|Dow||-115.44 to 18,010.68|
|S&P 500||-13.40 to 2,107.39|
|Nasdaq||-27.95 to 5,070.03|
|10-YR Yield||-0.04 to 2.095%|
|Gold||+1.30 to 1,190.10|
|Crude Oil||+$2.44 to $60.44|
It’s official: The U.S. economy is shrinking again.
First-quarter gross domestic product contracted at a 0.7% annualized rate, compared with an earlier estimate of a 0.2% expansion. That was roughly in line with the estimate of economists, but a sharp deterioration from the 2.2% growth we saw at the end of 2014.
The rising U.S. dollar was a key driver of weakness because it ballooned the trade gap. As a matter of fact, the gap between the imports we take in and the exports we send out subtracted the most from GDP (1.9 percentage points) than at any time in 30 years! Household spending and inventory growth were also revised lower.
Now, Wall Street economists will tell you that growth is going to bounce back in the second quarter. They’re looking for a 2.7% increase, and blaming everything from the West Coast port strike to cold winter weather for the Q1 debacle.
But I believe the dollar’s impact on domestic industries like manufacturing is a significant, fundamental factor. So is the plunge in energy prices, which torpedoed business investment and oil and gas drilling.
Those forces have nothing to do with the fact – surprise, surprise! – that it actually snows in winter. And no “double-secret-probation” book-cooking by government statisticians can cover them up.
|The rising dollar has made U.S. exports more expensive, hurting domestic industries.|
The rising dollar has made U.S. exports more expensive, hurting domestic industries.
We’re going to need to see the dollar lose ground again, and energy prices continue with their rally from the March lows, to get things going. I believe policymakers will do everything they can to kick the dollar in the teeth in order to bring the first development around, and I believe the self-correcting plunge in drilling will help fuel the second.
But if we don’t, then the markets could get rockier this summer. So make sure you pay attention to Money and Markets for my latest observations. I’m also planning to make some moves in the Safe Money model portfolio shortly for subscribers.
In the meantime, what do you think about the shrinkage in the first quarter? Is it all “statistical noise” … or is something more substantial going on here? If the surging dollar and falling energy prices helped bring about the weakness, will the opposite turn things around?
Are you expecting to see those trends reverse or not? What else could help improve our economy? Hit up the Money and Markets website and let me and your fellow investors know!
|Our Readers Speak|
Is there too much oil supply, and too little oil demand? Or are we heading toward the exact opposite situation as a result of production and drilling cutbacks? That’s what you were debating over at the website in the wake of my latest piece on the oil tanker market.
Reader Paul said he thinks the market is tightening up, for the following reasons:
“A) The Chinese are buying large quantities for spot and future delivery, which lays a floor on daily tanker rates
B) Oil demand is rising due to improved economies and the summer season nearing
C) Traders may be expecting crude and product prices to rise again after the summer, so buy spot, charter tanker space to store and deliver once prices have actually risen. This is called the contango game.”
Reader Jim also weighed in on the bullish side, saying: “I get savaged every time I throw cold water on the oil bears, but here I go again. The top twelve producers have all turned in static or declining production numbers over the last ten years except the U.S. The Great American Shale Boom has increased worldwide production by 4 percent.
“I have personally participated in the drilling in the legendary Bakken Field. The last one was drilled by Whiting Petroleum 30 months ago in Billings County, North Dakota, a pretty hot area. Initial production was 360 BPD. Last month the well averaged 12 BPD, a 95 per cent depletion, and still falling. There is nothing unusual about this well.
“The real question you have to ask yourself about shale is, ‘Will the junk bond money be there to restart the ‘boom’ or won’t it if prices rise?’ I contend that it will not and that the plunging rig count indicates higher prices ahead as it always has. Ignore the tankers, watch the drill rig count.”
But Reader Regis countered by saying: “Saudi Arabia is pumping as much oil as possible regardless of price because of the Yemen conflict and the ‘fracking effect’ on prices. Iran is pumping like crazy. Oil will sit on the high seas until it gets a buyer because all the storage facilities seem to be filled.
“Considering all of this, I would guess that oil prices are doomed to go much lower. If not, what am I missing? Which economy on the planet is cooking on all cylinders? Like … none?”
Reader Chuck B. added: “A market decline often starts big, as oil did last year, then bounces up a bit, as oil has recently, then drops again, before finding a true bottom area, which can last longer than anyone thinks. All that oil stored in tankers, which are more expensive than land storage, are going to make oil very cheap, as owners do their best to sell it off.”
I appreciate all the feedback, as this is an incredibly important topic. I’ve been harping on energy so much lately, versus other topics, because A) I believe the opportunities in that sector are incredibly attractive vis-à-vis almost any other sector out there, and B) There is so much bad and conflicting information out there. My job is to help you sort through it, and make sound investment decisions based on what’s really going on.
Please do continue to share any other thoughts you might have, using the website as your outlet like always.
|Other Developments of the Day|
GDP figures from elsewhere in the world also showed contractions, in part because of the commodity price weakness we’ve seen. Canada’s GDP shrank a worse-than-expected 0.6% in the first quarter, dragged down by a huge 30% plunge in oil and gas activity.
Brazil’s economy also contracted by 0.2% in the quarter. But that was smaller than the 0.5% decline that economists expected.
FIFA held its annual congress in Zurich, and President Sepp Blatter was elected for a fifth term despite multiple bribery, racketeering and corruption charges against officials of the organization. He largely blamed the awarding of the 2018 and 2022 World Cups to Russia and Qatar for the crisis, rather than the two decades worth of misbehavior that allegedly occurred under his watch.
In Japan, Mount Shindake erupted Friday – spewing huge clouds of ash and rock miles into the sky. The eruption forced evacuations of the sparsely populated island that Shindake sits on. It also raised some concern about a possible increase in seismic and volcanic activity elsewhere in the island nation.
The Scripps National Spelling Bee in Washington ended in a tie for the second year in a row. Each of the co-champions Vanya Shivashankar and Gokul Venkatachalam will get $35,000, a $2,500 savings bond, and other prizes. Those are much more generous than what my brother Andy competed for when he took second place back in 1986.
What do you think about some of the latest topics in the news – the dollar, the economic weakness, the fraying of the pension system, the latest mega-merger in tech? Or other topics. Let me know over at the website.
Until next time,