Its the Weather, Silly: Everything about the Abysmal GDP-report & the Failure of QE

May 2 2014

As manic-depressive Mr Market appears to focus wholly on good news only to confirm its bias that the U.S. (and world) economy is indeed recovering, the news that U.S. GDP numbers over the first quarter of this year were absolutely horrendous was silently ignored. More shockingly, if it wasn’t for Obamacare, GDP would have actually declined 1% year-to-year in the first quarter. Abysmal, in

Its the Weather, Silly: Everything about the Abysmal GDP-report & the Failure of QE

As manic-depressive Mr Market appears to focus wholly on good news only to confirm its bias that the U.S. (and world) economy is indeed recovering, the news that U.S. GDP numbers over the first quarter of this year were absolutely horrendous was silently ignored.

More shockingly, if it wasn’t for Obamacare, GDP would have actually declined 1% year-to-year in the first quarter. Abysmal, indeed, but markets seem to ignore anything that contradicts their recovery fairy tale as gold and silver moved lower during the week and the Dow Jones reached record highs.

GDP Would Actually Be Shrinking

What was the effect of Obamacare on Q1 GDP? Healthcare spending surged over US$40 billion in 2014 and added 1.1% to GDP. Does this healthcare spending reflect an economic recovery? Not at all: it is government-mandated spending due to Obamacare, nothing else. It doesn’t reveal a rebound of production or new viable investment. If healthcare services expenditures would be anywhere near the average (instead of an outlier), GDP would have contracted a bit in Q1.

It’s the Weather, Silly

Anything bad in Q4 of last year or in Q1 of this year is blamed on the weather. Anything. From employment figures (‘people don’t look for jobs when it’s cold’) to economic growth, housing prices, and corporate earnings.

Ironically, as we carefully review the home builders sentiment index (a housing market indicator), the latest number actually dropped the most in the “West” region, where sunshine and dry weather was prevalent.

Consumer spending is another example. In January 2014 U.S. consumers actually spent the most on services ever, when — supposedly — the weather was at its very worst. This, however, would contradict the headlines about the weather being the main culprit of a faltering economic recovery. If it’s not the weather next time, any other justification that explains a ‘temporary setback’ in the recovery will do.

QE Doesn’t Create Economic Growth

Most of western societies still live under the illusion that monetary policy can lead to greater prosperity. One of the goals of QE3 was — besides improving unemployment — to bolster economic growth. Even after QE1 and QE2 were failures, policymakers stuck to their circular reasoning: if the economy isn’t growing despite QE, than the problem is that they’re not doing enough QE. Besides job security, however, prosperity cannot be printed, nor does the labor market gain by inflating a currency.

The latest GDP-report is a new testimony to the fact that prosperity and economic growth cannot be simply left over to the whims of central bankers: structural changes are needed, not monetary changes. Monetary policy doesn’t create wealth, it can merely destroy it.

Many Believe the Fed

Many, however, seem to believe the Fed’s recovery fairy tale. Case in point is the forecast of Q1 GDP by Goldman Sachs: they predicted 3% annualized growth in Q1, 97% off from the actual 0.1%. Have they changed their mind about the ‘recovery’? Not even close. Goldman Sachs now predicts a 3% growth in Q2. “Second time lucky”, they must have thought.

It’s not just GDP growth in Q1: last year’s GDP estimates were also revised downwards. Annualized GDP in Q4 of last year came in at 2.4%, instead of the initial estimate of 3.2%. So much for a recovery...

This ‘recovery’ is similar to the recoveries the U.S. experienced during the Great Depression. Nothing goes down straight: but, in retrospect, everybody agreed that a recovery would be stretching the truth. Everybody will say the same about the current ‘recovery.

When the Recovery Isn’t a Recovery: A Bull Case for Gold

This popular delusion cannot go on forever. Someday markets will wake up to realize that the recovery was smoke and mirrors. That, at the same time, is the bull case for gold. When the many join the few, stock markets will decline and gold will experience renewed interest from investors.

As the wind turns, the ones buying and owning gold now will come out on top.

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