Jason Hartman: Welcome to the Creating Wealth 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 Baumohl and he’s written a book on that subject and it’s got a couple of printings, a couple of versions out and I think you’ll really get some stuff out of that, and come 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 wanted 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 or maybe I’ve given 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 anything valuable in aspiration of 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 longs. 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, or I should say, I have spent through my companies through different companies over the years, thousands and thousands and thousands of dollars kind of perfecting – really tens of thousands of dollars, I guess, perfecting this agreement. The agreement we require our vendors to execute with us so that we cam protect you, the client, and of course, protect our own interests as a company as well, and 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’ve got to be honest with you because I think I’m maybe giving my headers 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 great or good here, maybe it’s just better for everybody. It 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 provider of inventory in that market, and we work on these vendors with a — on a referral basis. So, they pay us a referral fee, as you know, for referring clients to them and one of the great luxuries I have that others don’t have is that I’m already far beyond the point of being financially independent,. You know, I 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 financial well being over the years. Like, so many people they just kind of blow it all, 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 the 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 or potential local market specialist mark up our agreement like this before. Usually they accept it. You know, maybe negotiate a few points, and we’re always willing to kind of do that with them. The first part of it is the part where they 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. What we do is we go a bit further and the Section 1A, 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 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 be trying to be squirrelly. It’s cheap to set up entities, of course. You know, anyone can go to the internet and set up an LLC or a corporation in most states for $99.00 plus the filing fees. It’s not hard to do this. Then you just open a bank account and what do you know, whala, 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 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 crossed all this stuff out. They crossed out basically the entire paragraph 1A that defines that stuff. In other words, if we were willing to accept that, it would allow them to be squirrelly and we don’t want to deal with squirrelly entities where we can’t really tell whom it is that we’re dealing with okay, and who is obligated to be on this contract.

And let’s see what else here. Oh, there’s so many changes, so many mark ups here. Okay, I’m just going to skip a lot of this stuff and go over what’s important to you, the investor.

Here’s one, okay. We want the company, the local market specialist to be on the hook. Now, some of these local market specialists — I’ll, 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 even, they’re in the market, they live in the City, they do business in the City, they have physical offices in the City and we want to put a lot of owners on them to be what we call them. We call them what? We call them the local market specialists, the LMS. 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 that they know they’re 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 in its entirety and basically says, company, that’s the local market specialists 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 specialists, okay. That’s what we want to do. And here’s another one. They crossed it — 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 is 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 crossed that right out.

Now, do we really — look at, a lot of my competitors, they don’t even have written agreements with their local market specialists. Okay. They may call them by another name, but we’ll just use that as the generic names since that’s the name we give them. They don’t even have a written up contract, so who knows what representations 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 consideration to any investor unless they offer to our investor too.” That’s basically what it says.

In other words folks, this is the concept of most favored nation pricing staffs, that we insist our investors get. They crossed 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, expressed and implied okay, use the lawyer legalese, that protect you, our client. And that’s what we want to do and that is — I’ve got to tell you, I remember someone saying that they always wanted — if they’re hiring a sales person, if they’re buying something from a sales person, they want a sales person 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 negation, 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. So, just a little internal stuff that I would never normally talk about on this show, but I thought it was instructive.

So here on Show Number 258, let’s get to our guest, Bernie here in a moment, but before we do that, I just wanted to play for you a little video because we 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 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. It was 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: [Inaudible] short sales is live in [Inaudible] at one of a number of locations dusting off the help wanted sign. George.

George: That’s exactly what they’re doing here Tom. Career opportunities is what the sign says and that only 20 jobs are filled here at the YWCA’s Head Start 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. Child care can be a high turnover business, but folks trying to find a job like Teacher Reynolds Schepel say you can sense some change in the job market and is 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 bill board, jobs, jobs, jobs it screams, and down on Shorto, a shinny new building tells part of the store. Machine metal workers are opening a new train facility later this week. They’re anticipating the need to train people after nearly four years where training apprentices stopped, 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 numbers say St. Louis has been a little slower to emerge and Andrews says the trains relying on the first and last out construction industry are finally on the verge.

And the bidders that’s out there, there seems to be more 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, are thinking about their talent pools 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 an inter view with Bloomberg that the national unemployment rate is going to keep dropping down to about 7.8 percent by the end of this year.

Live at [inaudible} George Sells, Fox 2 News.

Jason Hartman: 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 and you know, I was there in the fall with a couple of our investors. Come back, join us, register at JasonHartman.com. You still got — I think we’ve got one early bird priced 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 have got so many already recorded. Our next show will have Dan Amerman. He’s going to talk about rental property cash flows. You’re going to love that. Number 260 is a 10th show where 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, gold and silver bug, talking on Episode Number 261. So, be sure to join us for those and let’s get to our guest Bernie. But before you do that, register at JasonHartman.com, join me in St. Louis, and we’ll have the whole team there. It’s going to be a great weekend. We will be back with Bernie and talk about the Secrets of Economic Indicators here in about one minute.

Female Voice: Jason provides an extremely unique service, deal evaluator. Are you interested in a property outside of our network? Need a second opinion? No problem. Let our experts evaluate the deal. Find out more about it at JasonHartman.com. The price is only $50.00.

Jason Hartman: My pleasure to welcome Bernie Baumohl 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. Boy, if you pick up the Wall Street Journal or you watch CNBC, it’s even more confusing. So, today we’re going to drill down and what these indicators mean, and maybe which ones are the most useful to us as investors. Bernie welcome, how are you?

Bernie Baumohl: I’m fine, thank you and I’m glad to join you.

Jason Hartman: 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: 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 a government policy maker, everyone wants to have some sense appreciation of where the economy is headed. And very often, which is 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, there’s a reasonable probability of the direction of the economy that’s past and of course what the possible implications might be for interest rates 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 gold mine of information but it does require people to have the courage to dig into the data. You do not have to be a PhD Economist. You don’t have to have a Doctor in Statistics. A lot of the information there is provided. It’s simple to understand. It’s really quite intuitive and once you get the hang of it, I think everyone would be able to benefit by following these economic indicators.

Jason Hartman: Absolutely. Now I guess we could sort of categorize Bernie, into two major sections of indicators. One is the domestic or the U.S. Indicators and the other being the International Indicators. When you look at U.S. Economic Indicators, I mean how many are there? Are there hundreds? Are there dozens? Are there thousands?

Bernie Baumohl: I could say that all of that is actually true, it’s 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 the Government and there are also private organizations that put out these monthly economic indicators.

Incidentally, I need to 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 and shift in the economy much more quickly than can which puts out 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 are being 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 which are the ISM purchasing managers. You know, all of them provide some great clues and if you can cohobate them, if they somehow all points to a very similar direction, then you’ve got a fairly good understanding of not just where the economy is headed, but which specific industry are doing well and which are not.

Jason Hartman: 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 the nutshell, Bernie what is the business cycle?

Bernie Baumohl: 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, and that people are spending and that companies are investing and there are also moments when there is stress that seems to build up, so that when everybody is fine but for some reason when the economy is not able to produce enough, then inflation pressures pick up but at that point the Federal Reserve will start raising interest rates to cool off inflation, but very often they may overdue it with rise and rates and that can cause the economy to weaken ultimately then to fall into recession and then at some point, rates fall and real estate prices, for example, drop at the cost of borrowing for the loans, drop 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 — that seems to be a simple way of defining how the business cycle works.

Jason Hartman: 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 the business cycle inevitable that we’re always going to have those build ups and then the peaks and the valleys, or could it or should it even be smoothed out?

Bernie Baumohl: Now you would think that with everyone in favor of an expanding economy and rising employment, stronger income growth that we would all have an interest in seeing the economy just grow in perprututity, but that’s not the way it works. People make mistakes. Sometimes companies will buy more and more inventory than they really need. There are times when for — the economy just can’t produce all the goods and services that people want. So there are these stress points, and 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 II period.

You know, we used to have briefer periods of growth that would be followed by recession, but then by the decade of 2000, a 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 2007, when really there was an enormous amount of mistakes made by human beings at — you can categorize that into a caldron that consists of frauds and recklessness and all of these things sort of caused the economy to over heat, getting into trouble and we then had what turned out to be the worst really financial crisis and the deepest economic recession since the great depression.

Jason Hartman: 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 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 Kanzian thing in just creating so much new money? I mean, that seems like it would expand 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’re not attached to a sound money policy.

Bernie Baumohl: There are advantages and disadvantages to have going on to a goal standard. The advantage is that it would certainly limit excesses in spending and borrowing by the Government. It would certainly cap inflation pressures, but the disadvantage is that when we are in the middle of a huge global economy, one that’s expanding every day, I think then the Federal Reserves needs to have the ability to be more flexible, and that becomes really crucial. And one very clear example that we can 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 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 it gave that right to the European Central Bank. So, there are limitations to having a currency that’s fixed 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 you need to, and that means that they sometimes cannot rely on any fixed metal or any fixed currency to have flexibility, and I think that’s one of the great advantages of the Federal Reserve.

Jason Hartman: Fair enough. You know I don’t want to like make it a whole discussion about that. One of the things I love about your book, Bernie is that you start off with like Index of Leading Economic Indicators and you say market sensitivity. You rate it that way, is it low, medium or high, explaining what is the index, when it’s released, how frequently it’s released and the source of the index or the indicator, I should say.

So, tell us about that. Maybe let’s go through some of these specific indicators and what they all mean to us as individuals.

Bernie Baumohl: Let me just parentheses my comments by saying that the index of the leading economic indicators has actually undergone substantial changes in the methodology, that at a conference board it actually just gotten rid of a lot of the specific components that went into the leading economic 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 any more affective than the earlier ones, then 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 in the leading economic indicators and we can find them, because they’ve already been released. It’s just that the Conference Board puts them together, they combine them. So, let me just make that statement up front.

Obviously, what these indicators are supposed to do is help us understand where the economy is headed so that whether you’re an investor 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 and 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, you 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 that I think are worth tracking very closely. Certainly, the employment numbers is a key economic indicator, not so much the employment 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 50 pages long, buried in the 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. So since at some point people become tired, unless 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 prospect of employment.

We ant to take a look at temporary workers, our companies ramping up temporary employment because this is an early sign too that firms are becoming more optimistic about the future, but they’re not yet that confident that we’re in a sustained economic recovery, and so they take their chance first by hiring temporary workers.

We like to look at trucking employment. You know, how many — are 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, then we would expect employment in that sector — in the trucking sector to pick up, as well.

We like to look at child care employment. If more people are finding jobs and that means that parents have to put their kids in day care centers, we would have to see employment at day care centers pick up, because State law requires that there always be a certain ratio between care givers and the number of children that they watch. So, employment is one of the really important economic indicators, in general, to keep an eye on, not so much the unemployment.

Jason Hartman: Yeah, and 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 one in any real way, 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 some very good advice there. I like that.

Bernie Baumohl: Yeah, and so these are the pre-cursers of the future job growth. In addition to that, we look very clear fully at income growth and that’s actually a very big issue now days. 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 living, because that means that they have a greater purchasing power and will spend more, but these days for the last year, we have actually seen purchasing power erode, that is people — the wages of households are not keeping pace with inflation at all.

Jason Hartman: Oh, they have —

Bernie Baumohl: They are —

Jason Hartman: — they haven’t kept pace for 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 we still see that Americans are just treading water.

Bernie Baumohl: No, that’s right. I mean, without a doubt, Americans have been falling behind the cost of living, but there have been cycles when they’ve actually seen real income growth. 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 they have in the last couple of months. You know, they’ve sort of awakened now. There’s a lot more pepped up demand and they’re anxious to go out and spend, but when you have an erosion of purchasing power and they want to spend more, then 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. The 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 this.

Jason Hartman: Now that’s interesting, because I have paid a lot of attention to the savings rate in the last year but my impression was that 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.

Bernie Baumohl: We have seen, during the recession and during the earlier period 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’ll see that it peaked at some point early in 2011 and then started to drop off steadily over the course of the last 12 months. And that is because if consumers wanted to break out of that frugal mode, but they’re stuck because they have no real income growth, they have to find money somewhere. And so they’ve been actually saving less and they’ve also been borrowing more, and that becomes a concern, as well.

Jason Hartman: We’ll be back in just a minute.

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Jason Hartman: 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 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: Well, if you want to get a real sense of what the outlook is for the economy, the two or three indicates to look at most, because they really do tell you what output will be — what production will be in the future. So, take a look at those that tell you what orders are coming into businesses.

Jason Hartman: Factory or [inaudible].

Bernie Baumohl: Factory orders — there are actually a number of different indicators that tell you the Institute Supply Management, the ISM numbers, tell you what new orders a number of different industries are in, both manufacturers and services, because orders lead to more pro — 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 scale back and that obviously has implications for employment and consumer spending.

So you know, those are probably one of the most of — the best indicators that have high predictive values to what’s going on in this economy, is to kind of focus on the new orders that are coming in, factory orders — particularly durable goods orders.

Jason Hartman: You know, just a question for you on these types of things. You mentioned that there are also indicators that include service orders. How the heck do they know these things? I mean, when it comes to the collection of this State, of course there are a whole bunch of problems there, naturally, but how small will the business do they — for example, I have a couple of different companies and they’re service businesses. No one has ever called me and asked me, how’s business that’s collecting data for anything I can think of.

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 what size companies — are they only looking at — are they only calling Intel and Apple, or are they calling everybody else?

Bernie Baumohl:  Well, the Institute for Supply Management comes out every single month with the Purchasing Manager’s 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 — rather I’d say about 18 different industries across the country and you can actually see by going onto 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 ISM 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 sectors have seen an increase in new orders? And by the way, for those of you 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 standing. But there are. The increase in new orders would come from services, but [inaudible] 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 [inaudible] services out there, but 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 — the Manufacturing Index comes out the first day if the month and the Service Index on the 3rd day of the new month and they tell you what happened in the month that immediately proceeded. So, they’re really timely and I would really recommend that people become more familiar with them. They’re quite easy to follow on the web.

Jason Hartman: Sure, yeah. Okay so, the dashboard — the two or three or six or whatever — how many indicators there are, let’s keep going with those because this great and maybe we can kind of recap them too so everybody — they don’t lost in the conversation here as to what those are.

Bernie Baumohl: 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 Home Builders’ Confidence, put out by the National Association of Home Builders 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 then 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, is new construction and new construction does help stimulate the economy. Permits is one of those leading indicators. It tells you what kind of new construction we can expect in the future, but all tolled, new home construction can affect as much as 15 to 20 percent of USGEP when you take into consideration what happens when a person buys a home after its been built and the furnishings that go into it.

So, that’s one of the areas — housing starts and housing permits the National Association of Home Builders certainly knew and existing home sales would help broaden the picture of what’s going on in the housing industry. As far as consumer spending is —

Jason Hartman: You know, that’s an interesting thing that you mentioned because one of my investment philosophies, and I invest all over the Country and so do my clients, is something I call regression to replacement costs where you’re basically buying properties, houses and apartment buildings mostly, below the cost of construction. So, when you say that home builders — when the NAHB, the National Association of Home Builders 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 prophet or at least a break even 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, huh?

Bernie Baumohl: Absolutely, and 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: Wow, the lowest it’s been in five decades in 15 years.

Bernie Baumohl: Well basically the lowest it’s been on the record since going back to the first numbers which really go back to 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 allowed 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 traffic come into their home builder’s show room.

Jason Hartman: Their sales offices, yeah.

Bernie Baumohl: Their sales office is seeing a lot more traffic. That is an encouraging sign for them. In addition, they know that the number of households who have been temporarily living in rental buildings right now are anxious to start going out and buying homes again. And finally, mortgage rates are at record low levels and banks have become a little bit more forthcoming with mortgages. And by the way — and also the economic level, the confidence level of consumers have been picking up too, as you know, in the last couple of months. Put it altogether, and that is one of the reason why home builders are moving ahead with new construction and filing for new permits down the road.

Jason Hartman: Yeah, that’s a good sign. 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 another thing that’s going in the favor of landlords and home builders.

Bernie Baumohl: Yeah, I would not at all dismiss moving population a little bit more relevant indicator would be the growth in households. Yeah, they’re both in population, obviously, and obviously if there is a birth in the family, that increases the population, but households — heads of households, people who graduate from school and now are on their own who want to have their own home. People who leave the armed forces who are now looking for residence, they’re the ones that are actually helping to dry the house market, now. And that is where we begin to really see an increase and match. Take a look at some of the recent numbers of new and home sales that you do see pick up in demand there, as well.

Jason Hartman: What’s kind of funny is that no one’s really talking 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 II, you know where we had the baby boom and all those new heads of households. Troops have been deployed for years now, and some of them are coming home. So that’s —

Bernie Baumohl: That is certainly part of the overall equation that’s driving more demand in housing, yep. Well, the only thing I was going to mention was the importance of consumer spending. After all, consumers make up 70 percent of all economic activity, so 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 or whether it’s personal income, or it’s spending, we want to know — we want to know what consumers are thinking and what they’re doing with their money, because there’s 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 are followed by many economists, which is gaining revenues. Are consumers so confident —

Jason Hartman: That they gamble it away.

Bernie Baumohl: — that they’re willing to burn their money. And 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. They’ve dropped significantly during recessions, but they do pick up during recovery, and it is a sign of confidence.

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

Bernie Baumohl: 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. Its sort of been scaling back 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 political risks that are out there. So, it is something that we’re now beginning to track and focus on more closely.

Jason Hartman: Very interesting. What are your thoughts about inflation and interest rates heading forward and then how can someone — what indicators should the be looking at to judge those things?

Bernie Baumohl: Let take a look for a sec — let me talk first about the inflation numbers. Hopefully, inflation has stabilized in the last few months. It has been rising much of last year to reflect increase in food and energy costs, but then as oil prices start to come down, and headline inflation numbers began to stabilize in the final months of last year.

Jason Hartman: And headline inflation is —

Bernie Baumohl: Plus —

Jason Hartman: — core inflation meaning there’s no food and energy in that index, right?

Bernie Baumohl: No, no, headline inflation includes —

Jason Hartman: Oh, oh, oh. Sorry.

Bernie Baumohl: — energy inflation. Core inflation excludes. Right. So, we have been — and I like to talk much more headline inflation because I always keep reminding —

Jason Hartman: I agree.

Bernie Baumohl: –the impact it has on households. Federal Reserve, for obvious reasons, I’ll explain the obvious, but the Federal Reserve prefers to look at core, but let me just go back to the headline first. Headline inflation has stabilized. Look, that’s looking at prices in the past. What we have to do is try to figure out, all right 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 the U.S., particularly in the Middle East and Persian Golf area.

You know, you can see that already being manifested in gasoline prices but that only reflects a rise in energy — in all prices. So, we could very well see, as we have forecasted, that headline inflation will begin to creep up. It’s around three percent now. I think it’s going to go above four percent in the course of the year. It does put the Federal Reserve in something of a box because headline inflation that goes up above four — four and a half percent is a bit uncomfortable for the Fed, but they also know that these are the results or temporary factor, tensions in the Middle East, not the because of some stress going on in the U.S. economy.

And so, what they’re probably going to have to do is allow the inflation numbers to creep higher on a temporary basis or at least until the Middle East situation — Middle East conflict gets resolved, if it ever does. But for the time being, I think that the Fed has really no choice but to keep interest rates low and that is their mission. And that is what they — particularly [inaudible] Chairman and [inaudible] said 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 — near zero for the last three years and as you know, yields on 10 year treasuries have been hit record lows too. They’re below two percent, which then obviously, influences mortgage rates as well. So, you really can’t bring rates down much more than this, but they intend 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.

Jason Hartman: And what’s 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 them are the elite class that large companies and so forth who can borrow and the banks, as opposed to the traditional consumer that you said banks are more forth coming with mortgages. Yes that 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 we just got to have some significant inflation. I mean, that’s my thinking. You may disagree, but it’s like we’re in — those low rates are not benefiting the direct consumer, 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 rates certainly aren’t low.

Bernie Baumohl: Yeah, this is one of the real dilemmas that the Federal Reserve has right now. They have seen and done all they really could and they have really come to the conclusion behind closed doors, economy is not lacking money. There’s plenty of reserves out there. Companies are sitting on a record two trillion dollars in cash reserves, money that’s not being put forth. There’s no shortage of funds and as I said, the rates are the lowest they’ve been.

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 asset back mortgages that are linked to real estate and car loans, and as they’re trying to build up capital and they have to some degree really restored their balance sheets, they’re also worried that things can — that they can suffer a very serious set back if there is a major sovereign default in Europe, because the U.S. — many of the large U.S. banks have about 600 billion dollars exposed to what’s going on in Europe.

So, if there is a default in Europe, it affects European banks that can infect U.S. banks, and that’s one of the reasons why U.S. banks have been so apprehensive really opening up their lending window. They’re still very nervous about what’s going on.

Secondly, they’re also concerned about the outlook for the economy. You know, the economy might look good now but if oil prices keep moving higher and energy prices keep climbing that can slow the economy. And so someone who’s credit worthy right this minute, may not be credit worthy in six months from now or a year from now. So, there is an enormous cluster of uncertainty that we now face and that is what banks are doing with and that’s why they’ve been so cautious about lending.

Jason Hartman:  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: Well, I think the key indicators to take a look at, at this point, would be of employment, consumer spending and housing. Those are the key ones in the United States. For Europe, I think we would look very carefully at what’s going on in — with Germany, for example, and look at 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 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, and then of course what’s going on in Europe and let me emphasize the one area that we’ll have to focus on much, much more on these days 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 U.S. economy.

Jason Hartman: Do you want to mention that? What are — I mean of course, war and conflict, they change economies a lot. Do you want to say anything specific about that, the Middle East —

Bernie Baumohl: Yes, I think I do. When we are looking — unlike the past where people would not generally spend too much time looking at the GO political risks, because after all there’s really nothing they really can do about it, these days I think it’s become much more important. I think investors by and large that have had a habit of maybe rebalancing their portfolio once a year, they’re going to have to now take a look and possibly consider rebalancing their 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 have to really pay a lot more attention to what is happening outside the U.S. economy, because we can get buffeted very, very quickly. The damage can be transmitted in the U.S. instantly, so I think people have to become much more knowledgeable, much more cognizant of the events that are taking place and what the possible consequences could be in the U.S. 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. And our consumers are now getting so upset about the rise I gasoline prices that they’re cutting back on spending elsewhere. And Blumberg comes out with the weekly consumer confidence numbers, so 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 going on here in the United States.

Jason Hartman: Bernie, I’ve just got to complement 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: Thanks for inviting me and I appreciate the plug. Yeah, the website is theeconomicoutlookgroup.com.

Jason Hartman: Economicoutlookgroup.com. Bernie, thank you so much for joining us today. Really insightful, very much appreciate it.

Bernie Baumohl: Well, thanks for the invitation.

(Top image: Flickr | Sarah G)

The Jason Hartman Team

Transcribed by Debra

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