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Obama and Yellen Recovery Narrative Unraveling Fast – Ep. 158

  • The dollar index traded below 94 for a good part of the day, but it did manage to close up at 94 even, down just .20
  • Gold was up another $19
  • Silver really shined brightly today, up .54, just below $16/oz.
  • Mining stocks, of course, were on fire; GDX was up just under 6% on the day, GDXJ up just under 7%
  • This followed a spectacular day for the mining stocks on Friday
  • In fact, even though gold itself was down a couple of bucks, we had a huge up day in the gold stocks
  • Between  Friday and today, I think this is the biggest two back-to-back gains for gold stocks all year
  • The catalyst was the Atlanta Fed Q1 GDP estimate downgrade all the way down to .1
  • If you remember, from listening to my podcasts, the very first time the Atlanta Fed came out with its upward revision, with a lot of fanfare, to 2.7%, I said that that was all political and that they would have to walk that back all quarter long, and now they have eliminated the entire estimated gain
  • A fair estimate might have been -.1, but President Obama is still saying we have the strongest advanced economy in the world
  • I don’t know what his definition of “strong” or “advanced” is, but we might have one of the weakest of the advanced economies
  • It’s just that nobody wants to accept that fact yet
  • Here’s where it really gets interesting: CNBC was very dismissive of the weak economic numbers
  • They are characterizing the weak Q1 as similar to previous years’ weak Q1, where the weather pushed back some economic activity to Q2, causing rebounds
  • They said the same thing is going to happen this year.  No it’s not.
  • This year is different from last year
  • First, let’s talk about inventories: February and January Wholesale Trade Inventories have been revised down from +.3 to -.2
  • Last year, companies were still building up inventories, believing in the recovery narrative, boosting GDP
  • The inventory unwind that I have been talking about for the last year is just beginning
  • It started in Q1 of this year, and this inventory sell-down is going to subtract from GDP
  • Here’s another factor: the weather
  • The weather for the last two first quarters was very cold, pushing economic activity to Q2, helping Q2 to rebound
  • That’s not what happened this year.  The first quarter of this year was the warmest in over 120 years
  • So obviously there was no economic activity pushed forward due to weather, if anything, the weather might have pulled some activity from Q2 to Q1
  • As weak as Q1 was, it might have been weaker if cold weather had suspended some economic activity
  • The third difference is the trade deficit, which is rapidly growing this year
  • I think the growing trade deficit will continue to put a drag on Q2 GDP
  • The inventory liquidation will continue to be a drag on Q2 GDP
  • What that means is had the government properly seasonally adjusted Q1 for the unusually warm weather, I think Q1 GDP would be a lot lower
  • Q1 will be a contraction, and we are going to fall from there
  • If that is true, then we are in a recession
  • I think this recession will be longer in duration that the preceding one
  • The question is: What is the government going to do about it?
  • There was a meeting today between President Obama, Joe Biden and Janet Yellen
  • They have to figure out how to throw the economy a lifeline without admitting that it is drowning
  • The first thing the Fed can do is signal that they are not going to raise rates – change their forward guidance
  • By just not raising the rates, the specter of a hike remains
  • The question is what story will they use in order to not damage Obama’s recovery narrative and Hillary Clinton’s campaign?
  • Maybe they will blame it on the global economy, even though the U.S. is much weaker than many other economies
  • The Fed can’t cut much – one cut and they’re done, unless they want to venture into negative territory, which would be a disaster
  • They could re-launch QE, which I think there is a very good chance they’re going to do
  • The economy has always been weak; this is a done deal
  • What should be changing is the perception of investors to the reality of the economy
  • It’s amazing that the market has been oblivious to bad economic news for such a long time
  • What I got wrong was assuming that the market would figure it out sooner
  • Now it is becoming more and more obvious that the negative economic news is affecting GDP, and pointing to recession
  • I think it’s possible, given the dynamics I have already laid out, that Q2 is going to be worse than Q1
  • There’s no chance the Fed is going to hike rates in June
  • If Q2 is indeed lower, the government doesn’t have a lot of time to stimulate the economy before the November election
  • We’re starting to see a divergence now between oil prices, which are going up, and stock prices, which are headed south
  • I also wanted to comment about a discussion on CNBC with Henry Blodget regarding the minimum wage, and he repeated a meme about Henry Ford that is often misunderstood
  • It is popularly thought that Henry Ford paid his workers high wages so they could afford to buy his cars
  • That’s not true.  The real reason he paid his workers high wages is because of the high level of training required for each worker to work productively in the production line, and the cost of replacing these highly trained workers would be prohibitive.