U.S. economy hits the brakes…

[Hyperion]

…what’s next?

The U.S. economy slowed down sharply in the final quarter of the year and GDP clocked in at 0.6% while for all of 2007 GDP came in at 2.2%, the smallest increase in five years.

The annual GDP figure posted its third yearly decline in growth and 2008 could be number four while 2009 could turn out to be number five.

The GDP report showed that inflation, as measured by headline PCE, breached the 4% mark and came in at 4.1% (just shy of a multi-year high of 4.3%) and what may be greater cause for concern is that core PCE came in at 2.7% (the highest reading since the second quarter of 2006).

In addition to the poor GDP report initial jobless claims surged to 373,000 and slowly but surely march their way to the key 400,000 level. Initial jobless claims may be one of the best real-time indicators of economic health available right now and the message the labor markets send is clear. Employment is on a downward trend as claims continue to increase.

Last but not least the U.S. Dollar has hit record lows versus the Euro and continues to loose value due to rate-cuts and the supply of more U.S. Dollars since Bernanke prints money like he needs to win a race. The U.S. Dollar is the most over-supplied currency right now and recent monetary decisions have increased the problem. This translates into the continued decrease of spending power and a real-time loss in equity markets and portfolios in comparison to the global economy.

Let us summarize the above:

The economy slows down and is on a path to hit negative growth (as early as the current quarter), inflation is a huge problem and continues to accelerate while employment continues to decelerate.

That points to stagflation regardless if Bernanke and Friends want to acknowledge the fact. ‘Bernanke Doesn’t See Return of ‘70s Woes’ (Associated Press), at least not yet but if you consider who is at the helm of the Fed it will give you reason to believe that the 1970s will be remembered as not as bad as the 2000s.

Bernanke has chosen to ignore inflation and focus on economic growth but he seems to forget that the economy will not be able to grow with inflation at current levels since the back-bone of the economy, the consumers, will not be able to support the economy as more and more disposable income is required just to cover the basics.

The Fed has taken a dangerous stand on inflation and argues that it is not really a big problem right now and fairly contained. The more inflation is ignored (Bernanke claims that the Fed will keep a close watch on inflation but by the time inflation will show up in inflation figures it is too late; compare it to a story in the newspaper…once it hits the papers it is already too late) the more painful it will be once it does show up.

The weak GDP figure released today along with the continued deterioration of the job market will supply the ammunition Bernanke will use to argue and defend further rate-cuts but the ignorance of a problem will not make it disappear.

When is inflation a problem? Does Bernanke need to see it in double digit territory?

Again, when inflation shows up in different indicators it is too late. The markets have all but e-mailed participants a clear message:

Inflation was a bit of a problem before the rate-cuts and now the little problem has been grown into a big problem. Inflation is heavily embedded into the economic pipeline and a recession is required in order to drive inflation out of the system and bring it down to acceptable levels.

Once inflation starts to go into over-drive, and thanks to Bernanke’s rate cuts it will (maybe already has), there is no quick solution to the problem. The Fed should not only focus on lagging indicators but should be qualified enough to see the problem and understand the markets.

Sure, you can exclude food and energy (and everything else you would like in order to argue that inflation is well contained) but that does not change the fact that consumers are faced with those costs on a day-to-day base.

Bernanke cannot play on two parties (economic growth and inflation) at the same time and decided to fight the slowdown in the economy (which he will drastically and pathetically loose).

Bernanke fights the battle on the wrong front and that will cost him to loose the war.

[BadThad]

Talk about pushing back....how about DJI down -315 today!

[rtace]

yup, tricky times, QID and DBA are some good bets for me
gotta sit and think through some more strategy
DBA bets on inflation
QID is short
so aslong as the prospect of rate cuts is high dba does well and the bad econ news is good, however, people are gonna be compaining about high food prices soon, so when dba levels off good be time to load up short lol
...my thinking out loud

[Hyperion]

Sure was a great day...if you were on the right side of the move...

[Ciao]

for info .... if you follow Buffett

Buffett says U.S. in recession
http://www.reuters.com/article/newsO...EN425620080303

It is difficult for me to express myself in a foreign language with such difficult argument (trading, economy, recession etc…etc…)
But IMHO we are partially in …… and more bad to came…unfortunately the richer will get rich and the poorer will get poorer……

For an older trader IMO there has been worse market then what we have at the moment, but among that there is always something that go up (does anyone thought about Gold, Platinum, Euro etc…)
The main thing is not to trade at all cost, but get the one that goes up (there is always something that goes up… need a scalp view) and never be too greedy….. “a profit is a profit”

Gee why am I say all this ?..... I am sure you all know better…… take as a reminder rather then a lesson…

take care

[Grizzums]

IMO - Different sectors of our (American) economy has been in or is going into recession at different times. One could make the argument that our overall economy as measured by GDP has been in a recession for quite some time with the only savior being (meaning reason why we are "supposedly" not yet in a recession) is the fact that we measure GDP in the USD. Take into effect the loss in value of the USD or measure the American Economy in any number of other currencies or commodities and we are most certainly already in a full fledged recession, of which I'd rather see us go through without the Fed trying to manipulate the natural market course of correcting the previous malinvestment monetarily while keeping us walking along the edge of a cliff and creating the same field of play for the next go-round....but hey, I'm just an idiot not subscribing to mainstream government economic propaganda theories. I'm not a full believer in the Austrian School of thought as I do not think in today's global market environment that all applies, but there are aspects of it that I do agree with.

[Skydaemon]

Originally Posted by Grizzums

One could make the argument that our overall economy as measured by GDP has been in a recession for quite some time with the only savior being (meaning reason why we are "supposedly" not yet in a recession) is the fact that we measure GDP in the USD.

That's a really interesting point and probably quite true.

One thing I realized while watching the worldwide inflation taking place.

When a weak economy prints money or is mismanaged it's currency drops and that's it, it's contained.

When the US prints money and should be devalued, it's so central to the global economy that the USD doesn't change, the prices of every individual good rise up across the world to cause the same effect as a devaluing dollar. This might be partially because of the number of currencies pegged to the usd which force inflation everywhere else to compensate.

It isn't the USD that devalues, but rather other producing nations currencies which inflate, and they do that unevenly with the inflation of different good sectors which move in spurts and lurches.

Economies that are wholly dependant on the US for their national product value and currency value get devalued right along with the US, and the countries that rise in currencies are going to be the ones that have intrinsic value in the goods they produce and they'll rise proportionally to their separated values. I also think as i mentioned, that this inflation and currency rise elsewhere in the world is upward distorted by pegged currencies and the like.