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All Signs Point To Slower Growth

Aug. 12, 2014 9:59 AM ETCRB
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Contrary to the picture the main stream news and our politicians are painting, the market is pointing to slower economic growth ahead.

Slower growth generally means lower or weak equity markets and deflationary, not inflationary pressures. Now I know most of you think that inflation lies ahead, but it appears we will first have to deal with more deflationary pressures, then maybe inflationary pressures.

Also remember that not every part of the economy has to experience these pressures. In fact, we are seeing governments raising tax rates all over the U.S. As an example, my local government just proposed a 5%+ increase in property taxes and is looking at a 1% jump in the sales tax here in Hillsborough County. Those tax increases are inflationary, but they will result in slower growth as now the end consumer has less, not more, disposable capital to spend on consumer goods which drives 70% of our GDP. The end result is the government entity will see a temporary boost in revenues and then a longer term drop in growth and consumption that will lower their overall tax revenues…..not very smart! This whole process is a contributor to the slower growth that the markets are seeing in certain key sectors.

So let's take a look a couple of markets that are tipping their hands to slower growth.

First up is commodities. If global growth was really happening, commodity prices would be rising. Instead we have weak commodity prices and only pockets of rising prices based on select market dynamics. An example is that droughts in the Western U.S. have led to higher food costs here in America.

However, as you can see from the Reuters/Jeffries CRB index, below, commodities continue to drift lower after basing for several months.

We could see commodities bounce here in the short-term and challenge the red horizontal resistance line, but it appears commodity prices are ultimately headed lower as you can see in this weekly chart, below.

Next up is the ten year treasury note yield.

We have all heard the predictions that interest rates are going to rise from these very low historical levels and devastate bond holders and quite frankly I agree they will someday. However, today is not that day!

Note how ten year treasury note rates are declining in this weekly chart and the TRIX trend index is even below the zero line. This argues for even more economic weakness and even lower ten year yields.

These are not the signs of a bustling economy! In fact, these are the signs of an economy seriously lacking growth.

I read yesterday in email my dad sent me (thanks dad) where James Rickards, the author of Currency Wars and The Death of Money, had this to say about this very subject "Listening to mainstream market commentary on television and reading the financial press leaves one with the impression that the economic recovery is gaining strength and that stock market indexes, at or near all-time highs, will go higher still.

The litany of market happy talk is impressive. The unemployment rate has dropped to 6.1%, down about four percentage points from its peak, and is expected to go lower in the months ahead. The economy created about 230,000 jobs per month in the first half of 2014, which brings the increase in jobs to nine million since the economic recovery began in mid-2009.

Interest rates remain low, which supports high asset valuations in stocks and housing. Inflation is tame and expectations about future inflation are well-anchored. To hear the stock market bulls tell the story, all is right with the world.

But all is not right. In fact, the fundamentals of the U.S. economy are in awful condition and are getting worse."

Mr. Rickards goes on to debunk the employment numbers and show that productivity is actually dropping along with the number of full time positions. He also shows where corporations have actually hired more part-time workers rather than invest in new capital improvements, because the part-time help costs can be jettisoned at any time.

Finally he makes this very important point "So the conundrum is complete. Stock indexes march to all-time highs. Economic fundamentals fall apart. The two will be reconciled either with a spectacular turnaround in growth or a spectacular collapse in stock prices. The problem is that a turnaround in growth can only come from structural reform, not money printing.

Structural reform is the job of the White House and Congress, not the Federal Reserve. Since the White House and Congress are barely speaking, no help should be expected from that direction."

In our opinion that structural reform will not come without another crisis.

So buckle up and be glad that you are getting the signals to keep you out of trouble when this market finally starts a sustained descent! We believe that time is not far off!

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