The Punch Bowl Runneth Over

Fear not ye despairing lads and lassies. Surely thou wert fearful that said supply of spirits to enliven yonder punch bowl wert in peril of being dried up. Hark - the sum of all economic activity in the realm didst verily sink a fortnight plus ago. This turn of events must surely bring forth the purveyors of joy and bliss to aid thee.

Okay - I got a bit carried away - the big news, and I do mean "BIG" news this morning that has gotten the commodity sector excited and is in the process of pushing the US Dollar lower, is the fact that 4th quarter 2012 GDP actually managed to SHRINK! Yes, you got that right - it shrank! As a matter of fact, the reading was the worst since Q2 2009! Remember that we were back in an official recession during that time frame.

Ironically, and this to me is a big deal, government spending decreased and that is perhaps one of the biggest reasons for the reduction in growth. I have mentioned previously on this site that government spending was a large factor behind recent improvements in the rate of growth in this nation and that were it subtraced from the numbers, we would be showing very little in the way of actual growth. Lo and behold, I did not expect the growth rate to actually shrink were it removed from the equation.

Here is the ironic part - the US MUST REDUCE SPENDING as it is headed down a road that will certainly lead to economic ruin. When government debt is 100% of GDP it is unsustainable. Any who doubt need merely look across the Atlantic Ocean to Greece, Spain, Italy, Portugal, etc. Heck, even one of the French officials made the slip of the tongue in admitting the obvious, namely that France was bankrupt! While the US DEbt/GDP ratio is not yet at levels seen in the PIGS, it is most surely headed in that direction.

So guess what, if the US government attemps to rein in spending, economic growth will contract because this deficit spending by government is contributing to a large portion of the "growth" in this economy. But keep in mind, that government does not actually create wealth - it merely takes it from one sector of the economy with one hand and redistributes it to another sector with the other hand. To the extent that it adds "growth" to an economy, it is BORROWING FUTURE GROWTH INTO THE PRESENT when it deficit spends. Borrowed money must eventually be paid back and when it is in a debt-based economy. growth shrinks.


That brings us squarely back to the Fed - before this morning's GDP number was released, the world of investors were waiting with bated breath for the oracles to come forth from Delphi and issue their prophetic insight into the state of the US economy. Another duller way of saying this is that the conclusion of the FOMC meeting is today and the market was waiting for what statements would come out of that. Prior to today's GDP report, there were genuine fears of a curtailment in the QE4 program coming sooner rather than later. Today's GDP number should put those fears to rest.

This is what has gotten both gold and silver in such a tizzy this AM. Hedge fund shorts in silver in particular, that were put on below $31 are now being forced out. Same goes for gold shorts by hedge funds that were put on below $1660, those too are being covered. The reason? Traders are now revising their views of any premature end to QE4; based on today's contraction, it ain't gonna happen anytime soon.

I am going to wait until later in the day to see how the pit session closes and in particular, how the S&P 500 REACTS  before doing any charrting as I want to see those before making any conclusions as to near term technicals.

One thing I do want to point out however is that in spite of the pitiful GDP numbers, the bond market is FALLING. This is to me, perhaps, the most important price action of today's session. One would have expected slowing growth to rev up bond buying; it is not. The opposite is what is happening. The yield on the Ten Year note is now OVER 2.0% as I type these comments. We will have to monitor this extremely closely. Something big might just be afoot!