Surging Inventory to Sales Ratio Sets Off Stock Market Crash

The main reason of today’s decline in stock markets is the declining wholesale trade sales and increasing inventory. The inventory to sales ratio is hitting a new high for the year and translates to this. Surging inventories are a leading indicator for declining GDP. And declining GDP equals plunging stock markets.

Remember the correlation here?

Inventories can be considered a part of a group of leading indicators of business cycles. Whenever inventories surge, a possible reason could be a decrease in consumer demand. The result is that producers will cut output and sales. This will translate in a lower GDP growth.

It is worthy to plot the business inventory to sales ratio against GDP growth.

Following chart shows that the blue line is leading the red line. As inventories build up and sales go down (blue chart goes down), GDP growth will follow the trend (red chart goes down).

Business Inventory to Sales Ratio Vs. GDP

Inventories can be considered a part of a group of leading indicators of business cycles. Whenever inventories surge, a possible reason could be a decrease in consumer demand. The result is that producers will cut output and sales. This will translate in a lower GDP growth.

It is worthy to plot the business inventory to sales ratio against GDP growth.

Following chart shows that the blue line is leading the red line. As inventories build up and sales go down (blue chart goes down), GDP growth will follow the trend (red chart goes down).

//research.stlouisfed.org/fred2/graph/graph-landing.php?g=YXu

Since 2012, the inventories have continued to build up against lower sales, so I expect GDP growth to slow down.

U.S. Mint Sales Surprisingly Favor Silver

It is time to take a look at the U.S. Mint sales of gold and silver again to see if we can get some interesting conclusions out of it. We know that the U.S. Mint sales are a good proxy for global gold and silver investment demand.

Here is the data:

Chart 1: U.S. Mint gold and silver sales (ounces) (april 2014 extrapolated)

What immediately surprises me is that the two trends are in reverse (Chart 1). Gold sales (blue) have been hitting lows while silver sales (red) are booming. This urges me to look at the ratio between gold and silver sales.

Apparently, for every ounce of gold sold, they sold 90 ounces of silver in 2014, which cannot last forever (Chart 2). This is because annual silver supply is 1 billion ounces and gold supply is 130 million ounces. This is a ratio of 1 billion / 130 million = 8. So there is only 8 times as much silver available as compared to gold.

Chart 2: Ratio silver to gold ounces sold

So, how can it be that people are buying 90 times more ounces of silver than ounces of gold? Supply and demand will eventually go to equilibrium. Which means either gold goes down or silver goes up in price.

This is why I still think silver is grossly undervalued to gold and that’s why I will buy silver and silver mines, waiting for a surge in silver.

Retail Sales Vs. Disposable Personal Income Per Capita

When people have a low disposable personal income (income after taxes) (green chart), they will not go out and buy things. Retail sales (blue chart) will therefore drop. You can also think of it like this. When taxes go up, people have less savings, less disposable income and can’t buy much as a result.

Correlation: Mortgage Rates Vs. Mortgage Applications Vs. Pending Home Sales

Just discovered another correlation on Zero Hedge. If mortgage rates go up, lending becomes more difficult, so people stop applying for new mortgages. This means there is a negative correlation between mortgage rates and mortgage applications.

When mortgage applications go down, not a lot of homes will be sold. This means that home sales will go down. As suggested by the following chart, there is a correlation here between mortgage applications and pending home sales. In fact, mortgage rates/mortgage applications are a leading indicator for pending home sales as presented in this Zerohedge article.

If it’s true that interest rates and mortgage rates will go up, you can bet that we will have another housing crisis. Home sales go down. All those homes will be coming onto the market, while nobody wants them.