Is Atlas Starting To Shrug?

Today the Government released its second revision of Q3 GDP, which showed a big upward "revision" from 2.8% to 3.6%. These numbers are seasonally-adjusted, annualized figures which in and of themselves are highly problematic with how they are derived. Notwithstanding that, when you drill down beneath the headline reports, the components that make up GDP are downright ugly.

The revised number was almost entirely from a massive upward revision in the size of the Q3 inventory build-up by businesses. As has been written about ad nauseum, we know that retailers and auto dealers have amassed a huge amount of inventory, waiting for a recovery in consumption that will never materialize.

Speaking of consumption, that particular component of the GDP revision was revised down for a second time, 1.24% originally reported to .96% in the latest iteration. What this says is that consumption, which has been 70% of GDP for over a decade, has dropped below a 1% growth rate. If you strip out the inflation component of that growth number, it means that consumption actually declined on a real basis. In other words, unit volume sales to consumers declined. Think about that for a minute...

As you can see, unless the consumer makes a miraculous spending recovery, the economy likely has hit a wall during November. The Thanksgiving weekend retail sales reports pretty much confirm this. Although the growth in online sales has been promoted as a big positive, e-commerce represents less than 6% of total retail sales. Retail sales declined over that weekend. The consumer is tapped and so is our economy.

One last point about this, the release of today's factory orders report for October confirms my thesis here. Durables dropped 1.6% and non-durables dropped .2%. If you strip wholesale inflation out of the numbers, they are even worse. Note this: the inventory build-up that occurred in Q3 is likely going to turn into an inventory liquidation, which will negatively affect Q4 GDP. Also, this is consistent with my analysis posted yesterday which showed that the housing market is headed south.

Finally, with the headline reports bullish as they were today, shouldn't the stock market be screaming higher? The Dow is down 60 pts as I write this and the SPX is down almost .5%. Even more interestingly, the dollar has tanked hard. Theoretically, with the taper promoters out in full force today, the dollar should be screaming higher. It's not. Qu'est-ce qui se passe?

Today's action in the dollar - and this whole week for that matter - tells us the market is starting to perceive just how ugly the U.S. economic and financial situation is. No one is talking about the next budget/Treasury debt limit fight, but it's right around the corner. I think a lot of players at the dollar "poker table" are folding their cards and chairs and walking away from the game.

The Fed has no hope of reducing QE and the market is perceiving that. That's why the dollar has sold off hard this week despite the parade of positive headline economic reports. Under the hood is a different matter. Be careful with your dollar-based assets. The stock market right now is more dangerously over-valued vs. the fundamentals than it was in early 2000. I'm not the only one saying this. Jim Rogers made this statement on yesterday: "Be prepared, be worried, and be careful...this is going to end badly."