Friday, July 29, 2011

GDP Charade Just More Fake it Till You Make it Economic Policy

Hmm… notice anything striking about the chart above?

Let me draw your attention a bit closer.

Looking at the blue line, you see one of the most important market moving data-points, namely real GDP, as it stood just yesterday showing, more or less, a typical “V”-shaped recovery coming after the messy debacle of 2008.

Notice that not only did the recovery look vigorous, as of Q4 2010 the government reported that real GDP had surpassed the prior peak set in 2007.

So for about six months market participants (and other onlookers) believed that an important (possibly the most important) measure of economic health had completely recovered from the prior downturn.

Today though, the government released its annual revision to GDP taking down their prior quarterly “estimates” and reporting instead significant downward revisions to nearly every quarter from 2007 on.

The red line above is now the “official” estimate of real GDP and, needless to say, it’s painting a far weaker picture of performance of the macro-economy than the prior “estimates” with possibly the most notable anomaly being the fact that we have yet to see real GDP reach the level of the prior peak.

We already know that the government is engaging in “fake it till you make it” economic policy with its bailouts, the suspension of mark-to-market accounting, TARP, QE1 and QE2 etc. but this is really another matter altogether.

What is the use of estimates of GDP when the values are so far off?

Given that the stock market traded up on wildly phony GDP results, what should traders do now?

How can anyone believe that the stock market is a forward looking leading indicator (i.e. discounts the future) when participants are making trading decisions based on absurdly unreliable information?

Today’s GDP revisions should have been a significant blow to confidence as another notable sign of systemic weakness is recognized and the government’s clumsy charade is further disclosed.