There’s Never Just One Cockroach:  The United Kingdom’s Pension Funds, FTX, and Japanese Central Bank Sleight of Hand

In August of 2007, then Federal Reserve Chairman Ben Bernanke told Congress that the subprime crisis would be contained.  We went on to have the Great Financial Crisis GFC), of which the subprime crisis was just one cockroach.

Now we’re facing another financial crisis- potentially worse than the GFC- caused by another 15 years or so of kicking the can down the road through reckless money creation and irresponsibly fiscal policy.  Interest rates that were too low for too long caused destructive misallocation of capital.  Too much debt limits an economy’s ability to grow.

History tells us it always ends badly when the government’s financial model becomes unsustainable.  Modern Monetary Theory didn’t (and couldn’t) work.  We got the inflation we deserved.

A long-term debt crisis- the kind we are facing now- doesn’t just show up at a moment in time.  It happens as cracks in an increasingly dysfunctional and fragile system evolve.  That’s started to happen, and I want to tell you about three of those cracks.


Not too long ago, Liz Truss was elected Prime Minister of the UK.  She resigned after only 45 days.  Some of you may have seen the web page where there was a picture of her next to a head of cabbage.  The goal was to see which would last longer.  The cabbage won.

Upon becoming prime minister, Liz immediately announced 45 billion pounds of tax cuts (mostly focused on the wealthy) with no explanation of how they would be paid for- apparently with more debt.

The reaction of the bond market was not exactly positive.  Government bonds (“gilts” as they are called in England) cratered something north of 25%.  Interest rates jumped to 5%.

Meanwhile, UK pension funds had been struggling to earn enough money to pay their pension obligations while interest rates were down around zero. But never fear!  As always, the investment bankers were there to help.  For a healthy fee.  They got the pension funds (not just in the UK I bet) to invest in something called a liability driven investment (LDI) which used derivatives and worked just great in generating income as long as interest rates were declining.

Rates rocketed up due to the bond market’s skepticism of her plans.  The value of the pension funds’ collateral (the gilts) declined, and they had to sell their gilts to put up more collateral.  The more they sold, the further prices fell and the more they needed to sell.  I think I read that the margin call totaled something like 1.2 trillion pounds.  They didn’t have that lying around or they wouldn’t have needed the LDI in the first place.

On September 28th the Bank of England (BOE) had to step in and start buying government bonds again. It hadn’t been long since they’d started selling what they had.  Later, they also announced a short-term lending facility to provide more liquidity.

This all worked for a little while, but then interest rates started rising again.  A head had to role, so Liz fired her Chancellor of the Exchequer somehow ignoring that these were her policies.  Obviously, it didn’t work and not to long after, Liz lost to the head of cabbage.

The new Prime Minister has largely reversed the tax cuts.  In fact, he’s proposed some new taxes and cuts in government spending.  This is generally known as austerity.  With energy prices already where they are, the UK is looking at a further decline in its standard of living.  But hopefully, the bond market can be kept happy.

Not even sovereign first world states can issue debt forever without it catching up with them.


Closer to home- in the Bahamas to be more specific- Sam Bankman-Fried (SBF to all his friends, if he still has any) founded FTX in 2019.

“Its 28year-old founder and majority shareholder, self-styled as “SBF” (Sam Bankman-Fried), was a graduate of MIT and low-level ETF trader at Jane Street. He then established a two-year track record trading crypto assets through his personal hedge fund, Alameda Research, and launched FTX as an ultra-liquid trading platform for professional traders. FTX did not have a board of directors. Its auditor has an office in the “Metaverse.” Yet FTX managed to attract investments from some of the largest players in Wall Street and swiftly became the second-largest crypto exchange.”

I’m quoting from a paper by Daniel Oliver at  Myrmikan Capital LLC.  It’s called Crypto Contagion and you can read it here.  It’s unbelievable and entertaining.

But if you don’t read it (your mistake) what you should know is that FTX at its heart was a Ponzi scheme.  The paper describes exactly how and why by quoting SBF’s description of what he did.  Meanwhile, he got institutions like Sequoia Capital, the Ontario Teachers Pension Plan, Soft Bank, and Tiger Global to invest.  They are all now sorry.

At a time of endless liquidity, the lowest interest rates in 5,000 years, a long period when the market just went up, and competition to find good investments when some traditional ones are paying nothing maybe people just get too confident.  Like with Lis Truss in the UK, SBF was done in by too much leverage/debt, not to mention overvaluation of some questionable crypto assets.  Leverage can be a good thing- until it isn’t.


Japan, as you may know, is determined to keep their interest rates from climbing.  To accomplish this, they have been buying most Japanese government issued bonds and control something over half the bond market.  Effectively, their central bank is the bond market.

Recently, a strange thing happened in that market.  It was reported in an occasional email I receive from David Kotok, Chairman & Chief Investment Officer of Cumberland Advisors.  Acknowledging that he’s just seen an article on a report in a newsletter and not the details of the actual trade, he says:

“Here’s the trade. The central bank of Japan reached a holding limit of 100% of an outstanding issue of Japanese government debt. So, it then loaned the security to another institution that wanted to borrow it so they could sell it short. They sold short, and the BOJ bought it, which meant that the holdings of the BOJ exceeded 100% of the outstanding amount of the issue in question.”

He prefaces that comment by noting, “That act is absolutely bizarre in central bank history. We cannot find a prior example in the history of central bank over the last century.”

As I read this, the Bank of Japan bought more bonds than actually exist in the issue they bought.  In their efforts to keep interest rates low, they were selling these bonds to the people who were betting against them being able to keep rates down and then buying them back.  It’s so weird it must be true.  It’s also, as are the other two cracks, proof that this cannot continue.

I don’t know where the next crack will occur, when it will happen, or how big it will be.  Does the whole edifice come tumbling down, I wonder?  You may remember this quote from Hemingway’s book The Sun Also Rises.

How did you go bankrupt?” Bill asked.  “Two ways,” Mike said. “Gradually and then suddenly.” “What brought it on?”  “Friends,” said Mike. “I had a lot of friends. False friends. Then I had creditors, too. Probably had more creditors than anybody in England.”

This isn’t just a debt crisis for the United States.  Lots of other countries have managed their finances the same stupid way (giving money they didn’t have to people for things that didn’t increase productivity).  Did covid and the war in Ukraine speed this up?  No doubt.  But without those events we’d still have the same problem.  But like our friend Mike above, we’d be able to go slowly for a while longer.

How do you fix a debt crisis?  Well, what do you do when you have too much debt?  You tighten your belt so more money can be directed towards paying the debt.  Or you find a way to reduce your debt, either through negotiations or bankruptcy.

Governments have another choice.  They can print money.  When that money printing isn’t supported by productive activities, it causes inflation.  But inflation reduces the value of debt because you are repaying that debt with dollars that are worse less.

If you were an elected official, what would you do?  Tell your constituents you were going to cut all their benefits?  Not the best way to get reelected, though I’d vote for anybody who was that honest.  Nah, you’d hope or even engineer or allow inflation to reduce debt as a percentage of GDP.  Kind of stealth benefit cutting.

If that wasn’t part of the (off the record) conversation in the Federal Reserve building as they kept calling inflation transitory, I’d be stunned.

What’s the point of this article, aside from making me feel better by writing it all down?  I am guessing that many of you haven’t seen much about the inevitable result of a the end of a long-term debt crisis in print.  And you don’t really know just how bad our financial situation as a country is.  Those of you who want to dig a little deeper can let me know, and I’ll be glad to share some credible sources with you.

The United States will ultimately be fine (that’s another article), but we’re in for some rough years.  It would be a lot easier if we realized we’re all in the same boat.  Hopefully, that boat’s name doesn’t start with a “T.”

Airports and Mountain Resorts

Seattle’s main airport is surrounded by communities and has grown like a weed right along with the Seattle metropolitan area.  It has no practical way to expand.  Through recent technology and some clever evolution of facilities the airport authority is doing everything it can to shoehorn more passengers and flights into the same space.  But there’s a limit.  Airplanes, which are big and fast moving, need a certain minimum vertical and horizontal separation no matter how sophisticated the technology of the plane and control systems are.  They also need to park and move around while they are on the ground.

The same is true of skiers and snowboarders at mountain resorts in case you hadn’t figured out where I was going with this.

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Trying to Ride Two Horses with One Ass: The Federal Reserve’s Predicament and Why You Care

It started in May of 1984 when Continental Illinois Bank failed.  And was rescued.  People were saved from having made a bad investment.  So much for moral hazard- the idea that investing is a risk, which has evolved to be not the case in “too big to fail” companies.

We know what happened.  More and more bailouts and support of companies that should have gone belly up, with the investors losing money and remaining assets and capital being reallocated to productive uses.  The Federal Reserve, then, could apparently reduce the severity of or prevent recessions.  Wonderful!  What could go wrong?

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And Now for Something Completely Different

You haven’t heard from me much.  Spent the last few months trying to figure out just how I could be useful to the industry.  I decided it wasn’t by analyzing publicly traded company filings.  Truth be told, that wasn’t fun for me anymore.  I also think covid/masks/lockdowns/caution changed my behavior.  Permanently?  Don’t know.  How about yours?

This is my first attempt to help you think about some things that maybe you don’t often think about.  They are all relevant to running your business, though not just if you’re in active outdoor.

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The Water We Swim in: Don’t Stop Your Pandemic Thinking Now

I’ve used this before.  But I want to use it again; it’s increasingly relevant and I can give credit to the person who came up with it.

There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes “What the hell is water?”

David Foster Wallace, in 2005 Commencement Address to Kenyon College

What is our water, and how has it changed?

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What’s Jeff Reading: Vending Machines, Off Price Retail, Ghost Franchises

It wasn’t that long ago (actually it was, I’m afraid) when I reported, in a somewhat sarcastic tone, about Quiksilver trying to sell surf trunks in vending machines at resorts.  This was before their bankruptcy filing.  I thought that if they were highlighting this effort in a conference call, they were really struggling to find good news.  I’m not aware that they ever sold any that way.

Maybe they were just ahead of their time.  In “Cannoli kits and prime aged steaks: Here’s how the pandemic has revolutionized vending machines,” Laura Reiley describes where and how vending machines are being utilized.

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Kathmandu Six Months Results: Hard to Evaluate the Quality

The first thing to remember as we review Kathmandu’s half year results is the timing of the Rip Curl acquisition.  The acquisition was completed 31 October 2019.  It’s included in Kathmandu’s numbers for the full six months of the period ended 31 January 2021 but for only three months during the prior period’s six months.  The numbers are in New Zealand dollars, each of which costs about US$ 0.70.

Below are the as reported income statements for both periods for the consolidated company.

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Wait- Isn’t There a Pandemic or Something?  Zumiez’s Year and Quarter

You’d think I’d be getting used to it, but I still find myself surprised when another one of our industry’s public companies reports a strong quarter or, in this case, year.  The reasons are tending to be similar across reporting companies; higher gross margin, customer lust to get outdoors, ecommerce growth, expense reductions, government help (not quite sure how I feel about that for companies that don’t need it), making deals with landlords, maybe competitors screwing up, flexibility, reductions in expenses that will return next year, and the ability to continue to pursue their strategies.

Successful companies are ones who had strategies in place to deal with the changing retail environment before pandemic was a thing.  They just had to accelerate what they were already doing.  They even found opportunities amidst the initial chaos.  Zumiez was one of those.

Let’s do a review of the numbers as a basis for a more strategic discussion.

Net sales for the year ended January 30, 2021 fell 4.16% from $1.034 to $0.991 billion.  The sales decline was the result of covid related store closing.  Stores were open 78.4% of possible days.  The revenue decline “…was partially offset by a 13.6% increase in comparable sales driven by the increase in ecommerce sales as well as the strong performance of our physical stores upon re-opening.”  The chart below shows sales by region for three years.





Gross profit margin declined from 35.4% to 35.3%.  “The decrease was primarily driven by a 120 basis point increase in web fulfillment and shipping costs due to increased web activity as a result of COVID-19…and a 30 basis point increase due to the impairment of operating lease right-of-use assets. This was partially offset by an 80 basis point decrease in inventory shrinkage and a 70 basis point increase in product margin.”  You’d expect shrinkage to decline when stores are closed.

SG&A expenses were down 9.9% compared to last year, falling from $280.0 to $253.1 million.  As a percentage of sales, they declined from 27.1% to 25.5%.  Why?

“The decrease was primarily driven by a 70 basis point decrease due to governmental credits, a 60 basis point decrease in store wages, a 30 basis point decrease in national training and recognition events and a 20 basis point decrease in corporate costs.”

None of those would have happened without the pandemic.  If SG&A expenses had been the same as last year, operating income would have been $69.3 million rather than the $96.9 million reported.  But of course, revenues would have been higher- if only because there would have been no store closures.

Pretax income rose from $91.0 to $102.5 million.  “Our bottom line performance benefited from both our optimization efforts within the model as well as from the onetime adjustments we have made in response to pandemic around managing our payroll costs, reducing events, travel and training, managing marketing efforts, working with our landlords, receiving governmental subsidies tied to continue to pay our people and reducing projects and other expenses as feasible, given the uncertain nature of the environment,” said CFO Chris Work in the conference call.

Comparing this year’s fourth quarter with last year’s, we see sales growth from $328.7 to $331 million.  The gross profit margin rose slightly from 39.0% to 39.1%.  Net income for the quarter rose from $37.9 to $42.8 million, or by 12.9%.

The balance sheet and cash flow are both solid.

Let’s recall what Zumiez sees as it’s competitive strengths as stated in the 10-K.

  • Attractive lifestyle retailing concept.
  • Differentiated merchandising strategy.
  • Deep-rooted culture.
  • Distinctive customer experience.
  • Disciplined operating philosophy.
  • High-impact, integrated marketing approach.

No surprises here for any followers of Zumiez.  I’d highlight the 100 non-owned brands they introduced during the year (many of them exclusive to Zumiez) and the lack of silos in Zumiez’s operating style.  By lack of silos, I mean Zumiez has recognized the interrelatedness of all functions, and the need for information to flow quickly and seamlessly among the integrated functions.

Meanwhile, the growth strategies include:

  • Continuing to generate sales growth through existing channels.
  • Enhancing our brand awareness through continued marketing and promotions.
  • Opening or acquiring new store locations.

I’d say Zumiez lists them in order of importance.  Discussing the first they note, “We believe in driving to the optimum store count in each physical geography that we operate in and optimizing comparable sales within these markets between physical and digital to drive total trade area sales growth.”

“Optimizing” may not mean more.  Might mean fewer- especially in the U.S. where, as they acknowledge, they are pretty well built out.  Actually, an even more intriguing question is, “What’s a ‘store’?”

I know- I must be losing it but hear me out.  Maybe I can get some help from CEO Rick Brooks.

“We build an infrastructure in which the customer can shop with us to get what they want, when they want, how they want as fast, as they want. We’ve marked our business into a channel less organization with inventory visibility from all touch points and back-end capabilities that allow us to effectively leverage expenses regardless of the channel in which the sale originates.”

“Touch points.”  Yeah, I like that phrase.  How about the vans that are doing Zumiez Delivery in 26 of their trade areas in the U.S.?  During their fourth quarter they delivered, from 150 stores, about 55,000 packages.  Are those vans stores?  It depends on how they are used.  They are certainly “touch points.”  Recognizing that traditional stores exist and will continue to exist, a successful strategy requires thinking of them as just another touch point.

The touch point strategy is enabled by their trade area concept.  Or maybe it’s the other way around.  They talk about delivering in 26 trade areas and say that’s about half the trade areas they expect to operate in.  But we don’t know how many trade areas Zumiez has or will have in total.  Or if the number will be stable.  I’m guessing it will evolve with the market and the customer.

My definition of a trade area is an amalgamation of touch points that relate to a particular customer group.  I think each trade area represents a distinctive geographic area, but I’m guessing that geography is not necessarily the single defining attribute.  Some touch points will be ubiquitous to all trade areas.  The Zumiez ecommerce site for example.  Though the web site you see will vary depending on the customer information Zumiez has, the trade area you are in, the status of inventory and probably other things I haven’t figured out.

This integrated, flexible distinctiveness is a requirement of the market.  Here’s what Rick says.

“Our consumer, in fact, I think, not just our consumer, all consumers, expectations, they’re getting what they want, when they want, how they want as fast they want has never been higher, and we believe those expectations for speed are going to increase even more over the next five years. Another assumption we believe to be true is that the speed of trend cycles and brand cycles, already the fastest ever, are also going to continue to increase.”

Zumiez wants to “…create even more human-to-human connections, whether they be digital or physical, right?”  Human to human digital connections (kind of an oxymoron?) makes me wonder even more what a “store” is.  Those connections, by the way, aren’t just between Zumiez and their customers.  It’s among their customers as well and, I wonder, what other stakeholders.

I expect Zumiez will be surprised by, and be able to take advantage of, some of that connectiveness as their stakeholders define and evolve it.

With regards to brand awareness, I already noted the increase in advertising even in the pandemic year.  Remember what I said a hundred years ago?  “The best retailers make the brands they carry cool, not just the other way around.”  That brand building is increasingly important because (cue Rick again),

“Our Gen Z consumer is simultaneously a local and a global consumer. They want to be active in their local communities while being part of the same global communities. This concept applies in how they — our customer pursues their personal areas of passion and in their expectations that will be the source of bringing cool new brands from anywhere in the world to their local store.”

Zumiez ended the year with 721 stores- “…602 in the United States (“U.S.”), 52 in Canada, 54 in Europe and 13 in Australia.”  They expect to open 22 new stores in the current fiscal year.  Currently, they expect to open 5 stores in North America, 12 in Europe, and 5 in Australia.  Five or six stores will be closed.

I’ve been assuming that Zumiez’s greatest growth opportunities were outside of North America.  But the way the market has evolved (good deals available from landlords) and the trade area concept is making me question that idea- at least a little.

Conventional wisdom has always been that the German market is different from the French market is different from the U.S. market.  True of course, but if Zumiez can build a “global community” under the umbrella of its brand perhaps that’s not quite the impediment it used to be.  Zumiez sees brands, system tools, customer analytics, perhaps forms of touch points migrating around the world as their markets evolve.

Zumiez is finding advantage, as well as challenges, in the pandemic.  So are other companies who started working on the retail transition long before the pandemic happened.

What Do You Do for An Encore? Globe’s Six Month Results

When revenues rise 60.3% (from $77.8 to $124.8 million- Australian dollars of course) and net profit is up 292.9% from $3.9 to $15.3 million for the six months ended December 2020 compared to the same period in the prior year, I’m not left with much to analyze.

That’s especially true with Globe.  As a public but closely held company it has never been forthcoming with information on exactly how it has pulled off its results.  This time is no different.

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Deckers’ Solid Quarter:  Your Retail Strategy Had to be Right Before There Was Ever a Pandemic

Deckers produced a strong result in their quarter ended December 31.  I guess either because or in spite of covid.  Probably both.  Which is an interesting thing to say and I’ll have to explain it.

Revenue rose 14.8% from $938.7 million in last year’s quarter (LYQ) to $1.078 billion in this year’s.   The gross margin rose from 54.1% to 57.0%, “…primarily due to higher full-priced selling and rate expansion, favorable channel mix resulting from increased penetration of DTC, and favorable changes in foreign currency exchange rates.”

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