GDP for Q1 was revised upward to 1.4% on an increase in consumer spending. The US economy enters its ninth year of economic growth in July.
The first GDP estimate for Q1 was originally reported at 0.7%. So Q1 GDP grew at twice the rate as originally thought. That’s great. Obviously 1.4% growth is not great but to have GDP growth at twice the rate than originally thought is awesome.
The idea that the Federal Reserve has hiked rates too far, too fast, and thus was crashing GDP is pushed a little ways off with this Q1 GDP upward revision. Clearly economic growth is not slowing as rapidly as everyone originally thought.
Some economists suspect the Q1 GDP number still underestimates the true rate of increase in the US. Regardless of the upward revision to GDP, President Trump’s stated goal of quickly boosting annual GDP to 3% remains a struggle.
Analysts estimate that the U.S. market will grow at a 3% rate in the April-to-June interval, although the downturn in equipment orders and shipments reported earlier this week increases the danger that industry investment will supply less of a boost than expected.
A sustained average economic growth rate of 3% hasn’t been achieved in the US since the 1990s. The U.S. economy has grown an average of 2% since 2000.
Initial indications that GDP has accelerated in the next quarter are unlikely in the face of recent data on retail sales and manufacturing production.
The pitch by the Federal Reserve is that GDP is growing which is why they are hiking rates. The Fed has said that rate hikes are representative of their belief that economic growth is picking up and so really, rate hikes are something that is bullish for the economy and GDP going forward.
If you believe that, I know a guy who has an original picture of Jesus Christ in a piece of brick that he’d like to sell you for just $9,999.99.
The mainstream financial media is running with Yellen’s story as if it’s based in reality.
You can’t afford to be so gullible if you have your scarce dollars invested in the stock market.
Here’s a reality check chart that shows, everytime, that rising rates are more indicative of a falling GDP than of a rising GDP.
President Trump just said that GDP numbers are going to be shockingly good! Did the President just leak the GDP number two weeks early? But more importantly, does he know something we don’t?
GDP Numbers Are Shocking Bad
The gross domestic product is on a bad trajectory.
The economy and hence GDP has been contracting. Even the credit impulse which leads the gross domestic product by about 3 months, has plunged lower. But here is President Trump today:
What is going on? Is the President privy to information on the gross domestic product weeks before everyone else? The President didn’t just say the number would be good, he used the words “shockingly good”.
The Dodd Frank Wall Street Reform and Consumer Protection Act took a hit this week after the House passes a bill that guts many parts.
The House passed a bill called the Financial Choice Act that would allow banks to opt out of some regulations if they hold enough capital and would repeal the Volcker rule that barred banks from speculative trading.
One key component of the bill that I like is that banks will no longer be bailed out with tax payers funds as they will be forced to go through bankruptcy like any other industry.
Repeal the Dodd Frank Wall Street Reform and Consumer Protection Act
President Trump promised to repeal the Dodd Frank Wall Street Reform and Consumer Protection Act because it’s bad for business and in particular for small banks.
One of the original authors of the legislation, Jeb Hensarling (Republican from Texas) said Dodd Frank is a major factor in limiting GDP growth in the wake of the financial crisis.
Banking stocks are surging higher on news of the House bill but most see little chance of it passing in the Senate. Still, stock traders figure that even a watered down Senate version is better than what we currently have.
A trade war between the US and China is likely going to start next year with a key promise of Trump to declare China a “currency manipulator” on day one of his Presidency and to enact a 45% tariff on certain Chinese produced products sold in US markets.
China has threatened to retaliate by dumping Boeing and instead ordering from Airbus. China has said it will block sales of US automobiles and iPhones in China and that US soybeans and maize imports will be halted.
To better understand why I think 3D printing stocks are a good play on a trade war with China, we have to go back in history and use macroeconomic analysis to see how we got to where we are today.
China Joins the WTO
In 2001 China joined the World Trade Organization and began flooding America with illegally subsidized exports. Over the next ten years, the US would shut down over 60,000 factories, lose more than 5 million manufacturing jobs and see it’s historical annual rate of GDP growth cut by two-thirds.
Trade Deficits and Offshoring Subtract From GDP Growth
As a result of China joining the WTO, structural problems hit the US, Europe, and other major economies like Japan and South Korea.
If a country like the US runs a trade deficit, this directly subtract’s from its GDP growth. From that observation, you can see what the two most important structure drags on growth for many developed nations like the US have been.
The first has been the drag of the large trade deficits. The second has been the drag on lower domestic investment growth, as multinational corporations like Caterpillar, General Electric, and General Motors, have built more plants in other countries and fewer plants in the US.
Where have most of the offshoring of productions gone? The answer is China.
It’s no accident that the start of America’s era of slow growth in 2001 coincided with China joining the World Trade Organization or WTO, which gave China full access to American markets.
Contrary to the rules of the WTO, China began to flood the US with cheap, often illegally subsidized exports, and over the next decade and a half; the US would see the loss of over 60,000 factories and more than 5,000,000 manufacturing jobs.
The Emergence of Structural Trade Imbalances
During this time the economies of Europe, India, Brazil, among others, would likewise begin to have significant growth-sapping trade deficits with China and this would reduce global growth below what it would otherwise be.
The result would be the structural emergence of a growth-sapping global trade imbalance, as illustrated in the following set of figures.
Here, we see chronic annual trade deficits on the order of 200 to 400 billion dollars annually, with the heavily exported China.
By the year 2012, these deficits would help slow growth dramatically in both Europe and the US, and as a result, China’s two biggest customers would thereby be too weak to sustain China’s export-dependent growth.
In a ripple effect, slow growth in China, in turn, would lead to slower growth in so-called commodity countries like Australia, Brazil, and Canada, whose economies depend heavily on the sale of natural resources like coal, iron ore, and soybeans to China. More broadly, these structural trade relationships would lead to a new type of butterfly effect the world had not yet seen.
Here, we see that weak demand for Chinese exports from Europe and the US leads to weak import demand from China for commodities and other natural resources. In this way, chronic trade imbalances between China and other countries around the world would make it very difficult for a robust, global economic recovery.
Why Keynesian Stimulus Failed
From this butterfly effect, you can see why expansionary, Keynesian fiscal and monetary stimulus in the US and Europe, did not have the full effects anticipated. Indeed, this short-run Keynesian approach did nothing to address the underlying, chronic, long-term structural trade imbalances, acting as a drag on both the U.S. and European economies and by extension, much of the rest of the world.
3D Printing and China Manufacturing
China is rapidly losing ground to 3D printing technology. The business model of it being cheaper to manufacture goods in China could come to an end over the next ten years.
US companies will soon be able to make most things in small 3D printer factories right in your neighborhood or town. Factories, as we know them today, will get broken up and made smaller and local. Newsweek writes…
In the distributed manufacturing scenario, the carbon footprint, so to speak, of each shoe drops precipitously. Asian manufacturing is toast, probably upsetting the global balance of power. And factory jobs—well, they’re likely never coming “back.” 3-D printing automates a lot of what factory workers would’ve done. The hope is that distributed manufacturing creates a whole new set of opportunities for middle-class workers and keeps money local instead of funneling it overseas.
Coming Trade War With China
A Trump Administration will be placing tariffs on Chinese-produced goods effectively penalizing US corporations that manufacture products in China. China will retaliate by blocking the sale of US goods inside of China.
This trade war with China will only speed up the adoption of cheaper and faster 3D printing facilities inside the US IMO.
Many US businesses could increase their purchases of 3D printing machines as a result of the worsening trade relationship with China as well as the public outcry over the loss of millions of US jobs to China.
The earnings recession which began in Q1 2015 prevented businesses from buying 3D printers as consumer demand was uncertain. This last quarter we saw an end to the earnings recession, and if corporate earnings continue to rise, we could see more companies buying 3D printers.
Big Players and Big Money Flowing Into 3D Printing Technology
In May of 2016, the 2D printing giant HP revealed that it has been spending billions of dollars developing 3D printing technology and announced the release of its Jet Fusion 3D 3200 and 4200 printers. The more powerful 4200 was slated to begin shipping in the fall of 2016, while the 3200 will be available in 2017. HP claims these polymer 3D printers are up to 10 times as fast and twice as cost-efficient as current 3D printers powered by the leading technologies. HP sees the incredible future for 3D printing and aims to become the leading 3D printing company.
3D Printing Stock Chart
Chart Comments: Not a great looking chart. Twiggs Money Flow is rising but still below the 0% line. The 50-day moving average (blue line) at $15.21 is currently being tested, and a breakout above this level would be bullish.
Stratasys Stock Chart
Chart Comments: Stratasys’ chart looks even worse than DDD. The Twiggs Money Flow is rising nicely, but it is still below the 0% line.
HP Inc Stock Chart
Chart Comments: Twiggs Money Flow falls below 0% line after missing on revenue; however, overall, the strongest looking chart of the 3D printing stocks. Fantastic valuation at P/E 9.9 and forward P/E 9.2. Wait for candle over candle bounce before taking a long entry.
Disclosure: I do not hold any stocks mentioned in this article.
Increases in government regulation, taxes, environmental regulations, and ObamaCare on businesses, shifted the aggregate supply (AS) curve inward and thus reduced aggregate demand (AD).
With the explosion higher in the cost of doing business, businesses hired fewer workers. In fact, many small businesses reduced the size of their workforce in response to ObamaCare. Less hiring means a weaker consumer with less discretionary income.
Typically, in stage three of an economic recovery, the supply curve (AS) shifts out to AS2, as firms hire more workers, and expand output. Together, these price and wage adjustments drive the economy back to full employment at Q1 and close the recessionary gap, but at a new and lower price of P2.
Increases in government regulation, taxes, environmental regulations, and ObamaCare on businesses, shifted the aggregate supply (AS) curve inward and thus prevented the outward shift of the AS curve that was needed to get the US economy firing on all cylinders.
You will soon be reading about policy decisions from the Trump administration that are aiming at shifting the supply curve outward. An attempt to shift the AS curve outward means that Donald Trump’s economic team will end things like Dodd-Frank and Federal fracking regulations. The media will correctly call this supply-side economics.
Higher taxes also negatively impact the number of people willing to work as illustrated by the Laffer Curve.
The marginal tax rate is measured on the vertical axis, and total tax revenues are measured on the horizontal axis. Note that the Laffer Curve is backward-bending, reflecting the behavioral notion that at some point, people will work less the more they are taxed. This backward bend means that above a certain tax rate, “m” in the figure, an increase in the tax rate will cause overall tax revenues to fall.
Now here is the important point that Dr. Peter Navarro will likely be advising Trump on, for a supply-side tax cut to increase tax revenues, the existing tax rate before the tax cut must be above “m,” perhaps at a rate associated with point “n” on the curve. The tax rate being above “m” is an important point because, in the early 1980s, the Reagan Administration’s economists believed that the economy was on the backward-bending portion of the Laffer curve (above “m”) and that a tax cut would increase total tax revenues. Based on this assumption, it moved forward with one of the largest tax cuts in American history.
Policies which can successfully shift the economy’s supply curve out, do so with the twin advantages of both lower unemployment and lower inflation.
As traders, we track the monthly Employment Situation report closely. The market often does a short-term move on the first Friday of every month when the Employment Situation report for the previous month is released. Do you understand what the Employment report is showing? I bet many traders do not. As traders, we have to know a bit of macroeconomics, so we don’t make the wrong decisions with our money. Let’s briefly look at what the Employment Situation report shows.
There are different types of unemployment. When we talk about unemployment, most traders default to what is called cyclical or demand deficient unemployment.
Cyclical unemployment exists when individuals lose their jobs as a result of a downturn in aggregate demand (AD). If the decline in aggregate demand is persistent, and the unemployment long-term, it is called either demand deficient, general, or Keynesian unemployment. Demand deficient unemployment is caused by a lack of aggregate demand, with insufficient demand to generate full employment. Demand deficient unemployment shifts the AD curve left (inward) from AD to AD1.
GDP contracts from Y to Y1 and wages fall from P to P1. If wages “stick” at P rather than fall to the new equilibrium wage of P1 following a shift of demand, the result will be a much greater unemployment equal to Y – Y2.
Frictional unemployment is not caused by a reduction in aggregate demand. Frictional unemployment is due to people being in the process of moving from one job to another. The time, energy and monetary cost of searching for a new job is called friction. Friction is an unavoidable aspect of the job search process. Friction is a natural part of seeking new employment, but friction is typically short-term.
When most traders get the monthly Employment Situation report data of something like 150K jobs created in October, they don’t realize that those are net changes. What actually happened is that there are around 5 million new hires during the month, and 4.85 million new separations (quits or layoffs). The number you hear about each month is the net number or the difference between new hires and new separations. The net number is misleading. The net number hides the vast amount of job change which is happening.
Every month millions of people quit their jobs to get a new job. Some go back to school for more training and some retire. Other people start new jobs after graduating or finding new opportunities. This all leads to frictional unemployment and it’s a healthy part of a dynamic economy.
The prospect of a Federal Reserve rate hike is driving up the US dollar. The rising US dollar has a significant impact on the US economy and thus stock market. It’s important that traders understand the implications of a rising US dollar from a macroeconomic perspective.
Rising US interest rates mean that a lot of people around the world will want to take advantage of higher interest rates inside the US. For simplicity sake, we will use just one country, Brazil, to illustrate what happens.
On the supply and demand graph S equals the supply of the Brazilian real and D equals demand for the real. If the exchange rate were one dollar for two reals, then the price of one real would be 50 cents.
When the Federal Reserve raises US interest rates, Brazilians will want to take advantage of higher interest rates on their savings, and so they will want to put more money in the US. To get the relatively higher interest rates in the US, Brazilians need to exchange Brazilian reals for US dollars. Thus, the supply of reals increases which shifts the supply curve outward.
The increased supply of reals is now used to buy US dollars, so the demand for dollars goes up which shifts the demand curve for dollars outward. This increase in demand for US dollars pushes the value of the dollar up. The supply and demand graph is S equals the supply of US dollars and D equals the demand for US dollars.
The dollar will now buy more reals, and it would take more reals to buy a dollar. The dollar has appreciated, and the real has depreciated.
The rising value of the dollar is good for US consumers as it makes imports cheaper and so demand for imports goes up. That’s bad for the domestic US economy because cheaper imports are purchased over more expensive domestically produced goods.
Another reason why a rising US dollar is not good for the US economy has to do with exports. A strong US dollar is bad for the US economy as it makes US exports more expensive and thus decreases US export sales.
A rising US dollar increases imports and decreases exports. If the value of the imports is greater than the exports, the country is said to have a trade deficit. The rising US dollar makes the trade deficit worse.
A trade deficit (Exports – Imports) subtracts from the GDP. In the GDP formula:
GDP = C + I + G + (Exports – Imports)
Having more imports than exports means US dollars are flowing out of the country and not going into the “I” (business investment) component of the GDP formula. All the business investment is going into manufacturing plants overseas instead of into the domestic economy.
The US dollar is exploding higher right now.
The rising US dollar is why the durable goods orders and shipments activity in the US continue to languish.
New manufacturing orders just can’t get going in a rising US dollar environment.
Do you remember when the WSJ, CNN, CNBC, NBC, ABC, CBS, Bloomberg, Forbes, and Reuters ran stories at the start of the year about how no one even knows who was advising Trump on economic matters? They even went as far to say that Trump had no support of any economists.
That never sat right with me. I saw what Trump was doing at every level and how it would impact GDP. For example:
Border security = Eliminate illegal workers from coming into this country and competing with American citizens for jobs. Macroeconomic impact of illegal immigration discussed here. The mainstream media tried to convince the public Trump was a racist, bigoted, xenophobe who will send the police around knocking on doors to check your citizenship status.
Renegotiate international trade agreements = Look at all international trade agreements and renegotiate them so that they are fair to America and its workers. Penalize currency manipulators like China and Mexico. Increase exports and reduce imports as imports subtract from GDP. Macroeconomic analysis of trade deficits here and also here. The mainstream media tried to scare everyone into thinking that Trump was bringing in dangerous “nationalism” and that Trump will start a trade war which will crash the economy and stock market.
Significantly reduce refugees = Block all refugees coming from Syria and other Muslim countries if we cannot do a background check and make sure they are not radical Muslim terrorists coming to America to kill Americans. Terrorist attacks are bad for the economy and stock market. The OPEC cartel has been illegally manipulating the price of oil for decades (although Game Theory explains why they haven’t been too successful at it). Make OPEC countries take care of their neighborhood with all their ill-gotten gains over the years. Establish safe zones in Syria and elsewhere for Muslim refugees. A macroeconomic analysis of the OPEC cartel is discussed here. The mainstream media stirred up Muslims and other races by claiming Trump was a xenophobic racist on the order of Hitler and that he has a vision of a “white” Klu-Klux-Klan America.
Lower taxes = Lower taxes and institute supply side economics like Reagan did during the 80s. Higher taxes result in an increase in deadweight loss. Lowering deadweight loss will improve efficiencies in the economy and lead to both greater demand and supply. A macroeconomic analysis of taxation is here. The mainstream media stirred up class-warfare claiming that everybody should “pay their fair share” when it comes to taxes and that Trump’s tax plan will just allow the rich not to pay their fair share.
End ObamaCare = ObamaCare is a big tax on businesses. ObamaCare passed because Obama and Democrats lied to Congress and the American people about who was going to pay for it. It takes from the value producers and job creators, and gives to illegal immigrants and lower value producers, causing inefficiencies and disincentives in both hiring and working. Worse, it has lowered the quality of healthcare for everyone with long waiting lines and more doctors not accepting new patients. A macroeconomic analysis of ObamaCare is here. The mainstream media told everyone that Republicans just want to take away your healthcare so that they can get even richer.
Guess Who Is On Trump’s Economic Team?
I had to ask myself, was I just biased towards Trump and was I just twisting Trump’s positions into macroeconomics because I support him for President?
It now makes sense why I so clearly saw what Trump was doing while so many others did not. My economics professor is advising the Trump team! LOL.
Papa Giorgio posted a recent audio interview on Talk Radio with Peter Navarro:
MSNBC which supports Hillary Clinton had Peter Navarro on under the pretense of a serious talk about the economy. MSNBC then tried to talk about everything but the economy and trap Peter Navarro. Check out this heated exchange: