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 (www.bea.gov, 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

 

A Medical Opinion: Financial Pandemic Remains a More Extreme One than Swine Flu

While comparing a disease that has just caused acute and often painful death and that is spreading rapidly with the past almost two years' financial and economic mess is of course comparing two very different beasts, we should keep a sense of proportionality in dealing with disasters.

The world will continue to have epidemics and pandemics. These have not required airplanes to spread. One theory of the decline and fall of the Roman empire in fact draws upon two massive epidemics, both currently diagnosed as smallpox, that weakened the military as well as wiped out various populations.

It appears that based on the early returns, the course of this flu ex-Mexico is ordinary. Will some deaths outside of Mexico be caused by this virus? Almost certainly. But this swine flu pandemic is no SARS. That one was often fatal and almost always very serious; the global health care system acquitted itself wonderfully in limiting the spread of SARS as rapidly as it did.

Please do not adjust your portfolios based on the latest fear or relief regarding the swine flu. The institutions will react faster than any individual. (Do take all reasonable precautions that you should take every flu season all the time. Standard flu is a miserable experience, and vaccination is never close to 100% effective.)

The global economic and financial pandemic continues to roll on. Unlike influenza, there is immense debate amongst academics about what to do about it. Furthermore, much as one may agree or disagree with different points of view and priorities in a big picture way that will inform your policy preferences in the financial sphere, there is no disagreement about the importance of limiting the spread of infectious diseases.

Just in the past 24 hours, news has continued to accumulate about the international ramifications of the economic disaster.

1. Per a Naked Capitalism link, consider Two-Thirds Facing a Pay Cut or Freeze from the Independent in Britain. This is astonishing news:

More than two-thirds of British companies plan to cut or freeze their workers' salaries this year, the British Chambers of Commerce said yesterday, as it warned that private sector employers face a desperate battle to survive the recession.

A BCC survey of 400 companies from across the UK revealed that 58 per cent of firms plan to freeze salaries this year, while a further 12 per cent are expecting to cut pay. The BCC warned that half the firms in the survey were considering making job cuts over the course of the year, or had already planned a redundancy programme.

DoctoRx here: So much for price increases as an inevitable result of money printing.

2. TrimTabs reports:

Companies around the world are treating the rally as a selling opportunity. . .

We do not see any “green shoots” in our macroeconomic data. Tax revenue fell by a record 6.8% in Germany in March, and consumption loans plummeted by 5.8% in France. Therefore, we are cautiously bearish (50% short) to leveraged bearish (200% short) on all the markets we track.

DoctoRx here: EBR has no expertise in foreign markets. But TrimTabs does collect lots of data on overseas economies. That it is so bearish after a big run-up in prices, based on the trends it is seeing, is a negative.

3. The financial situation in Germany is likely horrible, as discussed at length by Ed Harrison at Credit Writedowns in German banks loaded with 816 billion in toxic paper. Here are some main points:

On Friday, the German daily Süddeutsche Zeitung (SZ) leaked a bombshell - a confidential report by Bafin, the Federal Financial Supervisory Authority, found that German banks were sitting on over 800 billion euros in toxic assets. Just three months ago, the reports coming out suggested the problem was only half as large, 400 billion euros. . .

This account should make clear how shaky many of Germany’s financial institutions are. Moreover, it is not altogether obvious which markets are deemed ‘toxic.’ German banks have a lot of residential real estate-related paper. But they also have assets related to the imploding European commercial property market and the Eastern European property markets. I suspect that the problem is even larger than is mentioned here.

If you recall, there was a big dust-up in February over a leaked EU document which suggested there were 16.3 trillion in toxic assets amongst European banks. In my view, the Europeans have their heads in the sand regarding the magnitude of the problem. The banking situation is much worse on the continent than its citizens are lead by government to believe.

In any event, Bafin is now seeking to obtain prosecutions for the damaging leak. Forget about the toxic asset problem, go after those who have brought it into the full light of day.

4. CNN reports in Spain unemployment tops 17 percent:

Spain's jobless rate rose sharply, to 17.36 percent in the first quarter, with just over 4 million people out of work, the government said Friday. . .

Spain's previous rate of 13.9 percent, issued early this year for the fourth quarter of 2008, already was the highest in the European Union.

When Spain's jobless figure earlier topped 3 million, officials predicted that it would not reach 4 million.

(We will avoid the obvious puns about the pain in Spain . . .)

The economic news is so horrible in so many places that it is hard to keep up and hard to fathom.
The world is not ending, of course, but the real problem is that medical science is a lot more reliable and certain than the "soft science" of economics and the theoretical constructs of Keynesianism.

It still seems that those who trade stocks are making lots of assumptions about a return to a post-World War II normalcy that was abnormally prosperous based on a longer-term economic history of the world.


Copyright (C) Long Lake LLC 2009