GDP In Recession Zone

This week’s letter we will circle back to the latest year-over-year GDP numbers and the increasing evidence that a recession is near, if not already upon us.  However, we will also discuss gold; its merits for investment and whether we should look at it as an investment or rather as insurance.

As I have stated a few times previously (see prior letters for supporting chart) every time year-over-year GDP growth falls below 2 percent the U.S. economy falls into a recession.  Thus far, second quarter GDP is showing 1.6 percent growth.  See chart:

We still have a second a third estimate to go before the second quarter GDP numbers are final, but considering first quarter numbers were revised lower, not higher, we are likely not getting out of the woods.

If you recall, last letter we spoke about price to earnings ratios on stocks and how for every 0.5 percent drop in GDP roughly a $2 drop occurs in S&P earnings.  Based on the recent trend in GDP and the fact that the U.S. deficit continues to grow we are still a sizable selloff from where you will see me writing that stocks are cheap.  High yielding stocks, like those of utility companies, is where I'd rather be overweight while the next year and a half plays out.

Speaking of the ever growing U.S. deficit (the debt deal just slowed down the expansion of the deficit over the next 10 years, not cut it) it is clear that the fiscal policy of our leaders is yet to change, so that keeps gold very much in play.

There are two ways to look at gold; is it an investment or insurance?  The answer really depends on what you are trying to accomplish.  If you are putting a percentage of your portfolio in gold as a store of value or "safe haven" as many put then you want to buy physical gold, like gold coins for example.
This option is for those that are looking to protect (insure) there money against a weakening US dollar, which is due to the anti-dollar fiscal and monetary policy of our current government (QE and deficit spending).

If you are speculating on gold as an investment because you believe there will be further price appreciation then you want to look at the gold ETFs, such as GLD, or investing in the gold mining stocks.  We have previously reviewed the gold miners and how they have lagged the appreciation in physical gold over the last three years. (See May 30th letter for more detailed thoughts on gold miners).

I will be keeping my eye out for the July consumer credit data due out September 8^th.  Consumer spending is the key driver of our economy and this data helps us gauge if U.S. households are saving or racking up more debt, and which type of debt they may be taking on to make purchases.

Your hoping people are balancing their budgets better than Washington analyst,

Mitch Jaworki