GDP = -3.8%
The advance GDP data was released. I expect the revisions will make this even worse.
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 3.8 percent in the fourth quarter of 2008, (that is, from the third quarter to the fourth quarter), according to advance estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP decreased 0.5 percent.
The Bureau emphasized that the fourth-quarter “advance” estimates are based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4). The fourth-quarter “preliminary” estimates, based on more comprehensive data, will be released on February 27, 2009.
The decrease in real GDP in the fourth quarter primarily reflected negative contributions from
exports, personal consumption expenditures, equipment and software, and residential fixed investment that were partly offset by positive contributions from private inventory investment and federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased.Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third. The largest contributors were a downturn in exports and a much larger decrease in equipment and software. The most notable offset was a much larger decrease in imports.
Final sales of computers subtracted less than 0.01 percentage point from the change in real GDP after subtracting 0.01 percentage point from the third-quarter change. Motor vehicle output subtracted 2.04 percentage points from the fourth-quarter change in real GDP after contributing 0.16 percentage point to the third-quarter change.
>
Source:
Gross Domestic Product (GDP)
8:30 A.M. EST, FRIDAY, JANUARY 30, 2009
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
http://www.bea.gov/national/index.htm#gdp
January 30th, 2009 at 8:48 am
Behold!
The power of the MUSTARD SEED!!!!!!!!!!!
Clearly the early mustard seeds planted reduced the GDP # from down 6% to down 3.8%.
Buy now, or be left behind when the revision makes the 4th quarter # +2.4%.
And tonight, we have Don Luskin and Brian Wesbury on for a victory lap.
January 30th, 2009 at 8:54 am
OMG!!! TWO…. TWO! consecutive quarters of negative growth! Noooooooooooo! It’s the end of capitalism as we know it!
January 30th, 2009 at 8:56 am
Well, this will be revised downward, of course. But I guess it’s better to revise down from -3.8 than down from -5.5 or whatever.
January 30th, 2009 at 8:57 am
off a cliff
will anyone buy anything from anyone ever again?
January 30th, 2009 at 9:06 am
Do we have the final 3Q GDP numbers yet? they were like -1/2% prelim, right?
I can’t imagine the 4Q not being revised worseward
January 30th, 2009 at 9:08 am
I’m a little curious. Lowered commodity prices contribute to economic expansion by lowering costs and making disposable income go further. I would call this a good thing, especially since the prices last year were the product of scammers and thieves, substantially.
However, lowered commodity prices also show up as a negative in GDP since their lowered cost is implies a decrease in economic activity. The price deflator would not reflect the mid year high costs accurately since many commodity prices are only 1/3 of what they were mid year.
So, is GDP really much better than -3.8% due to the commodity price anomaly? Is -3.8% reflecting a statistical oddity that will dramatically ‘reverse’ itself in 2009 since commodity prices are level again?
January 30th, 2009 at 9:10 am
Doubtless this unexpected good fortune will propel the markets skyward today — or will at least be credited for any upward movement.
January 30th, 2009 at 9:11 am
oops! forget to add the tag.
January 30th, 2009 at 9:13 am
that’s “oops! forgot to add the [snark] tag”
January 30th, 2009 at 9:14 am
@ dead hobo
I think that might be a more valid argument if we had more of a manufacturing base here. Since we do not you can see that the lower prices are not helping the economy expand (mustard seed/consumer tax cut)
you lose your job and discretionary/disposable income spending goes to 0. This might help explain that while oil prices/gas prices have gotten cut big time since last summer inventories are building and demand is still weak.
further, not all commodities (food) have dropped in price, no “tax cut” there for the consumer at the grocery store.
Last credit is still hard to come by so the low prices might not have the exponential impact of the past.
I’d like to try and be optimistic about lower costs as well but I’m just not seeing the benefit of that showing up right now.
January 30th, 2009 at 9:18 am
YEEEEEE-HAWWWWWWWW!!!!!!!!!!!!!!
Bank Asset Repository Fund just reported on CNBC. We’re down to pitching BARF now……
January 30th, 2009 at 9:18 am
BR,
A little off topic but I was wondering if you would be willing to give your thoughts on the money supply but not so much on it’s size.
I’m wondering how that money gets taken back out of the system? I have heard Liesman on CNBC say “the way the program is set up” will allow them (Fed) to remove assets off the balance sheet quickly.
I don’t understand that at all, how can they creat all that money and then quickly take it back.
Anyone?
January 30th, 2009 at 9:22 am
Only -3.8%?
Exactly who has been pulling hard enough to float this number above the obvious , yet understated, declines in other indicators? That is – who is pulling all of this slack in light of unemployment, bail outs, consumer spending, contraction of wealth, and corporate pullbacks? Is this a lagging indicator, or is the number simply stinky crap marketed as yummy fudge?
GDP is probably down closer to 15% than to 5%.
January 30th, 2009 at 9:22 am
http://www.marketwatch.com/news/story/Q4-GDP-falls-38-inventories/story.aspx?guid=%7B913CEBDA%2DAE34%2D48A8%2D84CC%2D80ECCBA1B6E6%7D
WASHINGTON (MarketWatch) — The U.S. economy contracted at a 3.8% annualized rate in the fourth quarter, Commerce Department data showed Friday — a decline that would have been worse except that the government counts an unwanted buildup of goods on store shelves as growth.
A clearer picture of the scope emerges if the inventory buildup’s excluded. As adjusted, gross domestic product contracted at a 5.1% pace in the final three months of 2008, the weakest in 28 years..
…and if I count count toenails as Kruggerands, I’d be better off too….
January 30th, 2009 at 9:23 am
Barry,
Meredith Whitney just ripped off my Bad Asset Repository Foundation acronym (BARF)…
in broad daylight…!!
Still, it’s an honor since it is Meredith, it’s not like Larry K saying “Bailout Nation” every 45 seconds, eh?
Soft rally anyone? Late dribbler, safety trade into Treasuries?? Long energy, short banks.
January 30th, 2009 at 9:32 am
The Bureau emphasized that the fourth-quarter “advance” estimates are based on source data that are incomplete
I can just see some clerk at The Bureau processing the “source data”, setting every third or fourth bad item into a “deferred processing” in-box …
January 30th, 2009 at 9:33 am
ben22 said:
This might help explain that while oil prices/gas prices have gotten cut big time since last summer inventories are building and demand is still weak.
reply:
Sorry, I don’t buy it. The low demand … buildup story is partly a con. People also accumulate when prices are low, such as now. Oil prices won’t rise back to $100 for years, but they won’t stay at $40 forever either. Natural gas prices of $14 was completely a con job. The prices of about $4.75 today are more correct and likely to stay for years unless speculative credit ruins this aspect of the world economy again. Nat Gas is not particularly scarce and new supplies were supposed to come on line this year … probably by now. Corn was $8 and not is $4. Pork bellies are 20% lower. Live Cattle is down 40%.
The benefit has not completely shown up because a few large consumers of petroleum products locked in at the top of the market and are taking it up the as* now. This, too, shall pass.
Ben22, you might try to ignore the analysis from AP and the headline writers. AP business writers only get it right by accident at random intervals. Headline writers are especially ignorant about cause and effect.
January 30th, 2009 at 9:46 am
Anyone have an opinion on what the recovery in the Baltic Dry Index since December means? Given that many view this index as a stealth leading indicator, is it a positive or just more noise?
http://en.wikipedia.org/wiki/Baltic_Dry_Index
January 30th, 2009 at 9:50 am
@ Bruce in TN: It’s not getting any better out there is it? The next number will be a screamer, maybe -6 or 7%. But markets being what they are, we might already be in rally mode by the time that comes out. No rally today, though. Hence, obviously no burger bet, I have been trading from the short side.
@ Ben22: GE is trading weak again… single digits are ahead for that one. Market stuck at SPX 850, will turn around at 10.30, traders will sell this early and go home. Watch the short end of the curve as people park funds.
Chicago PMI 33.3 – AT has become a gold bug – Borchers is curiously absent.
things that make you go.. hmm
January 30th, 2009 at 9:51 am
albnyc Says:
January 30th, 2009 at 9:46 am
Anyone have an opinion on what the recovery in the Baltic Dry Index
maybe or maybe not:
—————————————————-
When oil prices were very high, it was often said that oil tankers were being used as floating storage facilities, with the owners of the oil hoping to buy low and sell high in a few weeks. If true, this would have contributed to the shipping index by making it artificially high. Hoarding due to inflation caused by excessive speculative credit might have caused this bump in the index last year and now it is both reflecting an end to that speculative demand plus a bit of a world wide slowdown.
However, this is only a guess on my part because I don’t normally follow this.
January 30th, 2009 at 9:52 am
This number is always understated both ways once it gets above 1%. 4% tunrs into 5% after adjustments. -3% turns into -4%.
That inventory adjustment number highlights a lot. When credit freezes inventory does not move end of story. Oil buildups are a separate story, it takes time to move. Whats in the pipeline is in the pipeline it just doesn’t get accounted for until it is onshore. Next big numbers will be record falls in imports and exports.
This will of course have a big impact in 1qtr revenue on the small and medium businesses. You can’t sell what you don’t have, and you can’t sell when you can’t ship.
The only good thing for me last year was natural gas, Leased out mineral rights at the peak. I think 7$ is the historical norm. I thought it might go higher with Dems in office and turning all new power plants as natural gas.
January 30th, 2009 at 9:56 am
Lefty:
Our next wager, in view of your transplant status, should be fish and chips…
But seriously…I have always had the idea that government was a “necessary evil” and the way I see these fellows groping for answers, massaging the data, taking the “ready, fire, aim” approach to the economic crisis…sometimes I do wonder what Jefferson would have thought if he could see the kind of, er, statesman that now runs the country..
January 30th, 2009 at 9:57 am
Given that the quarter just reported is almost always the strongest quarter of the year, with the current quarter typically being one of the weaker ones, and looking at the hideous earnings reports (also from the past quarter) and the wave of recently unemployed … I gotta wonder what the final adjusted GDP shrinkage for the current quarter will eventually turn out to be.
Even allowing for a bump upward from seasonal adjustments, a 5% decline for the quarter (not the projected annual rate, just the quarter at hand) would seem to be well within the realm of the possible — a pretty horrifying picture to start 2009 with.
January 30th, 2009 at 10:01 am
The increase in real inventories made a 1.3% positive contribution to the GDP number. Expect a massive drawdown of stocks in Q1 to weigh heavily on growth.
http://www.investmentpostcards.com
January 30th, 2009 at 10:05 am
@DeadHobo & albnyc:
the baltic dry index is for bulk/container ships… it does not include crude carriers.
The rebound is most likely to do with owners idling ships and the end of the Brazil-China iron ore price dispute. Ships are also slow steaming to reduce bunker costs and to artificially reduce the supply of ships.
January 30th, 2009 at 10:07 am
It’s called “sandbagging” the numbers. Lower expectations and then beat the number and then revise downward later. Where have we seen this game before?
January 30th, 2009 at 10:08 am
@ constant – I think it is a given that Q1 ‘09 will be horrendous. The real question is what about Q2 ‘09, as the improvements in the credit market and the various stimulus measures begin to take effect and especially as commodity prices begin to stabilize or maybe even rebound? My guess would be -6.5% for Q1 and -2% for Q2 as the recovery by forced reflation begins.
By the time April’s GDP Q2 number rolls around the market may well be in the middle of a large rally. Not that we will be out of the woods, of course – we will get a W-shaped recovery with rising inflation providing the second wave down of the double-dip some time in late ‘09. For more details on the W, see Paul Kasriel and Asha Bangalore in the recent Words from the Wise.
January 30th, 2009 at 10:10 am
Might I remind people that job losses only began in earnest over the past couple of weeks. Q1 GDP #’s will be much worse than Q4 of last year.
January 30th, 2009 at 10:17 am
http://blogs.ft.com/maverecon/2009/01/the-good-bank-solution/
Curious what you think of this plan.
January 30th, 2009 at 10:19 am
Mannwich:
That is what I think too…again, since I don’t like shorts or puts (even though I own tbt now) I invest aggressively when I am convinced the bull is in place, so even though I haven’t been hurt here, I certainly am not making much money either..
My recurring thought is global synchronous deleveraging…GSD…
January 30th, 2009 at 10:22 am
“I do wonder what Jefferson would have thought if he could see the kind of, er, statesman that now runs the country..”
Jefferson and Jackson would be leading a revolution of the people. Jefferson, as the first Secretary of State, fought vociferously (and lost) against establishment of the first United States Bank by Alexander Hamilton, Washington’s Secretary of the Treasury.
And, of course, Jackson shut down the second United States Bank.
Sadly, it seems their (Jefferson and Jackson’s) skepticism at the tyranny of power necessarily attendant to central banking has been completely lost to history. Barack Obama, and George Bush before him, just think they are the most powerful men in the universe, mostly because it would be bad form for the Fed and the Treasury to quit pretending they defer to the people’s will as embodied in office of the president.
January 30th, 2009 at 10:30 am
For those who watch charts, 840 (right here), 820 (very weak) and 805 would be your SPX support levels today. Going into the weekend, not a lot of buyers out there. Treasuries are catching a bid, I will be looking for a re-entry point into TBT later today or Monday after exiting earlier in the week. I cannot see 840 holding. It seems like we have an appointment with 805, maybe next week some time.
@ Bruce said: “My recurring thought is global synchronous deleveraging…GSD…”
Bruce, the UK is in a bad way and my biggest nightmare when I am long in this market is a blow-up of one or more London-based hedge funds. Not everyone realizes that Chelsea got to be bigger than Greenwich in recent years, and of course some of those funds are in deep trouble in an environment of currency crisis (35% drop=crisis). Watch Britain now as they enter serious Stagdeflation – to see what we may face in the future.
January 30th, 2009 at 10:48 am
But these blog sites are invaluable. Invaluable.
Prior to the internet, and interested financial bloggers, today’s “good” GDP would have been reported as such. As soon as I read the MarketWatch inventory numbers where “bad is good” is reported in the GDP, I post it, and now that time has gone by, I see CR has the same thing…so all of us with an interest see a more honest take, at least.
Lefty, I read the article a couple of days ago about the Sovietization of Britain…I know you read it too. I dearly hope that is not what is in store for us. And I was listening to NPR yesterday on the way home (Nearly Pointless Radio)..and they were interviewing some of the Frenchmen on strike against the government and the way wages and benefits are being cut in possibly the most socialist state in Europe.
One of the strikers made the point that neither he nor anyone he knew invested in the stock market (and indeed, the French as a population are not aggressive buyers of stock) and since they were good little socialists, and had no aspirations other than letting the government look after them, he didn’t think the government should allow what is happening to affect their livelihoods…it was the I didn’t cause it, and shouldn’t have to suffer idea…and I thought it was very interesting for a change..
As for me..still just laying low..
January 30th, 2009 at 10:55 am
Good thing for the GDP calc that retail sales were down enough and we let those inventories build. … yes, was sarcasm.
January 30th, 2009 at 11:02 am
This explains briefly the inventory problem:
http://www.washingtonpost.com/wp-dyn/content/article/2009/01/29/AR2009012902248.html
“Businesses have little reason to resume their previous pace of production and won’t for some time to come, Wachovia economist Tim Quinlan said. With fewer orders coming in, business inventories have grown 17 of the past 18 months. Goods are piling up at every step of the distribution chain, from manufacturing plants to retail stores. Quinlan said he doesn’t expect business spending to rebound until the second half of 2010. ”
From The Washington Post this morning….
It is the old Who are you going to believe, me or your lying eyes?…syndrome…and the government has it in spades..
January 30th, 2009 at 11:04 am
bernandoo -
Thanks for that quick lesson – very nice. I recently heard about the ‘betting on the cantango’ strategy – basically selling puts on oil way-out – not when prices are high but when they’re low (like now)…do you think it’s too early @ 42/bbl? And why are crude tankers sitting in the dock for storage purposes not included in the Dry Index?
January 30th, 2009 at 11:04 am
And I have posted before on the ISM numbers and the massive decline in orders so the above is not surprising….
January 30th, 2009 at 11:07 am
TheReformedBroker wrote: “will anyone buy anything from anyone ever again?”
I’ve been considering the possibility of a “phase change” in the world economy, where it moves to a state where the population as a whole simply produces and consumes less. This would not necessarily be a disaster. We might still produce sufficient food, clothing, and shelter for everyone (which come to think of it would be a step up from today). But the level of traffic in non-essentials would drop considerably; people wouldn’t be throwing out last year’s car, plasma television, or clothes to get this year’s slightly (if at all) improved model.
Of course this also means far fewer jobs, both directly through less demand for hard goods and indirectly through the second-, third-, and further derivatives of those goods (i.e., transport, financing, advertising, insurance, repair, and so on). It might be kind of tricky to transition from such a state back to something like the current one (or rather, the one that held in, say, 2004). It’s hard to see how to bootstrap up the demand – especially in the short term, when a lot of people might be feeling burned by the “old” way of doing things. And of course, if it lasted long enough, it wouldn’t be the “old” way, it would be the “right” way, and there would be interests fighting to preserve it.
Now that I think of it, there might be a strange situation lurking here. What if we’ve finally reached the point where the capital plant is such that we can meet the needs (NOT wants, needs) of the entire world population at, say, 50% nominal employment of that population? Or 25%, or even less. Providing “work” to the rest of the population necessarily means stimulating desires for things that aren’t actually needed – which might be a fair assessment of what the economy has been running on for some time now.
January 30th, 2009 at 11:07 am
@dead hobo,
And where does the dollar fit into your thesis?
I don’t read the AP for research btw. I don’t need to read the papers to tell you about what I’m paying myself. I pay the same amount for food as I did last summer and my health care costs have increased so those alone offset the “benefit” of lower oil prices. Your whole statement was framed around lower prices are good for the economy/GDP and I just disagree. No need to get testy about that.
Now whether or not you think food prices and the price of college and the price of helthcare is a scam matters not because you are going to pay the price or you aren’t going to have them. Right?
Lower prices mean nothing to a consumer that doesn’t have any money to spend, and we have plenty of them that just lost a job and already have too much debt.
Anyway, if I were to read what you first said correctly I’d guess you’d be buying consumer discretionary stocks. I’m happy to stay as far away as I can. I hold cash/gold/miners/metals and energy and various shorts.
January 30th, 2009 at 11:12 am
@leftback
Are you trying to trade GE? That thing is moving just like a bank right now. How soon before the dividend or the AAA goes, one of the two seems inevitable at this point.
I don’t know if any of you ever look at mutual funds. I do to get a sense of what some of the managers are doing. Here is a trend I’m noticing in lots of funds.
Top holding in both BRK A and WFC. I’ve seen it in at least 3 dozen funds.
January 30th, 2009 at 11:53 am
If the number came in at -5.5 instead of the expected -5.4, we’d have a big really since it was not so much worse than expected. But because we beat, we get people selling on the ’strength’ instead of buying on the weakness. Earnings season has shown that there are still companies that make money and I would be comfortable buying some more of those right now. Interest is essentially nothing if you are credit worthy and have access to financing.
January 30th, 2009 at 11:58 am
The import/export component also needs to be considered. If imports are falling even more than exports, that may be “good” for the GDP figure (and the trade deficit) as far as the math goes. But since we now have to import so much of our real goods, a dramatic fall in imports (especially with a recently stronger dollar) is probably not a very positive sign wrt our prosperity.
January 30th, 2009 at 12:06 pm
Maybe it’s a signal that we need to build more “stuff” here instead of importing it?
January 30th, 2009 at 12:28 pm
What about the GDP deflator?
That was certainly an issue in Q2 of 2008.
January 30th, 2009 at 12:31 pm
leftback @ 10:30
I don’t want to add any new shorts until the “stimulus” bill is passed, along with a bank bailout package.
January 30th, 2009 at 12:39 pm
@ Bruce in Tn 10:19AM
your last paragraph regarding the observation of a French striker is quite telling- that he does not invest in the stock market (nor the French populace as whole I guess) so why does he have to take the economic pain? Valid point I think and which may fuel the same observation from many Americans- that they weren’t involved and were not profiting from the investment banking sector so why are they being laid off. The question then becomes- maybe the banking elite should feel the pain- have their assets seized and sold to payback ill-gotten bonuses and income. I have no sympathy for the former “Masters of the Universe” and I am fast becoming more of a proletariat by the day.
@ Ken 11:07 AM
I agree with you. Much of what we associate with as good- increased consumption and growth may be just the opposite. How someone spends their money is not my concern and if they want to waste it on frivolous objects that is their right. However- maybe we should have a new paradigm- where social good is perceived from reusing and saving and where society frowns on waste and over-consumption. Much of what drives people to make the choices they do is based on how they will be perceived by society. If the “Titans on Wall Street” were jeered and frowned upon by society for being “gauche” and materialistic then maybe much of the behavior we have seen would stop.
January 30th, 2009 at 1:01 pm
-3.8% doesn’t matter, it’s worse than last QTR and worse than same QTR a year ago. Maybe I’m a simpleton but that’s how I see it. Same as unemployment and housing starts. It’s worse, plain and simple. Also, don’t think all is priced into the market yet.
@ DL… About the Bank Bailout Package… isn’t it really a “Bonus Bailout Package”?
January 30th, 2009 at 1:02 pm
Imagine that they are reporting a annual growth rate of 1.3% !
Why does that sound like utter bullcrap?
January 30th, 2009 at 1:20 pm
@ben22 Says: January 30th, 2009 at 9:18 am
I’m wondering how that money gets taken back out of the system? I have heard Liesman on CNBC say “the way the program is set up” will allow them (Fed) to remove assets off the balance sheet quickly.
I don’t understand that at all, how can they creat all that money and then quickly take it back.
Anyone?
By selling all those ‘assets’ they bought at the height of the crisis back into the system. They basically just printed up a bunch of paper and bought these things (debt instruments) off the banker’s books in order to give them money to play with. That’s how they get money into the system, by buying debt. That is why the Fed is called ‘the lender of last resort’. When (or some might say if) that money starts to flow again and pool in places, that will start to create higher prices and thus artificial liquidity wealth. The fed will thus just start selling their previously bought assets on to the open market to soak up those liquidity pools as people seek to trade non-interest bearing assets for whatever interest bearing assets the fed is currently holding which is apparently almost anything right now.
January 30th, 2009 at 1:22 pm
Hey Barry,
I guess negative 3.8% really is ‘gross’ domestic product
After today’s report I hear they want to change the name to net domestic product
January 30th, 2009 at 1:46 pm
“This [lack of growth] would not necessarily be a disaster.” by Ken @11:07
Reply:
Agreed. But the whole premise behind America’s prosperity since WWII has been growth. What happens when the tree quits growing to the sky? The notion that prices, population, wealth and power have only a long-term upward trajectory flies in the face of history, logic and sustainability. The crux of the problem that started this melt-down was the notion that demand for houses, and therefore their prices, would never stop growing. It is the essence of hubris to think that age in which you live is different somehow, and that your empire won’t be subject to the same forces that destroyed all that came before you, or even just that supply and demand has no bearing on the price of housing.
On a lighter note, the inventory growth numbers show growth that is not good at all, if economic growth is assumed to be the goal and the good. It just reflects a collapse in aggregate demand, not unlike that experienced in the early years of the Great Depression. Once it bottoms, sometime in the next year or so I would expect, it may not recover, like during the GD, for many years to come. It took the empire-building exercise known as WWII to turn around stagnant aggregate demand in the US. Who knows what it will take this time.
I know this, though–printing money will not create demand where none would otherwise exist. It will just distort price signals. Which, of course, is its purpose.
January 30th, 2009 at 1:49 pm
Ken writes:
> What if we’ve finally reached the point where the capital plant is such that we can meet the needs (NOT
> wants, needs) of the entire world population at, say, 50% nominal employment of that population?
I’ve been wondering something roughly similar: Is ‘full employment’ the right goal if everyone can have what they need without everyone working? Maybe ‘full employment’ isn’t the right target… maybe it’s more like ‘full stomachs (and a roof over your head)’. What would Economics look like if human values mattered?
January 30th, 2009 at 1:53 pm
@ The Hobo:
“Sorry, I don’t buy it. The low demand … buildup story is partly a con. People also accumulate when prices are low, such as now. Oil prices won’t rise back to $100 for years, but they won’t stay at $40 forever either.”
Agreed. When confronted by many of my fundamental analyst friends (and some of my TA trend following friends as well) who were aghast at me for opening a long UCO position on Wednesday after the release of crude inventory numbers… which showed such a huge build…
I told them, look:
Do you REALLY think that the rise in inventories has to do with demand, when all we heard in spring and early summer last year was that the justification of crude at 150 was “demand”???
Its fairly obvious to me that the huge rise in inventories recently has alot more to do with people stockpiling and hoarding crude at these ridiculously low prices than it does actual demand destruction.
What will happen to the price of crude oil once demand, which has certainly tailed off naturally with the economic slowdown, begins to increase again due to normal factors?
Here’s what I see happening:
Now that the E and P folks are cutting down on P & E as a result of these low prices, when demand begins to increase again, there will be a shortage of crude available on the open market, which is going to bid up the price. All the folks who have been stockpiling recently will not begin to sell any of it until they feel they are getting the absolute best price they can get… which is going to cause a serious upsurge in price again.
Counterintuitive I know, and I-Man is certainly no energy analyst… but I’d be interested to hear peoples critiques.
January 30th, 2009 at 2:00 pm
pmorrisonfl,
What would Economics look like if human values mattered?
Common decency. Which happens to be anathema to the big shots.
January 30th, 2009 at 2:10 pm
@ Call Me Ahab…
This is essentially what the NPR story told…again, the last time I checked, the French population did not buy stocks in nearly the way the US, or Britain, or even Germany does…
http://www.wsws.org/articles/2009/jan2009/fran-j30.shtml
Mass strikes and protests in France against joblessness and austerity measures
January 30th, 2009 at 2:12 pm
I-Man,
It could be over a DECADE before demand returns. Our entire economy must be restructured. We are completely overbuilt on inefficient housing and shopping malls due to Americans spending beyond their means. Our economy has to move away from a consumption economy and toward a savings, investment, and PRODUCTION economy. That’s a lot of work to do and it’s going to take a long time.
I thought that Obama would be spending the “stimulus” money on that stuff — building up the electrical grid, converting us from oil dependency to natural gas production and distribution, building commuter rail lines to replace our SUV-clogged highways, and converting the nation’s remaining transportation into electrical, hybrid, and natural gas vehicles. These projects would provide a lot of employment and would pay returns in the future. But apparantly we are going to spend the money on pork barrel projects instead.
You may be in for a long wait while you sit on that crude position.
January 30th, 2009 at 2:13 pm
@ben22: I am just watching GE like an ongoing slow-motion train wreck. Nothing to trade.
@ I-Man: I like the way you think. Oil, gas = highly manipulated markets. Could snap back at any time.
Am long UNG and will nibble into UCO when I get the chance. Look, if we are wrong, we pay cheap fuel prices, if we are right we hedge our expenses in the future. As Robert Shiller said, if we use oil, then we are all short oil. Economics 101.
January 30th, 2009 at 2:16 pm
Doesn’t this inventory glut mean that companies will be cutting even more? We saw a hemorrhaging of jobs in 2008, and companies still produced too much inventory. This suggests that we ain’t seen nuthin yet on the number of jobs that we’ll lose if we don’t have stimulus.
January 30th, 2009 at 2:25 pm
franklin,
Probably. But a lot of those job losses will also be in China, Japan etc. since that’s where most of this inventory comes from.
January 30th, 2009 at 2:29 pm
@I-Man, dead hobo, leftback: With you guys on the energy play. Been buying DIG on the dips for a while now and hanging on for a bit.
January 30th, 2009 at 2:32 pm
Excess inventory…it can be also considered in other ways..this is from Calculated Risk, but there are many forms of excess inventory, and will be for the forseeable future…
http://www.bloomberg.com/apps/news?pid=20601087&sid=aId.u_N9CC88
Simon Falls on Plan to Pay Part of Dividend in Stock
“Development ‘Dead’
While David Simon tried to assure analysts about the dividend, he also said the company doesn’t plan to begin construction on new projects or major redevelopments in 2009 and there will be little new U.S. retail construction for years to come.
“The new development business is dead for a decade,” Simon said on today’s call. “Maybe it’s eight years. Maybe it’s not completely dead. Maybe I’m over-dramatizing it for effect.”
…..So we won’t have to worry about another ugly mall for a decade…in which to sell our abundant supplies of excess denim jeans, and on, and on, and etc…
January 30th, 2009 at 2:47 pm
@leftback 10:08
I think the Real Question is whether some sort of recovery begins in 2H09 or 2H10. Given how tapped out the consumer is, and how busted the banks are (not to mention Uncle Sam), I think it might take another year before the survivors are willing to spend.
We still have not seen a comprehensive ending of the ongoing mortgage firestorm, and the biggest whackage in employment in living memory will only feed the mortgage firestorm, in areas beyond ARMs. My guess is that most people have not yet moved their 401Ks and IRAs into money markets (or flat-out liquidated what little remains) — if and when that happens we could see some more major damage in the equities markets, and maybe a few mutual fund firms close their doors. AND, we have only begun to see the impending credit card crunch, with people who have lost their houses also having maxed out their credit cards prior to the lights going out on their financial lives. Of course, I’m sure the Fed will exchange bad credit card debt for good debt, same as they did with other toxic debt instruments — provided that Uncle Sam is still able to print money with impunity by then.
A bounce-back in the second half of this year seems kinda optimistic to me, even with the humongous amounts of credit injected into the system.
ps — why haven’t we seen pension funds, annuities and insurance companies collapsing? I woulda thought there was sufficient turmoil in the debt markets to have taken out several of these types of entities. I guess they are all in Treasuries, and will begin to feel the pain only when foreigners stop throwing good money after bad in our Treasuries.
January 30th, 2009 at 2:48 pm
But if you read the story above, they will pay dividends in stock…
and UBS is going to pay bonuses in level 3 debt “gains”…
Circuit City goes BK because they cannot get new financing..
..Um, maybe cash is king?
January 30th, 2009 at 2:50 pm
The downturn in the equities markets has only been going on for about 14 months, and even 20-24 months seems on the brief side, given the magnitude of our national/global wreckage.
I continue to look at Japan as the model for our future.
January 30th, 2009 at 3:11 pm
@constantnormal: Me thinks it will be worse than Japan. Their consumers were savers and had a cushion to fall back on. Our consumer savings rate was nil in recent years. What are these folks going to live on? Unemployment checks?
January 30th, 2009 at 3:22 pm
@ Thisson- I agree. Im not a big master plan kind of guy or even an Obama guy but I agree we must invest in those things which help us in the long run. I know in the end we are all dead as expressed by Keynes but I always think “what if we would had and intelligent energy policy 20 years ago”, “what if we invested heavily in mass transit 20 years ago”. Forward thinking . . . let’s put any money to good uses- projects that help people and the country as a whole.
January 30th, 2009 at 3:36 pm
Mannwich: “Our consumer savings rate was nil in recent years. What are these folks going to live on? Unemployment checks?”
You have it right there. Remember that W’s answer to 9/11 was not tell people to cut back, but “go to the mall.” The same theme has been put forward since then, since the only way Easy Al knew for the economy to grow was for people to borrow and spend more.
Re: the French strikes. The rub seems to be that Sarkozy committed 300 billion (don’t know how to make a Euro symbol) to bail out the French banks who had bought American and other worthless paper and he’s cutting government services to pay for it. Naturally, those who didn’t profit from the fancy financial maneuvers are a little po’ed at being asked to endure cuts in basic basic services.
January 30th, 2009 at 3:39 pm
Id anyone noticing that the MSM is not even discussing the possibility of having someone like the FDIC resolve the banks, selling off the viable parts and keeping the toxic stuff without having to pay the turkeys for it?
Is this silence because that option is dead or because Obama’s smart enough not to discuss it before getting a stimulus bill passed?
January 30th, 2009 at 3:43 pm
HowThecommon…
Thanks for that explanation, makes sense.
Wouldn’t a bad bank have to be created then though? If they are going to sell the assets back into the system to take back some of the liqudity who will buy and at what price? I suppose though it doesn’t matter that the Fed would ever sell anything at a loss. How can you figure out what price they paid for them? Is that available anywhere?
I would think if you could figure out what price they paid and then watch this play out there would be a way to profit of that.
I’m long oil like a lot of people here. I don’t think you are going to see it take 10 years for demand to come back but I don’t think you are going to see $100 in the next 12 months either. In the next 36 months, yes I’d be willing to make that prediction. Only time will tell if I’m right.
I-Man, deadhobo,
I get what you guys are saying about oil, the demand thing is silly, I should have been more careful with my response, Simply, I do not see lower oil prices as such a tailwind for the consumer that it will improve spending and thus GDP. Have you heard anyone say this recently “I’m spending because gas prices are lower!” There are too many other forces going against the consumer right now for that to improve things.
I wish I could be more optimistic like hobo but I’m not.
Back below 8k on the DOW.
January 30th, 2009 at 4:01 pm
constantnormal
AIG went under, are they not a big enough insurance company for you?
I think you’ll get some more of what you were saying this year, maybe one other big insurance company. Pension funds got killed last year but I think you would tend to see they diversify better than the banks here which is why they haven’t gone under, I could be wrong though, wouldn’t be surprised if one blew up.
I agree though, is the recovery later this year, or later next year. That is the big question. If we use Japan as the model, sure, there could be a recovery this year or next year, but is it sustained?
Mannwhich,
You are correct in saying that Japan’s consumer’s were better savers but the Nikkei was at 65 times earnings at one time, much higher than we are here, even if earnings go down further, and land there, according to Grantham was at several multiples of ours. I’m holding out a last hope that we aren’t as bad as them and that after a shorter period we come out of these and return to growth.
That said, I do continue to stare at the debt/GDP and where it’s going in horror.
If credit begins to flow again though people will get that last little bit of credit they can, we’ll blow a new bubble and net time this happens it’s going to be even more ugly.
January 30th, 2009 at 5:10 pm
AIG was a special situation — suicide by CDS — normal insurance companies do not (I hope) indulge in such things the way AIG threw themselves into the CDS casino. I was thinking of your more traditional consumer oriented insurance — cars, homes, life — the kind of insurance one assumes is backed by premiums and tons and tons of safe secure bonds (you in the back! stop that laughing!).
I think, upon reflection, is that the reason we haven’t seen a lot of pension headlines is that pensions are dying out, with fewer and fewer companies putting much effort into them. And they are probably all nearly 100% into Treasuries, or long AAA corporates (to limited the extent that AAA has any meaning these days, when companies can for all practical purposes apparently purchase bond ratings).
But the annuities world has got to be under some stress, as most annuities are intended to generate some rate of internal growth, which has been effectively impossible for at least the past year, based on the average returns of fund managers of all types. Lacking much in the way of transparency, annuities can hide their internal difficulties for a while, but if this keeps up for another year or two, I think that a lot of unimaginable fallout will begin to hit the fan.
January 30th, 2009 at 5:14 pm
We watched the tragedy unfold
We did as we were told
We bought and sold
It was the greatest show on earth
But then it was over
We ohhed and aahed
We drove our racing cars
We ate our last few jars of caviar
And somewhere out there in the stars
A keen-eyed look-out
Spied a flickering light
Our last hurrah
And when they found our shadows
Grouped around the TV sets
They ran down every lead
They repeated every test
They checked out all the data on their lists
And then the alien anthropologists
Admitted they were still perplexed
But on eliminating every other reason
For our sad demise
They logged the only explanation left
This species has amused itself to death
No tears to cry no feelings left
This species has amused itself to death
Roger Waters – Amused to Death. Check it out
January 30th, 2009 at 6:14 pm
constant,
Think about this too with annuities. In the past 2-3 years many annuity comps have promised certain payouts over the life of the annuity to the holder regardless of investment performance. I don’t know that this will show up right away but I would promise over the next decade someone is going to blow up on that stuff.
January 30th, 2009 at 9:13 pm
This is way too optimistic. My own estimates still show about -6.0%. I’ll be enourmously surprised if this is not hugely revised downward.
January 31st, 2009 at 7:30 am
I see DOW barely held 8K. It sure looked like they were painting the tape at the end. I don’t know who “they” were but it was pretty obvious to me.
January 31st, 2009 at 10:04 am
ben22 Said:
January 30th, 2009 at 11:07 am
@dead hobo,
And where does the dollar fit into your thesis?
reply:
Nowhere. I read several of the Dollar Crash books and some actually taught me some pretty good monetary theory. However, the dollar appears be influenced by factors not usually mentioned in the Dollar Crash books. If they were correct, the dollar, today, would have less value than a puddle of day old piss.
In fact, I’m starting to put together a new economic theory of the US and world. I have not yet developed it to the point of full clarity but it basically goes …
“Nothing that You or the texts say matters, really does. The theories tells a good story and give people something to talk about, but most are crap when compared to real world events. I’m starting to think a trillion dollar deficit wouldn’t hurt a kitten, although it would scare the crap out of people who make a living out of talking and writing about economic theories (few of which actually amount to much.) Crooks run everything important and their skill at making the economy a money machine will keep it going”
January 31st, 2009 at 3:31 pm
@ben22 Says: January 30th, 2009 at 3:43 pm
HowThecommon…
Thanks for that explanation, makes sense.
Wouldn’t a bad bank have to be created then though? If they are going to sell the assets back into the system to take back some of the liqudity who will buy and at what price? I suppose though it doesn’t matter that the Fed would ever sell anything at a loss. How can you figure out what price they paid for them? Is that available anywhere?
Good questions. I am not aware of any places to get the info but I try not to look too deeply in the the actions and happenings of the Fed and the banking system. I get entirely too angry whenever I do and that is not what I want my life to be about. Instead, I just try to know enough to know whether or not they have blown the financial system to bits. If they haven’t done that then I don’t care because I can probably survive. A saying I adopted many years ago that has served me well on all big picture issues is:
Never worry about what you can’t control
I also try to know enough to educate others for the few (though that number is growing daily) that are actually interested in how their money works. I consider that a moral duty as a member of dragon slayers international
I would think if you could figure out what price they paid and then watch this play out there would be a way to profit of that.
You could I’m sure but that is how many of them are trying to profit and I doubt they would want any of us looking into their club and business dealings. Besides, is there a soap on the face of the earth that would clean the slime off your hands once you finished dealing with that stuff?