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 1970's, 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 that 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 and the need to find normal equity returns elsewhere.
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5 comments:
Hey Roger, I kinda gotta disagree with your simple explanation. Inarguably, your points are correct, but for 99% of folks, the headline is that we're not in a recession in the U.S. Not even close.
I'm waiting for someone, anyone, to say they were wrong to bash the Fed. What of Warren Buffett, and his claim that we're already in a recession? How about my local evening newscaster, who wouldn't know what the defintion of a recession even is unless her producer told her?
Is there pain? Of course. I'm a retiree and probably feel it more than most. But I also recognize the power of the media to influence public opinion by negatively over-hyping the bad news. And 3.9% GDP growth is not bad news, but the silence is deafening.
I think the other shoe has yet to drop. GDP was outstanding under the circumstances. Too much easing by the fed plus excessive rebates in an election year, but hind sight is always 20/20.
Going forward unemployment and inflation or deflation will be the determining factors that determine if we are in a recession to your neighbors. I do not think it looks very good at all for quite some time to come.
That said Roger is right it will not be apocalyptic. Living below ones means and looking for equities abroad starting some time next year is probably the best we can do with the excessive house hold debt levels that currently exist.
I left yesterday's comment asking for your thoughts on the GDP number. I am in agreement with your assessment of the economy - I am in the real estate business in Orlando - but that assessment does not jive with the (revised)GDP number. My inquiry re the GDP number related to - what point we may be at in this bear market. I am not sure we are done with the bad news from the financial sectors and therefore don't think the worst in behind us.
I tend to agree WRT the GDP assessment. Still don't see much reason to abandon the "muddle through" model of the market and economy at this point and with a holiday weekend coming up pretty much all I see right now is low volume drifting around so I've semi-cleared my desk (bloody thing is never completely clear), closed out a couple trades that I don't want hanging over the weekend, and am off to pick up some herbs to build the rub for my family-famous, slow-grilled, baby-back ribs.
Hee, hee and 'ol McCain does love his zingers: bet the Dem strategists are scampering madly to build a dossier on his VP pick and calling Hillary for a tactical love-fest, no easy-going weekend for them; gotta hand it to the old screw, he knows how to light a fire and play craps in the flickering glow.
Have a great weekend y'all.
PS: Occam's Razor does not say the simplest idea is the best, that could trip a person up pretty badly at just the wrong time in the real world where some things have a bad habit of being complex.
It's better understood as a rule of thumb that helps choose between two (or more) explanations by pointing out that if both explanations appear satisfactory then the one that makes the fewest assumptions and/or requires the introduction of the fewest entities is probably the correct one. For this reason it is sometimes referred to as the law of parsimony.
For example I could argue that the market went up today because God ordered it to. Can't get much more simple than that but it requires the introduction of an entity that is actually not necessary to explain market action, a composite result of humans buying and selling (which can be complex at times).
IOW Occam's Razor only argues the simplest explanation is the best if all other things are fairly equal.
The GDP was so good because agricultural exports were huge due to increased agri prices. Short lived as these prices have dropped considerably. All other areas were miserable.
I agree with Roger that we are not facing an apocalyptic situation. However, we are going to see years of stagnant asset growth in the US. We benefited from the outsourcing boom in the 90s and early 2000s. It kept consumer prices low, which allowed the Fed to keep interest rates even lower. This caused a boom in asset prices and liquidity.
Now the capacity in China, India, etc. is much lower. There is competition for labor, which causes prices to rise. Their booming economies have caused commodities to rise in price. Now we face a situation where more of our dollars are going to commodities or higher costs from abroad. Consumer prices are rising.
This is also causing credit to get tighter. That and poor lending standards, that is. Now assets are facing deflation while consumer prices are up. Our lack of savings and higher costs will ensure asset prices won't rise (or rise below historical averages) for some time.
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