The One Stock That Tells You Everything You Need to Know about the Economy

July 27 2015

It seems too good to be true. Can one stock really tell you everything you need to know about the economy? You wouldn’t have to read the daily newspapers anymore; you could simply take a look at the company’s figures. Which stock am I talking about? And what does it tell us about the state of the economy?

Caterpillar: a Proxy for the State of the Economy

Caterpillar — CAT —  has factories all over the world. As you may know, they design and construct heavy machinery: bulldozers, forklifts, excavators, trucks etc. They are the biggest player in their industry.

Caterpillar’s profitability is closely linked to the state of the world economy; they flourish whenever the world economy is doing well, but also see their revenues decline as the economy weakens.

How is the world economy doing? If you are ever wondering this, you can obtain an instantaneous answer to this question by simply looking over Caterpillar’s figures, and nothing else.

How Is the Economy Doing?

Naturally, Caterpillar also publishes its financial statements separated for each geographic area. This allows us to check whether or not the industrial demand is falling in a certain region. We can even conclude in which geographical areas the economy is growing (or shrinking).

As an example, take the United States. In 2014, CAT’s revenues in the US increased slightly. The US is relatively 'strong' compared to other regions, but revenues declined this year nonetheless. The cause of this is the extremely low interest rates in the world’s biggest economy, leading to a recovery in the American housing market after the '08 recession.

The board of directors stated that the housing market has, more or less, camouflaged the weakened US economy. No wonder, given the current low interest rates. As soon as the housing markets slows down — and especially when the Fed decides to raise interest rates, thereby causing housing demand to drop correspondingly — it will no longer be able to hide the weakened US economy.

We can also clearly see that the economic growth of China and Japan is slowing down, and that commodity prices are falling. Declining commodity prices are a sign of economic weakness; it’s no coincidence that gold wasn’t the only commodity whose price fell.

year on year percentage change of cat’s retail sales by region (source: zero hedge)

From figures regarding the world economy we can safely say that the economic 'recovery' shouldn’t be called a recovery. Since 2013, Caterpillar has seen its worldwide revenues decline constantly. They’re having a hard time, just as the global economy is.

In the words of the board of directors: “The world economy is still stagnating (…) and there’s no sign of improvement.”

These figures seem to reconfirm what I said earlier about the US economy. The economic recovery is primarily an illusion. A new US recession is much closer than most think. The Asian economies are slowing down, the US economic recovery has ceased and Europe’s low growth persists. This isn’t strange, considering the global indebtedness. But apart from low growth, the underlying figures show that a recession is closer than we think.

THE YEAR TO YEAR CHANGE (%) IN THE GLOBAL RETAIL SALES OF CATERPILLAR (SOURCE: ZERO HEDGE)

Warning: avoid blindly staring at the price of a CAT share (NYSE:CAT). We’re currently in the middle of a miraculous bull market, and Caterpillar is repurchasing a large amount of its own shares. Consequently, the earnings per share remain the same or increases, while the underlying profit figures worsen.

You want to look at the profit figures for the entire company, not the earnings per share, to gain a good understanding of the economy.

How Much Further Will the Gold Price Fall?

All commodities are nearing an ultimate bottom. The end of the bear market is in sight. The oil price (WTI) dropped once more below $50/barrel, the price of copper is falling, and, as you may know, the prices of gold and silver are also falling.

Now history is repeating itself. The gold price has gone down — something I anticipated earlier — and many people claim to have predicted it. But instead of a rational switch from bearish to bullish, most become doom-mongers. This week, Dutch newspapers came with price expectations of $700 to $800/oz, another fall of 30-40%. The Dutch bank ABN AMRO can also be considered a part of the doom-mongers.   

Those who have been completely wrong about the price of gold for the past fifteen years, are now screaming the loudest, saying that the price of gold will fall much further. Needless to say, none of these persons will put their money where their mouth is (that is, in line with their price target of $800/oz). 

Their historical awareness is poor at best. A glance at the past provides us a glimpse of the future; the prices of gold and silver are in the longest downturn we’ve ever recorded. And to be honest, this isn’t a surprise given the fifteen years of continuously increasing gold and silver prices.

You have a better chance of winning the lottery than that these price targets created by these 'perma-bears' will actually become reality.  

So there is no need to be discouraged if you’re planning to buy gold. The most important characteristic of a price bottom is that a majority has given up on the investment. You don’t have to wait on any positive signs by the market, short-term support, long-term resistances, triangle formations or trend channels. You only have to remember one thing: “Buy when there’s blood in the streets,” Sir John Templeton would have said. And if you are reading the newspapers, you know there’s plenty of blood on the streets as of this moment. And Sir Templeton would certainly not be drawing lines on a price chart to decide whether or not to buy.

When I say that 'the end is in sight,' I’m not saying that gold cannot possibly drop any lower. I expect that the bottom is between $1,000 and $1,100/oz. There’s a small chance it will fall to just below $1,000 per ounce. But knowing that we are mortals, and are not all-knowing, now is the time to start thinking about buying gold.

Next week, the Federal Reserve will decide whether or not to raise the interest rates. This could be the first push towards a price bottom. If there is a rate hike, it is possible that the gold price will decline even further — in dollars, that is. After all, if the Fed raises the interest rates, the euro could easily drop by a few percentage points as well. 

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