Moneyball Economics
Vice Index Suggests Consumer Spending Strength Through 3Q

Moneyball Economics
Vice Index Suggests Consumer Spending Strength Through 3Q

Andrew Zatlin

The Vice Index is strongly correlated with Retail sales excluding auto sales and gasoline (with a multi-month lead).

Vice 1-2

Data showed a slight uptick for May, followed by steady growth of approximately 4% year-over-year.

But the total Retail Y/Y growth will come at a slower pace (due to lower gas prices).


Note the surge in Retail Sales (excluding auto & gasoline) that began last Summer. That's when gas prices started to plunge. It's also when the Affordable Healthcare Act (a.k.a.) Obamacare began to hit its stride.

Consumer propensity to spend remains strong. But while the VI is strongly correlated to Retail (ex Autos & Gas), it has recently diverged from total Retail spending.

Drilling down, total Retail has slowed faster than otherwise indicated by the Vice Index.

That's mostly due to declining oil prices.


With oil prices sliding, many are wondering why official Retail trade figures declined over the first half of 2015. With oil prices declining, and more money winding up in the pockets of consumers, one naturally would ask why the benefits of gas prices are failing to show up in Retail spending figures?

Shouldn't Retail (excluding Autos and Gas spending) be increasing if falling prices at the pump have put money into consumers' pockets?  

It is.

Spending on certain lifestyle fun (like Food Services & Drinking) continues to surge.

The problem is that Retail trade figures exclude a big chunk of consumer spending.

Except for Food Services and Drinking, Retail figures do a lousy job of tracking recreation.

Disneyland's multi-billion dollar ticket sales? Not included.

Airline tickets, hotels? Not included. And gambling. And prostitution. And drugs.

That's where we come in and set the record straight.

Gambling Revenues are Up

We predicted that April would show continued growth in gambling revenues.

Sure enough, that's what happened.

Compared to last year, April gasoline sales were down $10 billion.

So, where did that savings go?

Some went to gambling. First-quarter weather cooled gambling excursions, but a Spring rebound has started to bring them back in the second quarter. (May's gambling figures include the Mayweather-Pacquaio prize fight, which likely boosted results even further)

But gambling is only one part of the revenue that will go uncounted by the Retail figures.

Instead, investors should take note that there is a dynamic shift in what consumers are buying. Today, the US consumer already owns all of the things they need.

Today, they are buying experiences, which means vacations, vices, and the associated memories (at least the ones they can recall).

The associated hotel bookings and airfare - none of it will get included in the Retail figures. Even room service and shows - none of the billions of dollars will be included in the Retail figures listed above.

So how big is consumer demand?

Every hotel and airline beat expectations for 1Q on strong US demand. Marriott for example reported EPS of $0.77, far above the high end of their guidance ($0.72). The results were driven by strong demand and occupancy rates as well as strong RevPar (the money spent in the hotel beyond the room rate).  Ans that's including negative results for global business.

The US consumer is spending and gambling and having fun, but you won't see it in the Retail figures, which only track what a store sells.


Colorado's April Pot Sales Reached a New High


  • Nearly $1 billion in monthly sales
  • That has doubled from last year's sales
  • Meanwhile Washington State is about to stumble

Colorado's Pot Surge, While Washington State May Stumble

Seattle is the largest city in Washington State (population 652,000).

But the two largest cannabis retailers are located way south in Vancouver (Pop. 167,000) on the border with Oregon. Vancouver, WA, is a 1-mile drive over the bridge from Portland (pop. 610,000); a mere 15 minutes by car from Portland State University.

Unfortunately, for these retailers, Oregon retailers will start selling recreational marijuana next month. The shift will hit Washington's tax revenues by approximately $1.5 million.

This is one example of the tortured impact of the regulation-driven marketplace.

Meanwhile, Colorado is doing nearly $1 billion in cannabis sales each month, all cash because banks face fines for handling drug money. That’s almost double what the state was doing at the same time last year.

Meanwhile, marijuana and travel go are going hand-in-hand with the rise of the “cannabis resort” in Colorado. Time magazine recently profiled a 170-acre resort in Durango that combines yoga, marijuana, fine dining, and woodsy cabins. Per-night stays start at $395 with a three-night minimum.

And none of this spending will end up in any Retail figures.

That’s just the beginning of a bigger trend.

It’s important to note that nothing will change in this market for at least 3 years.

First, politicians will focus on the 2016 elections, ignoring one single campaign issue or legislation that might draw attention.

Then big business lobbyists will spend the next two years ensuring that any regulatory changes favor their businesses and operations.

That will leave three to four years for local businesses to prepare for the professionals to invade the markets. As we recently noted in the Alpha Pages, Philip Morris can't ignore Colorado's $12 billion annual market for cannabis. Neither can their competitors.

Throw in California, Florida, and other States, and this is beckoning Big Tobacco like a moth to a flame. There is a lot of opportunity for international tobacco companies looking to transition and diversify product offerings.

Meanwhile, a lot of hot money is chasing cannabis investments – both at the retail and the institutional level.

Investment in cannabis-related industries remains strong, but most of this is money is being thrown away.

That’s because today's cannabis supply chain will be very different in four years, and current players will not survive the onslaught of better-managed and capitalized companies. This market is in for a sharp transition in the years ahead, and investors should do a lot of research before they dip their toe into this cannabis marketplace.


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