GDP is tricky and easy to misrepresent and misunderstand

Outlook

This morning brings the usual Thursday weekly jobless claims, probably about 875,000. TradingEconomics reports "It would mark the second consecutive week of falling claims after a five-month high of 926 thousand. However, claims are far from the 200 thousand level reported back in February and will likely remain elevated for some time as the pandemic is far from controlled although vaccination has already started. Meanwhile, continuing claims are forecast to remain unchanged at 5.054 million in the January 16th week."

Nonfarm payrolls next Friday will likely have more influence, probably a rise by about 100,000 after a drop by 140,000 in December, mostly due to reinstated lockdowns in some places (like California).

We also get merchandise trade for Dec, new home sales and the Kansas City Fed index, but the biggie is GDP.

GDP is tricky and easy to misrepresent and misunderstand. The Q4 GDP estimate is expected at 4-4.2% after the splendid 33.4% in Q3. But as we noted last time, beware the statistical reporting method. That 33.4% number is "quarter-over-quarter annualized" (and to make matters worse, its also seasonally adjusted.)

On a quarter-over-quarter basis, GDP contracted 2.8% in Q3 over the same quarter the year before. So, just as 33.4% can look simply wonderful, the lower number today may not be as bad as it appears at first light. Annualization is the culprit. How the press chooses to report the data will be important in directing sentiment. If the press reports and markets choose the q/q basis and it's less of a contraction than in Q3, that's bright and favorable. If they choose the annualized and it's less than the expected 4%, that's gloomy and hints a sell-off is justified.

One estimate has that GDP will be -2.3% on the quarterly y/y basis, from -2.8% in Q3, and that's less-bad. Then the issue becomes whether GDP is positive at +4% on the annualized basis or a negative 2.3% on the quarterly y/y basis and less negative than the quarter before. In other words, it's good news orat least not horribly bad news, so stop being so fearful.

Having said that, the Fed's comments are fractionally more negative than last time. This could be a function of putting to rest any talk of tapering for once and for all.

The near-universal sell-off in equities and other currencies against the dollar is a panic move. Curiously, gold is not a beneficiary. We have no idea what that means and neither does anyone else.

We have to watch the stock market. Despite decent earnings, big tech name prices fell yesterday anyway—Apple, Tesla and Facebook. This is spillover from the Gamestop phenomenon in which a bunch of small retail yahoos ganged up against short-sellers to drive the stock price from $17 to $380 on nothing more than sheer volume, aided, of course, by bigger players jumping on the bandwagon. As noted above, the founder of the stock tip section on Reddit, WallStreetBets got a front page story in the WSJ. The newspaper speaks of a powershift to gangs of small retail traders and seekingalpha.com has a "new era."

Gimme a break. Short squeezes are nothing new. What's new is the energy source—smaller retail traders. Also not new is pump and dump. What's new is the power of social media that can enlarge the gang to unprecedented dimensions, plus technical analysis that has even supposedly savvy professionals with deep pockets jumping on whatever bandwagon is rolling the fastest—the old momentum trade from the late 90's that led to the tech wreck. As for targeting names with a big short component, it's a shame. Shorters provide a valuable service to the rest of us by finding names overvalued given their fundamentals. Musk doesn't like shorters because they insult his fundamentals. Tough.

It's possible the Gamestop phenomenon is not going away. It's also possible that so many tip sites spring up now, with pump and dump the true intention, that the effect is diluted. Given the First Amendment right of free speech, regulators have their hands tied. Back in the dark ages (mid 1990's) the CFTC tried to force advisors like us to register for the same licensing as managers, despite not managing anyone else's money. The top name on the suit was Larry Williams, who deserves lasting credit for leading the charge.

At a guess, this is going to fade, if not quickly. As noted so many times before, equities are the only place where any kind of return can be hoped for. Investors may flood money market and bond funds for a while, but it never takes long for the absence of return to start them itching.

Meanwhile, the currency markets will reflect risk aversion until something else comes along to override the stock market effect, including the stock market effect fading. FX can move faster than lightning so watch out.

Politics: The future of the Republican party is up in the air. So far it looks like Republican members of Congress in both houses are so fearful of the Trump supporters among their voting base that they lack the guts to convict him, let alone speak out against his inciting a seditious riot on Jan 6. Some analysts say the sane and reasonable Republics (like Romney) are the minority, and the majority of the party, by staying silent about misogyny and racism, are consenting to it. That may get put to a test soon, now that a House member has introduced a motion to censure and expel a newly elected representative from Georgia who wrote approvingly of shooting Speaker Pelosi in the head and hanging Clinton and Obama.

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