Something doesn’t add up.
Last week, the US government announced that the economy grew 0.6% in the first quarter. Most financial commentators define a recession as two consecutive quarters of negative growth. So if the economy grew 0.6% last quarter we couldn’t possible be in a recession, could we?
Yes we could… and we are.
For starters, a recession is not defined by two consecutive quarters of negative GDP growth. According to the National Bureau of Economic Research, a recession is “a significant decline in economic activity… lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
Based on this official definition, we’ve been in a recession for months. Incomes are down, real GDP is shrinking, employment is falling ?we’ve cut 250,000 jobs since the year began? and retail sales have fallen off a cliff.
Now, about that GDP growth…
The government arrived at its GDP growth of 0.6% by assuming that inflation was 2.6%. This is flat out fraudulent. According to the official inflation numbers?the Consumer Price Index?inflation year over year is averaging 4%. So the government is claiming that inflation was nearly cut in half last quarter, despite the dollar falling to several record lows. If you included the official inflation numbers, the US economy shrank 0.8% last quarter.
Real GDP growth was even worse than that.
You see, the CPI doesn’t account for food or energy expenses. I don’t know about you, but I still eat food and drive my car. Real inflation, that is, the actual increase in costs that most US families have experienced, is somewhere between 5% and 10%. Using this data, real GDP growth in the first quarter was worse than negative 1%!
Folks, the Feds are lying to us. They’re trying to convince us that the recession is over without even admitting we’re in a recession in the first place. And investors are being duped into believing that the bull market has resumed: a recent Barron’s survey revealed that 50% of institutional investors were bullish. Only 12% were bearish. And nobody was “very bearish.”
On the whole, the market believes that our economic troubles only pertain to the financial sector. If you exclude financial stocks, the S&P 500 has only fallen 10% since the beginning of 2007.
In reality, numerous industries? automotive, heavy machinery, retail? have been posting recessionary results for several months now. The US is in a recession, there is no doubt about it. And it’s looking far more serious than the recessions of 1990 and 2001. When the market finally realizes this, it will plunge dramatically.
Now, I can’t tell you precisely when this will happen. But historically the S&P 500 has made most of its gains between November and April. I think it’s highly probably that we will see stocks tank sometime within the next six months.
If you’re fairly new to investing, I strongly suggest moving some of your portfolio out of stocks and into cash right now. Those of you who have been involved with the markets for some time should consider establishing some short positions to hedge your portfolio.
There are a number of great bear ETFs. The UltraShort S&P 500 (SBS) returns two times the inverse of the S&P 500. So if the S&P 500 falls 5%, SBS returns 10%. If the S&P 500 falls 10%, SBS returns 20%.
Stocks have built up some strong upward momentum, so it’s a little early to short just yet. But as soon as the market starts to show signs of weakness, it’ll be time to sell. The crowd thinks stocks have resumed a bull market and that the worst if over. When they find out they’re wrong, there’s going to be a sell-off panic.
And we’ll ride it all the way down.
Best Regards,
Graham Summers
http://www.gpscapitalresearch.com
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