I have been warning that the initial BEA estimate of 2Q GDP was going to be revised down considerably from the initial +2.4% growth rate to the +1.0% range by the third estimate on September 30th. Friday’s revised 2Q GDP estimate was posted as +1.6% -perfectly midway between what they said last month, and where we’re saying we’ll end up in next month’s 3rd estimate. So our data and analysis are ahead of the curve and spot on. Furthermore the BEA’s GDP estimate showed only a +1.0% GDP growth rate when the spurious impact of inventories was removed. I’m pointing this out for 2 reasons:

First, inventory rebuilds are notorious for distorting GDP growth above & below trend -especially when they’re induced by unsustainable government spending.

Second, you can bet the farm that later this year when the inventory cycle completes, it’s impact on GDP will slam into reverse and then be further pulling down GDP numbers. When that happens the Wall St selling machine will be squawking that GDP growth would be higher if it weren’t for that pesky and spurious impact of inventory rebuilds taking away from GDP. Funny, we haven’t heard much from them over the past year on how the inventory rebuild drove the GDP growth rate up temporarily.

But from our view, it is slightly more interesting to understand how investment prices may be impacted from now until later this year when we see a -3% GDP number posted for 3rd Q and probably 4th Q as well. Since none of this was – or is- baked into current stock prices, you see the disconnect and the opportunity to profit.

We’ve talked about the BEA and their GDP estimates previously, so I’ll be brief. As our economy slows and reverts to recession, the BEA’s method of calculating GDP is apt to produce a steady stream of GDP estimates that are overly rosy on initial estimates, then lowered in later estimates. That’s not intended to sound like conspiracy or cynicism -though it might be justified. It’s just a reflection on their flawed process. The same flawed process will be thrown into reverse when a legitimate economic bottom is put in. Then the BEA’s GDP estimates will be continually revised upwards. I can tell you I genuinely look forward to those days.

With all this talk of GDP lately, it does appear the great Wall St houses are quietly back-peddling from their economic and earnings forecasts. At this point their forecasts remain too optimistic and are slowly being lowered to align with the view espoused by Triangle Wealth Management. But this is how the game is played. This is what the great Wall St selling machine does: perpetually sell a notion that stocks are headed higher. Then when their estimates are wrong and we endure a recession, you’ll notice that stocks fall at a faster rate than they rose. In some cases previously, Wall St insiders expected a stock market correction, invested their money and the firm’s money to profit from a fall, but continued to sell a notion that things are getting better to their clients. This enables them to keep selling product. Someone has to lose when markets decline. They’d prefer it were you.

90 minutes after the BEA released their updated estimate on the US economy in the 2nd quarter, Fed Chairman Bernanke made a statement. The upshot is Ben said the economy has weakened more than they thought it would, but they are ready to “provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly”. This is fed-speak that they’ll expand Quantitative Easing -otherwise known as the printing press- in order to help the economy. The Fed is committed to spending whatever it takes -hence the phrase – unconventional measures if it proves necessary. But understand, when the Fed tells us it will stand on its proverbial head if necessary, it’s not saying this because happy days are in front of us. This is the Fed gently laying the groundwork to be able to say: Yup, I told you this was going to be ugly.

Ben Bernanke’s statement about continued monetary candy did cause a nearly 200 point upward swing in the Dow over the ensuing 60 minutes. Before Ben’s speech, stock markets were falling at a steep pace as anticipated. There’s a healthy market for you: completely reliant on more monetary candy and steroids. This reminds me of recent comments from several big name Wall St players that have said such ridiculous things like “we’d be OK if the government would stop helping us”. Sure. You’d be OK. That explains why the stock market was tanking from the reality of the GDP report, then rallied within minutes of helicopter Ben stating the Fed would increase the monetary candy if he had to. I truly get a kick out of these guys. They’re delusional.