Wednesday, December 9, 2015

New Crisis Indicator: 1.31

- Never spend your money before you earned it. -

Thomas Jefferson

We violate the words of wisdom from our great founding father every day and a new indicator tells us another haircut is coming. There is a correlation in business that relates a ratio between a sale and length of time on a shelf prior to that sale. It is called the inventory to sales ratio. The US Census Bureau reported the latest figures with the index reaching 1.31.
Producers extend their product for retail or supply lines that eventually become retail based on the believe that there is demand for the product. However, if demand falls, problems ensue. Producers won't extend their product which places more demand for credit, but what happens when there is no sales? Discounters buy to sell, but mainline retail and producers suffer losses. Credit dries up because loan rates rise and fall into junk level status. Liquidity shows itself like with Lehman back in 2008 which is the last time that the sales to inventory ratio hit 1.31. Not good.
Fear Factor
enters the equation. When retailers place new orders, but had problems selling the previous supply, a common term arises, the business cycle. We are 80 months into this cycle which historically is the time-length duration. A producer will limit supply because he has not received payment with all parties aware that after every downturn not all retailers are able to open there doors. Where is Radio Shack? How about I could offer a litany of businesses that are no longer around and with debt at an all-time high, the "fear factor" grows with each monthly report.
The National Inflation Association(NIA) reported that credit card debt in US households grew another 4.91% YOY, while at the same time retail sales were flat. This implies that credit is being used to pay previous debt and that is the road to financial problems. It is never good to live by robbing Peter to pay Paul. NIA makes this other correlation: Whenever US wholesale inventories surpass 1.31 the S & P 500 has crashed. In the crash of 2001, the ratio peaked at 1.34 and it reached its record in 2008/2009 at 1.41, the Great Recession.
Cass Freight Index
which reflects North American freight volumes and costs just reported. Keep in mind that the global trading index or Baltic Dry Shipping is at its all-time low reflecting world trade is declining sharply. Anyway, shipments never exceeded 1.2 on its scale. In fact, the range level is between 1. and 1.2 for four years, while expenditures has slowly crept higher from 1.8 to as high as 2.8. It now sits at 2.4. Bottom line: shipping has declined MOM and YOY and costs are rising. Not good.
International Trade
figures were released on Friday and US exports declined another 1.4%, but imports rang up another $43.9 billon which is our money spent before we earned it and since this is the case every month, every year, decade after decade, when will we realize that we are being exploited by the global community and that there is no such thing as free trade. Not good for near term as well as the long term.