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GDP Friday – Waiting for The Bernank

Posted on the 26 August 2011 by Phil's Stock World @philstockworld

Sitting in a bunker here behind my wall
Waiting for the worms to come.
In perfect isolation here behind my wall
Waiting for the worms to come.

Ooooh, you cannot reach me now
Ooooh, no matter how you try
Goodbye, cruel world, it’s over
Walk on by. – Pink Floyd

We are waiting on The Bernank to give what we HOPE (not a valid investment strategy) will be a hint of QE3 in his Jackson Hole speech this morning (10 am) but, ahead of that, we’re waiting for our own GDP at 8:30 and they key is staying above that 1% line.

This is the 2nd estimate and the first was 1.3% and the people saying we are in a 2nd Recession are pretty ridiculous because you can clearly see on the graph below what a recession actually looks like – we’re just not there yet. I did say though, that we never got out of the first one and you can see what I mean as we still haven’t had enough growth to balance out the drop – that’s a Recession to me – until our GDP is EXPANDING as opposed to bouncing back to where it was – it’s not much of a recovery, but that doesn’t mean it’s getting worse, either.

GDP Friday – Waiting for The BernankDon’t forget this is backwards looking data anyway and July Durable Goods (first month of Q3) were up 4% and Retail Sales have been OK.  Inventories may be down and that’s a negative but I think that’s a good thing as it means restocking down the road.  

Exports have been picking up but Government Spending is going to be a problem in Q3 and, if anything is going to turn us negative, that will be it.   We also need to watch the GDP Deflator, which was 2.3% and that lowered the 3.4% INCREASE in Consumer Spending to 0.8% and that’s 70% of the GDP so end of story right there.  That just goes back to my main point – without wage inflation we are never going to recover…  As noted in this video I made in February criticizing QE2 as a follow-up to my video on inflation:   

Anyway, it’s OLD NEWS so let’s not get sucked into any reaction to GDP.  Weaker will actually be better as it makes the Fed more likely to act.  Michigan Consumer Sentiment comes at 9:55 and that’s likely to suck too and that will set the stage for Uncle Ben at 10 this morning.  Here’s a letter from Ben last year that gives us a little insight into his thinking:  


Notwithstanding the progress that has been made, when the Fed’s monetary policymaking committee--the Federal Open Market Committee (FOMC)--met this week to review the economic situation, we could hardly be satisfied. The Federal Reserve’s objectives--its dual mandate, set by Congress--are to promote a high level of employment and low, stable inflation. Unfortunately, the job market remains quite weak; the national unemployment rate is nearly 10 percent, a large number of people can find only part-time work, and a substantial fraction of the unemployed have been out of work six months or longer. The heavy costs of unemployment include intense strains on family finances, more foreclosures and the loss of job skills

GDP Friday – Waiting for The Bernank

Today, most measures of underlying inflation are running somewhat below 2 percent, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run. Although low inflation is generally good, inflation that is too low can pose risks to the economy--especially when the economy is struggling. In the most extreme case, very low inflation can morph into deflation (falling prices and wages), which can contribute to long periods of economic stagnation

Even absent such risks, low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating. The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is neededWith short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate this additional action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion. 

GDP Friday – Waiting for The BernankThe whole letter is worth a read.  Now, none of that BS in the last paragraph really happened, of course, but everything else is set up the same as last time.  If anything, Fed logic may dictate they need to do MORE than last year as it ALMOST worked but didn’t quite get us over the hump.  

So my expectation for today is a sell-off on GDP, panic ahead of Bernanke’s speech and then, possibly, even more panic when the speech does not specifically lay out QE3 (the one above is from November of last year, NOT from Jackson Hole) but, I HOPE (not a valid strategy) that, during the day, Fed people who are not Hoenig (the host of the conference!) will line up and begin talking about additional measures.  

If this does not happen – we have our Disaster Hedges and we have our Long Puts and it will be time to give up on our longs and get more bearish because the only thing that’s holding us up now is the HOPE (not a valid strategy) of QE3 and the FEAR of QE3 is the only thing stopping the bears from going beserk over what has been an awful, awful month of data. 

Gold rocketed back to $1,800 already, silver is $41.29 and copper is $4.11.  Oil is $84.55, gasoline is $2.78 and nat gas is $3.91 ahead of the Hurricane.  The Dollar is 74.13 at 7:39, Euro $1.44, Pound $1.63 and only 76.8 Yen to the Dollar so Asia is expecting QE3 but Europe is less certain.  

GDP Friday – Waiting for The Bernank8:30 Update:  Revised Q2 GDP came in pretty much as expected at 1% with the Chain-Weighted price index at 2.4%, a little higher than the 2.3% expected and that 0.1% change in the Deflator could have caused the entire revision.  Let’s keep in perspective that Q1 GDP grew only 0.4% so things are IMPROVING, not getting worse.  Of course those Q1 and Q2 numbers were WITH $600Bn of Quantitative Easing and WITH generally more Government Spending than we are likely to get under our new austerity plan

Government Spending is 20% of the GDP so a 5% cutback there could send us into negative territory and the Republicans want at least a 50% cutback ASAP in order to, I suppose, guarantee a Recession.

As we expected, the global markets are not taking our GDP figures very well and our Futures are off almost 1% with the DAX down 2.5% and the CAC and FTSE down 1.4% – all at the lows of the day as the Dollar is getting stronger (74.21).  




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