Wednesday, April 29, 2020

Q1 GDP falls 4.8%

Economy and Markets
For some time I've been telling you that the US stock market is completely separated from economic reality.  If you look around the globe you see a more normalized view where equities should be priced heading into a global recession or depression.  In the US we reported that GDP (a measure of all the goods and services produced by our country) shrank by 4.8% in the first quarter and stocks are soaring. 

US stocks are a video game and not a representation of economic activity.  The way to look at the stock market is if your kid plays Madden 2020 and wins the Superbowl as the Cincinnati Bengals, it doesn't mean the Bengals won a Superbowl in the real world.  Stocks going up no longer reflects anything other than stocks going up.

The decline of Q1 GDP is really shocking when you consider that a large portion of the US was still open for business as late as the end of March.  By March 15th most of NY State had decided to close, but 80% of the country was open through the 22nd.  The implications for Q2 GDP are unfathomable - will the economy shrink by 20%, 30%, 35%? If the initial indications out of China are any indication, reopening the economy will not lead to a sudden snap back in demand.  Yes, GDP will be up "BIGLY" in Q3 right before the election, but that's only because it will be coming off such a low base. 

Bear with me for a second to demonstrate how this works because some people are going to try to trick you with math later this year....

1) Assume US GDP is 100 for ease of calculations.  When GDP fell 4.8% in the first quarter, that makes GDP 95.2

2) Now let's assume GDP falls another 25% in the second quarter. I have no idea what the number will be but that's the mid-point of some estimates.  Now GDP is 71.4.

3) By the third quarter everyone is back at Panera and Chipotle so the economy perks up and they report a massive GDP jump of 15%!! Someone (not naming names but it rhymes with Frump) will go on TV telling you about the biggest jump in the economy ever! EVAHHHHH!  But, GDP is now just 82.1.

4) In the fourth quarter after the election, maybe GDP settles down a bit but still grows a staggering 8%!!! All of the way to 88.7. Huh, so people will tell you about growth, but the reality is that, in this scenario, the economy is still 11.3% smaller than it was at the end of 2019.

Cheers!

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