Economic Red Alert?

by Michael Haltman

Is an economic red alert called for?

As the owner of a title insurance provider reliant on a healthy and vibrant U.S. economy that hopefully leads to the same in the real estate market, I am always searching for clues to provide me with indicators both for today and moving forward into the future!

I suppose that some might call this strategic planning while others might term it worrying about things outside of my control but, nevertheless, I believe as the owner of a small business it is critical to do.

To do this I observe the stock and bond markets, international news as well as the U.S. government release of reports that gauge economic health.

What I have been witnessing seems to represent a rosy big picture if watching the stock market, yet more concerning if you peer under the hood at some of the other indicators and news reports.

Examples might be the Greece crisis and the overall stability of the EU, U.S. GDP growth anemic at best after seven years of quantitative easing and the recent volatility and move-up in interest rates discussed here yesterday (Bond Market Illiquidity: There’s A Very Small Door!).

Evidence indicating cause for concern?

Following the thoughts and prognostications of many economic analysts and market watchers, my bias typically leads me to put slightly more credence in the predictions of those who in my opinion do not have an axe to grind in a ‘market moving ever higher’ scenario.

In conjunction with many of these experts expressing varying degrees of concern, the following statistics seem to point to the need for the yellow caution flag to be waved.

But could these statistics all be a one-off and not indicative of any problems on the horizon?

Absolutely! Therefore I preface introducing them with the simple fact that for people who need to make decisions today that will affect them a year or more from now, knowledge is power.

So while the U.S. economy may or may not be on the right course at the present time and poised for future prosperity, one needs to gather as much information as possible when formulating a strategic plan!

Economic statistics to mull over!

‘…When an economy is healthy, money tends to circulate fairly rapidly. I buy something from you, then you take that money and buy something from someone else, etc. In a stable and growing economy, people generally feel good about things and they are not afraid to spend. But during hard times, the exact opposite happens. That is why the velocity of money almost always slows down during a recession. As you can see from the chart below, the velocity of money has indeed gone down during every recession since 1960. Once a recession is over, the velocity of money is supposed to go back up. But a funny thing happened after the last recession ended. The velocity of money continued to go down, and it has now hit an all-time record low…‘

• Corporate profits have declined for two quarters in a row: The Bureau of Economic Analysis in May reported that corporate profits showed a decrease from the previous quarter. ‘Profits from current production decreased $125.5 billion in the first quarter, compared with a decrease of $30.4 billion in the fourth.
• U.S. exports plunged by 7.6 percent during the first quarter of 2015: Also in May it was reported that ‘During the first quarter, imports surged by 5.6 percent. That means that we are buying more from the rest of the planet than we did before. Unfortunately, during the first quarter of this year exports dropped by a staggering 7.6 percent. That means that the amount of stuff that we are selling to the rest of the planet is falling precipitously. When our trade deficit expands, we lose jobs, businesses and economic infrastructure at an even faster pace.‘
• U.S. GDP contracted by 0.7 percent during the first quarter of 2015: Many years into what is reported to be an economic recovery that most would call tepid at best, negative readings in GDP is very bad. Particularly after years of 0% interest rates and massive infusions of cash by the Fed, 4-6% positive GDP would generally have been expected.
• Factory orders have declined year over year for six months in a row and demand for consumer goods has fallen:

• Margin debt is at a record high with this chart showing what has happened in the past when this indicator has gone above 2.25% of GDP…

• Finally there are derivatives that were discussed briefly here yesterday (Bond Market Illiquidity: There’s A Very Small Door!): Following is a graphic description of how these typically non-accounted for financial ‘time bombs’ (Term used by Warren Buffet, 2002) can potentially wreak havoc…’Derivatives are going to play a starring role in the next major financial crisis. I cannot emphasize this enough. In fact, if you want to listen for just one word on the news that will let you know that things have started to really unravel, just listen for the word “derivatives”. This form of legalized gambling is going to crush “too big to fail” banks all over the planet during the next major financial downturn. The “too big to fail” banks in the U.S. alone have 278 trillion dollars of total exposure to derivatives, but they only have 9.8 trillion dollars in total assets. To say that they are being “reckless” is a massive understatement.‘

Conclusion

While this discussion was not the typical economic ‘happy talk’ one might expect, it is critical for business decision-makers to take a full range of information into account when formulating both a near-term and longer-term plan. Similarly for individuals who may be making financial decisions, the same holds true.

Hopefully, as I said above, all of these indicators are a one-off and the economy will continue to limp along until it finally lifts off. On-the-other-hand, as a former trader, the phrase ‘where there’s smoke there’s fire’ comes to mind!

I suppose the other term that might also be appropriate is caveat emptor.

Article author Michael Haltman is the President of Hallmark Abstract Service in New York.

HAS is a provider of title insurance in New York State for residential and commercial real estate transactions.

For anyone either buying or refinancing a property your attorney will likely recommend a title insurance provider, although you always have the right to choose your own (click here to learn more)!

If you have any questions you can reach Michael by email at [email protected].

The quotes and charts are courtesy of an article at TECB!