Q2 GDP Much Lower Because of June Trade Deficit

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The U.S. trade deficit widened to $49.9 billion in June instead of improving as expected. This figure was missing from the second quarter GDP report and could mean a downward revision to 1.3% from the originally reported 2.4%. The lower GDP number means almost all of the growth in Q2 came from inventory accumulation and not from increased economic activity.

The U.S. trade deficit has to be funded from foreign borrowing, just like the budget deficit. Before the Credit Crisis, both used to be around the same size. Then the budget deficit exploded from record levels around $400 billion to over $1.4 trillion in 2009. The trade deficit went in the other direction, decreasing substantially, but is now coming back. The deficit in June was 19% higher than in May and would be almost $600 billion annualized. Exports fell, with computers and telecommunications equipment declining. Imports rose with consumer goods hitting a record high. Ironically, this is being made possible by the huge budget deficit the federal government is running. U.S. consumers are using the money they get from stimulus spending to buy foreign goods - something that will only lower U.S. economic growth.

The trade deficit reducing the GDP number for the second quarter has far wider implications than growth just being anemic. It confirms that the economic 'recovery' that supposedly started in the summer of 2009 has been based almost entirely on changes in inventories. From the Q3 of 2009 to Q1 of 2010, around two-thirds of the growth reported came from the inventory category. This fell to 44% in the first reading of this year's Q2 GDP, still a high number, but better than the 71% from Q1. If Q2 is revised down to 1.3%, the 1.05% that inventory contributed to GDP would represent 81% of total growth. Excessive inventory accumulation means lower GDP growth or even drops in future quarters.

Stocks turned ugly yesterday, whether because of the implications that growth was much weaker in Q2 than the originally reported number or because the realities of the Fed's August meeting finally sank in, is not clear. The Dow Industrials were down 265 points or 2.5%, the S&P 500 lost 32 points or 2.9%, Nasdaq dropped 69 point or 3.1% and the small cap Russell 2000 fell 26 points or 4.1%. Market weakness continued this morning and stocks are starting to suffer serious technical damage, which could lead to much bigger drops in the coming weeks ahead.

A just released NBC/Wall Street Journal survey indicates that close to two-thirds of the American public think that the economy is going to get worse before it gets better. Mainstream economists now think GDP growth will be 2.5% in the second half of the year. The Fed still thinks it will be above 3%. For months, both have denied the possibility of a double-dip recession. Increasingly negative economic reports however indicate another recession may have already arrived.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Euro Banks Up on Stress Test Farce

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Euro banks rallied nicely on Monday after results of the EU's stress test indicated there are essentially no problems in the European banking system. The stress tests have been heavily criticized as a whitewash and a cynical PR maneuver however. Nevertheless, rallies in bank stocks are continuing today on earnings reports from UBS, Deutsche Bank, Societe Generale and Credit Agricole.

Of the 91 EU banks analyzed for the stress tests, only 7 failed - five in Spain, one in Germany and only one in Greece. No bank in Portugal, Ireland or Italy failed the test and was deemed to be in need of raising more capital. The 7 banks that did fail were supposedly only short $4.5 billion. An alternative result produced by an analyst at JP Morgan indicated at least 54 banks should have failed the stress tests and at least $100 billion in new capital needed to be raised. Even that view may be optimistic.

Although considering the great earnings out today for UBS (UBS), Deutche Bank (DB), Societe Generale and Credit Agircole perhaps enough money is being poured into the euro banks from the ECB that it is irrelevant what condition they are in. After all, another bailout is potentially always around the corner. The UBS earnings were the most telling in this regard. One reason stated for UBS doing so well was that "withdrawals in the private banking arm have continued to slow". Yes, losing business at a slower rate is certainly bullish. The stock was up 7% on the news.

In a separate report released today, lending to non-financial companies was down 1.9% year over year in the EU. So euro bank earnings are rising even though less lending is taking place to businesses. Interesting, to say the least. Mortgage lending in the EU is going up at a 3.4% annual rate however. So maybe some minor reinflation of the real estate bubble is taking place in Europe while the economy slows down. That certainly bodes well for the future.

The stress tests show once again that any number, no matter how outrageously manipulated or false, will be accepted by the market as gospel.  We saw this last week with the UK second quarter GDP figures. The construction spending number was up by an amount indicating a major building boom was taking place even though there is no other evidence of a big pick up in construction. The fact that the reported numbers didn't match up with reality apparently didn't disturb anyone. You would think it would have since the current EU financial crisis that necessitated the stress tests was cause by Greece lying about its fiscal state. Greece's numbers were off by more than 400%, but no one in EU headquarters noticed any problem with them.

When economic or business numbers are fantasies, but are accepted anyway, a major crisis will invariably follow. Before the Greek debt crisis, there was a the subprime crisis in the U.S. Bundles of subprime loans - loans from borrowers who had no job, no assets, and no history of paying their bills - were believed to be triple A credits because some authority said they were. This allowed common sense to be thrown out the window and complete absurdity to be regarded as wisdom. This type of behavior though isn't as bad right now as it was during the subprime era - it's actually much worse.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.