Weekly Article 05-30-2018
As many of you may know I often view this article as a counterweight to the 24/7 “all is well! Time to buy!” propaganda that is foisted upon the public ad nauseum. I remember Josef Goebbels (Hitler’s propaganda minister) said- tell a lie over and over and eventually it becomes the truth.
Think a 4% unemployment rate and low inflation!
If we watch the financial game shows they are virtually all saying that corporate profits are at all time highs and the skies are blue as far as the eye can see. Of course, the numbers that they look at may be true (when massaged to tell the story of the day) but they don’t necessarily tell the truth.
As many may know the corporate share buybacks in the first quarter of 2018 were the largest in history. The important points here are that even with all these buybacks the major US markets are near flat for the year.
Those buybacks also reduced the number of stocks available and gave a one-time (each time) boost to earnings. Based upon this, what I consider flawed, information corporate profits would indeed be more than healthy.
Let us, however, take this financial engineering out and look at some numbers reported by the bureau of economic activity. I believe these numbers give a more accurate view of our economy today.
I have heard many “experts” touting 26% gains in corporate profits and 18% expected going forward. How about the REAL story from the BEA- “Corporate profits decreased 0.6% at a quarterly rate in the first quarter of 2018 after decreasing 0.1% in the fourth quarter of 2017. Good thing for the financial game shows that 99% of all people will NEVER see nor hear these numbers. It is like adding the 90 million people or so that they ignore when computing the unemployment rate or adding government transfer payments and R&D to GDP calculations.
Keep in mind that in our fiat monetary system debt growth and GDP growth must be continued at an ever-increasing pace to avoid an implosion of the system. I saw a chart just the other day on Zerohedge which showed that debt growth has only stalled once in the last 30 years and did not implode- it just stopped rising exponentially. I believe this is likely what caused our implosion of asset prices in 2008 and 2009.
Also keep in mind that US and most other government’s spending is off the charts higher when digesting these numbers. With the US running a trillion dollar deficit (nearly 6 trillion using generally accepted accounting principles) net trade grew in the first quarter of 2018 at a whopping 0.08%.
Personal consumption “dropped from 2.75% to just 0.73%, the lowest since Q2 2013, largely as a result of a sharp drop in spending on autos and various other durable goods”. Of course, gas prices rising puts a financial strain on budgets and shifts spending patterns towards necessities rather than discretionary spending. Subprime auto loans have been going bad at record rates for the last 3 quarters. It is likely that without the hurricanes last year in the south the auto markets would be far worse off today. I believe it was only a reprieve not a pardon.
Just a few headlines that make me believe I am correct in my belief that auto manufacturers are in big trouble as well as their suppliers.
- WSWS.org – Ford announces plans to slash US car production, cut billions in costs
- CNBC (4-26-18) Ford stopping production of all cars but the Focus Crossover and Mustang. GM said to be on the same path
- Nissan NA to cut North American Production by 20%
- Honda cuts US Accord output as sales slip, supplies grow
- WardsAuto (1-31-18) North American production set for a 2.6% decline, 50,000 less units produced
Looking at these headlines would you invest in auto manufacturers or their suppliers at this point? Before you answer you may want to see who is announcing share buybacks. That would likely be the lone reason for optimism about these share prices in the foreseeable future unless central banks start buying the shares.
Many other industries are in the same boat and are using massaged numbers to give the illusion of prosperity- just like the central banks give the illusion of solvency as they “print up” new money to pay interest on the existing debt and purchase newly-issued debt or equities that there is a lack of demand for in the real economy.
The charade continues. I believe there will come a day when the reality of this situation is front and center and cannot be hidden with massaged numbers any longer. As a matter of fact, many people know the numbers are mostly made up because of what they see with their own eyes. The jobs that gave the American middle class their affluence have mostly disappeared and the jobs available for those starting out are mostly third-world type jobs with little hope for the American dream that we all grew up with. Even those making a decent wage are being squeezed with higher and higher prices for virtually everything but especially for food, housing, health insurance, taxes, etc.
Also keep in mind that 40 million people in supposedly the richest country on the planet cannot provide food for themselves. That is 14% of our population that needs a handout to survive. 75.3 million people are on Medicaid. This is not Medicare. Medicaid means you have virtually NO ASSETS and are dependent on the state for your healthcare. That is nearly 25% of the entire US population with NO Financial ASSETS to speak of. (USDebtclock.org)
As we go along look for the chasm between reality and the reports to get wider and wider. I believe the central banks are already doing a lot more than we are aware of and may be forced to “print to infinity” to keep this illusion alive. If they go the “printing” route look for real assets to gain a lot of popularity as these assets must be either mined, grown or produced in some way- REAL value not some idea of value that can be conjured up out of nowhere in unlimited amounts.
If “printing” is taken to new levels look for precious metals to revert to their role as real money and to gain value in percentages that most people can’t fathom today. Could this be the reason that most countries are repatriating their gold now? If the central banks decide to stop “printing” and let the markets reprice themselves look out for falling debt and equity prices and rising gold prices to rise as the confidence in the system (other people’s promises to repay) is undermined and investors demand real assets for real assets. To me, that sounds like a win-win for gold either way. My opinion is that one of these outcomes is baked into the cake and it is only a matter of time. The clock is ticking!
Mike Savage, ChFC, Financial Advisor
2642 Route 940 Pocono Summit, Pa. 18346
Securities are offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.
Any opinions are those of Mike Savage and not necessarily those of RJFS or Raymond James. Expressions of opinions are as of this date and are subject to change without notice. The information in this report does not purport to be a complete description of securities, markets or developments referred to in this material. The information has been obtained from sources deemed to be reliable but we do n ot guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.
Commodities are generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. There may be sharp price fluctuation even during periods when prices are overall rising. Precious metals, including gold are subject to special risks, including but not limited to: price may be subject to wide fluctuation, the market is relatively limited, the sources are concentrated in countries that have the potential for instability and the market is unregulated.
Diversification does not ensure gains nor protect against loss.
Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or its members.