5 Things To Ponder: GDP, Dollar And Subprime

Tyler Durden's picture

Submitted by Lance Roberts of STA Wealth Management,

If you had fallen asleep at your desk recently due to the absolute lack of anything noteworthy happening, this past week should have woken you up.  A massive upset in the Virginia primary dethroned House Majority Leader Eric Cantor which sent moderate Republicans scurrying to shore up their voting bases.  Al-Queda backed forces, ISIS, have advanced through Iraq and are not closing in on Baghdad which has sent oil prices rocketing higher this past week. Lastly, the mainstream media was completely baffled by the "sea of red" on their monitors which caused one anchor to quip:

"Wow...stocks really can go down."

This weekend's reading list contains a smattering of topics from GDP to why we underestimate change.  As I stated earlier this week in "More Signs Of Bullish Excess:"

"Stocks have not 'reached a permanently high plateau' nor will 'this time be different.'  As with all late cycle bull markets, irrationality by investors in the financial markets is not new nor will it end any differently than it has in the past. However, it is also important to realize that these late cycle stages of bull markets can last longer, and become even more irrational, than logic would dictate.


Understanding the bullish arguments is surely important, however, the risk to investors is not a continued rise in price, but the eventual reversion (change) that will occur.  Unfortunately, since most individuals are only told to consider the 'bull case,' they never see the 'train coming.'"

With that in mind, let's get to our reading.

1) Q1 Economic Contraction Could Be Even Worse Than Thought by Ben Leubsdorf via WSJ

"The U.S. economy may have contracted more than previously thought during the first three months of 2014, private economists said Wednesday based on new health care-sector data from the government.


Some analysts said economic output may have contracted at a 2% pace in the first quarter. That would be its worst performance since the recession."

2) How Much Longer With The Dollar Remain King by Cullen Roche via Pragmatic Capitalist

"So, will the USA lose its reserve currency status at some point?  Yes.  In fact, it’s already starting to lose its reserve status to Europe and China.  Will it be the end of the world and will it cause everyone to suddenly ditch the dollar?

Probably not. It just means the USA will produce a lower proportion of global output and therefore, as a matter of accounting, the rest of the world will hold a lower percentage of US dollar denominated financial assets as a percentage of global output.  It’s not the end of the world.  It’s just a sign that market shares change and when you’re #1, well, there’s only one direction to go."


3) Subprime Lending Drives Spending by Atif Mian and Amir Sufi via House Of Debt

"It appears that the key to boosting spending in the U.S. economy is subprime lending. The financial system was lending against homes before the Great Recession, and now it has moved to lending against cars. But the basic message is the same."


4) Fed Prepares To Maintain Record Balance Sheet For Years by Craig Torres and Matthew Boesler via Bloomberg

"Federal Reserve officials, concerned that selling bonds from their $4.3 trillion portfolio could crush the U.S. recovery, are preparing to keep their balance sheet close to record levels for years.

Central bankers are stepping back from a three-year-old strategy for an exit from the unprecedented easing they deployed to battle the worst recession since the Great Depression. Minutes of their last meeting in April made no mention of asset sales.

Officials worry that such sales would spark an abrupt increase in long-term interest rates, making it more expensive for consumers to buy goods on credit and companies to invest, according to James Bullard, president of the Federal Reserve Bank of St. Louis.

The Fed is testing new tools that would allow it to keep a large balance sheet even after it raises short-term interest rates, a step policy makers anticipate taking next year. They would use these tools to drain excess reserves temporarily from the banking system.

'It is pretty clear they are anticipating operating in a situation with a lot of reserves and a high balance sheet for a long time,' said former Fed governor Laurence Meyer, a co-founder of Macroeconomic Advisers LLC, a St. Louis-based forecasting firm."

5) Why We Underestimate Change by Nick Colas via ZeroHedge

“Human beings are works in progress that mistakenly think they’re finished”. That bit of pithy wisdom comes from Harvard professor of psychology Daniel Gilbert.


It is in that final point where the link to the investment process makes an entrance.  The standard construct of any capital allocation process centers on forecasting.  We predict everything from inflation to corporate earnings to risk tolerances to preferences in the market for growth or value or some blend of the two.  But if we find it hard to predict the thing we should know best – ourselves- what level of hubris do you need to reach to believe you can forecast the actions of other market participants?


The ultimate point here is not to be negative on risk assets like stocks, but rather to provide a fresh construct to understand why we underestimate change until it is right on top of us.  As the Gilbert research shows, predicting how we ourselves will change is a very large blind spot in our psychological makeup.  Yes, perhaps when we look outside ourselves some of our biases fall away and we can do better.  But not a lot better, if current market dynamics are any guide."

Bonus Chart:


Have a great weekend.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
LawsofPhysics's picture

What part of all fiat goes to zero don't people understand?  Considering the scale of the fraud on earth, there is no way to return to a gold standard folks.

the devolution continues, get your tribe in order, a hot WWIII will not be announced and that will happen long before any sort of resonable monetary system can be established.  There simply are too many liabilities on the planet.  Let culling begin.

Same as it ever was.

Yen Cross's picture

  I'm a simpleton, so I'll stick with "GDP" for $50 Alex...

q99x2's picture

I thought we were expting to be able to short the market since 2009 and waiting for the collapse since then. The FED and the globalists are doing this and they have been stealing everyone's money. So, the reason we don't see change is because we were and are lied to by the globalists that are about to kill us. They own the US Military, The monetary system and the media. Fuck TED.

And they own Al-Queda too. (Notice all the new Mercedes vehicles and US weapons in the photos) And, fuck the globalists too. Is this from that writer that was trying to get a job with CNN?

deflator's picture

 The Ponzi has very little resiliency against deflation left as governments are at the ready to pick up any deflationary slack in the private sector.

debtor of last resort's picture

That global reserve currency chart, that's the stairway to heaven?

zhandax's picture

Looks like the reserve currency was whatever there was the most of at the time.  Why should we worry?  /sarc

Seasmoke's picture

Yes. But none of those empires had Mr. Yellen.

orangegeek's picture



there's that "USD won't last long as a reserve currency" chart again - some nice add on squiggles


I count 54 appearances here on ZH....and counting

TVP's picture

"It’s not the end of the world.  It’s just a sign that market shares change and when you’re #1, well, there’s only one direction to go."

^Stopped reading at this point.  This guy sounds like one of those anti-paranoia crusaders.  

When all of the dollars that the rest of the world currently uses for international trade come flooding back home, that spells INFLATION.

 Not the end of the world, unless you have to EAT.  


r00t61's picture

The author of article #2, Cullen Roche, is one of the leading proponents of Modern Monetary Theory, which is also known 'round these parts as "Magic Money Tree" economics.

In his view, there is no problem too big in the country that can't be solved by the federal government simply printing more money. 

Even losing reserve currency status.

August's picture

I'm a non-economist, but I get around a fair bit.  My take on the loss of reserve-currency status for the USA is that this will lead to a roughly 50 to 60% loss of the USD's international purchasing power, and do so fairly quickly.

So, it's no big deal, really.

Yen Cross's picture

     It's ironic how the most "Draconian measures" are always taken just befor the  ponzi collapses...

   We've got 60,000 Illegal immigrants flooding our borders, and no way to house, ass'imilate them.

      That cocksucking halfbreed Kenyen is destroying this country from the inside out!  

   Question POTUS;   Do you still have an "comprehensive" plan for terrorist attacks?


zhandax's picture

Park them on top of all the dead crops in California.  They already speak the language.  'Never let a good crisis go to waste'.

shovelhead's picture

The Dems are never gonna let you turn their new voters into fertilizer.

deflator's picture

1) Q1 Economic Contraction Could Be Even Worse Than Thought 


 The U.S. economy is all government spending and that is growing.

cro_maat's picture

The .GOV Parasite is growing but the Sheeple Host is shrinking and any productive citizen is dropping out of the Matrix as fast as they can.

The FED can monitize the debt all they want but at some point the circle jerk will be complete with the .GOV / MIC and FED the only ones playing the game. Maybe then it will be time for the FED to IMF the US and trade their toxic assets for Alaska and a player to be named later.

deflator's picture

 The FED, MIC and .gov knows full well the difference between debt and actual resources. They are steadily, everyday consuming more resources than the day before.

August's picture

>>>any productive citizen is dropping out of the Matrix as fast as they can.

If your skill-mix isn't conducive to growing your own sustenance off-grid, emigration is a good long-term solution.


zerocash's picture

Netherlands followed Spain as holder of the reserve currency and now Netherlands has utterly vanquished Spain at the World Cup 2014 (score: 5-1) after having been defeated by them at the World Cup finals in 2010.

petaloka's picture

Did you ever notice how full of themselves these "TED talkers" are? They probably think of themselves when they jerk off.

deflator's picture

 Are you supposed to imagine that you are someone else? Live vicariously through others?

August's picture

Any public presentation which begins "Why We..." is suspect.

infinity8's picture

"Eat you Peas!"

JB's Pass the Peas: https://www.youtube.com/watch?v=mUkfiLjooxs

Turn It Up.

The Magus's picture

This is Tyler for you. Oil prices go up about 1.5% and it's called "rocketing".



jonytk's picture

my god!, i'm i the first one in this thread to say

"bitcoin bitchez! " get bitcoins ?

the decentralized trustless deflationary crypto-currency will be the next reserve currency, when are are you going to accept it Tyler? gold it's so 20th century.

AdvancingTime's picture

A great deal of our economic system is about debt. It is important to remember not all debt is created equal. A mirage is a naturally occurring optical phenomenon in which light rays are bent to produce a displaced image of distant objects. Joining the idea of a mirage and contagion with the reality of collapsing debt forms an interesting subject.

It is important to remember all debts and obligations do not come due at the same time. Also, it must be noted when a bill is not paid or defaults it often starts a long and drawn out legal battle, this collection process that may extend years without harsh consequences. This my friends is the reality of modern life in America and much of the world. More on this subject in the article below.



moneybots's picture

"Lastly, the mainstream media was completely baffled by the "sea of red" on their monitors which caused one anchor to quip: "Wow...stocks really can go down."


Stocks have been going down all along.  Just look at a chart of the market.  A whole bunch of zig zags.

The market hasn't gone down by any appreciable amount, yet.  Three or four up days and the headline will be new all time high, again.