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Q2 GDP was a bunch of baloney / PM Smokes Big MO



August 29, 2008 – Comments (1) | RELATED TICKERS: MO

Everyone sing it with me, the Fed is not going to raise rates, do da, do da.  I have been saying for months and I will continue to say that the Federal Reserve will not raise interest rates before the end of the year and likely not until mid-2009 at the earliest.  Much of the dollar strength that we have seen lately is based on the premise that the Federal Reserve is more likely to raise interest rates before the ECB.  I say hogwash.

Wait you say, the second quarter GDP was amazing, right?  Uhhhhh, no.  Yes, the revised Q2 GDP came in at an astonishingly high they way, why do they even publish a first look when it's off by 50%?  If I published an estimate at my job that was off by 50% there would be heck to pay.  I digress. 

Yes, Q2 GDP was much stronger than expected.  However, two things gave it a significant boost

1) exports accounted for something like 3% of the 3.3% rise


2) the government stimulus checks made domestic demand look much stronger than it really is. 

If the economies of our trading partners weaken as may expect them to continue to and the U.S. dollar continues to strengthen U.S. exports will slow.  Add more realistic domestic consumption to this and I expect the Q3 and Q4 GDP numbers to be significantly weaker than the Q2 number. 

If unemployment remains elevated and the GDP weakens like I expect it to, the Fed will not raise interest rates.

As I mentioned earlier, without the stim checks consumer spending would have been much, much worse.  The personal income and spending numbers that were published today support this premise:

"Personal income in largest drop in 3 years

Consumers are spending more even though they have less cash in their pockets as the stimulus wave passes, according to a government report. " (link)

Here are a few highlights:

- The Commerce Department said Friday that individual income decreased by 0.7% in July.

- While personal income fell, disposable personal income sank even further in July. Disposable personal income - which is what consumers have after they pay taxes - fell by 1.1% in July, after a 1.9% tumble in June. In May, however, disposable income jumped by 5.7%, largely due to the initial wave of stimulus checks.

- personal spending in July increased by just 0.2%...The uptick in consumer spending was primarily driven by higher prices, however. Individual spending, when adjusted for inflation, actually fell by 0.4%

The bottom line here is that the Q2 GDP was a bunch of baloney.  It is a backward-looking statistic that was pumped up by the government handing out money that it doesn't have to consumers.  Do I believe that we're all doomed and that this is the end of the world as we know it like many of the annoying perma-bear bloggers who constantly post links to negative articles from their canned-food-filled bunkers without ever offering any constructive suggestions about what companies to short, or even a single long play (this is an investing web site right)?  No.  But I have little doubt that the economy is a whole lot weaker than the numbers are showing at this point.  This is why I believe that the recent dollar strength that we have been seeing has been overdone and that the dollar will at best remain flat and eventually begin to lose ground versus other currencies in 2009.  This is good news for commodities, but bad news for consumers.


Philip Morris Intl boosts dividend 17 percent: Hooray, PM outdoes its old parent company, raising its dividend by 17% versus Big Mo's 10%.  I am long PM in real life and I expect it to significantly outperform the S&P 500 over the next decade.


1 Comments – Post Your Own

#1) On September 02, 2008 at 5:00 AM, DemonDoug (31.33) wrote:

I agree with your calling a bottom in VE.  I added some myself a couple of weeks ago.  What are your thoughts on the overall market, Doug?  In your opinion, how close are we to bottoming out?

They're not going to leagalize weed.


Just wanted to respond on the most latest blog.  In terms of the overall market, I'm looking for capitulation.  I'm talking real capitulation.  A day where the trading curbs kick in (10% down on the Dow).  This type of day will force the fed to do another "emergency" cut, further devaluing the dollar, more bullish for oil and commodities of course.  As far as a bottom, we are not there yet.  I have a ball park figure of 9,000 on the dow and 1,000 for the S&P 500, but I'm not sure we'll get there.  The next 18 months are probably going to be the absolute worst of the economic slowdown.  I also looked at the absolute top-to-bottom from 2000-2003, which was 30 months.  Last october we hit the highs, which means if we take the simple example of recent history, we've got another year and 8 months to go.  Again, I'm not sure if it will take that long or be longer, but we are no where near a bottom.  As far as I'm concerned there has been very little actual capitulation, and until 90% of the homebuilders and banks go to zero (which is their intrinsic value), I'll continue to be bearish on the overall market.  The only thing propping up the market at this time is continued flooding of money from the federal reserve, if we didn't have that I firmly believe we'd be around 5,000 on the dow right now, even with trading curbs. 

Regarding cannabis, I don't think it will pass, but it has been proposed:

Personal Use of Marijuana by Responsible Adults Act of 2008

Written by Barney Frank D-MA, and sponsored by Ron Paul R-TX among others.

"Over 75 percent of American adults are in favor of decriminalization legislation, according to a CNN survey. Rep. Frank says that it's time “for the politicians to catch up with the public on this. The notion that you lock people up for smoking marijuana is pretty silly.""

BTW, this legislation is based on a study that was conducted in 1972.  Way to join the 1970s, Congress!! (Of course, bush, stuck in the 1930's germany, will never sign this bill.)

And hooray for PM!

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