This blog is published by Andy Waldock. Andy Waldock is a commodity futures trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.
This morning’s (10/29/09) GDP headline on MSNBC reads, “GDP Grows at Best Pace in Two Years.” Bloomberg says, “Economy Expands for First Time in a Year.” Lastly, CNN said, “Economy Finally back in gear.
Statistically, speaking, this morning’s GDP numbers showed growth of 3.5% for the third quarter. This breaks a four quarter string of steadily shrinking numbers. By definition, this uptick brings us out of, “recession.” This morning’s report looks great in the headlines, sounds good on the evening news and provides warm fuzzy water cooler conversation. However, I believe this is exactly the setup for the Double Dip Recession we’ve been talking about for quite some time.
Let me paraphrase the economic definition of “recession. “ A recession occurs when an economy has two consecutive quarters of declining GDP. We had experienced four straight quarters of declining GDP prior to this morning’s report. In a free market economy, I would join the water cooler conversation and breathe a collective sigh of relief. However, our economy over the last year, can hardly be called a, “free market economy,” and therefore, I will continue to hold my breath and face the realities of what I believe will be a SIGNIFICANT downturn in our country’s economic stability.
Over the last quarter, the economic effect of the government’s cash for clunkers and housing stimulus packages has been substantial. Unfortunately, the temporary stimulus has done nothing to fix the underpinnings of our country’s global ability to compete into the future. These programs were far more akin to giving a man a fish, rather than teaching a man to fish. Had we allowed the markets to work themselves out, we would have saved billions of taxpayer money that went to bail out worthless financial corporations. Had some of this money been spent on our country’s infrastructure instead, we would have created new jobs by updating the electrical grid and allowing new green energy to be transferred from where it’s created to where it’s needed. The highway system, bridges and railways haven’t been significantly updated since their creation in the 1950’s and are in dire need of repair. As I write this, I see that the Golden Gate Bridge is closed because a cable snapped! Finally, high speed internet needs to be rolled out to everyone, just like the phone companies did so many years ago. These INVESTMENTS in our country’s future would do far more to ensure long term growth than the corporate BAILOUTS we are paying for to make us feel good now.
Due to the programs that have been implemented, we have ended the recession. Hurray for us – NOT. What we have done is placed whip cream and cherries on a pile of cow dung. Let me blow the froth off and show you how much it smells underneath the rhetoric. Deflation is still our major economic concern. Deflationary economies have no chance of sustaining growth. Many of you will argue that because of the falling Dollar and our government’s position of Quantitative Easing, that inflation should be our primary concern. I don’t think that’s the case.
First of all, we still have rising unemployment. According to the last unemployment report, we are at 9.8% unemployed. There are also another 7% underemployed and another 3-4% who’ve simply quit looking for work. According to John Mauldin, “A few years ago, 1 in 16 Americans were unemployed or underemployed. Today, that number is 1 in 5.” Obviously, this means no wage inflation. This is also why I think national infrastructure retooling would’ve been more beneficial. Secondly, between the housing collapse and the bear market in equities, we have seen significant wealth destruction. People are increasing their rate of savings as their net worth declines. Haven’t we all tightened our collective belts a bit? Again, lack of spending equals deflation not, inflation. Finally, the Federal Reserve Board has dropped interest rates to near 0%. Typically, this would be extremely stimulative and very inflationary. However, the money the Fed is printing is not making it to out to home buyers, entrepreneurs or, small businesses. The money is being used to shore up the balance sheets of the many troubled lending institutions at the corporate and private levels. Therefore, the velocity of money is still very low in spite of the amount of money the Fed has been printing and money velocity is positively correlated with inflation. Low velocity means low inflation.
This morning’s GDP numbers need to be taken in context. The dip was halted but, it’s just a breather before the next section of the slide. Watch the Commitment of Traders Reports for the next selling opportunity.