The automotive industry is more than the proverbial “canary in the coalmine” when it comes to the health of the global economy – it is, in fact, its center of gravity. And according to a particularly powerful voice on the world economic stage, it is the auto industry dragging down the global economy right now. In fact, says this voice, that sector is most responsible for the fact we are hurtling toward recession.
Recession, you say? Why is there all this talk of recession? After all, financial markets are doing just fine. Key indexes have resumed hitting record highs, so many retirement savers believe all is well with their portfolios.
Not so fast, say experts. Yes, financial markets are surging once again, but few at the top of the asset management food chain seem to buy what the Fed is selling.
A recent CNBC.com article points out that since mid-September, the S&P 500 has grown roughly 4% – while, at the same time, the Fed’s balance sheet has increased about 4.5% after a furious round of repo and T-Bill purchase activity. The Fed is resistant to call what it’s doing another round of quantitative easing (QE), but analysts such as Albert Edwards of Societe Generale scoff at that: “Remember this is not QE4, as the Fed has repeatedly assured us. Tell that to the equity market, which is certainly reacting as if it was as it forges to new all-time highs.”
Morgan Stanley Wealth Management CIO Lisa Shalett isn’t having any of it, either, saying the recent activity is “massively concerning.”
“The market is diverging from the fundamentals quite a bit,” she tells CNBC. “This entire cycle has been proof in the pudding that liquidity is going into the financial markets. It’s not going into the real economy.”
It is, in fact, the real economy to which prudent retirement savers should pay attention, and there may be no better representative of the real economy than the auto industry. If you look past the “noise” being made by the financial markets and examine closely the numbers and the trends from the auto sector, you likely will come to the following conclusion: We’re headed for big trouble.
IMF: Auto Industry Responsible for 25% of Global Economy’s Contraction
Alt-financial site ZeroHedge has been watching developments in global auto manufacturing for two years, and has noted that there’s no major region of the world that has been spared declines in the sector. Now, says ZeroHedge, it’s clear that the auto industry’s struggles are actually responsible for leading the global economy into the abyss.
When considering the relevance of the auto industry to the global economy, many tend to overlook the millions upon millions of jobs that rely not only directly, but indirectly, on it. As ZeroHedge remarks, “The reaches of the auto market go deep, with long supply chains and large consumption of raw materials, textiles, chemicals and electronics.” It is estimated that roughly 50 million jobs around the world are dependent in one way or another on the auto industry.
So when the car business is on loose footing, it can have an enormous impact. Last year, for the first time since last decade’s financial crisis, the sector contracted. That’s a big deal. And the International Monetary Fund (IMF) is saying now that weakening in the auto sector is responsible for more than 25% of the slowdown in the global economy from 2017 to 2018.
That’s not all. The IMF also believes the anemic industry is responsible for as much as 33% of the drop-off in global trade during the same period.
Other experts agree the auto industry’s current frailty sits at the core of the global economy’s softening. The ZeroHedge article makes note of a telling declaration from Brian Coulton, chief economist at Fitch Ratings:
This is where the global slowdown has been concentrated. It has been the lead sector, not just broader collateral damage [of the trade war] . . . There is no doubt this is a key driver of the global manufacturing cycle.
As if the challenges presented by the trade war aren’t enough for the auto sector to deal with, the IMF also points out that other obstacles in the world’s two most populous countries are acting to depress auto sales.
In India, the massive slowdown in car sales there is due largely to problems within that country’s shadow banking industry. Shadow banks are non-bank financial intermediaries and provide roughly half of new car financing to Indian consumers. Funding by shadow banks in India has been drastically reduced in the wake of the 2018 collapse of Infrastructure Leasing & Financial Services Ltd. (IL&FS). Once one of India’s largest shadow banks, IL&FS tumbled against a background of fraud allegations. The failure of IL&FS has cast a pall over India’s shadow banking industry, and funding resources are now in short supply. Car sales in India are down roughly 30% right now.
Then there’s China, where car sales fell in October for the 16th straight month. A big part of the problem in China has been the sudden implementation of new, stringent emissions standards that were not supposed to take effect until later 2020 and have left purchasers confused as to what to buy right now. That and the decision by the Chinese government to stop doling out subsidies designed to encourage car ownership are having a pronounced effect on auto sales in that country.
Prudent Retirement Savers Know to Read Between the Economic Lines
It’s understandable why many would be taken in by the rosy picture painted by select elements of America’s economy. As referenced at the top of this piece, surely a lot of folks see their IRA and 401(k) values continue to rise and are tempted to dismiss any of the recession talk they may be hearing. But financial markets are not necessarily representative of a nation’s – or the world’s – economic health. If you want to get an accurate reading of the state of the global economy, look instead to truly relevant data, such as changes in the size and velocity of auto sales around the world.
And what about those financial markets on which so many desperately hang their hats as a sign that everything is really A-OK? They’re likely to fall when central banks can no longer sustain them through the application of enormously accommodative monetary policy.
The sharp contraction in the auto industry is an important clue as to where the global economy appears headed, but it’s hardly the only clue evident to those willing to look beyond the headlines screaming about new highs for popular market indexes or a sub-4% unemployment rate many say is “fake news”: According to ShadowStats.com, a watchdog site of official government economic reporting, the true unemployment rate – one that includes those who’ve been unable to find work for a year or more – is a whopping 21%, presently.
The real state of the economy is concerning, to be sure. However, it’s not as though you have no way to defend your retirement savings from the potential disaster that’s lurking. One of the best moves you can make, in my opinion, is to be sure your portfolio contains assets with the demonstrated potential to strengthen in the face of deteriorating economic conditions: physical gold and silver. It’s ironic that gold and silver are now seen as alternative assets by the mainstream financial community, because their tangibility, global acceptance and capacity to thrive in dark economic periods suggests they may be among the few real assets remaining.
Does your portfolio contain any physical gold and silver, presently? If not, it’s an excellent time to give the metals a closer look – while global financial markets could be in the final stages of a record-length period of growth. So-called “alternative” assets such as physical precious metals have the capacity to provide your portfolio with real protection from the real economy.
