DJ30 – 12,143   down 96
US Treasury 10 Year Bond – 2.81%    down 0.15%
USDEUR  -  1.4387
Gold – $1626     up $12
Oil – $95.88    down $1.56

Gold hit a new inter-day HIGH of $1633.  Wow – I am happy for all of you who are holding gold right now.

Bonds gained enormously today on the risk – as money flowed into Treasuries –  people were driven by the poor US economy (see GDP story below).  This lowered interest rates by 0.15% – amazing. Oil fell also on a poor US economy.  The Dollar fell slightly.  Stocks continued their fall.

GDP – that sucking sound……..

You saw it on the news – GDP was 1.3% for the 2nd Q 2011.  And, the bigger news was the 1st Q was revised down from 1.9% to 0.4%.  Wow – that means we were awfully close to a declining growth rate in the 1st Q – aka a recession.

Well, you think that 1.3% isn’t bad when compared to the 0.4% – do you?  Here is the truth.  It Stinks!!!!!!

And, just when you thought it couldn’t get worse – it got worse.  One lesson from these numbers is that you can’t trust those numbers when they first come out.  Who would have guessed that the GDP number could drop from 1.9% to 0.4% on a revision.

Here is one of those dirty little secrets.  The GDP numbers are not inflation adjusted – in other words, when this year’s GDP Dollars are compared to last year’s GDP Dollars to calculate the GDP % growth rate – they use actual Dollars at that time.  The Dollars are not adjusted for inflation.  So, what? – I hear you say.  Okay, you have a point.  This is the way GDP is calculated every time – so why make a big deal about it???

I am making a point out of it to show you that when you DO adjust for inflation – which is blazing along at about 4% right now – the actual (inflation-adjusted) growth is NEGATIVE.  The only reason we are having growth at all is that inflation is making the numbers bigger – ARTIFICIALLY.  This is one of the big benefits that politicians have when they can stand in front of the microphone and declare that “growth” is happening – and they get to do it because of inflation.  Inflation distorts the truth – in addition to kicking you in your back pocket (or purse – so it won’t hurt as much).

What caused this GDP slowdown?  Well, the FED and the economists have stated over and over again that the slowdown was caused by “transitory” things like the Japanese earthquake and higher gasoline prices – and it will jump right back to its great (???) growth rate soon.  I draw an entirely different conclusion from these “experts.”  I believe that our economic recovery is FRAGILE – and if a little hiccup in Japan or gas prices can make it almost go into a recession – our economy is going to tank even further as those “transitory” things keep happening.  For example, what happens from our Debt Cap talks?  Will they cause a decline in governmental spending – ergo a reduction in GDP?  That would be transitory too, wouldn’t it?  In fact, everything is transitory – because everything can and does change in the future.  So, I think those experts are just pulling the wool over our eyes.

I would expect economyguy readers to be able to deduce by themselves that higher gasoline prices have no impact on GDP.  Yes, people do spend more money filling their tank up.  And, they spend less money on something else.  The net is zero.  So, where does the logic come from by the experts?  Remember to think for yourselves and you will be able to protect your and your family’s financial future.

Let’s dial down into the 2nd Q GDP number.  What was the biggest contributor to the growth?  It was an improvement in the Net Exports component of the GDP equation.  In other words, by fixing our export problem a little – the US managed to help its GDP – and this factor helped our GDP the MOST.  It was not internal spending, or investment, or government spending (thank goodness), it was an improvement in net exports.  Here is the other side of this coin – net exports is fickle and what goes up, can come down.  Our net exports improved in 2 Q by lower oil prices – but oil prices are now rising – think about it.

The governmental spending component of the GDP equation declined.  It wasn’t the Federal Government, of course.  It was the State, County and Local governments spending less.  We see this showing up in the unemployment numbers too as the biggest component of unemployment growth is from state/county/local government.

Europe isn’t over yet……

Even though the headlines highlight the US, Europe continues to percolate in a threatening manner – threatening to your wealth.

1. Moody’s is threatening to downgrade Spanish debt from AAA (sound familiar to the US?).
2. The banks still must “voluntarily” roll over their depreciating Greek bonds – so this story hasn’t fully played out yet.
3. The politics in Germany are volcanic – as Merkel is trying to keep the lid on German hatred of bailing out Greeks.
4. France has been threatened with a downgrade unless the ACTUALLY follow through on their budget cuts.
5. French banks are being scrutinized for bad loans – and they don’t look too good.
6. Ireland is considering going back to the EU and telling them they want a deal like Greece’s deal.
   

Any of these details could raise its ugly head and continue with a Euro crisis – and threatened US banks – and threatened your wealth….  Just because we don’t see Europe in the headlines doesn’t mean that bad things aren’t happening over there.

Fannie and Freddie……

Just a reminder that Fannie Mae and Freddie Mac are now run by the US Government, and that while the taxpayer wasn’t responsible for them in the past, as of 2008 we are now responsible for any losses incurred by these Government Service Agencies (GSA).

What’s the risk?  Well, jointly they hold about $5 TRILLION worth of mortgages.  If they all go bad, you can add that amount to the Debt we owe.  So, far the government has not added anything to our Debt to account for Fannie/Freddie losses.  While the loss could be no where near $5 TRILLION, it does come into the hundreds of Billions of Dollars – and that ain’t hay.

So, just when you think our leaders have their hands around the problem – it is important to remember that they can’t even define the problem – let alone get their hands around it.

Some Random Thoughts on Rating Agencies……..

Let’s use our ‘out of the box’ thinking right now.  The S&P Rating Agency has threatened to lower the AAA debt rating on US Treasury debt.  This is because we have such a large debt and no plan on reducing it in the future.

Do you think any other nations have less risk than the United States when it comes to being able to pay back its loans?  How about France?  How about Germany?  How about Japan?  How about the UK?

My conclusion is that the US is still a lower risk than other nations.  The US Dollar is the reserve currency of the world, and that also gives it some weight.

So, the fact that S&P is threatening to lower the US rating means that they also must be considering lowering a bunch of other nations’ credit rating too, or they are incompetent (a definite possibility).  When you consider that the entire world is drowning in debt – all nations have the same problem – just to different extents.  Don’t get too excited about a credit rating downgrade – it is just a sign of our times and the very poor financial advice given to the world over the past 50 years.

DJ30 – 12.605   up 45
US Treasury 10 Year Bond – 3.17%    no change
USDEUR  -  1.4310
Gold – $1491     down $4
Oil – $98.49    down $1.61

Lots of swings in the price of our indicators.  Go no where stocks and bonds.  Gold and oil establishing a sideways movement.  The Dollar starting to fall.

Jobless Claims…..

Jobless Claims came in today at 409,000 claims with the 4 week moving average at 420,000 claims (a better estimate of the claims as it smoothes out the volatility).

This is still a fairly high level of people claiming unemployment benefits, and points to our weak economy.  The big numbers were claimed to be caused by auto workers laid off because of the part shortage caused by the Japanese earthquake.

Bottom Line – the US economy is weak and becoming weaker.  Remember the GDP growth from 1Q 2011 was 1.8%, and down from the previous quarter.

2Q GDP estimate…..

The data is starting to come in indicating that the 2Q GDP growth will be less than anyone has estimated.

The Philadelphia FED report showed that factory output was much less than anticipated – as reported today – and slumping to a 7 month low.  Auto output declined 8.9% last month and is blamed on the spare parts loss from Japan.  It is believed that factory output fall is temporary and will rebound later this year.

However, housing activity looks like it will stay with us for a long while.  Housing starts are at such a low level that you would need to look at the post-WWII level to see so few houses being built.  While this is good for working off the backlog of houses for sale, it doesn’t put anybody to work building homes.  The backlog of foreclosed properties is far from worked off, and states are still suing banks over their illegal methods of foreclosing.  This just means it takes longer to work out all these problem properties.  (My anticipation is that the housing market won’t turn around until 2013 at the earliest.)

President Obama and the Middle East Speech……

President Obama made a major speech today saying we should help Egypt and Tunisia by giving the Billions of Dollars in aid and forgiven loans.

Where does this money come from and how does it impact GDP?  (A question for our times.)

As we are borrowing money today, any new money (and his request is for new money) would have to be borrowed – 100% borrowed – to pay for the aid.  Many will ask “Why are we borrowing money – possibly from abroad – to give it away to foreign countreis?”  This is a valid question and goes to the heart of our foreign policy.

Foreign aid is a little tricky to think about when it comes to foreign aid.  On the surface, it looks like it comes (or adds to) “G” in the GDP Equation – and you would conclude it increases GDP.  But, the money is not being spent in America, and it is going abroad.  Isn’t this just like an “Import”?  When we import things, we get the goods, and the money goes abroad.  In this case, we get nothing, and the money goes abroad.

So, I would conclude that all foreign aid is something that is added to the “imports” part of Net Exports – and is a total negative on our GDP.

Japan’s 1Q GDP…..

Japan came in today with a MINUS 0.9% for their GDP growth.  This was the result of the earthquake and tsunami that stopped the production of so many manufacturing plants and associated exports.  This negative GDP will undoubtedly continue into the 2Q, and will be placing Japan firmly in the grip of a real recession.

FED Watch…….

It is fun to read the FED minutes when they are released.  The latest ones released talked about a discussion within the FOMC on how and when to reverse the “monetary easing” that is taking place – i.e. QE2.  The general consensus is for the FED to do the following, in the order stated:

1. Stop reinvesting the income derived from its assets (US Treasury bills and Mortgage Securities) – as you remember the FED is currently using those funds to purchase more US Treasuries – a sort of continuation of QE2.
2. Increase Interest Rates – like the FED Funds Rate
3. Sell its assets – US Treasuries and Mortgage Securities.
   

None of these actions are surprises as I’ve talked about all of them previously.  The order is the only real news here.

The timing of these actions was not addressed and undoubtedly has a big disagreement within the FED.

My person belief is that later this summer, the economy will start to decline, and the FED will decide to do nothing, or will decide to initiate a QE3 program.

DJ30 – 14,479   down 69
US Treasury 10 Year Bond – 3.12%    down 0.03%
USDEUR  -  1.4227
Gold – $1484     down $7
Oil – $97.11    down $0.26

Stocks continue their meltdown.  The Dollar has stalled against the Euro, but still gaining against the Yen.  Interest rates continued to fall today.  Gold and oil are consolidating right now for their next leg higher in the future.

Use the GDP Equation in Washington…..

I just read an article about a deadlock in Washington between the Obama White House and the Congressional Republicans.  This deadlock shows that our leadership does not understand the GDP Equation, and it provides a great example of how it could be used.

The White House is sitting on 3 Trade Agreements (South Korea, Columbia, plus one other) which will increase exports by $13B.  They are not passing it to Congress for ratification because they want a (non related) funding of a payment to workers who are displaced by their jobs going overseas which costs $800M (yes milliion).  The Republicans won’t pass that $800M bill because they are hung up on spending more money.

I am very nervous reading an article in the New York Times, so here are my assumptions regarding the numbers:

1. The $13B and $800M are correct numbers.
2. The $13B increase in exports would happen in a single year – and each year.
3. There are no associated imports from those countries which counteract the $13B exports – this is the weakest assumption.
4. The $800M is a one time expenditure.
   

So, let’s use the GDP Equation to analyze this situation:

1. The Net Exports increase by $13B – for every foreseeable year in the future.
2. The $800M is a one time increase in “G”
3. The $800M comes from increased taxes – which decreases “C” by $800M, or
4. The $800M comes from increased borrowing – which has no effect (ugh!!!!!) on the GDP Equation for a single year.
   

Conclusions:

1. GDP increases either $13.8B or $13B – depending on where the $800 comes from.  That is great for the economy isn’t it, as this is private industry work where real workers pay taxes and it doesn’t make government bigger?
   

But, there is one additional consideration to analyze.  How many jobs does the net exports create?  If we assume that the productivity of the average American worker is $50,000 – then all we have to do it divide $13B by $50,000 – and we get 260,000 jobs.

Now, 260,000 jobs is nothing to sneeze about – and I bet that this doesn’t even enter the discussion on this topic between Congress and the White House.

Also, the Republicans have stated that they will not increase spending.  And, I have stated that any deal should look at the big picture and not an individual issue (like this one – which is an excellent issue to bring up).  So, my recommendation is that this be agreed among the parties as part of the next “Big Deal” which is the increase in the Debt Limit discussions.

Thought you would like to see  a real issue using the GDP Equation.  I find it interesting that this hits in the one big area where progress can be made in our GDP – the Net Exports component.  When we reduce “G”, we are going to be reducing GDP accordingly, and the more offsets we have in increases in Net Exports, the better.  Now you should start using it when you read or listen to the news.

Google to sell $3B worth of Bonds…….

Google is sitting on a pile of cash totaling $37B.  Why would it want to sell $3B worth of its corporate bonds? It clearly doesn’t need the money.  And, selling bonds for the first time!!!!

Well, it is doing it just like many, many other companies are doing it right now.  They believe that interest rates are at an all time low, and they will be going UP in the future.  If they write these IOUs, and sell them for real money – they can put the money in the bank and pay the interest on those corporate bonds with inflated Dollars and as interest rates rise, they will be much better off – giving them a competitive advantage to the tune of $3B.

Smart companies are doing this right now, as is our Government…..  They are writing US Treasuries like they are going out of style?  Aren’t they?  The low interest rates is one of the reasons – but not the driving reason.  The driving reason is the insanity that thinks that deficit spending is good for the USA.

Supply and Demand…..

We are going through a classic supply and demand curve as shown by the US Gasoline prices.  People have reduced their spending on gasoline each week for the past 8 weeks.  This is being reported by the credit card companies who can monitor what is spent by their customers.

As this reduction in demand has taken hold, the price of a gallon of gasoline has started dropping in the past week.

The result shows the typical lag that takes place as the price of something rises – causes the demand to reduce over time – and then the price corrects to compensate for the reduced demand.

It’s nice to see this part of our economy not being manipulated as so many other parts are being manipulated.

In the news today…..

I love the way the government calculates GDP.  It just keeps revising it until the truth finally comes out.  Here is a great example.  Today, the government declared that 2nd Quarter GDP came in at 1.9%.  This was disappointing to the markets as they expected a much higher number as this was the quarter of the IRS rebate checks!!!!  So, the economy is doing worse than people had expected, or hoped for.  I know you’re not surprised!!!!

Dinner Conversation Tonight….

The weekly jobless claims for last week came in at 448,000!!!!!!!  Remember to think that anything over 400,000 is just plain bad news for the economy, and further pushes us into the recession.

Here is a graph of the weekly jobless claims made over the past few years, so you can put these statistics into context:

 Please note the steady rise since July 2007!!!!  You can also see this number is highly volatile, BUT the trend is very clear over the past 9 months.  

Here are today’s numbers:
Dow Jones 30 Industrial – 11,378 (down 206 points)
10 Year Treasury Bond – 3.98% (down $0.07)
Euro – $1.5607
Gold – $923 (up $10)
Oil – $124.08 (down $2.69)
Gasoline – $3.07 (down $0.07)