The market is down this morning on a worse than expected 1Q GDP estimate. GDP was reported at -0.3% which was below expectations of -0.2%. In addition, the Personal Consumption Expenditures figure came in 0.1% above expectations. While the market had a strong reaction, I don’t think this news is significant.
1) The stagflation story highlighted by lower growth and higher inflation is based on 0.1% deviations from expectations. The US economy is far to large and its economy too complicated to measure with that level of accuracy. This is something I’ve written in the past.
2) While I am often critical of the press, they absolutely nailed the big part of today’s GDP miss. Consumers who are worried about higher future prices due to tariffs bought plenty of goods in advance of expected higher prices. Imports subtract from GDP. This was inventory stocking by both retail and consumers and is a huge, but one-time event.
3) One thing that the gold community is focused on, but the press isn’t is the massive inflows of physical gold into the US. I read a report last night suggesting that gold imports are so high that the last six months of inflows are equal to about 13% of the amount of gold stored in Fort Knox. Those imports also subtract from GDP, but I don’t know that I’d worry much about the impact on GDP from importing physical gold.
4) As DKI has discussed many times, DOGE efforts to cut wasteful spending (whether your preferred party likes them or not) subtract from GDP. Our method of calculating GDP is so inaccurate that if the government wastes money, it’s treated the same as actual production.
5) As DKI predicted last summer, Congress will keep overspending. We predicted that would be the case whether team red or team blue won last November’s election. Team red claims to be the party of fiscal sanity, but their only goal is to slow the continual growth of spending by a small amount. The government is still taking on massive amounts of debt and that’s not going to stop. The reason I keep referring to our finances as a Potemkin economy is because our GDP numbers are determined by Congressional overspending and financed by debt and inflation. The productive private economy has been in recession for a long time and that’s been masked by government transfer payments and higher interest expense. Today’s negative GDP print tells us very little about the health of the private sector.
When I look at the -0.3% GDP number, I don’t think it tells us much about the actual health of the economy. That number was pulled down by a massive surge in inventory stocking, pulled down further by gold imports, and increased by government spending on consumption (not production). While the headlines will provide plenty of fodder for politicians and their friends in the press to attack each other, none of this changes my view on any of DKI’s portfolio companies or the wisdom of hedging out equity exposure.
IR@DeepKnowledgeInvesting.com if you have questions.
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