Get Ric’s Take on the Three Key Economic Indicators and What’s Next
Ric Edelman: Well, the financial markets bottomed on June 16th, and since then, the S&P 500 is up almost 20%. It's still down about 10% for the year. Is the worst behind us? Well, I just fear that I have the obligation to share with you the notion of the dead cat bounce.
That's a phrase coming out of Wall Street. What are they referring to? Well, forgive me for saying this, but even a dead cat will bounce off the floor once you drop it. In other words, you need to make sure that you aren't. Regarding the problems of the last six or eight months over, we know that we still have the pandemic. We still have environmental issues. We still have Putin. We're still dealing with rising interest rates and inflation. We've got supply chain shortages. We have the coming winter and food shortages around the world and the election coming up.
The turmoil is not likely to go away any time soon. This is raising a very real concern by a great many people in the financial industry, warning that the gains of the past couple of months will prove to be temporary. Now, I'm not suggesting that that is guaranteed the case. Nobody knows for sure what's going to happen next.
Gold is Not an Inflation Hedge, After All
My point simply is, don't let your guard down. One way that investors try to protect themselves in a declining stock market is by buying gold. The theory is gold is an inflation hedge. So if inflation is going up, causing stocks to go down, gold will go up with inflation. Well, nice try. But so far this year, gold is down 6%. This demonstrates what I have told you for decades. There is no direct link between gold and inflation. Sure, sometimes gold rises with inflation. It did in the 1970s, but other times, like right now, it's not the case. There is no direct correlation between gold and inflation.
One other aspect that's taking a lot of attention these days is residential real estate. Home sales here in the U.S. have dropped in July for the sixth month in a row. The median sale price is now down 10%. Houses had hit a peak, the median price of $430,000. That's now down to $420,000. And in July, 16% of sales agreements were canceled. That's the most since COVID began. We're also looking at a decline in housing permits that are down 1.3% and housing starts are down 10%. Now, we got to pay attention to all these numbers. Housing permits, housing starts and housing sales.
The Three Key Economic Indicators
What do they all mean? Well, they are all economic indicators. We're all trying to get an indication of how the economy is working: economic indicator. And there are three kinds: leading, coincident, and lagging.
You've heard of the phrase leading economic indicator. I often wondered what on earth did that mean? What's a leading indicator? I always thought it meant popular. You know, it's a leading, you know, whatever. No, it doesn't mean popular. Leading means in advance. In other words, three kinds of indicators, leading, coincident and lagging. Leading indicators tell you what's going to happen. Housing permits. If you want to build a house, you've got to get a permit. So if there's a lot of housing permits that's telling us that a lot of houses are going to be built. Housing permits are down, which means we're not going to be building as many houses over the next several months. That means fewer jobs in construction. And if you don't build a house, you certainly can't sell it. So with housing permits down, that's a leading indicator telling us that the real estate market will be doing worse in months to come.
And how about housing starts? This is a coincident indicator. It's telling us what's going on right now. The construction has started to build the house, but housing starts are down 10%. We're currently building fewer houses than we were.
And finally, housing sales. 16% of the contracts were canceled. Fewer houses are being sold and the ones that are selling are selling for less. This is a lagging indicator. All three indicators are bad right now for housing. Housing permits, housing starts, and housing sales all show that the housing market is entering a recession. We'll feel it in the next several months.
This is a big deal because the housing sector is the most important single sector for the entire American economy. It employs more people, and it has a bigger impact. Think about it. When you buy a house, it's a huge financial transaction with tens of thousands of dollars to the real estate agents, employing so many people - the construction industry, not only the real estate broker, but the mortgage broker, the title settlement. You're going to hire a moving company. You're going to buy new appliances and lawnmowers. You're going to find new dentists and doctors and butchers. The economy just gets such a jump when there's a big activity in housing, and now all three of those indicators are down.
This isn't good news for the fall and winter. You know what else is down right now? The resale market for luxury watches and handbags, it's crashing. Prices are down up to 50%. The price of the Rolex Submariner Watch, one of the most popular watches in the world, is down 46% since March. Guess who's reporting a big rise in customers? Pawn shops. Because if you have got to struggle economically and you need to come up with cash, you'll sell your bling. And who are you going to sell it to? A pawn shop. So when pawn shops do well, that's usually pretty bad news for everybody else. What these people are doing, selling their fancy watches and handbags, they're trying to avoid going into debt.
Global Debt Is Rising
Well, good for them because total global debt is now pretty high, 28 percentage points above pre-COVID levels. That's relative to GDP. The total global debt is now twice as high as it was in 2006. And we know what 2006 foreshadowed: 2008. Meanwhile, the Federal Reserve Bank of New York says US households have $16 trillion in debt. That's $2 trillion more than before the pandemic. We're beginning to see delinquency rates all rising for car loans, credit cards and mortgages.
And if all that's not bad enough, we've got the warnings coming out of Europe regarding energy. The CEO of Shell has warned that Europe might need to ration energy this winter. Germany has to cut its gas use by 20% to avoid shortages. And the European Union agrees. It has told its member countries to cut energy consumption by 15% between now and spring. Russia is slashing gas exports. They're using energy as a weapon in the war against Ukraine and a weapon against the rest of the world. And we're using the economy as a weapon as well against Russia. And Putin sure looks like he's hitting back. Russia provides the European Union with 40% of its oil and gas. So this 15% order to reduce usage is not just for government and business in Europe, but also for individual consumers. It certainly looks like our market volatility is going to be with us for some time to come.