Although investors have been celebrating the new green shoots of economic growth, the ISM data released Wednesday poured a bit of cold water on the celebration. The report was essentially a survey of the service sector environment for July. The index is based on a scale of 1 to 100 with 50 being “neutral” or showing no growth or contraction. The latest data came in at 46.4 as compared with a 47.0 reading in June. Analysts had been expecting a jump to 48.2 so the news was fairly disappointing.
The lower reading was particularly surprising after the ISM manufacturing index actually moved to 48.9 from June’s reading of 44.8. While both manufacturing and service sectors are showing declines, analysts had been encouraged by Monday’s manufacturing data as the decline was much closer to flat.
In other economic news, the employment index declined to 41.5 from a reading of 43.4 in June. The number is certainly ominous with the official July non farm payroll on tap for Friday. It appears there is significant potential for the payroll report to disappoint and with the market up significantly over the last three weeks, we may be overdue for a moderate correction.
Take a look at the US dollar index below:
You can see that the dollar is quickly losing ground against rivals as the US spends recklessly on stimulus plans and other entitlement programs. In all likelihood, the government will have to print its way out of the excessive debt which is likely to set off an inflationary move that will cause paper dollar savings to rapidly lose purchasing power. A good example of this trend beginning can be seen in the chart of silver below:
Silver is likely to offer better purchasing power than gold in the coming months because silver doubles as an industrial metal as well as a precious metal. So while nearly every ounce of gold that has been mined over the past several millenia is still stored in vaults or worn as jewelry, silver is actually being consumed as the metal is used for soldering, in medical supplies, as specialty reflective material, and even as an input for making some synthetic fabrics.
So as we look towards a period that will likely not be as rosy as the market trend would have you believe, it is important to protect the purchasing power of your capital. That may mean investing in agricultural products or companies, it may mean shorting consumer driven companies trading at high multiples, or it may include precious metals.
My caution is to avoid the two most common mistakes. The first mistake would be to jump headlong into this bullish trend in equities simply because stocks are going higher. Following the herd rarely turns out to be profitable and can put you in a place where you are facing significant risk. The second mistake would be to sit numb with your cash in a safety deposit box (or CD, or other deposit instrument). Inflation and a falling dollar could quickly erode the purchasing power of that capital leaving you with a stable dollar account, but a poor real (or inflation adjusted) return on your capital.
FD: Author has a long position in Silver futures contracts
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