In a Burning Building with Copper, New Housing Starts, and the Labor Participation Rate Falling All Around Us

The price of copper has fallen by more than 13% since May and hit a 5 year low last week. You might be wondering, what does copper have to do with gold? As we mentioned back in January, when copper had its largest single day decline in 3 years, copper is often referred to by economists as “Dr. Copper” for its ability to diagnose the true health of the economy. When copper prices are falling to 5 year lows and warehouse levels are hitting two-year highs– that means copper demand is weak. When copper demand is weak, that means that new construction projects are going to decline even further. Copper wiring and plumbing are used in nearly every new home and commercial building constructed today. So when copper prices decline and inventory levels pile up, it probably means that people aren’t going to be building as much in the coming months.
 
What few people take into account is that copper is ordered months in advance. That means that the full effect of this decline won’t be seen in the housing market for at least another 3 to 6 months.
 
When you look at the FED’s historical chart for Housing Starts since 1959– new homes started construction month-to-month– you can see that before the economic crisis of 2008 struck, and just before every recession (the recession periods are marked in grey stripes on the chart), new housing starts had already started to decline. In fact, they reached their peak in January of 2006 and then took a dive, falling every month until finally bottoming out 3 years later. Since then, the numbers have gradually built back up. But the most recent data to come from the St. Louis FED indicates that things are making a downturn again. New Single Family Housing Starts for May dropped more than 5% from April. Numbers for June won’t be released until the end of the week, but judging by what is happening with copper right now, you can expect the numbers to decline even further.
 
China’s stock market has been gutted by a 30% drop in just the past month. Much of the demand for copper over the past few years has been from China because the country has been in the midst of a massive real estate and asset bubble. Entire “ghost cities” have been constructed– some the size of Manhattan– without anyone to live or work in them. They have had so much money to invest in real estate, that they’ve even started buying and building in the U.S.. That means that China has been inflating a real estate bubble here in the U.S. as well. Toward the end of last year, they finally began a slowdown of these new construction projects. It has taken a while for that slowdown to ripple into the stock market, but with the 30% decline in the past month, the government has tried to institute controls in order to keep it from crashing completely. They banned the selling of stocks for up to 6 months for large shareholders and many companies have halted stock trading altogether. It has only managed to slow down the bleeding.
 
Last week, the New York Stock Exchange suspended trading and blamed it on a “technical glitch” due to a faulty software update. Coincidentally, the “glitch” just happened to hit after the market took a 200 point plunge in the first 2 hours after the opening bell. Of course some have suggested that the market could have been intentionally halted in order to prevent a total freefall caused by investor panic over a possible contagion from markets in China and Europe. The markets have perked up in days since the glitch as they’ve been caught up in a post-deal euphoria from Greece caving to the Troika’s demands in order to remain in the euro. Alex Tsipras sold out Greece’s Syriza party and will agree to nearly all of the Troika’s demands for new austerity measures and privatization of the country’s infrastructure. This was despite the country voting “No” by an overwhelming 60% majority in a referendum on the issue last week. The concession by Tsipras led to riots in Athens.
 
You can think of the deal in Greece and the market controls in China as medicine for an extremely sick global economy. But it’s not good medicine. It’s cheap and ineffective. It’s like taking aspirin for a brain tumor. It might temporarily take some of the pain away and convince you that you are getting better, but the reality is, it’s only going to get worse and you need an operation to truly fix the problem.
 
This temporary relief injects some euphoria into the markets but it’s going to be short-lived. Once the pain starts up again, you can expect the contagion to be felt here in the U.S. as well. And when that happens, when we do catch this flu that is spreading around global markets, it could be deadly. Because we’ve already got pneumonia.
 
Since the FED has kept interest rates close to zero for the past few years, trillions of dollars in free money has been pumped into the economy and used to inflate the stock market. And all of this has happened while the economic disparity in the U.S. has reached levels not seen since 1929, wages have stagnated, and the labor participation has sunk to a 38-year low.
 
Each month, the government continues to tout the low unemployment rate, now at 5.3%, its lowest since 2008. But what most people don’t know about the unemployment rate is that the way they count the number of unemployed Americans is purposely flawed. That number isn’t actually the number of unemployed people in America. It’s the number of people who applied for unemployment benefits. If you’ve ever had the misfortune of needing UI benefits, you probably know that it runs out after 6 months. And once it runs out, you’re not eligible to apply for more. So for people who have been unemployed longer than 6 months, they’re no longer counted as part of the official unemployment rate.
 
Of course, the labor participation rate also takes into account people who don’t want jobs. These are people who are retired or disabled or otherwise unable or unwilling to work and many critics of the labor participation rate cite the increasing number of those people as the reason for the 40-year lows. But even with the rise in baby boomers retiring and the myth of the lazy, trust-fund millenials, those numbers make up only a fraction of the potential American workforce. Some have suggested that the true unemployment rate in the United States could be more than 20%.
 
With copper prices dropping to 5 year lows, new housing starts dipping 5% month on month, the labor participation rate hitting a 38-year low, China’s stock market collapsing 30% in just the past month, and the over-inflated markets and insurmountable debt here at home in the U.S., you should be protecting yourself now if you have not done so already.
 
China has instituted market controls to prevent people from selling their stocks. The NYSE suspended trading last week in what was probably a last-ditch effort to halt a massive sell-off. If your money is in the stock market, and it starts to crumble, you won’t be able to get out in time. Only the people who get out right before the crash will escape without a scratch. Many people and large institutions are already preparing for what’s next. Last month, the U.S. Mint saw an increase of more than 250% in gold American Eagle sales and just last week they sold out of silver.
 
Major global currency shifts are happening in October with the IMF expected to include the Yuan in the SDR. The Federal Reserve has also stated that they still expect to raise rates in September. Raising interest rates will certainly put the brakes on the economy, but how big an effect it will have isn’t yet known. What we do know is what happened the last time the Fed raised rates: our GDP plummeted and we were plunged into our worst recession since the Great Depression. There has never been a better time to protect yourself with a gold ira.

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