The Secret to Forecasting the Economy

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Most investors make a common mistake.

They assume that the economy is based on the stock market.

It isn’t.

The economy is based on the real estate market.

But this disconnect in perception is why we can have the situation we do now.

The volatility in US stocks is presumed to mean the US economy is under pressure. That’s spooking people the world over.

But it’s not true. The broader US economy is fine.

But you have to look past the headlines to see why. Today’s Daily Reckoning will show you…

Oil isn’t the US economy

Granted, the volatility in the US stock market — and therefore the Aussie market — is coming from the oil price collapse.

But let’s put this into perspective. The US has a 15 trillion dollar economy. It’s the most diversified on the planet.

Former hedge fund manager James Altucher said this week that only 6% of the S&P500 is directly tied to the energy industry.

That’s far from the majority of the economy. That means the US economy can keep humming along.

Sure, companies around the energy biz take a whack. But they’ve had it pretty good over the last few years. Commodities are cyclical. They’ve been like that for thousands of years. This is hardly news.

It’s not like the oil is disappearing from the ground. The assets are still there.

Energy expert Daniel Yergin, author of the classic book on oil The Prize, says private equity groups are armed with $60 billion of ready cash.

That’s to snap up the assets of bankrupt US shale drillers. Then they’ll bide their time until the oil price swings up again.

But here’s what’s even more telling…

The best example of the how the US is still travelling ok actually comes from the oil state of Texas.

With oil prices traded at $30 a barrel — consider this news.

The Associated Press reported last week: ‘Employers added jobs in 36 states last month, led by big gains in California, Texas and Florida, evidence that hiring remains solid nationwide.’

Those are three of the biggest states in the Union by the way.

But let’s remember that in the oil bust of the 1980s, places like Houston in Texas were famous for their ‘see-through’ buildings. Meaning they were so empty they were transparent.

The Wall Street Journal reports that Houston offices have a 23.2% vacancy rate, compared to 17.8% a year earlier and above the national rate of 16.2%.

Not ideal if you’re a landlord, but not exactly bringing back the 100% vacancy rate in the previous collapse.

Texas is more diversified economy than we think. It’s not just Dallas anymore.

Colleague Phillip J Anderson actually travelled through there late last year. He tells me renewable tech like sun mirrors and wind turbines dwarf oil rigs.

And across the whole United States, the average American consumer doesn’t feel too bad either.

Reuters reported this week that the consumer confidence index rose as households shrugged off January’s stock market sell off and focused instead on a strengthening labour market.

‘”Households remain quite upbeat about the economic prospects and, given the importance of consumer spending to overall domestic activity, the resiliency in household sentiment will be seen by the Federal Reserve as good news,” said Millan Mulraine, deputy U.S. chief economist at TD Securities in New York.’

Don’t let the doomers spook you out of the market

So what to make of all the comparisons coming out between now and 2008?

I hear them too. Only last week William White, former chief economist of the Bank of International Settlements went on record as saying,

The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up.’

We’ll assume Mr White regards 2008 as a financial crisis like everyone else. But if you follow our work over at Cycles, Trends and Forecasts, you’ll know we don’t agree with that assessment.

It was a land crisis first and foremost that brought on the GFC. The problem transmitted to the financial system later. That’s why we watch the US land market for signs of trouble.

And it can’t be too bad. The Wall Street Journal reported that the value of New York real estate has now hit a trillion dollars.

It’s recorded the largest increase in values since 2008.

This is moving perfectly in accord with the US real estate cycle — something identified as far back as 1933 we might add.

Your trading and investing will vastly improve if you understand this dynamic.

Current market concerns are not related to the land markets in the West. Very few people can give you this insight.

Granted, what’s happening in China’s land market is unclear.

But the Western economies are not exposed to Chinese property loans in the same way they were to US subprime.

So, take the stock market dips in your stride. There’ll be more of them.

If you want the best way to put these dips — that is, buying opportunities — to work in your portfolio, go here.

Best wishes,

Callum Newman

Ed Note: This article was first published in Money Morning.

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Callum Newman

Callum Newman

Callum Newman is the editor of The Daily Reckoning and Associate Editor of Cycles, Trends and Forecasts. He also hosts The Daily Reckoning Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to The Daily Reckoning here.

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