On this Flashback Friday episode, Jason Hartman talks to Bernie Baumohl, author of The Secrets Of Economic Indicators: Hidden Clues To Future Economic Trends. They talk about economic indicators and how they might affect interest and inflation. They also discuss business cycles, the market index, market sensitivity, and the gold standard monetary system.

Announcer 0:00
This show is produced by the Hartman media company. For more information and links to all our great podcasts visit Hartman media.com.

Jason Hartman 0:09
Hey, this is Jason Hartman, thank you so much for joining me. Do you know what day it is? Yes, it is flashback Friday, where you hear the best of the creating wealth show and you hear some good prior episodes, some good review. Remember, we’ve got almost 500 episodes out. And you know what? iTunes doesn’t even hold them all if you’re an iTunes listener. If you are listening on Stitcher, thank you for joining us. So we want to bring you some good review stuff now. What’s interesting about flashback Friday, it’s a little scary for me. I got to be very, very candid with you on that. Because you the listener, you get the chance to hold my feet to the fire. Did I make any predictions? Was I right? Was I wrong? I’ve been right about a lot of things but I’ve been wrong about a few. So you can give me a hard time about that if you wish. But it’s flashback Friday and we will give you the uncensored Best of the creating wealth show with a prior episode. So let’s dive in. Here we go. Remember, this is not current, it’s flashback Friday.

Announcer 1:23
Welcome to creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine self made multi millionaire who not only talks the talk but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.

Jason Hartman 2:14
Welcome to the creating world show. This is episode number 258. And this is your host, Jason Hartman excited to be with you today. As always, thanks for joining me. Today we’re going to talk about the secrets of economic indicators with our guest, Bernie Bal mall. And he’s written a book on that subject. And it’s got a couple of printings couple of versions out. And I think you’ll really get some stuff out of that and kind of learn how to decode what you hear about what you read about in the news media, and what it means to you as an investor and as an astute financial person. But first, before we get to Bernie. Normally, I would just have something like this be an internal issue. However, I want to bring it to the external for you, and I want to bring it to the external because I want to kind of show you what We deal with as a company, my company, my real estate investment company, what it deals with. And it’s really interesting because I think, and maybe I’m just crazy, maybe I’m giving myself way too much credit here. We certainly do not do things perfectly. There are lots of challenges and problems in business as there are with with anything valuable and aspirational in life. But we do such a better job of this than most of our theoretical competitors. And here it is, it is the contracts we have with our vendors. We require all of our local market specialists in the different cities in which we do business around the country to sign a pretty comprehensive contract. It’s four pages long plus another part of the agreement is another three pages long. So basically seven pages, and I know that a lot of my competitors don’t even require any agreement whatsoever. Now we have spent thousands and thousands and thousands of dollars I should say I have spent through my companies through different companies over the years, thousands and thousands of dollars kind of perfecting really 10s of thousands of dollars, I guess, perfecting this agreement, the agreement, we require our vendors to execute with us, so that we can protect you, the client and of course, protect our own interests as a company as well. I’m not going to be foolish saying we’re doing this just for clients. We’re doing it for ourselves as well. But our interest is your interest as a client. So we were trying to get a new local market specialist online. And I’m not going to mention their name, but I will tell you that our referral agreement came back and it was all redacted and marked up and you know, they made a bunch of changes and they crossed out a bunch of very, very important provisions, provisions that protect you, our client, you the investor, and I want to just share some of these with you as an example. I’m kind of reluctant to do this, I gotta be honest with you, because I think I’m maybe giving my competitors who do listen to my show ideas as to how to run their business more effectively. But Heck, if I’m doing a little bit of work for the greater good here, maybe it’s just better for everybody and probably is so Heck, I’m not going to tell you everything they changed in this but I am going to share with you a couple of examples. And this is so important to you as an investor. Now remember, I have long said that it’s not just about the market. It’s also about the vendor or the local market specialist, the provider of inventory in that market. And we work on these vendors with a on a referral basis so they pay us as a referral fee, as you know, for referring clients to them. Remember, you’re listening to flashback Friday. Our new episodes are published every Monday and Wednesday.

One of the great luxuries I have Have that others don’t have is that I’m already far beyond the point of being financially independent. You know, I don’t have a lot of financial pressures, thankfully. And I’m very grateful for that. But you know, I’ve been doing this a long time I’ve invested I’ve squirreled away money to invest and do things that grow and increase my, my financial well being over the years. Like so many people, they just kind of blow it. All right. And I haven’t done that. I have a little bit of fun, certainly, but, you know, I also invest for the future and try to be prudent as well. And I’m pretty conservative like that. And so I have a luxury of kind of saying no, and not jumping into every relationship, just because I can go and make a quick buck with it. And so one of these vendors, you know, we were working with this one for many months and who knows, maybe they’ll come back around if they decide to agree to our terms. So we sent them over the contract our referral agreement, and heck, I have never seen a local market specialist potential local Market specialists mark up our agreement like this before usually they accept it, you know, or maybe negotiate a few points. And we’re always willing to kind of do that with him. But the first part of it is the part where they default we define the parties, just the simple. If you’re a lawyer, and you’re listening to this, every contract just it defines the parties, right? Every good contract. And so our party is the company. They’re usually an LLC or a corporation that we’re dealing with. But what we do is we go a bit further and section one a right on the front page of our referral agreement. It says the company includes a any officer, director, shareholder, employee or agent of the company, B any person acting for or on the company’s behalf or at the company’s direction. Any affiliate sister or other entity directly or indirectly owned or controlled, will be considered to be the company. That’s the party. We’re dealing with. Why is this so important? Well, why it’s important is because many of these companies, whether they be totally legitimate and legal and ethical in every way or they may try be trying to be squirrely, okay. It’s cheap to set up entities, of course, you know, anyone can go to the internet and set up an LLC or corporation, in most states for 99 bucks plus the filing fees, it’s not hard to do this. And then you just go open a bank account, what do you know, while Ah, there’s, there’s an entity, there’s a company, there’s an LLC, right? And what will happen is these different vendors, they will have several different entities and sort of hard to pin them down and know what business they’re really kind of doing business under. And so we just say look at any sister entity, anyone acting at your direction, you know, all this stuff. I just said they are part of this agreement, because this agreement is going to protect you, our client, the investor and they cross All this stuff out, they crossed out, basically the entire paragraph one a, that defines that stuff. In other words, if we were willing to accept that it would allow them to be squirrely, and we don’t want to deal with squirrely entities where we can’t really tell whom it is that we’re dealing with. Okay? And who, who is obligated to be on this contract? And let’s see what else here. Oh, gosh, there’s so many changes and so many markups here. Okay, I’m just going to skip a lot of this stuff and, and go over what’s important to you the investor Well, here’s one, okay. We want the company the local market specialist to be on the hook. Now, some of these local market specialist sell for lack of a better word. I’ll call them like remote companies, okay. Where they don’t really know the market. Most of them the ones we like dealing with, they’re in the market. They live in the city. They do business in the city. They have physical offices in the city, okay. And we want to put a lot of Have onus on them to be what we call them. We call them what we call them the local market specialist, the LM S that is the name we give them. And by golly, we want them to be a specialist. We want them to know that market like the back of their hand, and we want them to sign a contract saying that they know that market like the back of their hand and then they know their properties that they are selling to our investors like the back of their hand. So here’s another paragraph that’s important one that they crossed out in its entirety and basically says company that’s the local market specialist okay. acknowledges that we, my company, are relying upon their superior knowledge and understanding of applicable law and market conditions within the jurisdiction. Or area that the property is located and that we would not enter into this agreement. If it was not for these representations, and we just want to make them the specialist. Okay, that’s what we want to do. And and here’s another one, they crossed that out this this Scared me to death about dealing with this vendor. Because listen to this, they crossed out paragraph H. Here’s what paragraph h says this the next paragraph it says the property offered to any investor and or sold to any investor, as the case may be does not exceed the fair market value of the property. Oh, boy, oh, boy. They cross that right out. Now, do we really look at a lot of my competitors. They don’t even have written agreements with our local market specialists. Okay, they may call them by another name, but we’ll just use that as the generic name since that’s what the name we’d give them. They don’t even have a written contract. So, who knows what representations the the local market specialist is making to you the investor, we want them representing that this property does not exceed fair market value. Now, paragraph J. They also crossed out paragraph j completely. It says if the company is a seller of property or an agent of the seller, company, number one will not increase the purchase price of the property to any investor in order to offset payment of any fee in this agreement will not market or advertise or offer to sell the property or substantially similar properties to any third party for a price that is less than the price offered to our investor our client and will never fail to notify or give or offer any discount rebate allowance or upgrade or other considerations. to any investor, unless they offer to our investor to that’s basically what it says. In other words, folks, this is the concept of most favored nation pricing status that we insist our investors get, they cross that out completely. Now, we said No way. We are not doing business with that vendor. That local market specialist will not receive any referrals from our network. None of our clients will see these properties because we think with them crossing all of that stuff out, it is far too easy for our client, you the listener, the investor to get a bad deal to get a raw deal to get burned. And we have a whole bunch of other provisions in our relationship in our agreement, express and implied okay to use the lawyer legally ease that protect you, our client and that What we want to do, and that is, I gotta tell you, I remember someone saying that they always wanted if they’re hiring a salesperson, if they’re buying something from a salesperson, they want a salesperson who is hungry but not desperate. And that’s one thing that is really, really important. Never deal with someone who is desperate, desperate people, throw ethics, they throw, they throw negotiation, they throw, they throw the balance of power off, they throw ethics out the window, just to make the sale for today. Fortunately, being in a stable position, myself and my company, I have the luxury to say no, and I don’t have to do that. I don’t have to enter into bad deals, which in turn would be bad deals for you our clients. Okay, so just a little internal stuff that I would never normally talk about on the show, but I thought it was instructive. Just a reminder, you’re listening to flashback Fridays. Our new episodes are published every Monday and every Wednesday. So here on show number 258. Let’s get to our guests Bernie here in a moment. But before we do that, I just wanted to play for you a little video because we’ve got our St. Louis tour coming up and so many of you have signed up for that and are joining us for that St. Louis and St. Robert, two great markets. One St. Robert that we’ve been doing in business in for many years but also St. Louis, a newer market for us and our clients are having great experiences in both of these markets. And just wanted to play a little two minute video here for you is on a local Fox affiliate station in St. Louis area about the job market there so I’ll just play this for you and be right back in a moment.

‘Video clip recording’ 15:46
oxy short sales is live in phases Dale and one of a number of locations dusting off the Help Wanted saw GEORGE

‘Video clip recording’ 15:53
That’s exactly what they’re doing here. Tom career opportunities is what the science says. I’ve got nearly 20 jobs to fill here. the YWCA headstart program, and like so many people, they are working hard to get the word out. They’re hiring. It’s not like they stopped looking here. childcare can be a high turnover business but folks trying to find a job like teacher rebels, Chappelle, say you can sense some change in the job market. I was a little discouraged looking in February and March and April, but there’s been a lot more postings online for teachers and school districts are putting up more information. So I’m a lot more optimistic. Now. That seems to be the case all over drive down Highway 40. And there’s a billboard jobs jobs jobs it screams and downtown shoto. a shiny new building tells part of the story. The sheetmetal workers are opening a new training facility later this week. They’re anticipating the need to train people. After nearly four years where training apprentices stop as the job market dried up. We’re finally getting to the point where we have almost all of our apprentices to work and we can start bringing new people in the federal number say St. Louis has been a little slower to emerge. And Andrew says the trades relying on the first and last out construction industry are finally on the verge of the glimmer out there is that there seems to be more, you know, contractors that are actually bidding work, which means eventually may not be for a year we’ll be Manning those jobs. Meanwhile, other businesses like here at the YWCA about their challenges again, you never know when people are ready to move on. So we want to be able to step up and fill those positions right away. Now the head of the St. Louis Federal Reserve made national headlines at least in the financial press earlier this month, predicting in an interview with Bloomberg that the national unemployment rate is going to keep dropping down to about 7.8% by the end of this year. By page Dale George sells Fox two news.

Jason Hartman 17:54
Okay, so just a little video with an update on the St. Louis jobs market obviously growing obviously Coming back. We have phenomenal cash flow properties there. As you know, I was there in the fall with a couple of our investors. Come back, join us register it, Jason hartman.com. You still got I think we’ve got one early bird price category left. And this is a really inexpensive little trip. And I think you’ll really, really like it. And just be sure to join us for that. You get the creating wealth in today’s economy boot camp on Saturday, here in about two weeks. And then you get the tour of St. Louis on Sunday, the tour of St. Robert, on Monday. It’ll just be a great time you’re going to learn so much you’re going to see two totally different, but very, very interesting markets at the same time. Now, just a quick announcement before we get to our guests on upcoming shows. We’ve got so many already recorded. Our next show. We’ll have Dan Ammerman. He’s going to talk about rental property cash flows, you’re going to love that number to six As a 10th show, we’re going to talk about success and goal reaching how to reach how to set and reach goals goal reaching. I don’t know if that’s exactly the right phrase. And then we’ve got an inflation expert talking a bit of a gold bug golden silver bug talking on episode number 261. So be sure to join us for those. And let’s get to our guests Bernie. But before you do that, register at Jason hartman.com. Join me in St. Louis. And we’ll have the whole team there. It’s gonna be a great weekend. And we will be back with Bernie talk about the secrets of economic indicators here in about one minute.

Announcer 19:36
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Jason Hartman 19:58
My pleasure, welcome Bernie Brown. To the show, he is the author of the secrets of economic indicators. And this is so important because you know, I know we’re all so confused so frequently about all of the different reports. And boy, if you pick up the wall street journal or your watch CNBC, it’s even more confusing. So today we’re going to drill down on what these indicators mean. And maybe which ones are the most useful to us as investors. Bernie, welcome, how are you?

Bernie Baumohl 20:22
I’m fine. I’m fine. Thank you. And I’m glad to join you.

Jason Hartman 20:25
Fantastic. Bernie comes to us today from Princeton, New Jersey. And I like your book, it’s a great service. And tell us more about it. And maybe first what inspired you to write it?

Bernie Baumohl 20:38
Well, I realized that no matter what field you’re in, whether you’re an individual investor or a professional portfolio manager, or a CEO of a company, or even if you’re government policymakers, everyone wants to have some sense of appreciation of where the economy is headed. And very often we’re just utterly clueless about this. What I have found out, however, is that by taking a look at some critical economic indicators, there will be some very good clues that will help tell us a reasonable probability of the direction of the economy, its path and and of course, what the possible implications might be for interest rates and for inflation as well. The key lesson that I’ve learned is that one should not necessarily rely on what’s being reported in the newspapers, or what one hears on television because generally, they just provide the headline information with some superficial analysis. What really does exist in these economic reports is a lot more valuable data really a goldmine of information, but it does require people to have the courage to to dig in. To the data, you do not have to be a PhD economist, you don’t have to have a doctorate in, in statistics, a lot of the information there is just as provided is simple to understand. It’s really quite intuitive. And once you get the hang of it, I think everyone will be able to benefit by following these economic indicators. Absolutely. Now, I guess we could sort of categorize Bernie into two major sections of indicators. One is the domestic or the US indicators, and the other being the international indicators. When you look at US economic indicators. I mean, how many are there? Are there hundreds? Are there dozens are there thousands? I could say that all of that is actually true. It just depends on what the main economic indicators, the ones that are the most useful. There are about I’d say, two or three dozen that come out every single month. They come out by by the government and they’re also private two organizations that put out these monthly economic indicators. Incidentally, let me just say some of these indicators also come out on a weekly basis, which makes them in many ways more timely, because they can pick up, changes nuances in and shifts in the economy much more quickly than can, for example, monthly, or quarterly numbers. But everyone is pretty much familiar with the economic indicators that I’m talking about anywhere from the GDP numbers to retail sales, to housing starts and permits, all the way to the ones that have been put up by private organizations such as consumer confidence numbers, and perhaps more obscure statistics that are put out by the Institute for supply management to the ASM purchasing managers, you know, all of them provide some great clues and if you can corroborate them, if they somehow all points to a very similar direction, you know, then you’ve got, I think, a fairly good understanding not just where the economy is headed, but which specific industries are doing Well, and which are not? Sure? Well, you start off in the book, which I think is a great way to start by talking about the business cycle. Can you just explain in a nutshell Bernie, what is the business cycle? Well, the business cycle is a pattern with which the economy has behaved for hundreds of years. And basically, it means that there are moments when the economy is growing, that people are spending and that companies are investing. And there are also moments when there is stress that seems to build out so that when everybody is buying, but for some reason the economy is not able to produce enough, then inflation pressures pick up at that point, the Federal Reserve will start raising interest rates to cool off inflation. But very often, they may overdo it with with ride by rising rates and that can cause the economy to weaken ultimately, then to fall. recession. And then at some point rates fall and real estate prices, for example, drop at the cost of borrowing for auto loans dropped to a point where consumers find them attractive again, and they start to ramp up purchases, which then starts the whole cycle over again, with the economy responding positively. And then you get a recovery. With firms hiring again, people making more money and starting to spend that seems to be a simple way of defining how a business cycle works.

Jason Hartman 25:32
Very good explanation. One of the promises of the Federal Reserve back in 1913, was that it would end the boom bust cycle. And I know this may be a little bit off topic, but since we’re talking about the business cycle, I just wanted to get your take is a business cycle inevitable that we’re always going to have those build ups and then the peaks and the valleys and or could it or should it even be smoothed out.

Bernie Baumohl 25:59
You know, you would think that with everyone in favor of an expanding economy and rising employment and stronger income growth, that we would all have an interest in seeing the economy just grow in perpetuity. But that’s not the way it works. People make mistakes. Sometimes companies will buy more inventory than they really need. There are times when, for example, the economy just can’t produce all the goods and services that people want. So there are these stress points. And and let’s let’s also not forget the fact that people are often capable of committing extraordinary folly and all these things will cause at some point the economy to trip up, and that’s when we do get the weakness followed by the recession. Having said that, I think the Federal Reserve has shown I think increasing success in making periods of economic growth longer before an economy gets into trouble. That’s what we have seen during the post World War two periods. You know, we used to have brief periods of growth that would be followed by recession. But but then by, by the decade of 2000, the new decade, the new millennium, we actually began to see, and just before that, began to see longer periods of economic growth. But as you know, that all came to a head in in 2007, when really, there was an enormous amount of mistakes made by human beings. And you can categorize that into a cauldron that consists of fraud and recklessness, and all these things sort of cause the economy to overheat, get into trouble. And we then had that turned out to be the worst really financial crisis in the deepest economic recession since the Great Depression.

Jason Hartman 27:58
Yeah, you know, again, I don’t want to kind of Make this a whole discussion of Federal Reserve and this kind of stuff because I really can’t wait to drill down Bernie and, and understand more of these indicators. But just quickly to give the Federal Reserve credit for longer economic expansion periods, wouldn’t that just be made a lot easier by detaching the money from gold back in 71 and doing the Keynesian thing and just creating so much new money? I mean, that seems like it would expand, theoretically, for a short time before inflation hits, expand the economy. And it seems like it’s sort of easy to give them credit for that when you you know, when you’re not attached to a sound money policy,

Bernie Baumohl 28:38
there are advantages and disadvantages to going on to a gold standard. The the advantages that it would certainly limit excesses in spending and borrowing by the government. It would certainly i cap inflation pressures, but the disadvantage is that when We are in the middle of a, you know, huge global economy, one that’s expanding every day, I think then the Federal Reserve needs to have the ability to be more flexible. And that becomes really crucial. And one very clear example that we could find now of the difficulty of really going on to any standard is what’s going on in Greece at this moment. Greece, as you know, is in deep financial turmoil, but it is stuck with a single currency, the Euro, which means that it is incapable of helping its own economy, getting people back to work, getting companies to grow and invest there, because Greece is now handcuffed by holding on to a euro it cannot devalue the euro. nor can it lower interest rates any longer because that gave up that right to the European Central Bank. So there are limitations to Having a currency that’s fixed and removed and unmovable. And when you run into some economic hardships, you really do want to have some flexibility. So I think that it is important for the federal reserve for a country to be able to have the opportunity to lower interest rates when, when when need to, and that means that they sometimes, you know, cannot rely on any fixed metal or any fixed currency, they need to have flexibility. And I think that’s one of the great advantages of the reserve.

Jason Hartman 30:31
Fair enough. You know, I don’t want to kind of make it a whole discussion about that. One of the things I love about your book, Bernie, is that you start off with like the index of leading economic indicators. And you say market sensitivity, you rate it that way is that low, medium or high? explaining what is the index, when it’s released, how frequently it’s released in the source of the index, or the indicator, I should say. So tell us about that. And maybe let’s go through some of these specific indicators and What they all mean to us as individuals?

Bernie Baumohl 31:02
Let me just preface my comments by saying that the index of leading economic indicators has actually undergone substantial changes in the methodology. That is, the Conference Board actually just got rid of a lot of the specific components that went into the leading economic indicators index, because it really didn’t do the job accurately. So they’ve made some changes. And I think it’s still too early to tell whether the new changes that have been put in place are are any more effective than the earlier ones than the early index. Having said that, it’s also important to point out that it may also be ironically one of the most useless economic indicators out there. And the reason I say that is because it’s really based on a lot of data that has already come out, you know, you and I can look at all the components and the leading economic indicators. And and we can find them because they’ve already been released. It’s just that the Conference Board puts them to Gather they combined. So let me just make that statement up and up front. Obviously, what these indicators are supposed to do or help us understand where the economy is headed so that whether you’re an industrial or business leader, you can make the right decisions about what to do with your capital with your investment funds. So we look to it, but it’s not really, as far as I’m concerned the best. There are a number of other very sensitive economic indicators that are out there, although they may change depending on where we are in the business cycle. For example, I wouldn’t be too concerned about inflation if we’re in a recession. But I would be more concerned about inflation, if the economy is getting close to overheating, and the Federal Reserve may raise interest rates. So we have to keep in mind that the best indicators depend on where we are in the business cycle. Having said that, there are a couple I think that are worth tracking very closely. Certainly the employment numbers is a key economic indicator, not so much the unemployment rate, which I think has caused more confusion than clarity these days about what’s going on, but buried in the employment report, which by the way, is about 30 pages long. Buried in that report, though we have lots of data about weekly hours average weekly hours worked, we want to see those hours pick up. Because as people spend more time at work, that will likely lead companies to hire more workers down the road since at some point, people become tired that become less efficient, and quality control issues can sort of seep in under those circumstances. So the more hours worked, is good for the economy, and it’s good for the future prospects of employment. We want to take a look at temporary workers or companies, you know, ramping up temporary employment because this is an early sign to that firms are becoming more optimistic about the future, but they’re not yet that confident that we’re in a sustained economic recovery. So they take their chance first by hiring temporary workers. We’d like to look at trucking employments, you know how many In our car trucking companies hiring more workers. If they are, it’s a good sign because after all, the trucking industry delivers goods to factories, to wholesalers to retailers. And if they’re all busy, you know, then we would expect employment in that sector and trucking sector to pick up as well. We like to look at childcare employment, if more people are finding jobs and and that means that parents have to put their kids in daycare centers, then we would have to see employment at daycare centers pick up because state law requires that there always be a certain ratio between caregivers and the number of children that they want. So employment is one of the really important economic indicators in general to keep an eye on not so much the unemployment. Yeah, and

Jason Hartman 34:46
I like the way you look at that because that would be like looking back in the days of the California Gold Rush. That would be like looking instead of how much gold are people finding that indicator, right, if there really was any real But rather you’d be looking at what are the sales of Levi’s blue jeans and picks and axes and shovels. And so you’re looking at sort of what is needed the result of that employment. And so that’s, that’s some very good advice there. I like

Bernie Baumohl 35:13
that. Yeah. And so these are the precursors to job growth, the future job growth. In addition to that, you know, we look very carefully at real income growth. And that’s actually a very big issue nowadays, are Americans getting a wage that at least matches the rise in the cost of living? Ideally, we want to see incomes grow larger than the cost of lifting because that means that they have greater purchasing power and will spend more, but these days for the last year, we have actually seen purchasing power euro that is people. The wages of households are not keeping pace with inflation at all. Oh,

Jason Hartman 35:54
they haven’t kept pace for four decades now. I mean, Americans haven’t had a raise in a couple of decades. And that, by the way, is when you follow the official inflation numbers. So we have to first believe them. And then we still see that Americans are just treading water.

Bernie Baumohl 36:10
No, that’s right. I mean, it without a doubt, Americans have been falling behind the cost of living but but there have been cycles when they’ve actually seen real income growth that we did see that earlier in the decade. But more recently, we have seen it fall into the negative column. And when households want to spend more and and they have in the last couple of months, you know that they’ve sort of awakened. Now there’s a lot more pent up demand and they’re anxious to go out and spend but, but when you have erosion of purchasing power, and they want to spend more, and somehow you have to make up the gap between the loss and real income and how much more you want to buy. And so what we have seen is that Americans have been digging deeper into their savings saving rate has been declining for the last year, and people have also been borrowing more Borrowing more in terms of revolving credit, and also non revolving in form of bank loans, all of this to help finance all this increase in spending. My concern is that at some point that’s going to stop, you can’t continue doing it. Now, that’s interesting, because I haven’t really paid a lot of attention to the savings rate in the last year. But my impression was that the Americans I mean, post financial crisis, for the first time they were actually starting to do the right thing. They were paying off debt and saving money. But that’s no longer true or we have seen during the recession, and then during the early periods, after the early period of recovery, we certainly have seen households become much more frugal and increase the amount of savings that they have the savings rate certainly did increase. But if you take a look at the performance of the savings rate in the last year, you will see that it peaked at some point early in 2011, and then start To drop off steadily over the course of the last 12 months, and that is because if consumers wanted to break out of that, you know, frugal mode, but they’re stuck because they have no real income growth, they’re going to have to find money somewhere. And so they’re they’ve been actually savings, lat saving less, and they’ve also been borrowing more and and that becomes a concern as well. We’ll be back in

Jason Hartman 38:27
just a minute.

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Jason Hartman 39:13
So are we sort of putting I mean, you have so many indicators listed in the book Bernie, are we sort of putting together a dashboard, if you will, that are some of the the main primary things that a non financial person should be keeping track of? Is that what we’re kind of doing now just taking a dashboard view of how many indicators are like a real important ones. You’ve talked about a couple of them?

Bernie Baumohl 39:36
Well, if you want to get a real sense of what the outlook is for the economy, the two or three indicators that I like to look at most because they really do tell you what output will be what production will be in the future. It’s to take a look at those that tell you what orders are coming in to businesses, especially lamb factory orders. There are actually a number of different indicators that tell you about orders, the the incident supply management, the ITSM numbers tell you what new orders, a number of different industries are getting in both manufacturers and even services, because orders lead to more, if there’s an increase in orders, they lead to more production, two or three months down the road. But if orders start to decline now and we actually see that in the numbers, then we could expect to see production begin to be scaled back. And that obviously has implications for employment and for consumer spending. So, you know, those are probably one of the most the best indicators that have high predictive value as to what’s going on in economies to kind of focus on the new orders that are coming in factory orders, particularly durable goods orders, you know, just a question for you on on these types of things. You mentioned that they There are also indicators that include service orders, how the heck do they know these things? I mean, when when it comes to the collection of this data. Of course, there are a whole bunch of problems there naturally. But how small of a business do they collect from, for example, I have a couple of different companies and their service businesses. No one has ever called me and asked me How’s business? That’s collecting data for anything that I can think of? And, you know, I have friends that have small manufacturing companies where they’ll manufacture like electronic components and things and who’s collecting this data? That’s the Institute of supply management. I think you said and, and what size companies are they only looking at? Are they only calling Intel and Apple are they call it everybody else? Well, the Institute for supply management comes out every single month with the purchasing managers index. But in that index are some other components and one of those components includes new orders, and they survey purchasing managers at about 20 of weather, actually, by 18 different industries across the country. And you can actually see by going on to their website because they make all this information available to everybody. In fact, virtually all the economic indicators that I have in that book are in the public domain, there’s no cost to them. It’s freely available. And the isn people, what they do is they actually tell you, which industries in the service sector have seen an increase in new orders, which industries in the manufacturing sector is increasing new orders. And by the way, for those of you who are, you know, for those who are investors, that obviously can prove very valuable information because it sort of leads you in the direction of those companies that are actually expanding, but there are there the the increase in awards would come from services, but a broad array legal accounting, medical services, and all you have to do is sort of take a look at that particular website and see how they actually define the penalty of services out there but it’s, it is one of those indicators That has really attracted the attention of Wall Street, because they come out very, very early in the month. In fact, they usually come out the first day, that is the manufacturing index comes out the first day of the month, and the service index on the third day of the new month, and they tell you what happened in the image in the month that immediately preceded so they’re really timely. And and I would really recommend that people really become more familiar with them because they’re quite easy to follow on the web.

Jason Hartman 43:28
Sure. Yeah. Okay, so so the dashboard, the two or three or six or whatever, how many indicators there are. Let’s let’s keep going with those because I think this is great. And, and maybe we could kind of recap them to so everybody, they don’t get lost in the conversation here as to what those are.

Bernie Baumohl 43:44
All right. Well, at this stage of the business cycle, I would look very carefully at changes in consumer spending patterns and look at housing, because I think housing right now is one of the major areas that has been holding back The economy from growth and anyone looking at housing will begin to see that there’s now some daylight sort of breaking out what specific indicators should we be looking at? I like to take a look in the housing area. The the homebuilders confidence measures put out by the National Association of homebuilders. And some of the more recent numbers have shown that home builders and these people are on the front lines of the housing industry. They are now more confident than they have been since 2007. Since before the recession started. In addition, we begin to see housing starts and permits pick up housing starts Of course new construction, new construction does help stimulate the economy. permits is more of those leading indicators tells you what kind of new construction we can expect in the future. But all told, new home construction can affect when as much as 15 to 20% of US GDP when you take into consideration what happened When a person buys a home after it’s been built and the furnishings that go into it, so that’s one of the area’s housing starts and housing permits the National Association of homebuilders. Certainly new and existing home sales would help broaden the picture of what’s going on in the housing industry. As far as consumer spending,

Jason Hartman 45:16
you know, that’s an interesting thing that you mentioned it because one of my investment philosophies and I invest all over the country and so to my clients, is something I call regression to replacement cost where you’re basically buying buying properties, houses and apartment buildings, mostly below the cost of construction. So when you say that home builders when the nhp the National Association of homebuilders is saying, there’s more confidence, there’s more optimism, and builders are going to start building again that indicator is incredibly meaningful to someone like myself because what it says is that they are thinking that they can actually build something and pay the cost of construction plus the cost of Land and have a profit or at least a breakeven to keep the machine going. In other words their construction machine going to actually build and that means anybody that’s purchasing property today below the cost of construction is probably in a pretty good position. Hmm,

Bernie Baumohl 46:17
absolutely. One of the reasons why home builders are so confident is that the current inventory of completed new homes out there is now the lowest it has been in half a century,

Jason Hartman 46:31
while the lowest five decades in 50 years,

Bernie Baumohl 46:36
while the lowest has been on the record. I mean, since going back to the first numbers, which really go back to pretty much the beginning of the post war period, so it’s the lowest it’s never been lower than that they have just held back new construction and allow the market to gradually bring that inventory down. But I think the realization has also been made by Home Builders that they’re seeing more trouble Come into their home builders showroom, their sales offices, yeah, their sales office are seeing a lot more traffic. And that is an encouraging sign for them. In addition, they know that the number of households who have been temporarily living in rental buildings are now more anxious to start going out and buying homes again. And finally, you know, mortgage rates are at record low levels, and banks have become a little bit more forthcoming with mortgages. And we do and by the way, and also the economic outlook, the confidence level of consumers have been picking up too As you know, in the last couple of months, put it all together. And and that is one of the reasons why home builders are moving ahead with new construction and filing for new permits down the road.

Jason Hartman 47:45
Yeah, that’s a good sign. You know what, you know what’s interesting that I’ve always thought and I don’t think there is an economic indicator for this, but that is population. That’s not an economic indicator really, is it but the population is increasing too. So that’s a another thing. Going in the favor of landlords and home builders.

Bernie Baumohl 48:02
Yeah, I would not at all dismiss both and population a little bit more relevant indicator would be the growth in households. Yeah, they’ve been in both in population. Obviously, if, if there was a birth in the family, you know that increasing the population, but household heads of households, people who graduate from school and now we’re on their own, who wants to have their own home, people who leave the armed forces who are now looking for residents, and actually, they’re the ones that are actually helping to drive the housing market now. And, and that is where we begin to really see an increase in demand. Take a look at some of the recent numbers and new and existing home sales and you do see a pickup in demand there as well. That’s kind of funny that no one’s really talking

Jason Hartman 48:46
about that in terms of the housing market, but with so many troops coming home now. It’s kind of a mini version of what happened after World War Two, you know, where we have the baby boom and all those new heads of household. Those troops have been deployed for yours now and some of them are coming home.

Bernie Baumohl 49:03
So that’s that is that is certainly that is certainly part of the overall equation that’s driving more demand in housing. Well, the only thing I was going to mention was the the importance of consumer spending, after all, consumers make up 70% of all economic activity. So, you know, of all the economic numbers out there, most of them most of the economic indicators, take a look at what consumers are up to from one angle or another. So whether it’s consumer confidence, whether it’s personal income, whether it’s spending, we want to know, we want to know what consumers are thinking and what they’re doing with their money, because they’re so they play such a critical role in the economy. And so we do look very carefully anywhere from, as I mentioned earlier, income growth, all the way to some of the more obscure numbers that aren’t followed by many economists, which is gaming revenues, our consumers, so confident, are they gambling away or willing, that they’re willing to burn their money So we looked at Believe it or not, we do look at numbers that are put out by the Nevada Gaming Commission that tracks actual gaming revenues on the Las Vegas Strip. And we do see a pattern, you know, they drop significantly during recessions, but they do pick up during recovery. And it is a sign of constant.

Jason Hartman 50:17
How’s the gaming revenue doing now? That’s very interesting.

Bernie Baumohl 50:19
Oh, oh, it has picked up. I mean, during the recovery, we have seen steady increases in gaming revenues. But what is most interesting to me is that we have begun to see a slight decline. It’s sort of been scaling back in the last month or two. And I’m wondering whether this is one of the early signs that households may be coming under some financial stress, in part because the rise of gasoline prices, perhaps because of the lack of real income growth, perhaps the concerns of traveling because of the geopolitical risks that are out there. So you know, there is something that we’re now getting Getting to track and focus on more closely. Very interesting.

Jason Hartman 51:03
What are your thoughts about inflation and interest rates heading forward? And then how can someone what indicators should they be looking at to judge those things?

Bernie Baumohl 51:13
Let me take a look. First, let me talk first about the inflation numbers. Clearly, inflation has stabilized in the last few months, it has been rising much of last year to reflect the increase in food and energy costs. But then is oil prices start to come down? and inflation headline inflation numbers began to stabilize in the final months of last year. And headline inflation is core inflation meaning there’s no food and energy in that index, right? No headline inflation includes energy. Sorry, core inflation. Yeah, right. So we have been and I like to talk much more in terms of headline inflation, because I always have to remind the impact it has on households. The Federal Reserve for obvious reasons I’ll explain maybe August, but the Federal Reserve prefers to look at core. But let me just go back to the headline here. So headline inflation has stabilized. But look, that’s looking at prices. In the past, what we have to do is try to figure out Alright, well, does that mean that headline inflation will continue to be moderate in the next couple of months for the rest of this year. And here, we have some genuine reasons to be concerned, in part not because of what’s going on in the United States. But what’s going on outside us, particularly in the Middle East and Persian Gulf area, you can see that already being manifested in gasoline prices, but that only reflects the rise in energy in in oil prices. So we could very well see, as we have forecast, that the headline inflation will begin to creep up. It’s around 3% Now I think it’s going to go above 4% during the course of the year, and that does put the Federal Reserve in something of a box, because headline inflation that goes up above four and a half percent is a bit uncomfortable for the Fed. But they also know that these are the results of temporary factor tensions in the Middle East, not because of some stress going on in the US economy. And so what they’re probably going to have to do is simply allow the inflation numbers to creep higher on a temporary basis, or at least until, you know, the Middle East situation. Millie’s conflict gets resolved, if it ever does, but for the time being, I think the Fed has really no choice but to keep interest rates low, and that is their mission. And that is what they do, particularly the reserve chairman, Ben Bernanke. He has stated repeatedly that his goal is to keep short term rates and also long term rates down as much as possible. Short term rates have already been at zero or near zero for the last three years. And and as you know, yields on Treasury on 10 year treasuries have been at record lows. They’re below 2%, which then obviously influences mortgage rates as well. So you really can’t bring rates down much more than this. But they attempt to keep it down as low as possible in the hopes that it will ignite more economic growth down the road because the economy is still very weak. And what’s what’s the the odd and really lousy paradox we’re in right now, it seems like Bernie is that we’ve got these very low rates, but the only people in any real big scale that are able to take advantage of them are the elite class, the large companies and so forth who can borrow in the banks, of course, as opposed to the traditional consumer that, you know, you said banks were more forthcoming with mortgages. Yes, that’s true. I agree with you, but not as much as they should be, especially given all the money floating around in the system. And so ultimately, it seems like you know, we’ve Got to have some

Jason Hartman 55:01
significant inflation. I mean, that’s my thinking on it. You may disagree. But it’s it’s like we’re in these low rates are not benefiting the direct consumer, the middle class and the little guy because they can’t really take advantage of them very much. I mean, they do here and there, but it’s not significant. Credit Card lates certainly aren’t low.

Bernie Baumohl 55:22
Yeah, this is this is one of the real dilemmas that the Federal Reserve has right now. They have seen they’ve done all they really could. And they have really come to the conclusion behind closed doors that the economy is not lacking money. There’s plenty of reserves out there. Companies are sitting on a record $2 trillion in cash reserves, money that’s not being put, there’s no shortage of funds. And as I said, the rates are the lowest that they’ve been. But the problem is that we’re still trying to recover from a very serious financial crisis. And that’s going to take time, banks are still trying to fix their own balance sheets from the disaster that occurred with the abuses from real estate and from acid back mortgages that are linked to real estate and car loans. And as they’re trying to build up capital, and they have, and they have, to some degree really restored their own balance sheets, they are also worried that things can that they can suffer a very serious setback if there is a major sovereign default in Europe, because the US, many of the large us banks have about $600 billion exposed to what’s going on in Europe. So if there was a default in Europe that affects European banks that can infect us banks. And that’s one of the reasons why us banks have been so apprehensive about really opening up their lending window. They’re still very nervous about what’s going on. Secondly, they’re also quite concerned about the outlook for the economy. You know, you Economy might look good now. But if oil prices keep moving higher and energy prices keep climbing, you know, that can slow the economy. And so someone who is credit worthy right at this minute, may not be credit worthy, and six months from now or a year from now. So there was a, there was a enormous cost of uncertainty that we now face. And that is what banks are dealing with. And that’s why they’ve been so cautious about Monday.

Jason Hartman 57:22
good points. I know we’ve got to wrap up here. But did you want to give any more indicators or just kind of wrap it up on what indicators are the most important maybe kind of recap those and then we’ll let you go?

Bernie Baumohl 57:33
Well, I think the key indicators to take a look at at this point would be employment, consumer spending, and housing. Those are the key ones in the United States. For for Europe. I think we would look very carefully at what’s going on in with Germany, for example, and look at business client business confidence there to tell us whether there is a how deep the recession might be in Europe, and we would want to look also at whether China is is slowing markedly as well. And I’ve highlighted some key economic numbers that one can track and follow the economic conditions both in China. So it’s the world’s largest economy in the United States, and then the second largest China. And then, of course, what’s going on in Europe? And, and let me emphasize, the one area that people have to focus on much, much more on these days is, are the implications of a conflict in the Middle East, which could of course, cast a huge shadow and change everything overnight, as what’s happening in the European and US economy. Do you want it? Do you want to mention that? What do you I mean, of

Jason Hartman 58:35
course, you know, war and conflict, they change economies a lot. Do you want to say anything specific about that? The Middle East?

Bernie Baumohl 58:42
Yes, I think Yeah, yes, I think I do when we are, unlike the past where people would generally not spend too much time looking at the geopolitical risks because after all, there’s nothing they really can do about it. These days, I think it’s become much more important. I think investors by Large that have had a habit of maybe rebalancing their portfolio once a year, I needed to have to now take a look and possibly consider rebalancing your portfolio two or three times a year, simply because of the fluidity of events that are taking place in Europe and in the Middle East it, you know, you have to really pay a lot more attention to what is happening outside the US economy because we can get buffeted very, very quickly. The damage can be transmitted in the US instantly. So I think people has to become much more knowledgeable, much more cognizant of the events that are taking place and what the possible consequences could be. And the US and there are a couple of economic indicators that might give you some clues that things really look ugly. And in this particular case, it would be the weekly numbers you know, it was in our consumers now getting so upset about the rise in gasoline prices, you know, that they’re cutting back on spending elsewhere, and Bloomberg comes out with the weekly consumer confidence numbers. So that that captures the mood of consumers that much more quickly. Anyway, that’s just sort of to sum up the importance of also keeping an eye on what’s going on globally, not just what’s happening here in United States.

Jason Hartman 1:00:10
Well, Bernie, I just got to compliment you. You have written a very comprehensive book here and it’s easy to understand. Again, folks, the title is the secrets of economic indicators, hidden clues to future economic trends and investment opportunities. It’s available on amazon.com. And please give out your website as well.

Bernie Baumohl 1:00:29
Thanks for inviting me and appreciate the plug. The other website is the economic outlook.com

Jason Hartman 1:00:38
Economic outlook group calm Bernie, thank you so much for joining us today. really insightful very much appreciate it. Well, thanks for the invitation.

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