Economic Outlook

Big Trouble Looming: Rising Inventory to Sales Ratio

Under the recent information deluge, we haven’t had the time to analyze a very interesting and disturbing trend. The U.S. business inventory to sales ratio has been rising for months. What does it mean for the American economy and the gold market?

According to the Monthly Wholesales Report, inventories were up 6.2 percent in January from a year ago and 0.3 percent from December. Coupled with weak sales data (sales fell by 3.1 percent from December 2014 and 1 percent from January 2014), the inventory to sales ratio increased to 1.35 in January from 1.33 in December 2014. It means that it would take 1.35 months for businesses to clear shelves, the highest inventory-to-sales ratio since July 2009.

Why is data on business inventories so important? The answer is that the changes in the inventory to sales ratio indicate any supply or demand imbalances in the economy. Inventories rise when supply is greater than demand. Inventories rising relative to sales mean that sales fail to meet demand projections. Thus, the inventory to sales ratio usually reaches its cyclical peak in the middle of the recession, when the economy is slowing down. Indeed, please note three things.

First, that inventories of durable goods jumped the most – by 7.7 percent from year ago, which is generally in line with weak data on news orders for durable goods. Second, contrary to the historical declining trend (due to improved inventory management), we are witnessing a gradual rise since 2013 and particularly since the summer of 2014. Actually, the inventory to sales ratio has reached the highest level since the Great Recession (see the chart below). Third, inventories are rising despite low prices. Thus, this indicates week global demand.

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The consequences may be significant. The high levels of inventories could make entrepreneurs very

uncomfortable with adding more stocks. Thus, they will probably try to reduce their orders to get inventories in line. However, those orders are the suppliers’ sales. It means that reducing stocks and cutting orders may trigger a spiraling decline in sales and a recession. After Lehman, businesses reduced orders so aggressively that the supply chain seized, sales went down and inventories soared.

 

To sum up, inventories should not look only at the Fed’s actions and speeches, but also analyze fundamental data. The inventory to sales ratio is of utmost importance, since it shows the supply/demand imbalances. The rising ratio indicates that the U.S. economy is slowing down due to weak demand. The report on U.S. durable goods orders is good news for gold prices, because the possible recession could boost safe-haven demand for gold and change the Fed’s monetary policy stance to even more dovish.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

Gold News Monitor originally sent to subscribers on March 30, 2015, 7:00 AM.

Faber: Decoupling between Economic activity and Asset Markets

ET Now: Do you think financial markets are very naive in the way they are reacting? The world is fighting for deflation, but despite a global growth scare, most of the major markets are sitting at a record high, be it DAX, the Nikkei or the NASDAQ.

UnknownMarc Faber : Yes. There is decoupling between economic activity and asset markets. If you look at the economies globally, we know that in Europe there is hardly any growth. Can Europe, relative to its poor performance of the last few years, grow this year by 1-1.5%? It is possible, but we understand GDP is not a very relevant measure of economic well-being. In the US, the latest statistics are rather disappointing and in China, we have meaningful slowdown as well as in all resource producers of the world.

John Anderson, my friend who is a very good economist and also has his own consulting firm, calculated that the GDP figures in India are actually overstating economic growth significantly. It does not mean that he is bearish about the Indian financial assets. I am also positive essentially about the Indian assets, but growth is not what the government is publishing.
– in Economic Times of India

….more from Marc Faber:

Marc Faber: Indian Stocks can correct by 20%

 

Larry, From 1,300-Year-Old Tibetan Town, China

LarryEdelsonI’m now in the 1,300-year-old Tibetan Town, in Dukezong in Yunnan province, southwest China. A mix of mostly Tibetan Buddhists and Muslims, the area, with its dramatic scenery inspired the fictional paradise of Shangri-La described in the 1933 novel “Lost Horizon” by British author James Hilton.

To say the surroundings of mountains, streams, sheep, yack, Tibetan Monks and Imams is a sight to behold is an understatement. I have never seen such peaceful surroundings and beauty!

Tibetan Town is also along the old Silk Road. A trading route that will also be modernized by the build out of China’s Silk Road 2.0, the 21st century version of a trading network that will open Western China image1and trade to Europe, to Middle Asia, to Southeast Asia and even all the way to Germany on the Western portion of the route.

In a few weeks, I’ll tell you all about it, including a travelogue I’ll put together. Not to mention how you can get set to profit from the build out of Western China and Silk Road 2.0.

But right now, let me turn your attention to the markets. More specifically, DEFLATION. It’s here, with a vengeance.

The massive losses last week in nearly all commodity markets are beginning to take their toll with devastating blows in everything from precious metals and energy, to foods, soft commodities such as coffee, cocoa and sugar, and more, including slumping meat prices.

What’s causing it all? Some think it’s the soaring dollar. And in part, it is strength in the dollar that is causing import prices to decline. But it’s much more than that. It’s what the strength in the dollar signals, for the dollar itself is rising due to …

image2First, the absolute total mess that Europe is in. I have been warning about this for some time now, and Europe’s meltdown is now in process. The euro currency has plummeted more than 25 percent in the past few months, a shocking collapse.

The euro may bounce in the short-term, but its decline is far from over. The euro, currently trading at roughly 1.0540 to the dollar, will ultimately fall to 0.80 to the dollar, then cease to exist.

Second, European leaders’ insane policies of austerity measures and piling on more debt at the same time. It’s crushing the economies of Greece, Spain, Portugal and more, where debt to GDP ratios are rising, strangling growth, causing unemployment to remain high, and the youth to start to rebel.

Savvy Europeans, anyone with half a brain, is moving money out of Europe and into the dollar.

Third, U.S. leaders aren’t all that much better. Still up against an $18 trillion Federal debt limit, hunting down every penny of wealth Washington can get its hands on domestically and overseas, killing our tech leading spot in the world with its planting of spying devices on hard drives and computers, spying on each and every one of us …

Is all leading to a risk-off, hoarding money type of effect, causing the velocity or turnover of money and credit to slump — outright deflationary.

Bottom line: There will be more deflation ahead. Much more. For Europe, for Japan, and for the U.S.

Keep your eye on gold. It has now tested support at the $1,140 level. A bounce is overdue, but once gold closes below $1,140, DEFLATION will accelerate even more, leading to another round of crushing blows in all commodities.

And don’t let anyone fool you about the price of oil. It too has not yet bottomed. Before deflation comes to a head, oil will be trading near the low $30 level.

If you own the inverse ETFs on gold and silver, recommended Oct. 15 and the bullish ETF on the dollar, recommended Oct. 29, HOLD!

They’ve racked up gains of as much as 10.9 percent (GLL), 10.9 percent (DZZ),13.5 percent (ZSL) and 15.9 percent (UUP), respectively.

Best wishes, as always …

Larry

P.S. I’m so concerned about the massive new threats to your income, savings, investments and retirement that I am ready, willing and able to give you everything you need to help protect and multiply your wealth in 2015 — absolutely FREE.

 

Baltic Dry Index Hits New 29 Year Low

The very recent fall of the Baltic Dry Index (BDI) to the lowest level since 1986 (Figure 1.) confirms our fears about the health of the world economy. Why is the drop in the index a bad sign for the global economy?

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….read entire article HERE

Marc Faber on Dollar, The US Economy & Global Interest Rates

 

Marc-Faber-ESA ee17d6cd86QE has Grossly inflated Asset Prices

This year could be the year when investors lose confidence in central banks’ ability to engineer a sustained economic recovery, Marc Faber said in a presentation in London.

So far, London and New York property, as well as equities, have “reacted very well” to the Fed’s quantitative easing efforts, “but that doesn’t boost the wealth of the nation and it leads to less social cohesion,” he warned.

“One of the problems of this liquidity injection is that the Fed can force relatively responsible central banks to print money,” Faber added.

QE has “grossly inflated” asset prices and as a result U.S. equities as “highly expensive,” Faber said. A sustainable recovery should be based on investment rather than on consumption, but companies will find it more difficult to boost profits in the current economic climate, he added.

Canary’s Alive & Well

This week we will cover the ECB QE action, Euro, USD and their implications for global trade.  We’ll also update a still-intact rally in gold, silver and the miners along with some (NFTRH+) trade opportunities.  But first let’s review December’s Semiconductor Equipment sector Book-to-Bill ratio, just out on Friday evening and discuss some of the dynamics in play with respect to the ‘b2b’ and the US economy.

b2b

From Semi.orgThe three-month average of worldwide bookings in December 2014 was $1.37 billion. The bookings figure is 12.3 percent higher than the final November 2014 level of $1.22 billion, and is 1.1 percent lower than the December 2013 order level of $1.38 billion.

“While three-month averages for both bookings and billings increased, billings outpaced bookings slightly, nudging the book-to-bill ratio slightly below parity,” said SEMI president and CEO Denny McGuirk. “2015 equipment spending is forecast to remain on track for annual growth given the current expectations for the overall semiconductor industry.”

For our purposes in gauging the US economy, it is the ‘Bookings’ category that is most important, because orders booked today represent future economic activity. So while the actual b2b has declined a bit, it was due to accelerated billings with bookings actually increasing in December.

As for Mr. McGuirk’s forecast, we’ll take that with a grain of salt as this highly cyclical industry in particular is subject to sudden re-do’s when it comes to forecasts. With positive trends currently firmly in place, what is he going to say ‘the trends have been good but we have a feeling it is all about to grind to a halt’?? We’ll just robotically update the b2b each month going forward and use actionable data.

For now, the Canary in the Coal Mine is chirping away, and so a key forward-looking US economic indicator is fine. But you may recall that in Q4 2014 we drew a parallel between high end Semiconductor fab equipment and new Machine Tool sales. So with the caveat that I have no hard data to correlate year-end Semi Equipment sales dynamics with those of Machine Tools, we wondered if the SEMI b2b might get a December bump just as we are able to set our watches by year-end (for tax management considerations) Machine Tool sales. I have marked up the graphic from EDAdata.com:

machtools

 

Larger Image

Far from the days of the skilled machinist deftly turning handles with great precision while making calculations to tight tolerances, today’s machinist is a programmer with a CAD/CAM system and wireless data download to what are in some cases $1,000,000 or higher production beasts.  A typical range is in the $150,000 to $700,000 per unit.  One machine can easily cost more than a fine 5 bedroom home in a nice neighborhood.  The point is, this ain’t Grandpa’s machining industry.  It is high end manufacturing technology.

We have been thinking about the strong US dollar and its likely effects on the US economy over time.  So far, there is some moderation in the data that mainstream economists and financial media focus on.  The December ISM report on manufacturing moderated, with particular focus on ‘New Orders’, Wage growth has failed to take hold, Jobless Claims bumped up last week above expectations and Existing Home Sales came in well lower than forecast by economists.

But generally, the picture is still okay, albeit wavering.  Oh, the Consumer is giddy.  Okay, well… we have been in an ‘as good as it gets’ phase so why shouldn’t he get out there and run up his credit card a little?

The point is, we have expected a couple things…

1)    The relentless strength in USD to eventually wear away at US manufacturing and exports (this maybe be in its very early stages) and…

2)    A year-end phenomenon in the US Machine Tool industry to remain unbroken.  This would see a spike in December’s Machine Tool sales primarily due to reasons other thanthe economy.

The usual sources in the mainstream economic analysis sphere are looking at the usual economic data sets.  We will watch those, but to be as early as possible in getting real economic signals we need to watch the Canaries that started the whole economic upswing as we noted in real time in January of 2013; Semiconductor Equipment and by extension, manufacturing in general.  These led by a country mile the now readily observable economic revival.

Machine Tools sales are due for a spike and we have identified one company (NFTRH+, reviewed next segment) as a short after the year-end sales bump and continued stock price appreciation.  We also have another company from the long side (NFTRH+, also reviewed next segment) for a trade.  Company #1 is a standard US based machine tool builder with a lot of competition and Company #2 is also based in the US, but has far less competition for its unique product line.  Back on the main topic…

Bottom Line

Certain economic data have softened in recent weeks in line with the idea that an impulsively strong US dollar can start to fray the edges of certain industries and sectors.  But we will await confirmation by the Canary that started it all in January of 2013.  SEMI just reported a very decent Semiconductor Equipment b2b and the Machine Tool segment is due for its traditional year-end bump.

If these prove to have been seasonal bumps, perhaps trades can be made but more importantly, we may yet get some confirming negative economic data points a little further into 2015.  We should watch future ISM, b2b and Machine Tool sales closely.

NFTRH.com