Don’t get stuck in the past

I was reading a recent article in Barron’s that discussed the challenges that Harley Davidson (HOG) is coming up against from a strong dollar and weakening demographics.

Now, you wouldn’t be able to tell by looking at the stock price — it’s up 30 percent in the past 12 months.

But as I read the story, two things came to mind:

  1. This stock is the poster child for the current market optimism.
  2. Harley represents the challenges of many companies that are seeing their businesses transform as a new generation starts buying things.

Let me address these one at a time.

First, this Trump rally is like building a castle in the sky. Unemployment is at a 44-year low — but only for those looking for jobs. I’m not saying this is Trump’s fault, but remember there are more people who have opted out of the traditional workforce than any time in modern history.

According to sources ranging from Pew Research, to the Wall Street Journal and, there are between 92-94 million people who are out of the workforce. Pew’s report notes that 37 percent of the civilian population aged 16 or over is no longer part of the traditional economy.

This is a massive number that no one — not the politicians in power, not the Federal Reserve, not corporate America — addresses. Many of these fellow citizens have never gotten back on their feet since the start of the Great Recession and have now aged out of replacement jobs as employers favor younger, cheaper workers (with fewer health problems). It’s no surprise people 55 and older account for more than half of these workplace refugees.

Others got out of college and couldn’t find a real job, so they started driving for Uber or Lyft or took other “gig economy” work. This kind of part-time work is now in vogue for employers since part time workers don’t get benefits. It’s a general rule of thumb that benefits run nearly 50 percent of a full-time worker’s salary and most of that is paid by the employer.

And when you’re out of work and can’t pay the bills… well, there’s now a significant number of people in the economy who have bad credit scores and find it difficult to buy cars and motorcycles — unless they pay huge interest rates — much less condos or houses.

So we have a massive section of the population that is transitioning out of its prime-earnings years and another generation that is finding it very difficult to gain enough traction to find a career to build into its prime-earnings years.

Many of the baby boomers also dug into their own retirement to either keep their heads above water or to help pay for college for their kids. And many of the millennials are already sitting on so much debt that adding to their burden seems absurd, especially with no real prospects in sight.

There’s around $1.3 trillion in student debt hanging out there, or an average of $37,000 per 2016 graduate. That’s not including grad school, which is even more expensive.

Most new Harleys run somewhere around $15,000 to $20,000, and Harley offers financing around 7.5 percent. On a $20,000 that’s close to $380 a month on top of the other debt.

It’s simply not realistic to believe that the aspirational middle class that used to exist in the U.S. is still there. But HOG is certainly priced like it is.

What’s more, the strong dollar means even if President Trump gets them great trade deals in countries where consumers aren’t as debt laden, the strong dollar means the bikes cost more, and margins will make it harder for them to turn a profit.

No middle

And this leads to the larger issue here.

If the U.S. no longer has an expanding middle class, and the upcoming generations no longer have hopes and dreams of doing at least as well or better than their parents and grandparents, then investors can’t expect them to spend money like previous generations did.

This shift is going to be significant for companies like Harley Davidson and other companies that relied on certain consumers that will no longer be there and are already dwindling in numbers.

The markets like growth, and if a company isn’t growing, it will be punished. HOG is one such company. It has yet to be offered up, but its time is nigh.

Its biggest mystery is why it hasn’t attempted to pivot from what it does.

If you look at another fading industry, snowmobile makers, they saw the challenges and adapted by moving into the new ATV market. One even revived the old Indian brand motorcycles, which directly compete with Harleys.

Harley has started a riding school to encourage people to learn how to ride. That’s far too little, and it’s getting very late.

I love companies that have been around for more than 100 years. To me, they represent stability and patience and adaptability. But sometimes they believe in their history too much and don’t keep up with the times.

I’m not here to beat up on Harley. I only use it as a clear example of a major economic shift that investors can’t ignore. The market may be rewarding you now, but you will pay a significant price if you don’t adapt to underlying reality.

You need to keep this in mind when you invest. A new generation’s demands are now being played out in the markets.

If you want to keep your money safe from the market’s precarious heights, find some safety in real, ongoing mega trends.

Shopping online is growing rapidly —, ULTA and others are not only beginning to dominate that space but they’re expanding into brick and mortar having learned the lessons of Wal-Mart and Target.

More electronic devices require more electricity. Solid utilities like Dominion, Duke and Edison International will be beneficiaries of lower power-generation regulations and increased demand.

It’s cool to be frugal again. Consumer staples like Clorox and Proctor & Gamble, or deep discounters like Dollar General and TJ Maxx are great harbors from a storm.

If you’re interested in Bob Livingston’s deeper exploration of the shifting trends, and the companies that will be able to profit for years to come, check this out.

— GS Early

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GS Early