Simple economics dictates that when consumer confidence in an economy increases, it leads to higher consumer spending; that’s how you get economic growth. This is especially true in the U.S. where consumer spending accounts for 70% of the gross domestic product (consumer spending).
Consumer confidence this month dropped sharply to 60.6, the fifth drop in the last six moths and lowest level since November of 2011! (Source: Conference Board.) The data show that households are worried about the economy and are feeling it financially.
Reports from major consumer companies provide increasing evidence that American consumers are cautious.
Luxury jewelry retailer, Tiffany & Co. (NYSE/TIF), is one well-known company that’s feeling the effects of low consumer confidence and consumer spending. Following its second-quarter earnings report announcement (profit went up only two percent), the company’s CEO cut the outlook for Tiffany & Co. and was quoted as saying, “Not surprisingly, sales growth has been affected by economic weakness in a number of markets…” (Source: Wall Street Journal, August 27, 2012.)
Consumers are slowing down on their purchase of luxury goods; things they don’t necessarily need. They are looking for cheaper deals—not a great sign of increased consumer spending and consumer confidence.
But it’s not just the high end that’s suffering. McDonald’s Corporation (NYSE/MCD), the world’s largest operator of restaurants, serving 69 million people a day, reports that sales in July 2012 fell 0.1% in the U.S., 0.6% in Europe, and 1.5% in Asia-Pacific from last July despite its promotional activity.
Consumer spending is the fuel of the U.S. economy. If there is a decrease in consumer spending, it simply means economic growth is stagnant.
The drought and food prices aren’t very helpful, in fact adding further injury to the economy. The American Midwest is experiencing its worst drought since the 1930s. One sixth of the corn crop has been lost; soybeans and wheat are in the same condition. (Source: Spiegel, August 21, 2012.) This will result in higher food prices and, ultimately, less bang for your buck, as the higher prices go, the lower consumer confidence goes.
Aside from increasing the money supply, I don’t see a light at the end of the tunnel for the U.S. economy.
Consumer confidence only rises once consumers feel good about the economy. So far, there hasn’t been any economic growth. It’s no secret: the unemployment rate is high, the middle class is hurting, more people are falling into poverty, the banks prefer to buy U.S. T-bills as opposed to lending money (see: Why Banks Feel Safe Buying T-bills as Opposed to Making Loans), and the economic outlook is grim.
There is nothing on the horizon to jump start consumer spending or consumer confidence. But there is a growing mountain of worry for consumers. Throwing more money at the economy isn’t the answer, because the money doesn’t make its way down to the pockets of the little guy. It’s one of those situations where treating the symptoms instead of the disease is not the answer.
There’s plenty of media focus on the annual symposium at Jackson Hole where central bankers and other market personalities meet. The common hope for further quantitative easing by the Federal Reserve is also looming in the air.
What’s my take on what the Federal Reserve’s plan for quantitative easing for the small investor will be? Gold bullion, the shiny yellow metal loved by many, and a true hedge against inflation.
So far, quantitative easing has been about the Federal Reserve buying U.S. Treasuries or similar securities to put more money into the financial system. But more of something is not necessarily a good thing.
It may take time, but history has shown us that inflation and currency devaluation are the end result of too much money pumped into a country’s financial system.
Gold bullion is a hedge against inflation and a devaluing currency.
The more quantitative easing the Federal Reserve announces, the more reason there is to be bullish on gold bullion. In these pages, I have been harping on the fact that numerous world central banks are raising their stakes in gold bullion as they diversify their reserves.
Central banks adding more gold bullion to their reserves could be a sign they are losing trust in the U.S. dollar or in fiat currency in general.
On August 22, the price of gold bullion broke above its 200-day moving average; a very bullish sign.
Chart courtesy of www.StockCharts.com
The chart above shows the price of gold bullion increased quickly and broke its price resistance that was in place at the $1,630 per ounce area. This resistance level was in place since mid-June and was tested four times before going to the upside.
This recent move in gold bullion prices is significant. Gold bullion prices are starting to reflect their true value and, as I forecast many times before, they are going higher from here.
There is no economic growth in the U.S. Europe is still deep in its economic mess and the global economic slowdown is at full throttle. What does gold bullion provide? It provides safety. It holds value. And in a situation where the financial system is being pumped with more liquidity, gold bullion becomes a draw for investors.
Where the Market Stands; Where it’s Headed:
Some very important facts on the stock market I want to point out to my readers:
Trading volume on the NYSE has been extremely light (real market advances happen with strong volume). More and more stock advisors are turning bullish on the stock market (a bearish indicator). The Dow Jones Transports did not confirm the advance of the Dow Jones Industrial Average back in May (a bearish signal for the Dow Theory). Revenue growth for the S&P 500 companies could be negative in the third quarter of this year.
There is nothing in the stock market to celebrate…just lots of evidence of a bear market trap. (See: Why the Stock Market Is Running on Nothing But Thin Air.)
What He Said:
“I’ve been writing to my readers for the past two years claiming that the decline in the U.S. property market would not be the soft landing most analysts were expecting, but rather a hard landing. My view remains unchanged. The U.S. housing bust will cut deeper and harder than most realize today.” Michael Lombardi in Profit Confidential, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for worst times ahead.