UK Q2 GDP: Unblanced, Unsustainable, and Unbelievable

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 UK economy grew by 1.1% in the second quarter according to just released figures from the Office for National Statistics. The pound rallied sharply on the news, but a look inside the numbers indicates this growth is neither balanced, sustainable, nor even believable.

Even a cursory glance at the Office for National Statistics charts shows quite clearly three components of GDP had an outsized impact in creating the good headline number - Construction Spending, Business Services and Finance, and Government and Other Services.  Without these three sectors, there was no growth in the UK economy. While these sectors were growing, there were significant decreases in the Electricity, Gas, and Water and Transport, Storage, and Communication categories. It would be reasonable to assume that these categories should be showing increases in a growing economy, but they aren't. The charts can be found at: http://www.statistics.gov.uk/pdfdir/gdp0710.pdf

The UK had a bigger housing bubble than did the U.S. and they have yet to work off the excesses of too much building earlier in the decade. Nevertheless, the biggest contributor to second quarter GDP was Construction Spending, up a whopping 6.6%. Based on the numbers, a major new building boom is taking place there. People capable of logical thought may wonder how this is possible. A reasonable explanation is an obvious statistical error since the UK changed the source for its construction numbers and for the first time is basing them on a new Monthly Business Survey for Construction. Expect some major downward revisions for this figure in the future because it is something that is just not possible in the real world (government statisticians rarely question an impossible number as long as it makes the government look good).

The next best category was the one that contained financial services. The UK has propped up its big banking institutions (and has nationalized more of them than the U.S. has) with a number of government programs. Not surprisingly, after this huge transfer of money from government coffers, they are doing much better as are U.S. banks There was a 1.3% increase in the Business Services and Finance category and this contributed almost as much to the total rise in GDP as did Construction Spending. Together these are both part of the FIRE (Finance, Insurance, Real Estate) economy, where excesses led to the Credit Crisis. The UK seems to be trying to reestablish the imbalances that led to 2008 economic collapse.

Finally, government spending was up 0.9%, almost the same as the increase in total GDP. Government spending in the UK is indeed the lynchpin for making GDP look good as is the case in the U.S. The new Conservative government is planning major spending cuts and tax increases though and this will negatively impact future GDP numbers. Going forward things are not going to look rosy for the UK economy. Perhaps this is why the Bank of England was recently discussing lowering interest rates. Either they have access to other private economic data or they simply realize how misleading the current UK GDP numbers are.

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.

GM Saga Continues; Gold Becomes the New Oil

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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This is the last week for GM to arrange a deal with its bondholders in order to avoid bankruptcy - and things don't look good at the moment. While this has been weighing on the market for some time, it didn't prevent a huge rally yesterday that saw the Nasdaq zoom and close well above its 200-day moving average. This picture would be extremely bullish, if volume had been heavy instead of just average. Gold and silver were down slightly in the stock rally and this was odd behavior to say the least considering the Korean nuclear test. News coverage on the precious metals is beginning to resemble the negative coverage that oil experienced from February to just recently. Oil wound up basically flat on the day Tuesday, but was as high as $63.45 in European trading this morning. Look for $67.00 as the next resistance.

What has been going on with GM in the last few months highlights the extent of recent government incompetence in handling the U.S. economy. Federal policy from the last several presidential administrations has undermined our industrial base and built up the FIRE (Fire Insurance Real Estate) economy to replace lost manufacturing. Obama claims he wants to restore the balance. Unfortunately, none of his actions support his rhetoric. GM, which is the first major opportunity to help revive U.S production, has been handled disastrously. The Obama administration has interfered with the operations of the company as if somehow they know more about how to run a large industrial enterprise than people in the industry. They don't. While GM has been poorly managed for decades, it is still run better than the U.S. government.

Furthermore Obama's people have made demands that are improper and unlikely to be met in order for GM to get more bailout funds. No such demands were made on any financial institution that received TARP funds. While the unions have been more than cooperative, the unsecured bondholders have balked about accepting equity in exchange for their holdings. This was inevitable since they would be entitled to more in a bankruptcy, either through distribution of assets or by cashing in their credit default swaps - an action that would cost the financial companies receiving TARP funds a lot of money. Trying to force bond holders to accept equity is also an attempt to violate their rights under law. Who would want to lend capital in a country that does this? If the Obama people sat down in a room and tried to figure out an economic policy that would lose in the short term, lose in the intermediate term, and lose in the long term, they couldn't have done any better.

Lack of confidence, along with the massive money-printing operations of the major central banks, will continue to drive up the price of gold and silver. Don't expect to hear this from the mainstream media however. Some tidbits from today: 'Gold off for second day amid broad metals selling' (gold was down $2.20, a minor intra-day blip); 'The strong dollar has sapped some of the resilience that gold has been showing' (a quote from someone who has a $600 price target on gold and has been wrong about the price direction of gold for months, but that's not mentioned in the article and doesn't keep the media from quoting him); and 'silver skidded 4.5 cents' (but was still above the key breakout level of $14.50). I also particularly liked the coverage in the Wall Street Journal yesterday that said 'gold could go to a $1000 by the end of the year'. Now that's an earth shattering prediction. And to think investors who get their information from the media have trouble making money in the markets. I can't imagine why.

NEXT: Oil Takes Gas, Silver's Shining Moment, GM Watch

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.