Tariffs have been in the news, and we wrote about them last week. For a light-hearted 80’s reference in case no one was reading (Bueller, Bueller): Hawley–Smoot Tariff | YouTube
As for economic data, U.S. CPI came in slightly below estimates with headline inflation up 2.8% and core inflation up 3.1% year over year, both 0.1% below expectations. Markets are currently more focused on CPI data over the next few months to measure the impact of any tariffs applied on prices. CPI Inflation Report February | CNBC
In terms of GDP growth, one popular real-time metric the Atlanta Fed’s GDPNow, reflected a precipitous fall in Q1 GDP growth and was heavily cited to show the slowdown in U.S. growth and a looming recession.
With all data, particularly real-time data, it’s important to factor in the underlying inputs and components to determine if there are any anomalies. There is some of that with this Q1 reading, where imports reduce GDP. After the election, with the risk of tariffs pushing up the cost of foreign goods, some companies imported more and stockpiled. When you look at the calculation of GDP, we can see how this may impact the data:
GDP = Consumption + Investment + Government Spending + Net Exports (Exports – Imports)
When companies stockpile foreign goods, it reduces net exports and subtracts from GDP. What the real-time data does not factor in is the measurement of the inventory that companies now have from the imports, so in real time it creates a dislocation and shows a contraction. As inventories arrive on balance sheets or when the goods are sold, it increases GDP and straightens out in the following quarters.
What goods were imported matters more though: In January, imported goods increased by $36.2 billion but $20.5 billion of those goods were “Finished metal shapes” - i.e. gold. So much gold was imported into the U.S., that the U.S.’s trade deficit with Switzerland rose to nearly the same level as the U.S.’s trade deficit with China. If goods are imported, they are held as inventories or consumed. Gold typically sits in vaults and is excluded from GDP measurements. This may also mean that the Atlanta GDPNow measurements may not be relevant for the time being. The Atlanta Fed released a “gold adjusted” GDP forecast of +0.4%, which is low growth but not negative, reminding investors it’s important to consider the data presented. Gold Bullion Boom Sent a US Recession Alarm Blaring | Financial Times
Financial Planning/Investment Strategy Corner:
A few other things are going on with gold. For banks and investors, if they are concerned about tariffs, they would rather hold their gold in U.S. vaults vs. a foreign vault to avoid the surcharge. If you’ve flown commercial back to the U.S. over the Atlantic recently, you may have inadvertently dropped your seat back onto a bag full of bullion. Some big banks and investors are participating in the literal “carry-on” (forgive me) of moving gold bullion to the United States from London. The price dynamic of gold matters here, with the futures market in New York and physical gold in London or Switzerland. Futures prices of gold in New York are $20 higher than prices per troy ounce in London, with futures factoring in the price of tariffs. If investors close the futures contract, they will realize the loss. An alternative though, since gold futures contracts typically have a physical delivery component at expiration, if investors ship the gold to the U.S. and deliver the physical bar to the owner of the futures contract, they won’t incur the loss on the premium. So, this explains some of the import increases. Why Dealers Are Flying Gold Bars by Plane From London to New York - WSJ
Investing in futures contracts can be risky and the physical delivery component can lead to receiving goods that they may not be able to store (think negative futures contracts for Oil during the pandemic), a lesson I learned from Zack Morris on my couch in the 1990s: The Time Zack Morris Lost His Teacher's Car Investing In Potatoes | YouTube
Quick Hits:
- These may make good stops while we wait out mud season: 7 Independent Bookstores That Maine Authors Love | Down East Magazine
- I may not take investment advice from Martha Stewart, but I do like these potting benches: 15 Potting Bench Ideas That Are Practical and Beautiful | Martha Stewart
- These graphs and charts were quite interesting: The baby boom in seven charts | Our World in Data
- How a Stuffed Animal Named Billy Possum Tried—and Failed—to Replace the Teddy Bear as America's National Toy | Smithsonian
Quote: “It is very risky. But each time a child opens a book, he pushes open the gate that separates him from Elsewhere.” – Lois Lowry
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