Market Report: U.S. Gross Domestic Product: Should We Get Excited About the Revised Figures?

Publisher’s Note: Stephen Oakes is sitting in for Ian Cooper on today’s Market Report. Stephen is the editor of the new service, Black Sheep Trader, and also Volume Spike Alert and is a contrarian’s champion, often beating institutional buyers and sellers to capture huge profits, including gains of 62% on CNXS and 37% on DRYS in just a few months’ time.

I remember reading a 2007 economic report that said U.S. current account deficits have led both policymakers and economists alike to worry about the sustainability of the current stock market boom, or as author Harry Dent would say, “The Roaring 2000s.”

In fact, years of large current account deficits have deemed the United States the world’s largest debtor. Not too long ago we heard about U.S. GDP annualized growth coming in around 4% for the year. While everyone celebrates this as proof of our economic viability, I’d urge you to reconsider. Let me explain:

When you factor in that the U.S. deficit is likely to reach $870 billion, or 6.6% of GDP, up from 4.8% of GDP in 2003 and just 3.8% of GDP in 2001, it makes you stop and think.

Are we really better off here?

My point is that if you take the net of borrowed funds from other countries and compare it to current GDP percentages, the United States is in the net negative by 2.6%. One word comes to mind: Unsustainable.

Of course there will be some out there who argue that the U.S. has been running these kinds of deficits for decades. Although this is true, it doesn’t make things right. If you borrow money from someone else you had better place those funds in investments that will yield a higher return than your cost of funds.

Is the United States investing this money in new industries and creating next-generation jobs? I’m guessing not as much as we need to. Most of the debt is being funneled over to Iraq. If the Iraq situation stabilizes and turns out to be a democratic ally, then those monies have been invested wisely. History and future administrations will have to decide what that outcome is to be.

I can’t stand it when people point to U.S. debt in dollar terms. It’s like comparing apples to oranges. The total GDP in dollar terms grows along with the debt. In essence, it’s unfair to come out and say something like, “This president has run up more debt than all the previous presidents put together.” I’m not exactly thrilled with our president, but this is an unfair statement. Of course historic debt will be less in dollar terms than all previous periods combined.

So, what do we measure?

Professionals in finance measure the success of a company by looking at the financial statements. As you may already be aware, these same professionals normalize the dollar figures. They look at percentage changes, either quarter versus quarter or year versus year. When economists look at our nation’s debt it’s important to compare the dollar figure to the percentage of GDP. The rule of thumb has been to keep the debt under 5% of GDP. Clearly we are entering troubled waters.

Take a look at the chart below. Do you think the market boom from the 1980s to today happened by chance?

Fellow colleague and market analyst, Adam Lass, editor of WaveStrength Options Weekly, had this to say:

The market surge over the past few decades was accompanied in part by the printing of more and more money. People used increased circulation to buy stock. Same goes for the housing boom when investors shied away from investing in the markets during the recession of 2001-02.

I asked Adam, “Even though the valuations of companies have risen in general, are they any better off?”

He responded with a hysterical and resounding, “No!”

The answer lies in the simple fact that the value of the dollar has fallen dramatically. It takes more dollars today to purchase the same amount of goods and/or services in the past.

In my estimation, this is why Americans are so frustrated. They’re working multiple jobs in an effort to make more dollars -- which used to purchase so much more many years ago. Are we due for a political revolution in 2008? Maybe so.