Is the recovery over?

The first negative GDP print since 2009 has confounded the bulls. And there is more pain coming.

By Anthony Mirhaydari Jan 30, 2013 1:44PM

For the first time since the recession ended in the middle of 2009, the U.S. economy contracted at the end of last year. Fourth-quarter GDP growth fell to -0.1% from a 3.1% rise in the third quarters, surprising the optimists so focused on Dow 14,000. As I've been saying for weeks, the fundamentals didn't justify the market melt up. And eventually, fundamentals matter.

 

The optimists are already trying to dismiss the report as a fluke since a large part of the drop was connected to a 22% fall in defense spending. It's no fluke: In a month, the Pentagon will likely be hit with another budget cut worth 9.4% of its discretionary spending, or more than $50 billion a year.

 

And it's about to get worse.

 

People forget that it was government spending -- in the guise of bailouts, unemployment benefits, and stimulus -- that bolstered the economy in the early stages of the recovery when business and consumer spending was in the doldrums. Now, with businesses nervous and consumers suffering from tax hikes, higher health care costs, and still stagnant wages, the government's fiscal mess is forcing it to pull back.

 

 

The bulk of the fiscal cliff -- the tax hikes and spending cuts worth 5% of GDP -- was merely postponed. The fact remains that the government has no choice but to tighten the budget, or else it faces the threat of additional credit rating downgrades.

 

So people should get used to weak government spending contributions to GDP.

 

 

What about consumers, who contributed +1.5% to the Q4 GDP number? Not only is confidence down hard on the payroll tax hike, but they are about to be hit with higher gasoline prices and higher rental costs as well. Moreover, the chart below shows how government budget cuts will impact consumer spending -- which the bulls and political operatives are grabbing onto as the bright spot in the report -- since government transfer benefits (unemployment, etc.) have been a more important factor than work wages.

 

 

All of this will drag on consumption expenditures later this year and reverse the one bright spot in the report.

 

And businesses started pulling back on inventories in Q4 in response to uncertain demand from consumers. This should continue as well.

 

A second negative GDP print in Q1, amidst budget battles and tax hikes, would technically throw the U.S. economy back into recession -- joining most of Europe, Japan, and soon, the United Kingdom.

 

If you average out the last two GDP prints, you get an economy stumbling along at a 1.5% annual growth rate. An economy that isn't ready for the fiscal cuts and political turmoil that awaits in 2013. Already, the regional Fed manufacturing surveys have been terrible. Home sales are down. It's not looking pretty.

 

In response, I'm adding new short exposure to my Edge Letter Sample Portfolio via Alpha Natural Resources (ANR) and U.S. Steel (X). I'm also doubling up on the VelocityShares Daily 2x VIX (TVIX) with the CBOE Volatility Index ($VIX) deeply oversold and rounding higher.

 

Disclosure: Anthony has recommended X short, ANR short, and TVIX long to his clients. 

 

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107Comments
Jan 30, 2013 10:17PM
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One more quarter of negative GDP growth and the plug will get pulled on this market big time if not sooner. I figure people won't tolerate the losses they did in 2008/9. 5-6% in bonds is better than losing your butt in equities. As for BO, it'll be anybody's fault but his.
Jan 30, 2013 9:33PM
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What are Obama's 29 Czars and their 1200 patronage workers going to do during his second term besides collect a pay check and go golfing all the time with '57 states'?   I'd love one of you Obama supporters to describe any work they have actually done or for that matter one thing any  of them have done...   Quick, can you name 3 of them?

 

LOL...   here is the VERY FIRST place we can cut...  Fire all 1200 of the patronage workers and the 29 Czars...

Jan 30, 2013 9:17PM
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Ok, Anthony we were heading toward that horrific fiscal cliff that the networks were hyping all last quarter. The economy is going to grow at 2% because the government has to cut spending by $100-200 billion a year.  Quite complaining and whining the US Government has to cut spending and raise taxes or the USA is going to go bankrupt.
Jan 30, 2013 8:15PM
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The only recovery in this country is the fantasy game that Wall Street is playing. You would think that we are in an economic boom the way that they are operating. Their Big Bubble will eventually burst. All they do anyway is to drive up the essentials that we all need to live with their selfish Greed.
Jan 30, 2013 7:51PM
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There are reasons we advised caution the last two hours today...Manipulators saw an opening and took advantage...After the awful GDP and this bad economy, actually this market is very resilient...Normally after a day like today we would have been down 250-300 points. The GDP was a total disappointment but not unexpected. Remain cautious the rest of this week; scumbags will come out swinging, better believe that. So glad the markets and the economy are not correlated, the Dow would be at about 5000 points.

Jan 30, 2013 7:19PM
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Mr. Mirhaydari, I object to the first line in your article, "the recession ended in the middle of 2009".  Either you have someone paying for your food, sundries, gasoline and the like, or you are REALLY out of touch with Americans.  The recession is progressively worsening and the Middle Class is shrinking.  I have been to Third World countries and have noticed there is no middle class, only the poor and the rich.  This is what is happening to the United States of America.

 

Remember the date:

August 28, 2013 - the Middle Class Rights March on Washington D.C. will change everything!

Jan 30, 2013 6:38PM
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While this recovery has taken, what 4 years, just be glad this isn't the 1930's.  That recovery took 9 years, with several down ticks and yes we did survive.  I, despite the gloom and doom nay sayers dire predictions, have faith in the United States to survive and fully recover, just as it did then!
Jan 30, 2013 5:19PM
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I rough in the 2% payroll tax hike to result in just shy of $200 billion worth of contraction in domestic spending that we should see in Q1 2013.  That's about 1.5% of gdp and I don't think traders are factoring that in to thier recent buying spree.  (Either that or it's all just a pump and dump scheme)  Either way, once those numbers get baked into the data (which is emminent), the bears will come out to play.  Get ready for 2-3 months worth of red.

 

Still though, I'm a firm believer in the laws of supply and demand which has controlled the markets since the beginning of civilization.  Everything I look at tells me we are still in the 1st half of a very long, slow recovery which began in 2009.  Once all the numbers from the new fiscal reality are in effect, all that happens is we resume growth from a new baseline.  That baseline sets everything back about 12 months.  So, as I've been saying, a fair price for the S&P is somewhere between 1375 and 1400, with around 5% growth from there by the end of 2013. 

 

The recovery is not over, just shoved backwards a year.  That's why I remain conservative unless I see a substantial pullback in the markets.

 

Jan 30, 2013 5:11PM
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It must be he11 to be a liberal and know you can never fix what you believe Bush broke.... It will be Bush's fault until your dying day............ You know why... because your hero politicans are no better that's why...... they are stealing you as blind as any in the past ever did and messing things up even further..... LOL... Libs need to wake up.
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The faster we get into a recession or depression, the faster the Secular Progressives can get rid of the Constitution and all it stands for.  We are on the razor's edge of a very steep dive into a country dominated by "progress".   Only the progress isn't for the average person.   This is just the beginning.

 

Remember the writing on the wall:  "Everyone is equal", painted over by "Some are more equal than others".

Jan 30, 2013 5:01PM
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No. The Insane Fed will continue to pump sunshine into the muddy pond and tell everyone to take a dive into the nice cool water. And the sheep will line right up, big smiles on their faces, tv guide in one hand, cell phone in the other, and in they go. Weeeeeeee! Into the hot muddy polluted pond.




Jan 30, 2013 4:34PM
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The stock market doesn't have to reflect the economy.  It could go up because of Bernanke and the cheap money.  Also, fixed income/bonds are so expensive & rates so low that a rotation/rebalancing into stocks could lift the market.  Also, many stocks now yield more than fixed income.  When people get their insurance checks from hurricane Sandy, that could spur growth & spending.  Who knows.  It's a casino.  Make your bets.
Jan 30, 2013 3:59PM
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These numbers show that private sector has to create the jobs. Government can't  be the job creator, it ultimately crushes capitalism and creates an economy that doesn't stand on it's own feet. QE's are OK for a short term kick start, not a perpetual  program.
Jan 30, 2013 3:52PM
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Just about any and all of the recovery from 2009 was due to two to three things.  Easy money policies from the FED propping up prices while deflating currency values, financials and fanny/freddie not foreclosing on people when they should have to allow the housing market to really correct.  And massive stimulus spending by the government.  Both in their stimulus bills, and the huge increase from Bush Era budgets as yearly spending.  All those things did was mask the problems and delay it from appearing.  You can never 'beat' market forces with this type of outside intervention.  Our economy is built on sand and debt and it's finally starting to show through no matter how much spending the government does.

 

Unfortunatly I believe the response will be 'spend more', and that's the exact wrong thing we need to do.

Jan 30, 2013 3:49PM
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Another upbeat report from Miri - If you're always negative, you'll be right half of the time. 
Jan 30, 2013 3:33PM
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This Anthony story kind of makes sence.....cool.
Jan 30, 2013 3:31PM
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We are going into a depression just like 1929!  All the signs are there ! But our government says we are in the recovery mode ! Great spin by the puppet masters !  Wall street is a perfect example of the this !

SCREW THE SMALL INVESTORS ! Keep the (TBTF) Financials so they can SCREW THE AMERICAN PEOPLE !  TAKE YOU MONEY AND RUN !

Jan 30, 2013 3:29PM
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..Bush's blunders are going to adversly affect this nation for at least a couple of generations..remember, bushie put two (count 'em, TWO) unwinnable, unnecessary and totally pointless wars on the ol' taxpayers' credit card, in order to line the pockets of his war-profiteer cronies with taxpayer dollars..(and what better way!!!) 
Jan 30, 2013 3:26PM
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I thought it would be interesting to actually  "view his current stock picks" as it says in the next to last line of his column.  Though his current track record is rather poor, having missed the phenomenal run up we had this month, I think the more interesting point is the time line in which he trades his position.  I don't think it unfair to call him a "churn and burn" trader.  How he "invests" is his business, but that is in no way relevant to how I invest.  I am an old fart, buy and hold trader.  Consequently, his investment advice has no relevance to me.

On a side note: Hey Anthony! January!  Bwa ha ha ha ha ha ha!

Jan 30, 2013 3:24PM
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Pull back from recovery? When was there a recovery?

 

There certainly has been no real recovery in the labor market or in wage earnings.

 

The ONLY reason the unemployment numbers are below 10% is still due to millions permanetley giving up and not being counted. Why is this so hard for people to understand? Oh, I know because the media refuses to talk about the facts.

 

In the meantime, wages have been stagnant while basic costs of living have skyrocketed. Food, gas, electricity, healthcare have all gone up while wages have been stagnant or lowering due to less working hours.

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