This past week saw some more wildly volatile and negative sessions on Wall Street. One day the Dow cratered around 400 points while the Nasdaq slid further in its correction territory with another three percent drop.
Even the mighty five FAANG stocks Facebook, Apple, Amazon, Netflix, and Google/Alphabet settled officially in bear market territory. With the Nasdaq having fallen over 12.5 percent in the third quarter, the long-time tech engine that powered the longest bull market in history forward has simply run out of gas.
There are all kinds of speculations and reasons for why the markets could be down, ranging from production problems with Apple to the grinding on trade war with China. One that has not been considered enough is that there is now housing market trouble brewing in the form of a significant decline in the economic leading indicator home builder sentiment measure. A growing chorus of analysts like Peter Schiff claim that this plunge in confidence for home builders is the first clear warning sign that the all-important confidence in the everything bubble has finally popped.
Thanks to the rising interest rate crusade of the Federal Reserve, mortgage rates have passed the crucial five percent level. This 5.17 percent interest rate on 30 year fixed rate mortgages represents the high water mark going back to September of 2009. That was an scary month for the U.S. and world markets too.
The entire current economic and market rally was built precariously on confidence. With the home builders having broken the confidence wall, the next step will likely be businesses in the business confidence indicator. This could begin with small companies or with major corporations.
Finally comes consumer confidence as stock market portfolios decline in value along with the falling stock market. Home equity is the other major factor underpinning consumer confidence. It can not remain elevated with home sales growth declining and the future over housing and the real estate market values becoming increasingly cloudy. When Fox News is running graphics announcing trouble in the economy, you know that consumer confidence’s unshakable foundation is in serious trouble.
As if this is all not enough to threaten the shaky markets, now legendary billionaire investor and hedge fund manager Ray Dalio has raised the specter of the dollar losing the cherished status of global reserve currency. That would threaten the value of the dollar seriously. According to Dalio, it would decline by 30 percent. This would actually be a relatively minor decline, seeing as the greenback crashed 70 percent once the government decoupled it from its long-time link to gold.
It is important to remember the consequences of a falling stock market at the same time as the dollar loses value. In the 1970’s the last time this happened, enormous inflation broke out and ravaged the economy for years. Worse, it turned into stagflation as inflation rose and growth stagnated simultaneously.
This is the worst possible outcome, as it takes more dollars to purchase goods and services even when people and businesses have fewer dollars coming in to spend. This chart below shows the staflationary periods of the 1970’s:
The difference between the 1970’s scenario and where we find ourselves today is that now there is an enormous amount of debt strangling the U.S. federal government as well as corporations. The remedy to the economic malaise and skyrocketing inflation in the 1970’s was revered former Fed Chairman Paul Volker’s tough choice to massively increase interest rates. Thanks to the U.S. government’s over $21 trillion in debt on the books today, such a solution would be impossible.
Is Your Retirement Portfolio Prepared for the Collapsing Confidence?
Today there are so many threats to the markets, it is hard to know which one to be most concerned about. From falling home builder sentiment, to out of control government spending and debt creation, to threats against the future status of the U.S. dollar, the only thing that you can be sure of is that you need a dependable and reliable financial insurance policy for your retirement portfolio. Gold has served its invaluable role as just such an insurance vehicle for not hundreds, but for thousands of years. When economic decline and geopolitical chaos threaten the fabric of the world order, it is the yellow metal to which far-sighted and enduring investors always turn.
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