GDP Growth

GDP growth is a measure of all the goods and services produced within a country (gross domestic product) and its level of growth from the previous time period. GDP growth is usually calculated and stated in real terms, which means that it is adjusted for inflation. This number for GDP growth gives an accurate picture of the true strength of an economy. The goal for policy makers and politicians is to create an environment for GDP growth to reach maximum potential without increasing inflation.

Why Japan’s Aggressive Money Tree Is Disastrous

By George Leong for Investment Contrarians | Apr 8, 2013

Japan’s Aggressive Money Tree Is Disastrous The world is going gangbusters, printing money to drive the economies and growth. Yet despite the bailouts in the eurozone and easy monetary policy in Europe, Asia, and the U.S., there’s a sense a financial crisis could surface down the road. China is facing a potential real estate crash that could implode, given the speculative buying and the rise in property values. The reality is that the world—not just America—is extremely busy printing money, especially due to record-low interest rates. The easy money is a pretty good short-term strategy, and it’s much needed—but what a potentially explosive national debt!

And there’s no guarantee all of this easy money will save the eurozone from a deeper recession. In America, the easy money has amounted to a massive national debt that will need to be increased and bankruptcy in many municipalities.

Japan just announced an extremely aggressive monetary policy last Thursday that could see the Bank of Japan pump up its money printing presses and double its government bond holdings within two years. (Source: Ranasinghe, D., “Bank of Japan Unveils Aggressive Monetary Policy,” CNBC, April 4, 2013.) This all sounds so familiar.

I hate to sound repetitive, but the easy money strategy could blow up as interest rates rise.

Japan is a great example of how low interest rates have done very little to help the economy. I’m not saying the United States is in a similar situation, but there’s an eerie resemblance.

The Japanese stock market may be the top-performing market in the world in 2013, but much of the upward push has been driven by government spending and the promise … Read More

What Sluggish GDP Is Saying About This Season’s Earnings

By George Leong for Investment Contrarians | Apr 3, 2013

GDP Is Saying About This Season’s Earnings It’s that time again. On Monday, aluminum maker Alcoa Inc. (NYSE/AA) will once again grace us with its presence, as the bellwether gets set to tell how the global economy is feeling when it gets the first-quarter earnings season going. The company has long been a staple for the earnings season, as aluminum is used in numerous industrial applications globally and represents a decent barometer on the condition of the global economy. From automobiles to aircraft, packaging to building, and construction to consumer electronics, a strong report from Alcoa this earnings season will keep the current rally going.

Yet a few weeks ago, there were some early warning signs. Bellwether shipping company FedEx Corporation (NYSE/FDX) and farm equipment seller Caterpillar Inc. (NYSE/CAT), both considered to be barometers of the global economy, suggested some global stalling.

The first-quarter earnings season is expected to see earnings fall 0.7%, but growth is estimated to return to 10.3% in the third-quarter earnings season and 15.6% for the fourth-quarter earnings season; clearly there are some optimistic estimates, according to FactSet. (Source: “Earnings Insight,” FactSet Research Systems Inc. web site, March 22, 2013, last accessed April 2, 2013.) The contraction in the first-quarter earnings season is not a big deal, but the optimistic growth expectations going forward appear to be somewhat too optimistic and could result in a market letdown.

According to FactSet, about 84 S&P 500 companies have warned of lower-than-expected earnings, versus 24 companies that provided positive guidance.

The sectors issuing the worst forecasts include materials, health care, and consumer staples, so you may want to stay away from these sectors.

The top-performing earnings … Read More

Fed’s Easy Money to Cause Next Financial Meltdown

By George Leong for Investment Contrarians | Mar 14, 2013

Easy Money to Cause Next Financial Meltdown The Federal Reserve may be responsible for the biggest financial meltdown yet to come. In fact, this meltdown could be even bigger than the subprime mortgage crisis in 2008.

Let me explain. We all know the Federal Reserve has created an artificial economy that has been built on the availability of easy access to cheap money due to near-zero interest rates. There is no argument here. Via its aggressive quantitative easing programs, the Federal Reserve has produced an economy that is dependent on cheap capital.

Some would argue the Federal Reserve didn’t have a choice; if they didn’t introduce monetary policy, the housing market and banking system may have collapsed. I agree to that extent, but with the economy now in recovery, you kind of wonder why the Federal Reserve continues to allow the flow of easy money.

Recently at its January Federal Open Market Committee (FOMC) meeting, the Federal Reserve suggested that it would have to review the possible stoppage or slowing of its $85.0 billion in monthly bond purchases. The market reacted by selling stocks. Federal Reserve Chairman Ben Bernanke then came out and said that the central bank was committed to its monthly bond buying as long as the economy and employment remain fragile. So which is it? The Federal Reserve needs to really think about reining in its easy monetary policy and reducing the amount of the M2 (all money in circulation, plus savings deposits, time-related deposits, and market-money funds) money supply in the system.

Here’s the dilemma:

The climate of historically low interest rates has driven a false sense of comfort. Consumers are buying more … Read More

What’s Really Behind the Dow’s Record High

By George Leong for Investment Contrarians | Mar 7, 2013

Dow’s Record High The Dow Jones Industrial Average eclipsed a new record on Tuesday, when the blue-chip index surged to a new all-time record high of 14,261.46, easily blowing away the previous mark of 14,164.53 achieved on October 9, 2007. The move will be recorded as a major point in the evolution of the stock market, which was trading just above 8,000 a few years back, prior to the most recent bull market wave that led the index to its record high.

While I like records, I really kind of wonder if the Dow is deserving of it. Big U.S. companies are faring better, but the growth is nowhere close to what we saw prior to the Great Recession. The reality is that the pumped-up stock market may have a lot to do with the liquidity that is being pumped into the monetary system.

The easy monetary policy and historically low interest rates at near zero have artificially created gross domestic product (GDP) growth.

Think of it this way… Low interest rates mean very little returns. A typical one-year municipal bond was yielding 0.25% as of Tuesday, which is absolutely dismal for those looking for income. A five-year U.S. Treasury bond is yielding 0.78%. These are not rates that are going to attract the majority of investors to buy bonds—unless, of course, they have $10.0 million to invest, for example.

The end result is a shift to dividend paying stocks that provide much higher income potential, but with added risk of capital losses. However, the alternative is extremely miniscule income on bonds that are fueling the move from risk-free T-Bills to stocks that … Read More

Why America Will Be the Next Japan

By George Leong for Investment Contrarians | Mar 4, 2013

America Will Be the Next Japan The media is harping on about how the U.S. is well on its way to recovery. Well, I don’t agree—the country’s economy is slowing. In the fourth quarter, gross domestic product (GDP) growth based on the second estimate expanded at 0.1%; this is above the -0.1% reading in the first estimate, but nonetheless, it’s below consensus, which estimated the economy would grow 0.5%. I’m not sure how the 0.5% growth was arrived at, but the concerns of the fiscal cliff in the fourth quarter clearly made consumers think twice about spending. Of course, the government also saw its spending curtailed due to the debt limit and pending sequester.

I’m not going to spin a good story for you to hear; I truly feel the country is in trouble. The sequester deadline last Friday came and went. The two parties have yet to iron out a strategy to cut the deficit, so the country will face a daunting $85.0 billion in annual cuts for a total of $1.2 trillion over the next decade. Of course, this will have a negative impact on economic recovery in America. The cuts will be focused on the defense sector and Medicare, so as an investor, I would stay away from these sectors. If the jobs market also stalls, I would be careful when looking at housing and retail stocks.

The nonpartisan Congressional Budget Office (CBO) estimates the automatic cuts to spending will reduce GDP growth by 0.6% this year and will result in the loss of 750,000 jobs. And while this is not what you want to see during these times, the sequestration is needed; … Read More