Ever run out of petrol (gas)? Sure you have. You're cruising along without a care in the world and suddenly, your engine starts missing. Soon after that, there is the eerie sensation of no noise coming out of the engine bay as the car starts to slow down. If you happen to be on a long downhill, you can go for a long time before you eventually stop, but stop you eventually will. Worse, if you don't have access to more fuel, there's no way to get going again, no matter how hard you stand on the accelerator.
That works with cars, which won't go without petrol (gas). It doesn't work in quite the same way for something as nebulous as an economy. To take an example, the US economy, so the pundits never tire of telling us, runs on something called "confidence". This is a very ephemeral "fuel" indeed, high octane when it is there, but when it isn't, it cannot be refined and then pumped into the economy to get it going again. When confidence dissipates, it is VERY hard to get it back again.
There is no "confidence" left in the US economy, or in US markets. Oh yes, there is no shortage of wishful thinking, nor is there any shortage of efforts to pump up markets for electoral purposes or to reflate pension plans. But no matter how hard the efforts are, real bedrock confidence in the future of the US economy is on death's door.
In September, US durable goods orders, which were expected to fall by 2.0%, actually fell by 5.9%. Not to worry, said the US real estate industry, in September, both new mortgages and the refinancing of existing mortgages were still setting new records.
In September, in fact on the last day of September, most Treasury debt paper yields hit their lows for 2002. They have risen sharply since then. The results have not been long in coming. Over the week of October 14-18, it was reported that US mortgage applications FELL by 12.4%. Worse, applications to refinance mortgages fell by 17.7%. It is the refinancing of mortgages which, above all other factors, has been fuelling the US "consumer" sector this year.
Speaking of the US consumer sector, the latest measure of consumer sentiment has come in at 80.6 - down from 86.1 a month earlier. This is a precipitous fall, and brings the consumer sentiment index to its lowest point in almost ten years. That's on a national basis. Now consider consumer sentiment in one state - Massachusetts. In April, consumer sentiment in Boston was measured at 109. In July, it was down to 92. And now in October, it is down to 78. If that isn't bad enough, total wages and salaries in Mass are DOWN year on year. IN 2000, they were rising at double digit annual rates.
This is being repeated all over the US to a greater or lesser degree. For more than two years now, since the middle of 2000, Americans have been told to expect an economic "recovery" in the next quarter. With nine quarters and counting now having been and gone, this message simply doesn't fly anymore.
When the stock market tanked, there was always the Dollar. Well the US Dollar index hit a post 1986 high of 121.21 in July 2001. As recently as January 31, 2002, it was less than a point below that at 120.59. Now it is 108.17, having been bouncing between about 107 and 109 for two months following its drop to 104.42 in mid July.
And, of course, official interest rates were slashed from 6.50 to 1.75% in 2001 and have been kept at that 1.75% level since last December. This allowed the bubble in real estate and in vehicle purchases to survive. But Treasury yields hit 2002 lows two weeks ago and then spiked sharply. See above as to how instantly, and severely, that rate jump has impacted on real estate borrowing, the LAST source of fuel for consumers to continue to spend.
The continuing talk about "recovery" and good economic "growth" is being done in a climate of increasing unreality. It is as if these are words and phrases from a dead language attempting to connect to people who are no longer listening to them. The US has gone through a nearly three year period of wanting to believe that everything would turn out for the best. They are fast losing that belief, and the "confidence" is now gone.
But, what is still keeping at least a semblance of "business as usual" alive in US markets and in the US economy is that most Americans can't find anywhere to go outside the markets and investments they are used to. There is still an urge to find something, anything, with which to regain the painful losses they have suffered. As long as the present market rally (now slowing down) lasts, that urge will remain.
It will NOT survive another market downturn. That's when the search will begin in earnest, not primarily to regain losses, but to salvage something from the wreckage. That's how the Gold "boom" began in the 1970s. That's how it will begin this time. Right now, and this has not changed for two decades, the vast majority of investors don't consider Gold at all. They didn't consider Gold at all in the 1970s either, not until VERY late in the decade.
Gold, like the US Dollar, has been running on the spot for most of this month. We think it will continue to do so until after the November 5 US mid term elections. After that, all bets are off.