Last Time that Ratio Soared like this, Stocks Crashed

This was a data set we didn’t need. Not one bit. It mauled our hopes. But the US Census Bureau dished it up anyway: wholesales declined again, inventories rose again, and the inventory-to-sales ratio reached Lehman-moment levels.

In August, wholesales dropped to $445.4 billion, seasonally adjusted. Down 1.0% from July and down 4.7% from August last year.

It was ugly all around. Wholesales of durable goods dropped 1.2% for the month, and 1.9% year over year. The standouts: Computer and computer peripheral equipment and software plunged 5.1% for the month and 6.2% year-over-year. Machinery sales dropped 2.7% from July and 3.5% year-over-year. Both are the signature of our ongoing phenomenal white-hot high-tech investment boom in corporate America, focused more on financial engineering than actual engineering.

Wholesales of non-durable goods fell 0.7% for the month and plunged 7.2% year-over year! Standouts: petroleum products (-36.6% year-over-year) and farm products (-12.4% year-over-year). They’ve gotten hammered by the commodities rout.

But the pharmaceutical industry is where resourcefulness shines. At $52 billion in wholesales, drugs are the largest category, durable or non-durable. And sales rose another 0.9% for the month and jumped 14% from a year ago! Price increases in an often monopolistic market can perform stunning miracles. Without them, wholesales would have looked a lot worse!

Falling sales are bad enough. But ominously, inventories continued to rise from already high levels to $583.8 billion and are now 4.1% higher than a year ago.

Durable goods inventories rose 0.3% for the month and 4.2% year-over-year, with automotive inventories jumping 13.5% year-over-year. Non-durable goods inventories are now 4.0% higher than a year ago, with drugs (+5.4%), apparel (+11.6%), and chemicals (+7.9%) leading the way. But petroleum products inventories dropped 21.9% year-over-year.

The crucial inventory-to-sales ratio, which shows how long merchandise gets hung up before it is finally sold, has been getting worse and worse. In July last year, it was 1.17. It hit 1.22 in December. Then it spiked. In August, it rose to 1.31, the level it had reached just after the Lehman moment in 2008:


Inventories tie up cash. So inventory management is a data-driven obsession. Companies that are optimistic about sales prospects stock up. But when sales fall instead and hopes hit reality, inventories balloon and the inventories-sales ratio rises. And now it has risen to ugly levels.

So does today’s low cost of capital obviate tight inventory management?

Hardly. Even today, for most companies, capital isn’t free. And there are millions of other reasons why large inventories are a risk: spoilage, changing fashions or customer preferences, new products and obsolescence, stuffed warehouses and overflowing storage tanks…. When inventories get out of hand, they become a nightmare, and whittling them down often means big price cuts and write-offs, euphemistically called “inventory adjustments.” Cash down the drain.

The ratio had been much higher back in the day. But computerized inventory management and ordering systems that replaced index-card systems allowed businesses to reduce their stocks while improving sales. The wholesale inventories-sales ratio declined over the decades. It reached 1.14 in October 2005. After the turmoil of the Financial Crisis, the ratio dropped to 1.13 in early 2011.

But the trend has once again reversed. And the last two times the inventory-sales ratio reached this level, all heck was breaking lose:


Wholesale merchants, hit by declining sales, aren’t seeing that rosy scenario. Instead, they’re now stuck with big-fat inventories. That increase in inventories added to GDP. But when these merchants are trying to get their inventories back in line, they slash orders. That’s when they push their inventory debacle up the supply chain: these orders are revenues for their suppliers.

This can get ugly in a hurry, ranging from a business cycle recession, as in 2001, to a panic, as seen in October 2008, when the supply chain began to freeze over. During both periods, stocks crashed. And now stocks are perched at ludicrously high levels, teetering, waiting for just such an event.

With sharply dropping revenues and overcapacity that looks to be “even greater than in 2009,” the shipping industry and the lenders and bondholders that fund it are facing a tough future. Read… Global Shipping Veers into Capital Destruction

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  26 comments for “Last Time that Ratio Soared like this, Stocks Crashed

  1. Out of Bounds in Utah says:

    Well this is my second post of the day(and I have not posted in along time anywhere). My first post will probably not be read as it was on an article from October 2nd. I am going to keep this short, (ya fat chance on that, cause I am tired of bubble heads and bubble vision). First I Love reading Wolf, and Stockman, since so many blogs are total blather. Not sure if alot of them are just to influence trading, or really are only sites for financially smart posters to one up each other. I hope things in our economy go in toilet big time, as i am ready for that. Haven’t built my wall, but will be like the Alamo if you come to my neighborhood ha ha. No lack of NRA around here. Anyway, I think people in America need to get a good dose of what we spread around the world with our pious views of democracy and so called capitalism. Simply put we don’t have real capitalism, we have engeeniered for the benefit of some capitalism. We don’t have any better political system than China or other facist countrys who claim to be democratic in some aspect, we just have fascism by different kinds of committee’s(Democrats and Republicans for a (better political, military and Wallstreet industrial complexes)(Note I grew up on military base in Spain.while Franco was alive, and only thing we are staring to miss here are boots and hats. We do have a better rule of law, albeit tweaked by the guy w the best money can buy at times. I am old enough to remember my dad(ex military and retired teacher and principal) telling me when i wanted to join up for Vietnam, that something was not quite right, and I should go to college on the last 1S deferment, then make my mind up. Well my old man was smart, as i went to 6 funerals in the first year, and still have the “Platoon” like letters that asked and wonded why the hell we were over there? But like people had said we had been kicking rear so long it was time we got ours kicked, and we still haven’t learned? Well the only change this country will understand is if we have a revolution, and change our course. Funny I had hope when I thought, wow we are going to elect a black guy, and he could have been the black Lincoln or Roosevelt. Instead we got a sell out from a guy who when the history books are written, will just have been a black guy, whose only major accomplishment was to give us a half loaf of national health care w premiums that make it a joke, lousy coverage. Ya know you have to be real rich not give it all back if you are sick or die slowly(I know I worked in health care). So hide your money!!! Ya too bad one individual can’t change our political system, or have the balls to try. And I am not blaming on side or the other, just we have bad choices and voting doesn’t count anymore. If I thought it did I think Elisabeth Warren might get my vote, but like that will happen. No my only hope is to watch Wallstreet burn, and many wealthiy suffer like the poor. I am heartened by one thing recently, and that was John Bainers decision to quit. I am not sure if he got religion from the pope, or got tired of baby sitting the fringe right children of the republicans, and suckling up to the left(not really and difference,as there is no left) in the white house. Whatever, I am sure he will have a smoke, and a drink, and a little to much sunlamp, and. wander off to the country club. Well everyone have a good nite, and I have enjoyed my 2 cents worth. Stocks in the tank pleaeeees!!!!!! DOWN WITH THE RENTIER CLASS!!!! FROM A working GUY WHO OWNS EVERYTHING HE HAS AND HAS NO Debt. (FEAR) worries of war or anything AND (DEBT) the ruling class moto!!!!!

  2. Out of Bounds in Utah says:

    Addendum, to my rant. Some of my comments were tongue and cheak but alot was not!! Ya know I get that our freedom in the Good old USA has and will often be won at the point of a sword. And I do not take the kind of freedom or being AN AMERICAN LIGHTLY!!! It’s just we don’t have to treat our own
    people as though they are the enemy(And that is what our ruling class of people and company’s have done!!! And hard working people often poor, are the one’s fightingt for that freedom you wealthy people enjoy. Let’s let them have a home over there head’s, and let them have health care and eduction, without ot being a privileged right of the few. Then I don’t think the people will mind being fleeced as much by the few. I am Just saying before its too late!!!!

    • Petunia says:

      I enjoyed your rant but want to take issue with a basic assumption you make that is wide spread in the working class world. Your advice to pay off your house and live debt free is easier on your budget, but it won’t protect your assets. You work in healthcare and should know that if you ever get severely sick on medicare, they will take everything. Your children will not get a penny of everything you earned and saved.

      After I lost my home I took a good look around and realized that the people with money never own anything outright. Everything is owned by a company or trust. This is how they avoid paying their fair share. So if you really want to be protected, check it out.

  3. NotSoSure says:

    I heard Fort Knox is empty. The Fed can suck up all those inventories into Fort Knox.

    Problem solved.

    • hidflect says:

      Fort Knox doesn’t hold government gold. It’s a repository that holds other people’s gold. The govt. doesn’t have large deposits of gold.

  4. Oliver says:

    This says to me that we´re right smack in the middle of what economists call a liquidity trap – and if that is so, you can lower rates all you want, but the horse just won´t drink the water the way we were hoping it would.

    ´Cause it can´t, for all the reasons so skillfully brought forward in this blog.

    So, what way out ? Well, putting more wealth into the top 1% or even the top 10% isn´t going to do it because their propensity to SAVE is, lavish lifestyles and all, probably over 90% – they just can´t consume anymore. So they save. And when they spend, they spend not on consumption but on buying assets.

    Now, if you doubled taxes on the top 1% and raised, for argument´s sake, $200 billion and redirected all that to the lower 10% of the population, their propensity to consume would be close to 100%. They would spend it ALL – on food, power, schools, gas etc. …. which in turn would lead to increased business activity, investment etc.

    All the huffing and puffing about monetary policy just distracts from the real solution to growing the economy: transfering spending power from those that have it, but can´t use it, to those that don´t have it but CAN use it.

    This is not some wild eyed ´socialist´ plea for more justice and less inequality. It is Economics 101. And it is not an argument for another government stimulus/bailout program that borrows money from the people that won´t and can´t spend (by increasing the deficit – that horse is satiated as well).

    Fix the economy´s overall propensity to consume, and a lot of other things will fall into place.

    • hidflect says:

      You are correct. It’s not the amount of money in the market but the velocity of that money. The uber-wealthy just throw it onto the pile or into a rent-seeking asset. People in the Fed surely know this, it’s not rocket science so they are deliberately crippling the broader economy to enrich their own kind.

      • Kam says:

        Without solid middle incomes there can never be a recovery.

        Consumption that depends on borrowing or stealing other people’s assets and futures is a cancer on the nation.

        The Fed is nothing but a tool to divert from the many to the few.

  5. MC says:

    Don’t worry, I am sure wholesalers are just stocking up for the best Christmas shopping season ever. ;-)

    My pathetic attempts at sarcasm aside, I suspect the reasons for this frankly worrying inventory buildup are very clear.
    Wholesalers and other large buyers attempted leveraging on China’s problems and the commodity/shipping slaughter to build up stocks at discounted prices. Either through miscalculation or denial to look at present trends they expected consumers to flock to the shops and shop till they dropped. Because of this expectations, despite getting better deals from their Asian suppliers, retail prices remained unchanged. The difference was, of course, going straight into profits.
    Fly in the ointment: consumers are not only leveraged to the hilt but dealing with what can only be described as crummy wages. In spite of a propaganda machine that would make Dr Goebbels envious, inflation not only exists, but has been biting hard for years with no compensation: the BLS may use “edonistic adjusters” in their complicated computations, but eggs, butter and bananas don’t lie.

    But I can hear the Panglossian crowd: what about car sales? They are booming!
    I don’t know how the situation is in the US, but EAPR on the average new car here is now around or slightly under 4% even if your record is not exactly spotless. Credit card interests (if you are considered a good payer) are 10.5-12%.
    When you subsidize something, anything, you invariably get far too much of it.

    And there’s another thing to consider. Even up there at the top, things are starting to change. Apple may have phenomenal sales for the iPhone 6S but its direct competitor in top level smartphones, Samsung, has been taking the proverbial pounding. The new top of the line phones from the Korean chaebol are not exactly flying off the shelves, so much Samsung dealers are already offering 10% off the latest and greatest model.
    One may think Samsung customers are shifting their preference to Apple but, judging by the number of used iPhone’s on the market, I tend to believe it’s just Apple customers upgrading to the new model.
    But even more worrisome is the fact for the first time in my memory fashion house Louis Vuitton has authorized its official dealers to offer discounts.

    I really don’t know what lays ahead. The signals all point to something as ugly as we’ve never seen before but I want to believe we won’t get that far before we decide to put out financial house of card in order.

    • Petunia says:

      I had to apply for a credit card at 20% to fix the A/C in our car, that will no doubt show up as strong consumer spending. This is the real state of the economy.

      As a side note, I didn’t renew the subscription on a fashion magazine, $12, because the items advertise are obscenely priced, $200+ face creams, $30 lipsticks, $3000 handbags (made in China by the millions). This stuff is not even a possibility anymore.

      • MC says:

        I guess that takes care of how much credit card interest rates are in the US, then.

        And those luxury items… the funny thing is how much and how fast they depreciate. Last year my mother really wanted a Louis Vuitton handbag but at over $2000 she felt it was grossly overpriced. And she was right.
        While in Japan I had a look in a couple of second hand fashion stores (helped by the incredible staff there since handbags all look the same to me) and I found exactly that handbag in tip top shape at the equivalent of $300. And yes, it was genuine, just used (as confirmed to me by an expert in handbags, boots and shoes). Let’s just say I came out as a very loving son on a budget. Took care of birthday and Christmas in one single stroke.
        I could not but help thinking about that unknown Japanese woman who paid two thousand bucks for a fashion item and sold it just months afterwards for a tenth of its value to a second hand shop.
        It literally boggles the mind.

  6. Sam Grant says:

    Hi Wolf. Great research as always.
    There are NO countries in the world which are the enemies of each other. None. They are all in it together. China, Russia, the US. All of them. The “enemy” story is the veneer we suckers get duped into believing – so we, our friends and relatives, sons and now daughters, will patriotically sign up for the next bullshit war which only serves to feed the voracious military money machine so they can take over countries’ resources, displace millions of people and further the NWO agenda. Seriously folks, even if you’ve had your eyes opened for years about the NWO, there is one podcast you cannot miss. John Corbett shows the PROOF of how “they” (Kissinger, Rockefeller et al) put it together with China starting back in the ’70s, which included hundreds of US corporations. I was rootin’ for Putin but no longer. While this podcast doesn’t talk about Russia at all, we know they have to be part of the club. What I find most interesting and a fact that bolstered my confidence, is that there’s only about 6,000 of “them” and 6 billion of us. Just sayin’

  7. economicminor says:

    I enjoy the comments as much as Wolf’s analysis.

    A couple of points IMO about consumer spending.. Inflation mostly exists in the monopolistic sectors like health care, meds, and in the rural areas, power and Internet. There are totally unregulated monopolies in the rural areas if the country. Even food is supplied by only one source in much of rural America. Seems like there is no longer a PUC. I have no idea if they were de-funded or captured but in my area, they might as well not exist at all. And I can’t imagine what life will be like in the major metro areas when this mess finally breaks.

    As for the top 1%’s income to spending ratio. Yes they spend and the *value* of high end art and super compounds has gone up dramatically but I imagine most of their wealth is involved in stocks and bonds and PE partnerships and such. And as such, much of it isn’t taxed very much. The premise that it isn’t going around can be seen in the FED’s charts on the Velocity of Money.

    As we all know, debt has to be repaid, even at ZIRP there is a term, a time to the debt.. It isn’t ZIRP with no payment schedule or better an infinite payment schedule. So as the debt keeps increasing at many companies, including Apple, it takes increasing revenues to repay increasing debt. As the Velocity of Money chart shows, there has been a long period of decreasing money flows and that has to affect the revenue streams. Thus why there has been lots of stock buy back programs to keep the EPS from falling off the cliff. This keeps the 1% looking like they are actually wealthy. Which in reality most aren’t as wealthy as their paper looks because all this wealth is supported by way more debt than can be serviced except by more debt. So they have income but is it real revenues from productive profits or phony income from more borrowing?

    As for Out of Bounds wanting this to get going, I really understand your frustration and anxiety and feel similar BUT none of us are going to like the down side of a collapse. I think this one will make 2008/9 look mild. I hope and wish I am wrong at the same time because the downside looking at the distribution system and the cities and how dysfunctional the governments are, it just looks like hell could come and I don’t wish that on anyone.
    What I’m saying is that when this rolls over, there will be lots of bankruptcies and much debt just wiped off the face of the ledger sheets. Those who have the most, will lose the most as their net worth plummets. Any of them that are highly leveraged in any way will become paupers.

    The biggest problem I see is that so much of the over all debt in the world has been transferred to the public and there is no efficient way for the government to write it off like a corporation can in restructuring or bankruptcy. I think at some point Congress will have to disband the FED and just have the Treasury print dollars to fund the unfunded liabilities. At that point probably the only things to hold would be hard assets. But that isn’t for some years as I don’t think Congress right now is a functional organization. They couldn’t come to any agreement about which brand of toilet paper to buy much less something as big as disbanding the FED and printing money themselves.

    • Kam says:

      Nearly all the new “wealth” held by our 1% overlords came from higher stock and commodity prices which were funded by leveraged Fed/Central Bank debt and government debt throughout the world.

      It’s a great game for those in control- increase your “wealth” and send the bill to the less fortunate; especially the voiceless unborn.

      The money/credit/fractional reserve game created unprecedented demand for commodities. Now that demand has cratered. May we live in interesting times ?

    • Oliver says:

      So, the top 1% of wealth owners have broken down the transmission effect of monetary policy – what is meant to provide economic stimulus (consumption, private and public investment) is just being used to buy and drive up asset prices.

      This is not some type of conspiracy by the rich and the super-rich, but it is the sum of rational investment decisions by rich folks that want to get an attractive rate of return. Problems is that what makes good sense for each individual (´invest´ surplus liquidity into assets that can easily be bought and sold to earn a return) in the aggregate has the effect of blunting monetary policy, thus forcing us into what we have now, which is the aforementioned liquidity trap. Where a 200 basis point decline in rates used to cause an upturn in economic activity, now even ZIRP doesn´t have the expected effect).

      The question that nobody has been able to answer is the mechanism and timing of a breakdown in the distortions and abuses that result from what is basically a straightforward policy failure. In other words, when will the house of cards cave in ?

      This blog does an outstanding job in identifying signs and signals that something is fundamentally wrong.

      The problem is the ability of dysfunctional systems to just muddle through. A bailout here (Autos, Banking), a sector recession (Oil) there, a sudden devaluation of the currency (China), and there you go, we have just extended the current system by another x number of months or years.

      So, we are blessed in our understanding of what is going on, but we are frustrated in our expectation of things just HAVING to right themselves, of the bubble deflating, or of the rich becoming paupers when it all falls apart.

      It may not happen for a long time. The power of ´fixing´ asset and credit bubbles through restructuring and the unlimited capacity of the ´printing press´ to paper over financial excesses has been shown time and time again.

      Everybody can see the moral hazard that they imply, but I can put that aside as long as MY problem, MY industry gets ,fixed´.

      And the system just muddles through, for years on end, and the game goes on.

      • Wolf Richter says:

        Great point. Japan is one of the most glaring examples of how a dysfunctional system can keep on muddling through for a very long time. All politicians, central bankers, the heads of Japan Inc. etc, hope that the “inevitable” won’t happen on their watch. And so far, their hopes have been fulfilled.

        Meanwhile, to keep the dysfunctional system alive for as long as possible, policies are imposed that make it even more dysfunctional….

  8. Paulo says:

    What would I buy?

    I might buy one of those empty and unused shipping containers mentioned in a yesterday post. That is to say, if I could get one very cheap. I would then bury it and use it for a produce root cellar.

    Petunia, I am sorry to hear about losing your hard-earned assets for health reasons. Could people transfer property to a trusted relative in order to avoid this problem? Or, does this open you up to a civil suit and they bleed you out with legal fees? (Pun intended) There has to be a way of retaining your home security!

    Too bad the Dems did not put in a single-payer health system during the Clinton years, that era when there was supposedly a balanced budget. Of course the Repubs controlled the House then, didn’t they? When Obama came in the country was broke and he was apparently beholden to Wall Street. It’ll never happen, now.

    As a Canadian I look at our family’s debt-free property as a way of transferring some of my life to my children when I die. It is a secure feeling and allows me to freely spend, should I want to?, which is supposed to be good for the economy? But, I seldom do beyond buying tools, building supplies, and the occasional lunch in town.

    It’s a mess. I do know this. All of us are going to live lives with a lot less stuff and spare cash, going forward. Most of what people aspire to own is a waste of life, anyway. It’s a mess. Consumerism as religion and a way of life is pretty hollow, imho.


    • economicminor says:

      Actually, I believe Clinton had both houses early on but put Hillary to the task and she wasn’t a very good negotiator nor was personable and got creamed. Then Obama had both houses when he took office the first term and he caved in to Wall Street and lost the public trust and then first lost the House then the Senate. To bad he was such a wimp or so misdirected by his advisers. Another wimpy Democrat.

      The entire US health care system is a black hole sucking up all available resources. It isn’t even the best, just the most expensive and getting worse all the time. Most states have the ability to take your house when you run out of money to fund the Machine and then are forced to rely upon them for health services. There is no way for most people to defend themselves from the state either.. If you own outright, you might transfer to your children but there are tax consequences for this and this has to be done 3-5 years prior to you getting sick. Or it is considered fraud. The big corporations, Hedge Funds and PE groups can out right steal your money and your life with out consequence but when the little guy gets sick, you are also screwed by the system. So much for We the People!

    • Kam says:


      A Louis Vuittan hand bag ? Conspicuous consumption- nothing else.

  9. Vespa P200E says:

    Channel stuffing at its worst.

    Sure made the Q2 and Q3 #s look good but alas what to do with all the inventories while the economy is teetering back in to the Great Recession. Shucks – who cares about better paying mfg jobs I guess…

  10. Kam says:

    And 7 years to pay for a GM product ? Talk about robbing from future sales.
    Has anyone ever looked at a 7 year-old GM vehicle. You might as well start offering a 12 month lay-away plan for a Big Mac.

  11. ERG says:

    I love the comments! Here is my $0.02.

    We (the US) have been more or less a clandestine kleptocracy since the early part of the 20th century. But when the banks had to be bailed out by the government in 2008/09, all pretense disappeared (if you bother to actually pay any attention!). Please tell me How In The Hell a nation where the government bails out the banks (i.e., now it OWNS them!) can even pretend to be a democracy, much less a democracy in a republic – which is what we are really supposed to be!

    We now OPENLY operate by the “Golden Rule”: the ones who have all the gold make all the rules. That is one reason why you see our Con-Gress (the opposite of Progress!) in a total panic at the moment over having to maybe, possibly, perhaps make someone Speaker who will actually work for the interests of what is left of our decimated middle class.

    I’m not holding my breath.

  12. Sgt Milstar says:

    ERG, I have always maintained that the Federal Reserve is owned by the US government secretly.

    You want proof, it’s website is, their police officers have the same powers of arrest as federal officers, and all profit and losses go to the US Treasury.

    The chair is chosen by the President and ratified by congress. Smells like a federal agency to me.

  13. Roddy6667 says:

    Is Japan’s economy “dysfunctional”? It can continue in the mode it is in now for many more decades. This does not fit the definition of dysfunctional. It is just not the roaring tiger it once was.

    • Wolf Richter says:

      Not “many more decades.” A few more years, maybe. It’s all going to end up in the currency and it will mean the impoverishment of the people (already happening). Of course, what else is new!?

      I’m attached to Japan like you’re attached to China. So for me, it’s very sad. What is interesting is just how cynical the Japanese are about their own government and system. They’ve given up believing in it long ago.

  14. ERG says:

    Re: Japan. When there are more senior adults buying diapers than new parents, it’s ‘Game Over’ no matter how industrious or noble the civilization.

    Re: The Fed. Owned or not owned, functionally they have been bed partners for a long time. No matter how independent they may profess to be, getting into bed with the Federal Government is like getting into bed with an 800 pound gorilla and assuming no fornication will take place. Good luck with that plan!

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