Friday, January 29, 2010

All Engine No Transmission

Taken with a grain of salt, this morning the headline read:

WASHINGTON (MarketWatch) -- Coming out of the worst recession in generations, the U.S. economy grew at the fastest pace in six years during the fourth quarter of 2009.

Uh huh. Out the blocks the Dow rose more than 100 points and then reason drifted in. If one assumes the report today to be good news and we are still at this moment trading at a 30 point loss for the day, it is very troubling indeed. Bull markets rise on bad news and bear markets tend to fall on good news. Misleading news? I'm not sure, except that such things eventually come home to roost.

The headline 5.7% quarter on quarter annualized GDP growth looks halfway decent unless one is a economics wonk. Removing the adjustment of inventories to sales to more accurately look at true demand, we get to a lackluster 2.2% annual rate of growth. If we take out the foreign trade sector we find domestic growth of 1.7%.

The massive amounts of monetary and fiscal stimulus would, in a "normal" recession be creating growth over 10% and begs the question, what happens if public debt stimulus fades this year? Aggregate hours worked in the private sector FELL in the fourth quarter, so equating to a 5.7% growth rate stretches credulity. Domestic demand is little more than flat in the end analysis. Is it any wonder that President Obama singled out export growth an economic driver in the future in his State of the Union address? Domestic economic demand for the next few years looks tepid at best. We HAVE to look elsewhere.

What are the investment implications of this call to export arms? (Excuse the unintended pun) In domestic equity investments those companies with substantial export capabilities likely offer better prospects. Secondly, the likely driver of increased exports will be a weaker dollar to enhance international competitiveness. In that vein a longer term perspective on commodities and precious metals should also prove useful. Shorter term the asset bubble that we are once again experiencing, including commodities, may may take a breather in this still substantial deflationary environment.

It will be years before this economic python swallows this debt pig.

John Barnyak
Stonehouse Asset Management