Is Our Economic Growth Rate Rising Or Falling?

Current expectations say the economy (as represented by GDP) is recovering slowly but that growth will rise in the second half of the year; yet economic data points in the opposite direction. Which view is correct?


In the short-term, expectations are what drives the market. Current expectations assume that the “gap” in demand (consumer spending) can be filled by enough government spending; and that the markets (securities and housing) can be levitated by the Federal Reserve pumping $100 billion per month into banks to keep mortgage rates low and allow the banks to invest in equities etc.) Then, when the markets rise, housing prices rise and the spending gap is filled, the government and the Fed can begin withdraw money from the economy and raise interest rates. This “improving economy” story is told and repeated 24/7.

When a negative data point comes along like the jobs report on Friday (expectations of adding 193,000 jobs turns out to be 88,000 jobs on a model adjusted basis); they report the headline but focus on a single positive data point within the report like hours increased 0.1% and extrapolate from that single data point that things are still improving. They do the opposite when the headline number meets expectations like the prior months jobs report and ignore the underlying data points like the huge number of those jobs that were part-time, low-pay and no benefit jobs.

Net: current status quo maintained.

In the long-term, expectations will have to adjust to reality. This recession is not the result of an “inventory correction cycle” (prices rising faster than supply); this recession was caused by a debt cycle (debt rising faster than incomes.) Therefore, to get back on track, we have to reduce debt (sovereign, corporate and personal) to not only sustainable levels, but to levels where credit expansion can take place again. So, in the long-term, expectations are that economic growth is falling.

Net: the market is very short-term oriented; therefore, you must be positioned both positively and negatively.

Governments Are Destroying The Pillar Holding Up Their Recovery Plans

March 19, 2013

The major reason the market is moving up while the economy is moving -at best- sideways is the confidence America has in its political leaders to do the right thing, to solve our economic problems. Our politicians, our economists and the media have sold us on the expectation that we are out of recession, slowly recovering now but recovery will speed up in the second half of the year. The market trades on expectation.


If we loose confidence in our political leaders to do the right thing, expectations will change dramatically.

Yet, at the same time, they don't seem to know or think or care what we think as long as they can keep the status quo until the next must win election. What happened in Cypress this weekend is important because we are globally connected. It is an example of destroying the rule of law and destroying confidence in the government. The President of Cypress two weeks ago said the government would not even discuss an asset tax. Then on Friday night, the ATM's are shut off (to protect the banks) and news of the asset tax spread, person to person, by Twitter.

We have seen act after act in Europe where the government has stated one thing and done another. We are doing the same thing here: the continuous bailout of the banks, the disregard for the law in the GM bankruptcy, the crony capitalism, the fake hysteria over a small increase in budget (also known as sequester.)

If our politicians do not face the real cause of our problems, and stop treating the symptoms, we will loose confidence and the assumptions we have now will have to change and it may not be for the better.

What Does $145 Million Per Hour Buy?

 March 11, 2013

If you though the President and Congress were spending a lot of money ($3.6 trillion per year), you may not realize that the Federal Reserve (Chairman Bernanke et. al.) is also printing and distributing $147 million dollars per hour 24/7 to the major banks (including foreign banks with domestic branches).


The banks are using this money to increase assets, reduce reserve requirements and buy assets (including equities, bonds and commodities). This is one way to help the banks and lift the stock market which then reinforces the assumption that we are out of recession and the economy is growing.

This program (increase debt to get out of debt) by the Federal Reserve is being touted by government economists and most of the media as courageous and beneficial. Here is what it brought us in the 4th quarter. Federal Reserve spending over $300 billion, GDP up $5 billion and a growth rate of 0.01%.

Stay on your toes,

The Great Disconnect

December 24, 2012

Several recent events indicate that financial companies may be, once again, coming into favor. But remember, caution and hedging are required in our noise driven, centrally planned world.     

1. A week ago, the Federal Reserve increased the amount of money they are creating from $40 billion a month to $85 billion a month. That's $1trillion more dollars going into the banking system over the next year. This will enable the banks to get rid of a lot of toxic assets and allow them to reclassify assets which will increase their excessive reserves (they have over $1.4 trillion now) and reduce reserve requirements (think bank profits).
2. At the same time, the Central Banks have a coordinated, multi-national Central Bank lending/currency program to help shore up sovereign debt.
3. Last week, Greek sovereign debt was upgraded and their credit rating moved up to stable (they did get part of the $16 billion they need to pay bankers). Result: Greek bond spreads narrowed and Europe equities rallied.
4. A few days ago, Meredith Whitney (a key bank analyst) put a buy on BAC and Citi. She stated that after the next stress tests, BAC should be able to buy back stock, raise its dividend and add billions in capital. One of her reasons is that they have worked off a lot of bad assets.
5. Also, the market thinks a deal will be made on the Fiscal Cliff in that taxes will be raised and spending cuts will be done with smoke and mirrors so there will not be any real cuts (i.e. $350 billion saved in reduced interest costs over the next 10 years, $180 billion saved from Chained CPI numbers for Social Security increases, etc.). Therefore, no immediate cuts and more spending (Sandy relief, a $3.5 trillion budget, $1 trillion in new money by the Fed, etc.) implying that we will not have a recession (negative GDP) in 2013.  

 Net: Thanks to Ben's money, the economy and the markets are on different trajectories. Or to put it another way, the status quo will be maintained at any cost until we meet the black swan.