Soaring Retail Sales?
Headline retail sales for April were reported as a gain of 1.26%, but if one digs under the numbers, the retail picture is not quite as rosy as one would expect.
Taking out auto sales, which had an unusual jump in April, the gain was only 0.8%. Year-over-year retail sales were only up 2% when inflation is taken out. That tells us that retail sales are only keeping pace with population growth and nothing more.
Fuelling retail sales was a big jump in consumer credit in March. Consumer credit, it seems, is growing faster than consumer spending.
Despite the jump in April retail sales, the overall trend continues to deteriorate—a characteristic that often precedes recessions.
Besides a huge jump in consumer credit, car loans have gone up more than 50% since the 2008 financial crisis. Meanwhile, income growth is stagnant.
All of this makes the jump in retail sales for April suspicious.
When the “You-Know-What” Hits the Fan
There are a considerable number of real risks out there that many are either discounting or not paying attention to. The trend is not good.
Since the world came off the gold standard in 1971, debt and money have grown while purchasing power has collapsed. The world has faced a series of financial crises, each one more intense than the previous one.
Yet conditions today suggest that the next crisis may be worse than that of 2008.
Debt growth has been high since 2008, but as long as there is a modicum of GDP growth the debt is manageable. But if GDP growth stalls—or worse, declines—the debt problems grow.
Debt problems are showing up in energy, Chinese real estate and sovereign countries. Defaults have occurred, but none that is yet a defining moment. Countless rounds of QE and lowering interest rates to zero (and even negative) have not generated the GDP growth expected.
Now things are beginning to weaken once again. Income inequality has never been so high in the US and China, while the inequality in the Eurozone is between countries.
Polarization and dysfunction mars politics, especially the upcoming US elections. China’s sharp divide of classes is potentially a growing social problem. The EU is inundated with refugees and migrants fleeing war and poverty. Failed states abound.
Right-wing xenophobic, anti-immigrant, anti-EU parties are on the rise in the Eurozone. The US is seeing the rise of populists whose platforms are not dissimilar to the xenophobic, anti-immigrant parties in the EU.
Geopolitical tensions are high along the Russian border and in the South China Seas.
Any of these could become a black swan event that takes stock markets down.
Fed Minutes Signal Further Rate Hikes
The Fed’s FOMC April minutes hinted strongly that an interest rate hike could be on for June. It caught the markets by surprise, and the US dollar soared while gold prices fell sharply.
Against this backdrop, keep an eye on high-yield bonds (junk bonds). There are signs that they are rolling over once again.
Weekly Market Review
Stocks
“Sell in May and go away.” So far so good, as the markets are down this month. Well—not all of them. The TSX Venture Exchange (SPCDNX) has been a strong performer.
We look at an inflation-adjusted chart of the S&P 500 along with a look at the TSX Composite, the CDNX, the Shanghai Stock Exchange (SSEC) and the Nikkei.
Currencies
Following the release of the Fed minutes for the April FOMC and the suggestions of an interest rate hike in June, the US Dollar Index soared, breaking out over 95. This leaves open the possibility of a move back to earlier highs at 100, and even new highs.
Meanwhile, most of the other major currencies (Canadian dollar, euro and yen) fell, except for the British pound. That was an odd one, as polls are showing that the Brexit might occur.
Gold and Precious Metals
If the US dollar goes up, that usually means gold falls. The loss this past week wasn’t much, but we note that silver, platinum and palladium were down more. Follow-through selling is expected. Strong support zones lie below.
All of this came against the backdrop of positive news. A few well-known billionaires announced they were buying gold. The Chinese moved into London with the purchase of a large gold vault from Barclays Bank, and are positioned to become a major market maker in the London market as Barclays and Deutsche Bank leave gold trading.
Finally, there was an announcement of a coming Sharia gold standard and potential gold investments from Islamic financial institutions that manage upwards of $2 trillion in assets.
The gold stocks took it on the chin this week, even as the TSX Gold Index (SPTTGD) made new 52-week highs.
Unfortunately there was no confirmation, as neither the Gold Bugs Index (HUI) nor the precious metals (gold, silver, platinum or palladium) made new 52-week highs.