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Rudi’s View: US Recovery In Worse State

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Aug 04 2010

"Lies, Damned Lies, And Statistics"

By Rudi Filapek-Vandyck

This past week I have been repeatedly reminded about the phrase that originally had been attributed to 19th Century British Prime Minister Benjamin Disraeli, but that was ultimately popularised by the ever so clever Mark Twain: [there are] "Lies, Damned Lies, And Statistics".

Two new insights landed on my desk this week, and neither of them are positive.

Firstly, I have been informed by a trustworthy and reliable source that one Wall Street firm has come to the conclusion that Friday's Q2 GDP estimate might have been erroneously inflated by some 70 basis points.

What this means is that GDP growth should have been reported as 1.7% instead of 2.4%, as was reported by the Bureau of Economic Analysis on Friday. The “error” in the initial estimate seems to have occurred through a too large assumption of inventory-build.

The underlying message here is: expect next month's revision to take the number a lot lower than where it seemingly stood on Friday. Thinking about it, this is exactly what has been happening with initial estimates over the past few quarters anyway.

1.7% – hardly a number to get overly excited about, is it? Maybe this is why Wall Street is whispering “more Fed action” and “more Obama action” these past few days?

Various bullish market commentators in Australia have been pointing at increasing evidence that the US economic recovery is taking a sustainable shape, but with ongoing disappointment from consumer related companies in the US (see Procter and Gamble last night) and the above “insight” it would seem exactly the opposite might be occurring.

Could this be the reason why the Federal Reserve has resumed discussing Quantitative Easing? Remember Bernanke's “unusually uncertain” outlook description a few weeks ago.

The irony is, of course, that if the Federal Reserve would be compelled to further re-stimulate US growth, this would likely be taken as a positive by Wall Street (equities and other risk assets in demand).

The past weeks have seen ongoing weakness for the US dollar, while gold seems to be climbing back from earlier losses. Both trends should not only continue, but accelerate in case of renewed Fed-stimulus.

Also, those looking for reasons why the July-August rally seems to lack any sort of conviction: see above.

The news does not get any better, with the privately owned Consumer Metrics Institute (about which I have written a few times since last month) reporting its measurements for US consumer spending seem to have gone in freefall this month. Right now, reports the Institute, things are looking so bad that it would seem we're back to where we were in the bad days before the Lehman Bros collapse in 2008. This is clearly shown on the Institute's “Contraction Watch” chart:

Reports the Institute: “a glance at the above chart tells us that the 2010 contraction is figuratively in 'uncharted' territory, behaving very unlike either 2006 or 2008. After nearly 200 days of contraction, the 2010 event is now less than a month from surpassing the 'Great Recession' in longevity, with no end in sight.”

Other observations made by the Institute only add to the gloomy picture. US consumers seem also to have started to scale back on smaller “feel good” purchases. This while “the ultimate big ticket Housing Sector has moved back into significantly negative territory.”

The Consumer Metrics Institute believes its proprietary measurements of consumer spending are more up to date and more accurate than the good old fashioned surveys conducted by the Bureau of Economic Analysis. If so, then it will only be a matter of time before the ongoing weakness in consumer spending starts showing up in other surveys and indicators.

Sorry to be the bearer of bad news, but does this seem like a sustainable economic recovery?

P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to Portfolio and Alerts in the Cockpit and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website.

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