The Commerce Department will release the preliminary estimate of third quarter GDP on Thursday and the consensus expectation is for a positive growth rate of 3%. Considering what has been spent on behalf of economic recovery I would sure hope that we get something north of 3%. TARP took roughly 5% of GDP from the private economy and passed it on to the financial and auto industries. The stimulus bill took another 5% of GDP from the private economy and passed it out to a variety of constituencies apparently chosen from a Democratic Party campaign contribution list. If the Keynesians are right, the spending of this 10% of GDP should be working some wonders right about now through the magic of multipliers.
No matter what the reported number is, the overall effect of TARP and the stimulus package on the economy will be difficult to determine because we have no idea how things would have turned out absent the government intervention. There are a few things we do know though. If Congress hadn’t succumbed to the arm twisting of Paulson and Bernanke last fall, Citigroup would not now be charging exorbitant interest rates on its credit cards and canceling people’s gas cards without notice. Some other bank might, but not Citigroup. We also know that no highly compensated employee at that storied institution - or GM, Chrysler or AIG - would be facing a 90% cut in pay thanks to the Obama administration czar in charge of populist rage. Finally, we know where to find all the highly compensated employees of these institutions that actually deserved their paycheck - at some other institution that is willing to pay them what they are worth
Steve Rattner, the Obama administration official in charge of the auto bailout, said last week that they were shocked - shocked! - at the poor management they found at GM and Chrysler. Really? Did it take a car czar to figure out that GM and Chrysler were poorly managed? I would think losing billions of dollars would have been a clue but then I’m not a hot shot hedge fund manager like Rattner. I guess the special skills involved in running a hedge fund don’t include recognizing the blindingly obvious. Being poorly managed apparently wasn’t enough to convince the administration that they should just let these two dinosaurs fail though. They feared that letting them fail would have cost, according to Rattner, “the loss of a million jobs in the short run”. He didn’t have an estimate of how many jobs won’t be created in the long run because we wasted $81 billion on these two lousy companies.
The President’s economic advisor, Christina Romer, warned last week that the peak of the stimulus’ effect on the economy would come around the middle of next year. If I didn’t know there were elections next fall, I’d be a bit surprised by that. Is the administration already laying the groundwork for Stimulus, Part III (don’t forget Bush’s tax rebates last year)? The trial balloons are so thick over DC right now that the FAA is re-routing flights so my guess is yes. So far, there have been hints of proposals to send seniors another $250 check, extend unemployment benefits, extend the Cobra premium subsidy, expand the home buyer’s tax credit and enact a job creation tax credit. The Obama administration has milked the recession for all it’s worth; everything they propose is touted as a boon to the economy. Healthcare reform? Cap and Trade? All for the good of the economy. What will they do if they enact all these things and the economy is still chugging along on three cylinders? I’m afraid to ask.
I’m sure there are some good things in all this spending but the basic bet of government spending as a recession cure is that 535 politicians, heavily influenced by lobbyists, can make better spending decisions than the other 220 million adults in the US. I just find that hard to believe. For evidence I offer the following observation. I live near Black Point marina in Miami and I often head out there to watch the drunks launch and retrieve their boats at the ramp. It’s great fun, but you can’t take the kids unless your goal is to teach them to curse in Spanish. Anyway, a few months back, I started to notice a lot of new golf carts using the bike path out to the marina. Until a few months ago I’d never seen one so I got curious. In talking with one of the drivers of a totally tricked out model, I learned that the purchase of this vehicle was so heavily subsidized that the total cost to the driver was less than $500.
It turns out that the American Recovery and Reinvestment Act, otherwise known as the “stimulus” bill, included a tax credit for the purchase of electric vehicles and someone convinced the government that golf carts should qualify. And so, I have apparently been purchasing golf carts for my neighbors which they drive on the bike paths, also built with my tax dollars by the way, endangering those of us who are trying to use them for their intended purpose. I’m sure the golf cart manufacturers are ecstatic about this, but is this really how the US economy will lead the 21st century global economy? Through the domination of the golf cart industry? Really? The shape of the fellow behind the wheel of the golf cart I purchased involuntarily would seem to indicate that the purchase of a bicycle would have been more beneficial for him and our future health care costs. Stimulated is probably not the best way to describe my mood upon learning of the great golf cart tax credit.
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Weekly Economic and Market Review
The economic data last week continued the mixed pattern that has been prevalent for weeks now. Housing starts rose slightly but only after a downward revision for the previous month. Producer prices fell again based on a drop in energy prices that promises to be reversed next month and for a number of months after. Jobless claims rose back to 531,000 and remain stubbornly over the 500,000 level. The leading indicators rose 1% but the biggest contributor continues to be the steep yield curve which is not exactly inspiring. Lastly, existing home sales rose 9.4% while inventories fell to 7.8 months supply at the current sales pace. The impending expiration of the home buyer’s tax credit was credited with the surge in sales, but I have to wonder about that. For a sale to qualify now, it would have to close by the end of November which would seem hard to do if you are just now signing a contract. Or maybe the buyer’s will just lie:
Treasury Inspector General for Tax Administration J. Russell George told a House panel that more than 19,000 people filed 2008 tax returns claiming the credit for homes they had not yet purchased. George said his office had identified another $500 million in claims, by some 74,000 taxpayers, where there were indications of prior home ownership.
He told a House Ways and Means oversight subcommittee that they also found 580 taxpayers under the age of 18 who claimed $4 million in first-time home buyer credit. One was 4 years old.
When the government starts handing out your money, you can bet someone will find a way to scam it.
I suspect that GDP report this Thursday will be a bit of a test for the market. Economists may be expecting 3% but portfolio managers and the public would seem to have higher expectations. Earnings have been coming in much better than expected but it hasn’t been enough to keep the market moving up. Companies that beat are generally rising slightly, but companies that miss are being punished. There is little urgency for buyers but any whiff of weakness causes sellers to rush for the exits. The same will likely be true of the GDP numbers; better than expected may not be enough to move the market higher while a number at consensus will likely be enough to send portfolio managers back to those sidelines everyone is talking about.
Selected charts
The GSCI has broken out to the upside:
Thanks to a break out in crude oil:
The pound resumed its downtrend after GDP numbers showed continued contraction. QE may be extended now. I may get short:
It looks like I got out of Copper too soon as it made new highs for the move last week:
I still prefer platinum:
The Yen is threatening to break a long term uptrend. The fundamentals of the Japanese economy do not support a rising currency. This may be a great short:
Sugar appears to have peaked and is a good short candidate:
Japan’s stock market also looks sick:
The VIX is in a steady downtrend but volatility may pick up into the end of the year. Buy VXX for a hedge:
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