Windchime Capital GDP

Posts Tagged With 'GDP'

What do you think about US Inflation rate in a year?

Posted by admin Jul 13, 2009 No Comments »

Inflation increase for May 2009 on a seasonally adjusted basis was 0.1% and on the annual basis it has fallen by -1.3% over the last 12 months. Core inflation, which excludes food and energy, increased by 0.1% in May whereas energy index increased by 0.2% and food index decreased by -0.2%.

I believe that going forward core inflation numbers would see small increase as housing costs stabilize or increase a little further. Also, energy prices may see continuing increase while coming off their recent lows. As you can see from the graph below, we have seen a roller coaster of a ride in the price of gasoline. From the highs of $3.5/gallon in the middle of 2008 to lows of $1.0/gallon at the end of 2008 to now around $2.0/gallon, gasoline prices are crucial to the inflation numbers. It is apparent that gasoline prices have crept up, and, I believe, that they would continue to increase staying between $2-$2.5/gallon the next year and increasing inflation marginally.

gas prices
Additional factor to consider is the money supply relative to the GDP. M2, which is readily available funds, has been increasing at a faster pace than the US GDP.

m2-gdp

This relative increase would continue to put inflationary pressures on the US economy as more money chases same amount of goods and services. Considering both of these factors, I believe, that by the end of 2009, we may see inflation of around %1.0-%1.5 on a 12 month basis.

Comments on GDP and Savings Rate

Posted by admin Jun 29, 2009 4 Comments »

I had mentioned earlier that GDP should continue to reverse its downward trend. The economy, measured by Gross Domestic Product (GDP), which is the sum of all good and services produced in the country (thats why, “domestic”) had shrunk by 6.3% in the 4th Quarter of 2008.

Latest figures show that GDP contracted by a lesser degree at 5.5% (revised) in the 1st Quarter of 2009. This revised figure was slightly better than the original (or preliminary) estimate of the GDP in 1st Quarter. Looking at the recent trajectory of GDP growth in the graph below

GDP

we can see a small glimmer of hope already and I expect that GDP will continue to shrink by a lesser degree in the 2nd Quarter of 2009.

Why do I think that GDP will continue to improve?

The most important reason is personal spending or in technical terms “Personal Consumption Expenditure or PCE”. Personal spending has been coming down as people have become fearful of losing their jobs and increased emphasize by various financial gurus to build “emergency funds”. This has also resulted in personal savings going up considerably. As you can see below,

pi0509_19705_image001

personal spending as % of personal income (technically Disposable Personal Income, or DPI) has come down from 94% in October, 2008 to 90% in May, 2009. As personal consumption makes a big portion of GDP, it also explains the drop in GDP numbers. I do not foresee this drastic cutback on personal expenses going forward thus improving current quarter and next quarter GDP figures.

You can also see from above graph that personal saving as % of income has shot up to around 7%, some of the highest levels we have seen in recent times. I believe that people will start to splurge a little and these savings rates would come down.

So, I believe that people will start to save less with savings rate coming down from recent high levels as well as increase their expenses. The increased personal expenditure will contribute to improvements in the GDP going forward.

Is Gold a Good Hedge Against Inflation?

Posted by admin Jun 18, 2009 No Comments »

Paul: Is gold a good hedge against inflation? Do you see inflation picking up as the government spends Ts?

Generally commodities are considered as good hedges against inflation. Gold is definitely one of those commodities.

I must caution you though that not all commodities are inflation hedges. Only those commodities that have the following two characteristics are inflation hedges.

1) Commodity should be “storable”. Gold, industrial metals, precious metals etc. can be stored. Agricultural products such as perishables (corn, wheat) can not be stored for too long and thus are not good inflation hedges.

2) Commodity’s demand should be relatively constant even in the face of rising/falling supply. The idea is that a steady demand will result in ability to pass on the rising costs to the consumer. Commodity with a seasonal demand is not a good hedge, e.g. heating oil. Heating oil’s demand goes up during winter time but the producers build up huge supply balancing out the two.

Government is definitely issuing a lot of Treasuries to finance its TARP/TALF and all other kinds spending programs designed to kick start the economy. What I suspect is that foreign investors, such as China and Japan, might get increasingly concerned about their Treasury investments and stop buying more Treasuries.

This shunning of Treasuries might devalue the dollar, raising the price of imported good and putting an overall upward price pressure on all goods and services in the US.

So, I do see some inflationary environment due to continued selling by the Treasury and accompanying deficit concerns.