So, Where's the GDP Disaster?

Last October, when we were told that spending and incomes were about to collapse, I predicted that "real GDP will not drop below $11 trillion (chained 2000 $)."

Here is a graph (click to enlarge) of real GDP during this recession, through September 2009.



Admittedly, I had no appreciation last October for the labor market distortions that were emerging (by early November I started to realize that -- see this post), which allowed me to incorrectly predict in October that payroll employment would not drop below 134 million (now it is amount 131 million). But a lot of people (such as the Obama adminstration) overestimated employment and underestimated unemployment, even with the benefit of the data released and public policies implemented after I made my forecast.

Comments

[Mad Hedge F...:]

cbf Those of you who heeded my GLOBAL RISK ALERT on October 13(click here for report at www.madhedgefundtrader...) missed the top of the market by six trading days and 10 S&P points. I’m sorry; I’ll ring the bell more precisely next time, with a more accurate date and time. Since then, technical sell recommendations have been breaking out like acne at a junior year prom dance. You are all now out of your positions or love them so much that you are willing to carry them through another crash. At the risk of hubris, even PIMCO’s Bill Gross has jumped on the bandwagon, although I doubt he needs my help ascertaining the direction of stocks and bonds. The way everything turned tail and ran at exactly the same time was a complete vindication of my theory that a tsunami of liquidity was raising all boats, completely unjustified by the underlying fundamentals. Long time readers of this letter know the only short I have advocated this year was in long dated Treasury bonds through the TBT. But the better than expected Q3 GDP of 3.5%, obviously fueled by temporary government programs like “cash for clunkers” and the first time homebuyers tax credit, may be presenting one of those pristine, “sell on the news” moments. Will this data finally give us our long awaited double top? Fading rallies in stocks is looking more enticing by the day.

Oct 30 08:49 AM

[De Graaf:]

I honesly don't buy any of the GDP numbers coming out.

I mean c'mon, if unemployment is at 10 percent, U6 (1930 like measure) at 17 percent, you can't expect me to believe that the GDP is an accurate measure of economic growth!?

The more we spend, the bigger GDP gets...thats inherently phony.
Also, if companies are downsizing their payroll size and implementing other efficiencies that improve productivity, then GDP is suppose to decline! not grow!

The US is stepping in their own excrement soon but they won't see it as the roads are covered with a giant pile of leaves. Soon the man on the street will slip... and the cascade begins..

Oct 30 09:02 AM

[Old Trader:]

I recently (yesterday) came across an article suggesting that C4C accounted for 1.7% of the 3.5% rise in GDP, so if that's backed out, (because it was a one-time kicker), that leaves growth at 1.8%, considerably below consensus estimates (and that's before any revisions).

Oct 30 11:54 AM

[Troy Jensen:]

I woke up this morning on a wonderful day off in AZ, and sat on my father's patio. He had come across a site that, to my father, was jaw-dropping - utilized interactive map and had over-layed in visual fashion the number of homes in foreclosure, or currently held by the bank (oversimplified, but for this brief post I won't go into technicals). It showed dozens and dozens of homes in his retirement community in south Phoenix in foreclosure - as he zoomed out, his face dropped. I quietly dove into my analysis of broad macro-policies that were essentially holding those homes off the market, probably for years, to artificially hold up current property values. He was dismayed...it's hard for many to grasp.

But honestly, it goes right to the GDP arguments. Is the GDP artificial? If the United States can continues to expand the money supply, and we can continue to re-inflate the economy, and asset prices, by issuing record debt and maintaining budget deficits for the foreseeable future, why is that "artificial?"

It goes back to a basic premise I am writing about on my blogs today (including my SeekingAlpha blog) - the United States, as the fiat currency of the world, indeed can continue this course if needed for some time, without major repercussions. No, the U.S. Dollar is never going to collapse - I detail this in my blog later today, but the talk of the dollar collapsing or, even more ludicrous, another currency emerging as the fiat currency of the world, is simply not a realistic possibility. Zero chance.

You must not just study geopolitics, but do so with a very sharp, unemotional eye - almost impossible for Americans, who are very uncomfortable with their position as the most powerful military and economic force the world has ever known. Nothing in history even comes close - thereby rendering theoretical models based on historical trends and data redundant.

I will expand more today, but the bottom line is I understand everyone's point - that GDP was inflated by government spending. But to call it artificial is simply inaccurate. Our top export is debt, and it is purchased for a simple geopolitical Positive Feedback Loop:

Our military power is staggering, and most importantly, we control the world's oceans. No one nation has ever had that ability in the history of the world. That military projection-of-power where our economic power is directly derived from. Our currency comprises 65% of world currency reserves for a reason. Our economic power allows us the ability to produce debt at a record pace, and not just maintain but increase our military rate of which is staggering - all the world's nations COMBINED do not spend what the United States does annually. We are projected to spend between $925 billion and $1.4 trillion in military spending. The next largest nation in terms of military spending is China, who will spend an estimated $89 billion this year. Or, we spend what the next largest military in the world spends in a year - every single month. And to continue the feedback loop, our economy derives its power economically as a direct result result of United States military power - round and round we go.

Our debt is purchased and held, and much of the world's weath and commodities are traded in dollars, for a very basic reason - a fiat currency derives its innate core value from the nation issuing it - the nation declares it "legal tender" for all payments. So when analyzing the dollar long-term, you must then analyze the United States' ability to support the U.S. Dollar. And that, my friends, is they key - the United States' power is staggering. And why, as the ultimate arbiter of the international geopolitical system, the U.S. Dollar is the only 100% secure investment in terms of flight-to-safety.

I am not making a moral or political statement here. Geopolitics is a very non-emotional assesment, and tough at times, because harsh realities are what they are - it does not matter if I feel it's wrong, it is what it is.

Bottom line: Please read my blog if you are interested further this evening. But to bring this comment's point home - if we can indeed export debt and inject the funds derived from that issuance of debt into the economy in a number of ways (cash-for-clunkers, bank reserves to allow them to hold onto residential and commercial foreclosures for 3-5 years to allow the demand to rebuild, etc) - then why is that always considered artificial and false, and unsustainable? It isn't. I absolutely agree we need to make some aggressive policy changes to get the economy not just re-inflated but roaring again, and I do disagree with much of how the Administration is spending the stimulus. But because of the factors outlined above, my point is simple - much of the GDP increase was indeed derived from government spending, but to indicate they are artificial in some manner just ignores reality.


On Oct 30 09:02 AM De Graaf wrote:

> I honesly don't buy any of the GDP numbers coming out.
>
> I mean c'mon, if unemployment is at 10 percent, U6 (1930 like measure)
> at 17 percent, you can't expect me to believe that the GDP is an
> accurate measure of economic growth!?
>
> The more we spend, the bigger GDP gets...thats inherently phony.
>
> Also, if companies are downsizing their payroll size and implementing
> other efficiencies that improve productivity, then GDP is suppose
> to decline! not grow!
>
> The US is stepping in their own excrement soon but they won't see
> it as the roads are covered with a giant pile of leaves. Soon the
> man on the street will slip... and the cascade begins..

Oct 30 02:56 PM

[Old Trader:]

" No, the U.S. Dollar is never going to collapse - I detail this in my blog later today, but the talk of the dollar collapsing or, even more ludicrous, another currency emerging as the fiat currency of the world, is simply not a realistic possibility. Zero chance."

Troy,

Actually, the last few hundred years of first European, then US global dominance are the outlier. Going back a thousand years, and more, global dominance fluctuated between China and India.

The quote I took from your comment smacks of more than a teeny bit of hubris and arrogance. How does that saying go?....."Never say "Never""....or how about "Pride goeth before the fall"?

Oct 30 06:42 PM

[Ricard:]

To be fair to the Europeans, there was no concept of 'global dominance' before Christopher Columbus.


On Oct 30 06:42 PM Old Trader wrote:


> Troy,
>
> Actually, the last few hundred years of first European, then US global
> dominance are the outlier. Going back a thousand years, and more,
> global dominance fluctuated between China and India.
>
> The quote I took from your comment smacks of more than a teeny bit
> of hubris and arrogance. How does that saying go?....."Never say
> "Never""....or how about "Pride goeth before the fall"?

Oct 30 07:04 PM

[Old Trader:]

Ricard,

True enough. While being "first generation" from Eastern European immigrants, I work very hard at trying to maintain a global perspective....not merely US, nor US/Euro-centric.


On Oct 30 07:04 PM Ricard wrote:

> To be fair to the Europeans, there was no concept of 'global dominance'
> before Christopher Columbus.
>

Oct 30 08:40 PM

[Tony Daltorio:]

Let me see if I have this right - the government has wasted, I mean invested, trillions of dollars and we now have an economy that is showing little growth - comatose, if you ignore the government-stimulated sectors such as autos and housing - and the author is estatic about it??? Amazing!

Nov 01 11:16 AM