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Where's the Crash?

By Mad Hedge Fund Trader
Posted on Thu, 31 January 2013 15:39 | 1

That was the questions traders were scratching their heads and asking this morning in the wake of this morning's shocking Q4, 2012 GDP figure.

While most analysis were expecting the government to report a more robust 1%-2% number we got negative -0.1%, the worst since 2009. With growth flipping from a positive 3.1% figure in Q3 many thought that a Dow down 500 points was in the cards. Instead we pared back a modest 44 points. What gives?

Ahhh, the devil is in the details. The main culprit was in defense spending, down a mind numbing 22.2%, the worst since the wind down of the Vietnam War in 1972. I remember it like it was yesterday. In fact, government spending was weak across the board as a quasi shut down in advance of the fiscal cliff brought spending to a grinding halt.

In the end, the fiscal cliff never happened. But the downshift shows you how severe such a slowdown would be, if we ever go over the cliff sometime in the future.

There were other one off factors. Hurricane Sandy put a dent into the economies of the US east coast, especially in the transportation sector. The effects of last summer's drought, which triggered a serious shrinkage in a broad swath of the agricultural sector, were also felt.

What traders instead decided to focus on were the impressive strength of the private sector. Business investment rocketed 8.4%, while consumer spending jumped by 2.2%. It all confirms my theory that the passage of the presidential election broke the dam for private economy, and got people off their behinds once all the negativity and uncertainty was gone. Businesses suddenly began investing and hiring, while consumers stepped up consuming.

What this data tells us is that there will be a sizable postponement of growth from Q4 into Q1, 2013. The Pentagon will ramp up spending once again in the knowledge their budget is secure, at least for the time being. In the meantime, the private sector continues on fire. Q1 could well turn out to be a monster quarter. This is what the unremitting rise in share prices is shouting at us.

In the end, traders don't really care what the GDP is. In fact, most can't even spell it. The focus of the street is on the future, not the past. And the data promises to improve.
This morning we saw private sector job growth of 182,000 from the ADP. If Thursday morning delivers another five year low in jobless claims, the market will be primed for a hot January nonfarm payroll on Friday. It's become "a glass is half full, glass three quarters full" kind of market. Is either goes up, or up more.

Dow Jones Industrial Average 2

By. Mad Hedge Fund Trader


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  • Jeff on February 01 2013 said:
    With the way the financial system is people need to give up all hope when other systemic events, descridbe in terms like "fiscal cliff" or "correction" or "collapse" or "debt ceiling" are brough into play. They aren't. The system is so broken, and so rigged, and so corrupt that other terms like "free market economy" or "capitalism" also need to be put aside. Painfully so I admit, but put aside none-the-less. Of course, you know what this means? It means that other terms must be put aside as well, like "priced in," or "manipulated" or "virtual money" or "transparency" or "record highs" or "recovery" need to be put aside as well. Whatever is or is not happening is. What will or will not happen already has, and never will.