Wednesday, April 29, 2009

Advance GDP Data Show Domestic Consumption Collapse

The Advance GDP data are out.  Spinmeisters will crow about the decline ending, as massive inventory reduction accounted for much of the downturn.  What will receive little publicity is the following, taken from the BEA Press Release (, see "Latest Release"):

Real gross domestic purchases - - purchases by U. S. residents of goods and services wherever produced - - decreased 7.8% in the first quarter, compared with a decrease of 5.9% in the fourth.

This shows a true collapse in domestic consumption.  My quick explanation is that imports collapsed 34% while the smaller quantity of exports collapsed less, at 30%.  Thus the country enjoyed a significant diminution in its share of the world's goods and services (consistent with the need to start running trade surpluses).   The implication appears to be that consumers could not afford imported goods.

Please recall that GDP relates to domestic production.  As a reductio ad absurdum, if the U. S. became a colony of another country and produced only for export except for food and water etc., GDP could grow and grow but the American people would not see any of that production.
So what good is GDP?  That's a good question.

Stock market futures are up on the GDP report.  They are also reportedly experiencing a relief rally that the swine flu pandemic is not as bad as SARS, or some other thought of the day.  This blog advised readers on April 27 to more or less ignore the swine flu news in their investing activities.  This pandemic is a non-trivial problem, but there is no way EBR sees to profit from it.  Overall it is obviously bad for worldwide economies, so on a short-term basis, it is a negative for stocks, but over the long run (which is what stock prices are supposed to discount)
what we see now is unlikely to have major macro effects on the economy of the world.

In the meantime, all the money-printing is converting bears to bulls.  Yet as Louise Yamada points out, there is no real leadership, unlike 1982, when long-suffering groups such as consumer goods showed real relative strength all throughout the 1981-2 bear market and had long bases from which long advances began when the bear market ended.  In contrast, leaders of one year ago, such as gold and oil, are going nowhere, and the high-quality Dow leaders of 2008, WMT and MCD, have stock charts that are becalmed.

Fitting that theme, a recent report found "millionaires" more confused than ever as to where to put their funds.  Increased interest in investing in both stocks and bonds was reported.  Meanwhile, a recent poll of money managers showed only about 4% bulls on Treasuries.  Louise Yamada has pinpointed about 3.1% on the 10-year Treasury as a recent top in yields, which corresponds exactly to the low yield in the prior cycle (2001-3), and therefore feels it may represent support in price/resistance in yield.  Given that mortgage-backed securities are now a bit rich historically vs. Treasuries, a trade from the former to the latter may be of interest.

Copyright (C) Long Lake LLC 2009


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