Reuters commented that the US economy is as close to ideal as it could have been dreamed of a decade ago. It is growing at a pace topping 4 percent, unemployment is as low as it has been this century, and inflation has safely edged up toward an official target.  On Wednesday, the Fed increased its benchmark overnight lending rate from 1.75 to 2.00%.  The rate hike was the seventh in this cycle and marked a shift to a neutral stance in which the policy rate matches inflation. Fed Chairman said that “the economy is doing very well”.

The Wall Street Journal commented that the US Federal Reserve is concerned with the US unemployment rate being too low.  Only twice in the past half-century has unemployment fallen to its current rate of 3.8% - for a few years in the late 1960s and for one month in 2000. The ’60s episode helped spur years of soaring inflation that took a decade for policymakers to corral. The latter coincided with a technology bubble that, when it burst, caused the 2001 recession. The WSJ expects that on Wednesday the Fed will raise short-term interest rates, trying to put some brakes on the economy.

The BBC reported that the House of Fraser plans to close 31 of its 59 stores by the end of the year, including its flagship Oxford Street store.  House of Fraser needs approval from at least 75% of its creditors to go ahead with its rescue plan.  Established in 1849, House of Fraser became a national chain after World War II, through multiple acquisitions.  In 1948 the company was publically listed, but in 2006 it was acquired by a private consortium of investors.  In 2014 the chain was sold to a Chinese department store chain, and it now needs to handle voluntary administration.  Multiple other attempts were made along the way to acquire the business.  We have always held a view that multiple ownership changes will eventually destroy any business.

We have commented on a few occasions about the Bitcoin bubble (and we are not alone – Warren Buffet recently characterised it as “rat poison squared”). Reuters reported that today Bitcoin traded at US$6,763, down 65% from its December 2017 peak.  This is also an 11% drop since Friday, after the South Korean Coinrail Bitcoin exchange was hacked and apparently lost about 30% of its accounts.  If you ask us, we think that US$6,763 is still a stiff price for something that is virtually worthless.  Warren Buffet said that “buyers of bitcoin thrive on the hope they’ll find other people who will pay more for it.”  We couldn’t agree more.  Like all other bubbles, this too will come to an end when the majority of people will no longer be willing to pay more for it.

This is the title of the recent analysis from the Geopolitical Futures team. With the ongoing media debate about the risks posed by the US to free trade, GF pointed out that even with zero tariffs, free trade cannot be achieved. States use a wide range of vehicles to restrict trade and defend their interests.  These include ‘compliance’ regulations, deliberate delays in processing certain goods through customs, antitrust regulations to restrict large companies, etc.  Such obstacles may not stop the flow of goods, but they could massively escalate exporters' costs.  The exporting countries use a different set of tricks to abuse the system by e.g. enacting looser labour laws or by offering outright export subsidies.  Bottom line, increases in customs duties are just a one piece of the puzzle in international trade.

Inside Retail commented on Guy Russo’s progress in fixing Target.  The decline in earnings evident over the last several years has been arrested and sales have started to grow in several key categories.  The aim is to create a smaller and more profitable Target.  We think that this is a robust, pragmatic and brave strategy (for a publicly listed company) that will help to secure Target’s future.  Target aims to reduce its real estate footprint by 20%.  We also like Target’s strategy to boost new fashion, better differentiate products, and most importantly – to adopt the Digital Path to Purchase approach – “increasing exposure to online” in the words of Mr. Russo.

The AFR reported that Godfreys has warned of a serious cash squeeze in early July and the need for emergency financing.  A new management team has been appointed following John Johnston’s increase of his stake in the business to 80%. As the new management takes over, an ever bleaker picture continues to emerge.  Godfreys operates 200 stores in Australia and New Zealand. The new CEO expressed hope that the business can be repaired, but it looks to us like a monumental task.

On 25 May, we reported on the counterintuitive strategies currently employed by Coles. More details have now emerged. The key problems within the business seem to be caused by high-cost infrastructure and a drift towards home brands, progressively destroying local suppliers and reducing customer choice. The Age reported on Coles' latest plans, which in our assessment will generate short-term gains, but medium-to-long term serious loses, due to further weakening of the brand and an increase in the underlying cost structure. Coles now intends to expand its generics range from 20% to 40%, which will lead to the destruction of more local suppliers. In addition, Coles will expand its online business, adding $1 billion in capital expenditure. But, don't worry, because it will concurrently deploy an "advanced analytics centre, to solve problems". None of these initiatives will improve the customer offer and day-to-day prices.  Aldi and Costco must have been pleased to learn about all this.

According to an annual survey conducted by the NRF and the University of Florida, shrink in the US averaged 1.33% of sales, down from 1.44% the year before.  Shoplifting and organised retail crime were the most frequent causes, accounting for 36% of losses, followed by internal employee theft (33%), administrative paperwork errors (19%) and vendor fraud or mistake (6%).  The most substantial losses per incident came from retail robberies, at an average around U$4,250 each, down from U$5,300 the year before.  We attribute the decline to the continuing shift from cash to electronic forms of payment.

According to the Wall Street Journal, US job openings this spring (6.7 million at the end of April), outnumbered unemployed Americans (6.3 million) for the first time since such record-keeping began in 2000.  The figures are the latest sign the US is facing a historically tight labour market, confirming that a 3.8% unemployment rate in effect means full employment. For workers, that’s good news; for businesses, a real challenge.