By Justin Spittler

Retailers are falling left and right.

I’m not talking about mom and pop shops. I’m talking about some of America’s most iconic companies.

In the past year alone, Sports Authority, Wet Seal, American Apparel, Aeropostale, and Eastern Outfitters have all filed bankruptcy or liquidated their assets.

Other major retailers like Macy’s, Gap, Sears, and Guess are in “survival mode.” This year alone, retailers have announced plans to close more than 1,500 stores.

In short, a major crisis has rocked the retail industry. And it’s not going to end anytime soon…

I’ll explain why in a second. But you first need to understand why this huge industry is unraveling.

• The retail “bubble” has popped…

“Bubble” is one of those buzzwords you hear all the time.

People usually say it when they’re talking about asset prices that have lost touch with reality. Think internet stocks in 1999.

But it can also describe an industry that’s become too big, too quickly.

Richard Hayne says that’s exactly what happened to the U.S. retail industry. Hayne is the CEO of Urban Outfitters, one of the many major apparel companies fighting for its life.

Hayne spoke with CNBC earlier this week:

“Our industry, not unlike the housing industry, saw too much square footage capacity added in the '90s and early 2000s. Thousands of new doors opened and rents soared. This created a bubble. And like housing, that bubble has now burst,” Hayne said.

Like us, he says this crisis has just begun:

“We are [now] seeing the results — doors shuttering and rents retreating,” the CEO continued. “This trend will continue for the foreseeable future and may even accelerate.”

Keep in mind, the housing market bounced back from the 2008–2009 financial crisis. Today, U.S. housing prices are almost as high as they were in 2006.

But the retail industry might never recover.

• The internet is killing traditional retail…

It’s no secret that the internet has radically changed how we shop.

These days, you can buy anything with a few clicks of a mouse. Because of this, many people don’t go to malls and department stores anymore. That’s obviously bad news for retailers that depend on foot traffic.

Of course, online shopping didn’t just sneak up on traditional retailers. It’s been around since the 1990s.

But here’s the thing…

Most traditional retailers underestimated the power of the internet. They didn’t adapt to it. Now they’re paying the price.

Just look at how much these major retail stocks have plummeted over the last three years.

  • Macy’s is down 45%

  • Sears is down 72%

  • JCPenney is down 25%

  • The Gap is down 42%

  • Urban Outfitters is down 33%

Now look at this chart of Amazon (AMZN), the world’s biggest online retailer. It’s up 130% since March 2014.

Amazon isn’t the only serious threat to traditional retailers, either.

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• Inflation is rising at its fastest rate in years…

Inflation measures how quickly prices rise.

High inflation makes everything from shoes to jeans more expensive. It hurts everyday people.

Right now, the official U.S. inflation rate is 1.9%. That’s its highest level since 2012.

This is a big problem for the retailers. Bloomberg Markets reported last week:

Consumer spending rose less than projected in January as rising prices pinched Americans’ wallets, leading inflation-adjusted purchases to fall by the most since 2009.

• The retail industry is close to its “tipping point”…

As we’ve said many times, inflation is likely headed much higher.

If we’re right, everyday Americans are going to have less disposable income. That would kill consumer spending. It could even cause retail bankruptcies to skyrocket.

America’s biggest credit rating agencies share our concern.

Fitch recently said that the default rate for the retail sector could hit 9% this year. That’s up from 1% over the last 12 months.

Moody’s, another major credit rating agency, is also worried about the financial health of the retail industry. It’s assigned credit ratings of Caa or lower to 19 retail and apparel companies. This means that these companies are in dire financial condition.

PricewaterhouseCoopers, one of the largest U.S. accounting firms, says 2017 will be the “tipping point” for the retail industry. It, too, expects retail bankruptcies could surge this year.

• The retail industry hasn’t been this distressed since 2009…

Back then, the U.S. economy was in its worst downturn since the Great Depression.

If the U.S. economy runs into problems today, the retail crisis could quickly turn into a full-blown epidemic.

If you haven’t already, lighten up on traditional retail stocks immediately.

Also, be sure to read Monday’s Dispatch. In it, I’ll explain how the retail industry’s problems have already spread to other parts of the economy.

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Oil is in free fall.

Today’s chart shows the price of oil over the last three months. You can see that oil’s plunged 11% over the last two weeks. It’s now trading below $50 for the first time since December 7.

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Justin Spittler
Delray Beach, Florida
March 10, 2017

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