Ominous News From the 'RV Capital of the World'

What's a casual $300 billion anyway?... Fed press conference eve... A balance-sheet boost while fighting inflation... A look at the 'RV indicator'... Ominous news from the 'RV capital of the world'... The good and the bad...

We've got one eye on the banks and the Fed...

There are a lot of storylines heading into tomorrow's Federal Reserve policy announcement and post-meeting press conference. Consider this one, which arrived in our inbox from subscriber Will K. today...

In the past year, we have seen both a reduction in the Fed's balance sheet AND higher rates. What is the likely consequence of a Fed that has started adding back to its balance sheet all while continuing to increase interest rates?

Well, this is a big, important question... For those who missed it amid the Fed's recent bank rescues and an effort to squelch more runs on deposits, the central bank's balance sheet spiked by a casual $300 billion in the past 10 days...

Our Stansberry NewsWire editor C. Scott Garliss shared a must-read post this morning, which includes this chart of the Fed's balance sheet over the past year. You can see the bank trimmed from a high near $9 trillion down to around $8.4 trillion. Then came the rescue efforts that, in part, allowed banks to tap more cash through (another) new Fed lending facility...

As you can see, this essentially erased the past four months of balance-sheet "trimming" that the Fed has been working on since the start of 2022 in its effort to fight inflation. Evidently, that inflation fight doesn't matter as much anymore...

As the Fed said itself last Sunday night, amid the fallout from the run on Silicon Valley Bank...

The Federal Reserve is prepared to address any liquidity pressures that may arise.

Be sure to read Scott's analysis for much more detail. He explains what the Fed actually did... why its balance sheet has grown again... why it might need to stay there... and what all of it might mean for the stock market moving ahead.

You can bet this exact thing will be a topic of discussion tomorrow...

The Fed will publish its new policy decisions and economic projections at 2 p.m. Eastern time, and Fed Chair Jerome Powell will address reporters a half hour later. We'll have a report on everything that happens there in tomorrow evening's Digest.

But I (Corey McLaughlin) digress from Will K.'s specific question... I believe the likely consequence of the Fed suddenly adding back to its balance sheet amid the recent bank panics could mean higher-than-expected inflation over the longer run – it's essentially an economic-stimulus measure. But it may also be a short-term boost for stock prices.

Here's more from Scott's post today, which backs up my impression. As the chart shows, when the Fed's balance sheet grew during the pandemic recovery, it was good for stocks. And the opposite has been true the over the past 14 months or so...

The balance sheet more than doubled from $4 trillion at the start of the COVID-19 pandemic in February 2020 to a recent peak of $9 trillion in April 2022. Over that time, the S&P 500 rallied 58.4%, or 24.7% on an annualized basis.

And a similar thing happened during the great financial crisis. From September 2008 to January 2015, the Fed's balance sheet swelled from $900 billion to more than $4.5 trillion. During the same period, the S&P 500 rose 102.4%, or 11.9% annually.

We'll have more on all things Fed tomorrow. But I want to bring your attention to a different sort of economic indicator... It got our attention when we looked into it, thanks to another subscriber's reminder and urging...

We've got another eye on the 'RV indicator'...

Paid-up subscriber Joe G. recently wrote in with this idea worth sharing and checking in on...

If you want to see where the economy is heading, look no further than the unemployment rate in Elkhart County, Indiana. In the past, as the unemployment rate goes higher the economy goes lower. Due to Elkhart County having a large manufacturing base through the Recreational Vehicle business, it is usually the first to go into a recession and the first to come out of a recession. Just my thoughts after living there for 64 years. Thank you.

Thank you, Joe. I love looking at economic indicators like this from the real world.

Sales of recreational vehicles ("RVs") have long been seen as a leading indicator of the health of the American consumer. There is a good argument to be made that it is an overused indicator, like if analysts make too much of a short-term dip in RV sales, for instance... But you bring up a great point, Joe, about looking at the unemployment rate where many RVs are made.

First off, for context for everyone, Elkhart County in Indiana produces about 50% of the RVs on the road today, according to county officials, and the region is responsible for upwards of 80% of global RV production, given Americans' preference for using them more than anyone else.

Elkhart County is home to factories for publicly traded companies like Thor Industries (THO) and Winnebago Industries (WGO), along with privately owned or family-operated businesses like The RV Factory, Gulf Stream, and more.

According to Elkhart's visitors bureau...

How did it all begin? Wilbur Schult, a dynamic promoter and retailer, bought Elkhart's Sportsman Trailer Company from Milo Miller in 1936. Schult was such a promoter that by 1939, he was the largest manufacturer in the industry and Elkhart was beginning to attract lots of suppliers and more manufacturers. In addition, Elkhart's major highways and railroad transportation links and central location to large metropolitan markets made it accessible for easy shipment of goods. By the late 1940's, when things began to boom again after the war, industry magazines began calling Elkhart the "Trailer Capital of the World".

Eighty or so years later, it's still the RV capital of the world.

Today, you can tour many of the RV factories and even visit the RV/MH ("Manufactured Housing") Hall of Fame, located in the county. Now that I've shared some local history and free tourism information, let's take Joe's advice and look at the unemployment data...

A year ago, the unemployment rate in Elkhart County was the lowest in the nation at less than 2%. And while it has gradually risen over the past 12 months, it had stayed below the national average. Not anymore...

The unemployment rate in Elkhart just spiked...

The RV-manufacturing hub's unemployment jumped to 4.9% in January, the most recent data that the U.S. Bureau of Labor Statistics released last week. That's up from just 2.5% a month earlier – nearly double. After that startling rise, it's now above the national average of 3.6%.

Now, the RV industry of course boomed during the pandemic as more and more people sought their freedom from COVID-19 and other things. So there's bound to be significant cooling as this turn in the business cycle arrives.

However, the same can be said for the broader economy in general. Come to think of it, since so many other sectors also relied on pandemic-related trends, there actually might not be too many more relevant indicators than what's going on in the "RV Capital of the World."

To this point, Thor Industries recently cut its sales and earnings outlook, pointing to slowing sales because of sagging demand it attributed to inflation. Rising interest rates have also increased the cost of financing big-ticket items like RVs.

This is ominous news...

This chart shows the unemployment rate in Elkhart County since 1990. The gray areas indicate "official" recessions, and you can see the new spike to near 5% in the lower right corner...

The last time the unemployment rate in Elkhart County moved that dramatically higher is when it topped 30% in April 2020 amid pandemic shutdowns.

Before that, the last times it increased more than 2 percentage points in a month's time were amid the Great Recession. It rose from 6.8% in June 2008 to 9.6% that July... and from 16.2% in December 2008 to 19.8% in January 2009.

Back then, unemployment in Elkhart went on to peak at 20.6% in March 2009.

Perhaps not coincidentally, March 2009 is the same month when the U.S. stock markets finally hit financial-crisis lows... On March 9, 2009, the benchmark S&P 500 Index closed down roughly 50% from its top in October 2007.

That's the bad news...

The good news is the S&P 500 then gained 60% through the end of that year as things got "less bad."

So, if the unemployment spike in Elkhart is a sign of things to come ahead for the broader economy, it seems like most people could be caught off guard dramatically in the months ahead... And if you're a believer that it will matter for stock prices, things could get worse for stocks before they ultimately get better over the long run.

We can't know for sure what will happen next or the precise timing... But the "RV indicator" certainly has my attention that more trouble for the economy could be ahead, or at least maybe more trouble than many observers want to believe today. Still, there are also signs that a more friendly Fed environment could be on the way, too... And that could help stocks in the shorter term.

New 52-week highs (as of 3/20/23): Broadcom (AVGO), inTEST (INTT), and Torex Gold Resources (TORXF).

In today's mailbag, more feedback on the upheaval in several banks... and some kudos for Retirement Millionaire editor Dr. David "Doc" Eifrig's advice that we shared in last Thursday's Digest... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Lots of discussion about [bank runs], but no has bothered to discuss the fact that banks are still paying a fraction of a percentage on savings accounts. Meantime, you can get significantly higher rates from short term T-bills and brokerage money market funds. Is there any wonder why depositors would be pulling funds out?

"Again, it appears banks are making bad decisions by not paying their depositors market rates, and losing them to other options.

"Failure is the way you flush bad decisions from the market. If the government does not allow that to happen, these bad decisions will just keep happening." – Paid-up subscriber John J.

"Thank you for sharing Doc's Advice on aerobic exercise to help with stress. This is one of the few times you have shared this kind of info. This is very important at this time the way the market has been this last year. This advice in my opinion will help your health in the long run..." – Stansberry Alliance member Lowell D.

All the best,

Corey McLaughlin
Baltimore, Maryland
March 21, 2023