GDP and Velocity Redux

imageFirst and threemost, the new Gross Domestic Product figures are out from the Bureau of Economic Analysis today.  So let’s start with the press release:

“Real gross domestic product — the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes — increased at an annual rate of 1.0 percent in the fourth quarter of 2015, according to the “second” estimate released by the Bureau of Economic Analysis.

In the third quarter, real GDP increased 2.0 percent. The GDP estimate released today is based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, the increase in real GDP was 0.7 percent.

With this second estimate for the fourth quarter, the general picture of economic growth remains the same; private inventory investment decreased less than previously estimated (see “Revisions” on page 2).

The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), residential fixed investment, and federal government spending that were partly offset by negative contributions from exports, nonresidential fixed investment, state and local government spending, and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.

The deceleration in real GDP in the fourth quarter primarily reflected a deceleration in PCE and downturns in nonresidential fixed investment, in state and local government spending, and in exports that were partly offset by a smaller decrease in private inventory investment, a downturn in imports, and an acceleration in federal government spending.

Real gross domestic purchases — purchases by U.S. residents of goods and services wherever produced — increased 1.2 percent in the fourth quarter, compared with an increase of 2.2 percent in the third.

Real gross domestic product — the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes — increased at an annual rate of 1.0 percent in the fourth quarter of 2015, according to the “second” estimate released by the Bureau of Economic Analysis.

In the third quarter, real GDP increased 2.0 percent. The GDP estimate released today is based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, the increase in real GDP was 0.7 percent.

With this second estimate for the fourth quarter, the general picture of economic growth remains the same; private inventory investment decreased less than previously estimated (see “Revisions” on page 2). The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), residential fixed investment, and federal government spending that were partly offset by negative contributions from exports, nonresidential fixed investment, state and local government spending, and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.

The deceleration in real GDP in the fourth quarter primarily reflected a deceleration in PCE and downturns in nonresidential fixed investment, in state and local government spending, and in exports that were partly offset by a smaller decrease in private inventory investment, a downturn in imports, and an acceleration in federal government spending. Real gross domestic purchases — purchases by U.S. residents of goods and services wherever produced — increased 1.2 percent in the fourth quarter, compared with an increase of 2.2 percent in the third.

The real deal is GDP is running $18.1484 trillion for 2015.  Current Public Debt to the Penny is $19.04 trillion…so yeah, still going down the Greek Road, so to speak.,

This warms me to one of the huge problems I have been writing about since we turned over the first electrons here in late ‘96:  We have an economy which is careening toward a collapse, likely in the 2017-2018 period.  And is should be a doozey.

When people are expecting inflation, like I was in the early 1970’s, the smartest thing you could do was to run out and buy all the house you could reasonably afford.  For me, at the time, it was about a $7,500 down payment (going from memory) and that got a $43,950 house which was being financed at 7 3/4%. 

That is so much higher than today’s situation as to be unthinkable.  But check this out:  I had been around the new business long enough to be talking to really smart people a lot (like the late Dr. Paul Erdman) and I’d figured that because interest rates were on the way up (to pay for the Vietnam War and all the social program expansions) that inflation would overtake the underlying home rate.  Which it did.

This did one other thing:  It forced money that was laying around in passive savings to flee the bank’s clutches because it was losing at one point in 1981 almost 7% a year compared with real estate or other simple investments.  You just couldn’t go wrong.

Since the interest rate peak in 1981, though, things have been going the other way.  Presently, home prices are only just back to 2005 levels and – making it worse – the numbers used in the Case-Shiller/S&P/Dow Jones/Core Logic reports – like the one out on Tuesday and pure apples to apples which in the case of home purchases is only somewhat useful.

The reason is this:  there are selling costs (paint, carpet, repairs, commissions, points, possibly inspections and, if going VA perhaps appliances or whatever is required).  While owning a home since 2009 has been grand, after we get one more run-up in the markets, it may be time to think about doing something else…like renting for a while.

Elaine and I are so serious about this that we are actually thinking about moving into a rental and unloading the ultimate prepper’s hideout in the woods.  If we could get say $250K for it next year, and then we see a huge return of deflation…we MIGHT be able to buy back something much nicer for perhaps $100K.

Problem is, it becomes a fine judgment call whether government will actually decide to let deflation work its way through the system, or not.  The case for deflation is that it will clean up all the malinvestment.  The case for hyperinflation is that we’re all saved, but no one can afford to live.

A while back, I told our Peoplenomics readers that whereas the big monetary problem of the last Depression was to get rid of convertibility of paper into gold or silver (hence, the reaon for the calling of private gold (April ‘33) and private silver (August ‘34) was to make government money the only game in town.

I said – and I will tell you the same thing – that the government this time around will most likely go with inflation AND STAMPEDING EVERYONE INTO ELECTRONIC MONEY where it can be used for all kinds of Kafka-like purposes.  Can you imagine having a government “money account” and having to do your income taxes to match what went through any of your accounts?  One little error and Bang!  You would be in hot water.

OR, even worse:  Government giving you money every month if you’re retired – but then turning around in the same month and taking a big chunk back out of “your account” because they reckon you owe them income taxes.  Oh boy!  End of “tax float” huh?

Where are we, I mean REALLY in the great scheme of things?  Well, we use this indicator called the Velocity of Money.

It is the ratio between Federal Reserve M2 and the GDP.  Even though Janet Yellen and the Fed claim to have raised rates, they have pushed more out the back door to the bankers and as you can see in the (prior to this morning’s data) M2 Velocity chart, we have NEVER SEEN SO MUCH MONEY ON THE SIDELINES IN OUR LIFETIMES.

When it gets scared out of the banks (shortly) and out of bonds (shortly) we will have one gigantuan (feel free to use it) explosion to the UPSIDE.  Housing will snap back and the market will soar to unbelievable levels – way past old “new highs” – I mean this will be amazing.

The problem – as in 1929-1933 is that when it lets go, there will be more financial crap around that even Charmin could handle.

So here’s the chart:

image

The interesting thing is that our “back of the envelope” puts year end Velocity at 1.4755.  The more of less official Federal Reserve data is showing 1.48 for Q4, but that may be revised, or not, based on this morning’s data.

All of this is like having a personal roadmap to when to invest in real estate.  When Velocity is peaking, owning is great.  When Velocity is bottoming, not so much.  When it looks like there’s no where to go but turn up, then housing becomes an interesting wager again.

Well, whatever… the market loves what’s going on and the futures are up again this morning and we are looking to move smartly up a bunch more in the leg 1 up of five (likely) to finish my long awaited blow-off top.

Not saying world governments can’t steal defeat from the jaws of victory, of course.  Their track records aren’t particularly impressive.  But global, synchronized INFLATION in here is the point…and while the money supply soars, sooner or later it will come out of the closet and starting buying anything that moves including stocks and homes.

So to a certain degree, we can all sit back and watch and the powder keg loads if you know where to look.  That would be the Fed H.6 report.  And this is what we call the “money out the back door” indicator:

image

How to read this?  Simple:  If the 3-month is higher than the 12-month, they are stepping on the gas and prices will head higher.  When the 3 month is lower than the 12 month, they are stepping on the brakes and markets might go down.  It’s so stupidly simple, I sometimes can’t figure how people manage to lose money investing in the medium term. But patience isn’t for everyone, I suppose.  If you want to make big money, you need to think in the old fashioned ways.

Black Lives Matter Costs

Thought you would find this interesting: 4 Black Lives Matter protests in St. Paul cost $250,000.

Meantime, in my old stomping grounds (Seattle) the Seattle Times report that “‘Black Lives Matter’ protesters demand firing of police chief after fatal shooting.”

Interesting though that when you read the story, the report is the vic was a 46 year old man who made a move for the gun he was carrying when an arrest was attempted and he was in possession of crack and some black tar heroin, and he was not legally allowed to carry a gun (past convictions) and so we’re not exactly talking about the pure and righteous according to the case background. 

Fire the police chief over it?  Hmmm…

Another Mass Shooting

Four dead and fourteen wounded in Hesston, Kansas overnight.

Troubles in DC, Too

Turns out another Marine was been attacked and left for dead in DC.  Doesn’t do much for tourism, you know.

How About that “Transparency?”

In tooling around this morning, on the Eric Holder email deal (more in the Coping section to follow), I couldn’t help but notice this on the Freedom of Information Act Advisor site:

FOIA News: The TSA Releases Data on Air Marshal Misconduct, 7 Years After We Asked.

Yes sir, no problem with the transparency, but if you’d stand in this line over here till you’re dead, that’d be juss fine…

Comments

GDP and Velocity Redux — 22 Comments

  1. ” Current Public Debt to the Penny is $19.04 trillion ”

    Someone tell me how the money for that debt was generated. I doubt it was by digging gold out of the ground.

  2. One concept we often forget is the underlying theme of what George does on the land. Income substitutes. So if you had no water bill, no sewage bill, little or no electric bill, fresh eggs and garden veg, reduced medical outlays, very low maintenance and taxes, and little need for transport, not to mention the insurance of keeping lots of rotated food on hand, how much income would that be a substitute for? If your truck and tractor and Lexus could reasonably be expected to last for 30 years, with basic maintenance, how much income would that displace? When Social Security and Medicare go belly up, would renting be the best bet, or would it be better to be able to bring in renters? If timing got screwed up by some rogue actor popping off a WMD before the Depression hit, how agile would apt. Living be? Where would you like to be the day, say, Indian Point nuclear plant had a big emergency? Or there was an 8.0 in Seattle? I begin to see buy and hold as a viable choice for the right kinds of real estate, since there is intrinsic value in them. Borrow and hold, maybe not so much.

  3. Dear George and Elaine, I’m thinking that if you are planning and selling and moving from your present survival digs that you are not planning on surviving the great depression. I know that I’m not going to survive the depression. Surviving to what????
    Love
    Snazzee

  4. George ;
    You are solvent, paid for land,vehicles,home. fully equipped shop, lots of neat stuff all over. easy to get anywhere in the world you want to go..
    I know you have congenital restlessness of a yondering
    man but you got to have a base to go back too. Just to recharge for a new adventure.. You have heaven on earth right where you are.. Only thing better than Texas is Montana. Except when its cold but this year it has not been very cold at all.LOL..

  5. I was on the “other end” of that inflationary 1980’s cycle. While my friends decided to spend money fast before it lost value (which I did to a certain extent)..once Reagan was elected, I started squirelling away money in CD’s once I saw the interest rate drop a point. So by the time they matured, the banks were paying me 23% interest on my money, at a time when the interest rates were under 10%. That was when I paid cash for my house. Tiny one-room house, but still purchased independently of banks. I doubt that opportunity will show up again in my lifetime.

    • You are a smart woman. I don’t know why more people don’t get it like you do! And why other websites are such time-wasters…but oh, well…can’t save everyone, I suppose…

  6. George,you wrote…..”we have NEVER SEEN SO MUCH MONEY ON THE SIDELINES IN OUR LIFETIMES”. But who actually has the money? And who exactly is going to spend it? I don’t have it. Do you?

    • Lol, us either. But money markets and dead pools of big capital of the rich…and bonds and….

    • Much of the cash on the sidelines may be linked to the constant flow of 401k “cash” that goes into the markets every pay period along with funds managing a bit more cash waiting for a new trend to establish. The 10% down January was enough to freak a lot of people out. Of course, 10 months doesn’t mean a 0-priced stock market – but it sure could have scared people thinking 2008 was happening all over again. Some “pundits” say low oil price may mean world economic downturn. Hardly – it just means the dummies keep pumping and can’t stop. The growth in GDP is a horrible metric to look at – I would rather have a flat GDP growth with more jobs added than a growing GDP on the back of inflation. The more workers we can keep working, the less government money we need to pay them to not work. But we need to find a safe and sturdy “stasis” – consider the works of Brian Czech and casse.org where he believes in finding sustainability rather than requiring constant growth. Bounding and bouncing bubble economies pay off for those who risk it “both ways” (long then short then long then short) when “they and their friends” can work together the establish well defined directional trends in trading patterns. The algorithmic trading engines just follow trends and cause resonance in the markets to follow that trend. Then, they hit stall and restart it in the other direction. There are huge gains to be made going both ways.

  7. Hey George, I’m hearing rumors on GLP that PA trucking is way down and Chicago rail is way down. Any truth? And should we be worried?

    • Nope – just the charlatans or prediction trying their best. But, you see, we tend to run on data around here. I won’t go looking for trucking stats but the Association of American Railroads data this week says:
      WASHINGTON, D.C. – Feb. 24, 2016 – The Association of American Railroads (AAR) today reported U.S. rail traffic for the week ending Feb. 20, 2016.

      For this week, total U.S. weekly rail traffic was 497,210 carloads and intermodal units, up 5.1 percent compared with the same week last year.

      Total carloads for the week ending Feb. 20 were 244,747 carloads, down 5.7 percent compared with the same week in 2015, while U.S. weekly intermodal volume was 252,463 containers and trailers, up 18.2 percent compared to 2015.

      And when I look at inbound cargo, there’s no shortage of goods coming in, so SOMEONE is buying a lot of stuff and that’s not what happens in a big Depression – so anyone who has been screaming “Depression is here” should be considered a less cred source in the future, as I see it. Until they get things right in the long term.

  8. Problem is, selling the property solves nothing. You still have the overhead of the cars and all the services involved in USA life, plus the risk that you don’t know what the value of that $250k will be in a few years.

    If you expatriate and put that 100k into something now, you will be locked in for life, and your living expenses can go to $5-600 a month, for a good life.

    We will see the day when expatriating from the USA with two suitcases will seem like the better choice.

    • But you’re still thinking in terms of dollars down there. How long before Ecuador decides they’re not using the dollar? Or wants foreigners out?

      • There are a few countries that will grant permanent residency with a reasonable investment in the country. I think Ecuador may be one. Generally, governments are best off following their own laws. Nothing is guaranteed, and having more than one residency is ideal, if you have someone watching the unoccupied one. Certainly spreading assets between countries is prudent.

        Ultimately, where will you be happiest, and in congruence with your own value system? It’s a rather complicated decision due to so many variables.

    • What if someone has gold and/or silver coins and cash, and decides to expatriate from the USA? I’m guessing packing all that in a couple of suitcases and trying to make it through stateside airport security, as well as customs at the destination, would be a really bad idea, correct?

    • *Ecuador….heading that way soon to retire. Bought 2 900sq.ft. home under $80k. & Now being rented for $550 each. USA was good while it lasted.=)

    • What if someone has gold and/or silver coins and cash, and decides to expatriate from the USA? I’m guessing packing all that in a couple of suitcases and trying to make it through stateside airport security, as well as customs at the destination, would be a really bad idea, correct?

    • I believe in owning in almost all cases where you’ll be staying more than a year, but never investing more than you can afford to lose outright in real property. It is always out there in plain sight.