At least a couple of major retailer stocks got clobbered last week as investors sold on reports that they missed earnings estimates.

What's surprising to us is that the fate of these individual companies was such a surprise to so many investors. Inflation is obviously a problem – retailers often run on very thin margins – but a problem of which investors should have already been well aware.

What we really think is going on is both investors and corporate management are having a hard time understanding the real economic impact of "unprecedented" policies. As a result, normal macroeconomic analysis isn't as helpful.

Yes, unemployment is very low. Yes, real GDP is up a solid 3.6% from a year ago. But the economy has been deeply influenced the past couple of years by a massive increase in government spending, COVID-related shutdowns of normal business activity, and a huge increase in the money supply. In turn, the economy is deeply distorted versus where it was before COVID.

Retail sales are up 28.8% versus where they were in February 2020, an incredible surge over twenty-six months. For comparison, retail sales were only up 6.7% in the twenty-six months before COVID started. In other words, retail sales increased roughly 4x the normal pace because of pandemic spending and money printing. That can't last.

But many firms apparently believed this COVID-era trend would continue, as if it were some sort of new normal. Part of the recent misses in earnings may reflect a generational shift, with a whole new cohort of managers who didn't have jobs of any significance during the inflationary and Keynesian-dominated 1970s. They saw rising earnings earlier in the pandemic and thought they were brilliant when they were just lucky they were working in the sectors that were temporarily helped by money printing and redistribution. That goes for some retailers and some home exercise equipment and technology companies, as well.