Thursday, September 27, 2012 - GDP Dries Up

GDP Dries Up

by Sinclair Noe

DOW + 72 = 13,485
SPX + 13 = 1447
NAS + 42 = 3136
10 YR YLD +.02 = 1.64%
OIL + 2.25 = 92.23
GOLD + 24.30 = 1778.60
SILV + .67 = 34.76
PLAT + 13.00 = 1654.00

This economics stuff is an imprecise, semi-dismal, pseudo-science. This morning the Bureau of Labor Stats released the preliminary annual benchmark revision to the jobs report. Seems there were an additional 386,000 jobs as of March 2012. They'll revise the numbers again in February.

The Commerce Department reports the US economy grew at an annualized rate of 1.3% in the second quarter; that's down from 2% in the first quarter; and that's down from 4.1% in the fourth quarter of last year. The results were worse than anticipated. The Bureau of Economic Analysis made an initial guess that GDP grew at a 1.7% pace, then they revise the guess down to 1.5%, then they make a third and final guess which was today's 1.3% number.

We can talk about politicians, corporations, workers, the Fed, and lots of other factors but one of the most important factors in the lower GDP number was the weather. The Midwest drought wasn’t the only thing that caused the government to change its GDP estimates. Figures for consumer spending and business investment also were revised down, along with the contribution to GDP of net exports. A drop in farm inventories knocked about 0.2 percentage points from the GDP. And we're just feeling the initial impact of the drought; the economic effects will likely continue into the second half of the year.

Despite some rain associated with Hurricane Isaac, the drought is not improving. A couple of weeks ago, 63% of the contiguous US was suffering some sort of drought. Today, 65% of the country is affected by drought. The economy will have to deal with weaker exports of agricultural products and you and I will deal with higher prices for food.

Yesterday we talked about the political polls showing Obama taking a solid lead over Romney. Today, the Reuters/Ipsos daily tracking poll showed Obama with 49% support compared to 42% for Romney among likely voters. Early voting is underway in several states. The race might be decided before election day. The next point is how this polling might affect the makeup of the House and Senate.

According to a Bloomberg National Poll, Republicans in Congress have an unfavorable rating of 51 percent, and Democrats are only in slightly better shape, with 49 percent of poll respondents viewing them unfavorably.

So, I'm waiting for an October surprise, or waiting to see the results of Florida's new 600-lever voting machines. The Florida voting officials say the steam powered devices should streamline the process of punching out chads on the 36 page ballots. What could go wrong?

In less than a week Mitt Romney and President Barack Obama will face off in the first of three debates. The focus is domestic policy, and taxes will undoubtedly be a key topic.

President Obama wants to extend the Bush-era tax cuts for all but those earning more than $250,000. Romney wants to extend those tax cuts for all including top earners, cut individual rates another 20%, and eliminate the capital gains tax, making up for all revenue losses by closing loopholes.

A new report released by the Congressional Research Service questions the impact of tax cuts for the wealthiest Americans. The nonpartisan CRS says cuts in the top marginal tax rate and top capital gains tax rate "do not appear correlated with economic growth."

The report says cutting top tax rates don't appear to boost saving, investment or productivity, or the size of the economic pie, but do seem to increase disparities in income. Current top marginal tax rates are 35% on income and 15% on capital gains and dividends. All are set to expire by year-end if Congress doesn't act to stop implementation of the Budget Control Act. That law mandates that the top marginal rates will jump to 39.6% on income and dividends (as they were when Bill Clinton was president) and 20% on capital gains after the new year.

But even those rates are much lower than historic rates. In the 1950s the top marginal income tax rate topped 90% and the top capital gains rate was 25%. The Congressional Research Service says tax rates for those with the highest incomes "are currently at their lowest levels since the end of the second World War."

And the share of the income earned by the top 0.1% of families is more than double their share in 1945---9.2% during the 2007-2009 recession, though lower than 12.3% just before the recession hit, according to the latest data from the Congressional Research Service.

So, if you watch the presidential debate next Wednesday, you could make a little game out of how many times you here a reference; you know, every time a candidate mentions CRS, you take another hit on the crack pipe.

Spain has announced a new budget for 2013 and a timetable for economic reforms. Central government spending would be cut by 7.3 percent and they'll impose a 3.8% VAT tax. Ministry budgets will be cut by 8.9% next year and public sector wages will remain frozen for a third year. The Spanish government announce 43 new laws to reform the economy, including reforms to the labor market, public administrations, energy and telecom services. The Spanish state of Catalonia might secede; they've scheduled a referendum on independence. The unemployment rate still tops 25% in Spain, and half of the young workers can't find jobs. Anti-austerity protesters have taken to the streets. One recent protest in Madrid drew one-and-a-half million. The measures announced today will likely result in more street protests.

It seems we can't get through a day without another case of banks behaving badly. Today's edition features a familiar name, Goldman Sachs, in a case involving campaign contributions to ex-Massachusetts state treasurer, Timothy Cahill, who was a candidate for governor in the state. Cahill lost his gubernatorial bid to incumbent Deval Patrick. In April, Cahill was indicted on criminal public corruption charges for allegedly using the state's taxpayer-funded lottery advertising budget to boost his campaign.

Neil Morrison, a former vice president in Goldman's Boston office, worked extensively on Cahill's 2010 campaign while also soliciting underwriting business from the Massachusetts treasurer's office. The SEC has also charged Morrison, and the case against him continues. Goldman Sachs will pay $12 million to settle charges it violated what they are calling “pay to play” rules. Pay-to-play refers to cash or other contributions made to officials to influence the award of lucrative public contracts. Or to put it simply – bribery.

Kareem Serageldin, the ex-global head of Credit Suisse Group’s CDO business charged in a bonus-boosting fraud tied to a $5.35 billion trading book, will fight extradition to the US until he reaches a plea deal.

Serageldin’s lawyer told a London court today that his client’s arrest yesterday outside the US Embassy was a result of “miscommunication”, and Serageldin was negotiating a plea bargain with U.S. prosecutors before the arrest. Serageldin, a US citizen who lives in England, was charged in February with masterminding a scheme to fake collateralized debt obligations. Serageldin was named in an indictment unsealed in February accusing him of conspiracy, falsification of books and records and wire fraud. The conspiracy charge carries a maximum five- year prison term on conviction. The other counts are punishable by as many as 20 years. The case is being investigated by agents of the Federal Bureau of Investigation in New York.

OK, why is this important? Because it might represent the the highest-level Wall Street executive to be charged in a case relating to the 2008 financial meltdown.

I had an email from a listener. You can do that by writing me sinclair@moneyradio.com

How is it that both Gold and the stock market move in the same direction;

it should be that they move in an inverse relationship since they represent

opposing economic factors and cycles. Inflation, money creation and debt expansion should be sending the Gold market soaring,while the equity and debt markets should be declining!

What gives?

Here's the quick answer: Central banks are weakening their currencies to boost their economies and gold is a beneficiary, and the story of weak currencies and strong gold is back in play and it’s not just the dollar, it’s all currencies. All that money printing is a stimulus for stocks, but also a weakness for currencies.