failing

Any business adversely affected by the pandemic could have said something quite simple to its workers: "Sorry folks, but we're all going on shorter shifts, and your pay will be cut 80%." Or, "Sorry, folks, but we're shutting down for three months. When we reopen, you will all have your jobs back." Any landlords involved would have been told, "We can't pay for the duration, but we'll be back soon," and the landlords would all say, "OK." No other response would make sense.

Easy as pie. No failed businesses. No bailouts necessary. Why isn't it happening that way?

The answer is: DEBT.

Neiman Marcus just declared bankruptcy. After only two months of social distancing? Why didn't the company just reduce salaries or close its doors and reopen later?

The answer is: Before the virus hit, Neiman Marcus was in debt to the tune of one billion dollars. Debt must be serviced. The stores had to stay open every working day just to pay interest to the company's creditors. A few down weeks, and the entire operation was in danger of becoming the property of creditors. Creditors don't know how to run a business. All most of them know how to do is liquidate assets as fast as they can to try to get some of their money back. Under Chapter 11, a business can "restructure," which means to stop paying interest to creditors, "temporarily." But the crisis is not over, and what is deemed temporary today is likely to become permanent. When IOUs become anything less than fully paid, that's deflation.

The story gets even more revealing. Guess who owns Neiman Marcus? Answer: a pension fund! How would you like to have your pension fund run by people who thought buying a highly indebted retailer was a good idea?

What is a pension fund? It is a cache of assets backing promises to pay. The promisers of pensions are debtors. In the case of Neiman Marcus, then, a debtor owns a debtor. The entity that had promised other people billions of dollars' worth of pensions owns a business that had promised other people a billion dollars in cash plus interest. Now the pension-promiser has lost much of the value of its "investment," and what's left of the business will be promised anew. One failed debtor weakened an even larger debtor.

How many more bankruptcies will occur? Answer: lots of them. Articles about struggling retailers all say the same thing: Their debts are huge, and they can't pay the interest. As Conquer the Crash warned well before all this happened, there is too much debt. It can't be sustained, and it can't be paid off.