Things That Matter More Than the GDP

A reader asked for my take on GDP, which printed a better than expected 3.3%! It probably means gray skies are gonna clear up and that all is right in the world. Ahem.

Barry Ritholtz does the heavy lifting of dissecting the report and spelling out why there is less than meets the eye. Ditto Durable Goodies so I won't reinvent the wheel. Mish just invoked the term Occam's Razor which means the simplest answer is the best or most likely answer. I love this idea and believe in it.

So, to the question, which I'll broaden a tad to the US economy. Well, housing prices are down a lot in many parts of the country (dare I say places that are economically very significant to the country?). This means that if you had to sell your house you could not get a price you'd be happy with and for many folks this means the proceeds wouldn't pay it off. If you could find a buyer willing to pay a "good" price, that buyer might not be able to get financing.

The housing issue is part of the asset deflation story that has unfolded for a while now. The S&P 500 first closed at 1300 (yesterday's closing price) on March 15, 1999. People worry about whether this period could turn into the 1970s, it already has. Nine years with no gain in stock prices in nominal terms (maybe things look better if you add in the dividends, but then you would need to inflation adjust the whole thing and I'm thinking it still wouldn't look so hot).

At the same time our assets are grappling with deflation; many of the things we have to pay for every week or every month have gone up a tremendous amount.

The economic policies of the gubment have left us indebted, needing more debt and needing foreigners to buy an awful lot of that new debt on top of what they are already holding. In order for this to continue it means the US must rely on several things all continuing to go right (they probably will but this reliance exists and is a risk factor).

I haven't even touched on energy, social security or Medicare issues.

So sticking with the issues cited above, what is the simplest answer? Thinking about that answer, does it really matter how GDP prints? What matters more, I submit, is that if your house was worth $400,000 a year ago -- what could you get for it now if you had to sell? What matters more is whether your financial plan is on track for where it is supposed to be in 2008. What matters more is your ability to meet your obligations. What matters more is the gubment's ability to meet its obligations.

Anyone can take anything they want from the data and probably make it sound plausible. The simple explanation spells out trouble continuing. This is not apocalyptic because certain markets have offered normal returns and people who live beneath their means can weather a poor economy, and there is demand for the US debt.

All this takes me to the same place I have been for several years, which is: slower growth at home, slightly higher interest rates than we are used to, and the need to find normal equity returns elsewhere.

Comments

[investor88:]

Roger has written a very sensible article. No matter how you look at the numbers, stress test it against reality ie is the house worth less, is the sp500 investment higher than in 1q1999? etc. So the economic and investment outlook is lousy, but what to do? Hold cash or look for better equity returns elsewhere? I do not agree with Roger that we should look for equty elsewhere now as foreign markets outside the US has tumbled more leading to more losses. I go with Minnyanville's Todd Harrison stand that it is probably safer to hold cash maybe even for a few years until such time there is a genuine upswing in world equity markets. Of course in between the major trends, there will be plenty of trading opportunities for savy traders.

2008 Aug 29 10:26 AM

[Owen B:]

According to a New York Times article today on the strength of expansions, the Bush expansion just ended was the weakest since Worl War II. Artcile includes great chart to make the point:

www.nytimes.com/2008/0...

2008 Aug 30 10:55 AM

[Ellen:]

so, WHAT cash - USD, Canadian Loonie, Swiss Franc, other, a mixture? And in what form - certs of deposit? short, long? bonds?

2008 Aug 30 11:41 AM

[Hazel Hende...:]

Right on Roger ! Have you checked out the Calvert-Henderson Quality of Life indicators I created with the Calvert Group , upadated at Calvert-Henderson.com We created these indicators ( reference manual (2000) from Amazon , as a reality check to GDP. also visit beyond-gdp.eu for the proceedings of the European Parliament 's BEYOND GDP conf. Nov 2007 and our Survey with Globescan of London in ten countries at EthicalMarkets.com and GlobeScan.com

2008 Aug 30 01:41 PM

[Hazel Hende...:]

Right on Roger ! Have you checked out the Calvert-Henderson Quality of Life indicators I created with the Calvert Group , upadated at Calvert-Henderson.com We created these indicators ( reference manual (2000) from Amazon , as a reality check to GDP. also visit beyond-gdp.eu for the proceedings of the European Parliament 's BEYOND GDP conf. Nov 2007 and our Survey with Globescan of London in ten countries at EthicalMarkets.com and GlobeScan.com

2008 Aug 30 02:11 PM

[WAKEUP:]

Excellent, realistic article, Roger. (And such things ain't easy to find, these days.) You seem to have a grip on how things are going to be, for a while. I happen to think it's going to be a LONG while. I am still struggling to understand why it is so hard, apparently, for Americans to grasp the fact that bubbles don't last forever. Apparently a great many Americans bought into the mistaken belief that money was going to flow like warm honey from their house, for eternity. They spent all that honey - money like it was water; now it's going to take them a very long time to recover from the debt hangover they accumulated along the way (they will NEVER get their money out of those houses). I tried to warn my close associates about all that free - spending and debt - accumulation, when the cash tap was turned "On," but only two of them took my warnings to heart. Those two thank me for those warnings, every time I talk with them. The others don't want to talk about it, at all. I don't mention it to them. Given the awful situations they have gotten themselves into, one of them might shoot me, if I even brought up the money subject.

2008 Aug 30 04:30 PM

[John Lounsbury:]

Americans are starting to learn the hard way that they can not create wealth by borrowing ever larger amounts and by selling houses to each other. Until we return to building wealth by building things that (1) produce needed consumables and/or (2) things that can produce more things of productive value, the road will be rough.

It is the nature of the American psyche to strive to build things of real value, so I believe we will get there. There is just a hugh pile of toxic financial waste to get through first.

2008 Aug 31 01:24 PM