Forecast GDP: November 2007

Our forecast is not secret, which likely affects neither its relative accuracy nor the incidence of its usage.

November's forecast addresses three elements in graphic detail: GDP, inflation, and employment. All of these indicators are projected to break out of their recent patterns and evidence more volatility. As we've mentioned, the recession we call for has already begun and will extend through the middle of next year. Important underlying assumptions are a hawkish Fed and a Democratic president in office in 2009.

GDP

Real GDP growth in the presence of ongoing massive deficits has lost its meaning as an indicator of the productive capacity of the economy. Growth is being borrowed from future taxpayers. This is the reason we have introduced the measure "Net Real GDP," which simply subtracts federal borrowing and presents a number premised on paying our current bills.

In addition, as we have argued elsewhere and particularly in times of was, GDP is not a measure of economic well-being or health, but simply a measure of monetized activity. Additional significant unfunded borrowing from the future is not acknowledged when we ignore the environmental liabilities we are building nor the long-term costs to people and systems from the Iraq War. The liabilities associated with entitlements (Social Security and Medicare funding) are not included in their full form, but borrowing from these entitlements' trust funds by the operating budget is deducted along with other federal borrowing to create the Net GDP number.

November 2007 GDP Forecast

Forecast Recession: October 2007

We are already in recession. Issued (October 25, 2007)

The various prognosticators trying to see over the horizon by jumping up and down on their statistical trampolines will not get the official word for another three months. But without housing employment, the US would have been in at best a stagcession over the past three years. Now there is no housing employment, and the consumer spending derived from home equity is gone.

Inflation is guaranteed by the bidding up of commodity prices and the flip side, the falling dollar. Very likely the Fed will panic again, this time to the upside. The same matrons screaming at their husbands during the credit crunch will be screaming just as loud for rate hikes when they see their dollars eroded by the very cut they demanded in the first place.

(Beware, I have learned my lesson, and I'm not calling for a precipitous drop in the dollar that would be indicated by the fundamentals, just the current slide. There are plenty of players with powerful positions who will do all they can to stem the tide. They may be successful for as long as eighteen months.)

Recession and Inflation

Crisis will be deepened by Fed action.

Forecast Weak Economy, Strong Stock Market, Strong Commodities: September 2007

The economy slips toward recession and stocks ignore it. Why? Courage from the average investor perhaps? Confidence in the underlying strength of the economy? Hardly.

Investors are in full flight, trampling each other to get out from under the collapse of the housing industry, just as they rushed out of stocks and into housing after the so-called dot.com bust. Now they are fleeing housing after creating a similar fiasco in that market. But the money has nowhere to go. The Fed’s solution to every crisis since 1987 has been to pump low-cost money into the financial markets. That’s one reason Wall Street thinks it sees strength over the past four decades while Main Street has turned into a row of double-wides. The money pump rattled into action again on September 18, when Bernanke and the Fed cut rates by half a point. There was only one excuse: To give the financial markets "confidence" so they can “run smoothly.” Bailing out financial institutions is a central bank theme.  it kept chugging along on October 31, with another quarter point.  Again,the avowed purpose was to:

"forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time." (Fed statement, 10/31)


"Growth over time" means they know interest rates don't sift into the real economy for 18 months.  this is not about economic health, it's about bailing out the banks. in the old days, "liquidity" used to mean cash and liquid assets, now it means access to credit.  The rate-cutting action of the fed is equivalent to printing money for the financial sector.

So we have plenty of money sloshing around at the top. But where to put it? Housing is deflating. (Pity the poor homeowner who was counting on that to finance his retirement.) Stocks? It IS rumored some companies have foreign presence. Bonds? Sure, but you’re going to lose real value if inflation kicks up.

Commodities, of course, are tops as an inflation hedge and as a first bet on the next bubble. both printing money and bidding up commodities mean we are in for inflation.  Inflation and recession is the rule nowadays, and unfortunately the millions of inflation fighters in the form of the unemployed can't touch a cost-push inflation they didn't start.

The smart money is buying foreign securities. Even if they don’t appreciate in value, you can ride up with the underlying currency. Or at least avoid sliding down with the dollar. Weakness in the stock price of the financials is not warranted.  the fed is proving "too big to fail" is still in operation.  What could be better for a bank than access to the mint?  A massive transfer of wealth from the real to the financial economy is under way.  Get those financials while they're down.