I have to admit that while I have a lot of sympathy for some excellent economic analysts who think that the US economy is growing at between 2% and 3% per annum, I increasingly believe that there is a disconnect between official government statistics and private surveys, which has, in my opinion, to do with how price increases are measured.
As an example, the September 0.6% increase in U.S. retail sales simply doesn’t rhyme with data such as truck tonnage, railroad car loadings, state sales tax receipts and the shrinking trade deficit. The American Trucking Association’s truck tonnage index is 2.7% lower than a year ago, and railcar loadings were down 2.8% year-on-year (also, in October, Ryder System – “R” – revised its earnings forecast, primarily due to lower expected results in its US Fleet Management Solutions business segment).
The decline in volume of freight shipped is also confirmed by the Cass Freight Index, which peaked out in June 2006. According to contraryinvestor.com, Cass Freight Systems is a “freight payable processor” that deals with 1,200 divisions of 400 individual companies representing a broad spectrum of industries; therefore, the company has a very good feel for the flow and character of the US freight industry (part of the decline in the Cass Freight Index since June 2006 may have been due to the decline in energy prices in the second half of last year, but with energy prices now back to peak levels the index has failed to approach its 2006 high. Shipments by Canada’s largest railway, Canadian National Railways, which derives 33% of its revenues from the US, are down 12% year-on-year).
In theory, it could be that trucks and railroads are suddenly carrying fewer but higher-value goods, but a more likely explanation is that volumes are down but prices in retail stores are up, which explains the surprisingly strong September retail sales. But even if this were the case, it doesn’t tally entirely with the declining trend in states’ sales tax receipts. In California, September’s sales tax receipts were down 7%, compared to the previous year. One possibility we shouldn’t exclude is that the economic condition of US households has deteriorated to the point where they are curtailing the purchase of discretionary items, which are subject to sales taxes, but increasing the dollar sales of groceries, due to price increases (not because of an increase in volume).
Since a large number of groceries are sales tax exempt, their price increases can boost retail sales while at the same time – due to the deficiency of demand for discretionary consumer goods – sales tax receipts decline.
I should just like to emphasise once again what I have said before, which is that cost-of-living increases for households bear no resemblance to “core inflation”. I recently asked a level-headed friend of mine who lives in London (the UK should have a lower inflation rate than the US, given its strong currency) to estimate his cost-of-living expenses increase (in short, his inflation rate). After checking with his wife, he told me it was 8.6%. Then, over a drink in Hong Kong, a rather intelligent woman told me that her grocery expenditures had recently increased by 15% (since Hong Kong’s currency is pegged to the US dollar, its inflation rate should be similar to that of the US). Also, if in the Euro Zone, whose currency has appreciated by more than 40% against the US dollar since 2001, price increases seem to be higher than in the United States, one has to wonder about the reliability of the Bureau of Labor Statistics’ data.
Other signs of economic weakness in the United States include car sales, which are down year-on-year, and imports, which have slowed. In August, inbound containers at US ports were down year-on-year by more than 1% (at Los Angeles-Long Beach, inbound containers were down 7% in August). Fred Hickey notes that the North American semiconductor equipment book-to-bill ratio collapsed between June and August. The same seems to have happened in Japan, where the semiconductor equipment industry reported “a free fall” in its book-to-bill ratio, from 1.02 in June to 0.88 in July (another indicator that all is not well in tech land is that Taiwanese direct exports to the United States were down year-on-year both in August and September). According to Fred Hickey, “the declines in these forward-looking indicators are warning that industry revenues and earnings are about to fall off sharply worldwide. It fits with all the other data we have. The memory markets are glutted with capacity and prices are falling.”
According to Fred, “bulls have been hanging on to their semiconductor equipment stocks all year despite deteriorating market conditions”. Not surprisingly, Fred holds several put options on tech related stocks, including Apple, Research in Motion, Amazon, Applied Material, and Texas Instruments. I might add that, despite all the bullish comments about high-tech stocks, the Philadelphia Semiconductor Index (SOX) is down 11% from its June 2007 peak, while the NASDAQ 100, driven by a few stocks such as Apple, Google, Research in Motion, Garmin, Wynn Resorts, and Amazon, whose combined weight in the index accounts for more than 23%, has risen by 20% since the August 16 low. It would seem to me that the performance of semiconductor stocks is a better leading economic indicator than a few momentum-driven concept stocks.
Another indicator of an economy that has slowed to a crawl, or is already, as I believe, in recession, is the shrinking trade deficit. But, not to worry! With Mr. Bernanke at the Fed and Mr. Paulson at the Treasury, both of whom are well-advised by the Wall Street elite, “there have been extraordinary rises in the quotations for all shares, the chief cause being the catastrophic change in the economic situation”. More to the point, the recent strength in the stock market has been due, as Bill King pointed out, to “the Fed creating credit at banana republic-like rates”. Since August, the compound annual rate of change of MZM of the average four weeks is 24.3% and for the third quarter it is 18.7%.
I should like to add one more thought. It is, of course, “slightly” embarrassing for a government that the stock market is at an all-time high while the median household is struggling with illiquidity. According to Greg Ip, writing for the Wall Street Journal, the wealthiest 1% of Americans earned a record 21.2% of all income in 2005 (it is likely to be even higher today), while the bottom 50% earned just 12.8% of all income (lower than at the peak of the stock market in 2000). Greg Ip also quotes a study by University of Chicago academics Steven Kaplan and Joshua Rauh, which “concludes that in 2004 there were more than twice as many such Wall Street professionals in the top 0.5% of all earners as there are executives from nonfinancial companies.
Mr. Rauh said ‘it’s hard to escape the notion’ that the rising share of income going to the very richest is, in part, ‘a Wall Street, financial industry-based story.’ The study shows that the highest-earning hedge-fund manager earned double in 2005 what the top earner made in 2003, and the top 25 hedge-fund managers earned more in 2004 than the chief executives of all the companies in the Standard & Poor’s 500-stock index, combined.” (According to Ip, “IRS data show that the median tax filer’s income – half earn less than the median, half earn more – fell 2% between 2000 and 2005 when adjusted for inflation, to US$30,881.”)
Because of this “embarrassment of riches” in the financial sector while the middle class and the workers struggle, one can safely assume that the US government and Wall Street will have the tendency to paint the economic picture for the average American household in a favourable light.
Following the August 16 low, the recent rally in equities led to new highs in several indexes and individual stocks. The S&P 500 is, as of this writing, up 10% year-to-day, but in Euros it is up just 2.44%. From the August low the S&P 500 is up 11% and 5.9% in Euros. However, it is down in Euro terms by 4% from its June high (high in Euros was in June). Gold has appreciated by 21% since the beginning of the year, and by 14.7% since the August 16 low. (Since the beginning of 2001, gold is up by 194%).
Money has three principal functions. It is a convenient “medium of exchange”, “a unit of account”, and a “store of value”. The “store of value” function requires that money can be reliably saved, stored, and retrieved, and that it is predictably useful when it is retrieved (purchasing power should have been maintained). As a “unit of account”, money is a standard unit of measurement for the market value of goods, services, and assets. It is also a measure or a standard of relative value and deferred payment, which is necessary for the formulation of commercial agreements involving debt.
In last month’s report I described the hyperinflation in Zimbabwe and how the Zimbabwe dollar had entirely lost its “store of value” function and had also become largely useless as a “unit of account”. I might add that in all the hyperinflation economies I have looked at, sooner or later goods, services, and assets were valued in a strong foreign currency or in gold. Has the time now come where we should consider gradually presenting US economic statistics such as GDP, and assets such as bonds, stocks, and real estate, in a strong currency such as the Euro or in gold? This would bring to light a totally different economic performance of the United States, and of its asset markets, since the expansion began back in November 2001. In both Euro and gold terms, the economy wouldn’t have expanded, but contracted. Bonds and cash, as well as most equities (but not resource, material, and oil stocks), would have provided a negative return.
I am fully aware that my economist friends will shake their heads at this heretic thought and doubt my sanity. They will argue that employment is up since the expansion began, and that this is a good indicator of an economic expansion. To this I shall respond, “Yes, employment is up, but far less so than in previous expansions since the Second World War”. Moreover, I shall also point out what kind of employment is up. For September 2007, healthcare employment is up year-on-year by 494,300, to a record high of 15.4 million. Restaurants and hotel employment rose year-on-year by 367,000, to a record of 11.6 million. Professional and business service payrolls added year-on-year 314,000 jobs, to a record of 17.9 million. Retail employment fell moderately to 15.3 million.
Manufacturing employment continued to slide to 13.9 million (year-on-year, manufacturing has lost 223,000 jobs). In construction, residential specialty trade, contractors cut 15,000 jobs in September and more than 160,000 since February 2006. Moreover, as Bill King reported, the Bureau of Labor Statistics announced that the next benchmark revision will show that March 2007 payrolls were overstated by roughly 297,000 jobs.
King: “Please take a minute and think about the absurdity of suddenly producing better than expected NFP [non-farm payroll] growth with upward revisions of the past few months and at the same time admitting that prior NPF growth was overstated by 297,000!!!!” King then quotes John Williams, who believes that “these data from the BLS are nearly worthless as economic indicators and are highly suspect, given the global financial markets in ongoing crisis and given the positive ratings of US President and Congress hitting historic nadirs. The reported numbers continue to run counter to better quality employment indicators such as new claims for unemployment and the collapsing help-wanted advertising index.”
I find the BLS data more useful than John Williams, for the simple reason that they reveal what kind of a consumer-oriented economy the United States really is. Sure there are numerous productive jobs among the healthcare, retail, hospitality, and business service payrolls, but the majority is geared towards consumption, which raises another question about the economic growth of the United States. Is consumption equivalent to economic growth, or rather, is a consuming economy contracting?
Part II coming tomorrow…
Dr. Marc Faber
for Markets and Money
Editor’s note: Dr. Marc Faber is the editor of The Gloom, Boom and Doom Report and author of Tomorrow’s Gold, one of the best investment books on the market. Headquartered in Hong Kong for 20 years and now based in northern Thailand, Dr. Faber has long specialized in Asian markets and advised major clients seeking bargains with hidden value, unknown to the average investing public.