Juggling Dynamite

The first estimate of US GDP today came in at 5.7% Q/Q annualized for Q4. This was the second consecutive quarter of GDP growth, and the first of 2009 to resemble anything like a post-recession bounce. The print came in stronger than market consensus for 4.7%.
On an annual basis, U.S. GDP growth is now up 0.1% Y/Y, which is an improvement from the -2.6% Y/Y pace seen in the final Q3 report. Based on the advance estimate the pace of growth during Q4 clocks in at the fastest since Q3-2003.
The key factor pushing GDP higher during the quarter can be attributed to the slowing pace of inventory liquidation after deep cuts early in the year. In Q4, the change in private inventories contributed a large 3.6 ppt to the headline print. Not surprisingly, residential investment was also quite positive during the quarter as favourable mortgage rates and good affordability spurred construction and renovations. (Caution: the next wave of foreclosure-induced inventory is coming soon to markets all over).
A few things to keep in mind here: the market was already expecting a big number for Q4. If we could not get a decent bounce in Q4 after massive inventory depletion and with enormous government help, then recovery would seem hopeless in deed. But it is also worth noting that the originally reported 3.5% Q/Q ann. gain in Q3 was eventually revised down to 2.2% Q/Q ann. We don't expect the Q4 number to be revised substantially lower at this point, but it is likely to get marked down somewhat on the next round of tabulations.
Lastly, the issue of focus here is what will the next two quarters of growth look like? Governments are beginning to pull back a bit from extraordinary measures (and Q4 GDP will encourage them to keep pulling back), meanwhile the real economy is still trembling with the after shocks of the credit bubble and on going deleveraging.
World markets have taken quite a drubbing in January, a relief rally here might be likely, but questions about “what kind of recovery?” will plague us for some time yet. Any euphoria over last quarter may be short-lived.

George Soros did a 30 min interview with Bloomberg from Davos, and explains why he supports Obama's proposals to limit proprietary trading at banks. See the clip here.

Honestly, I think everyone should watch some of this testimony and cross-examination from the hearing today. It is remarkable. I was trying to explain what happened to my kids as they watched some of it. No small feat to explain.
Each person is entitled to form their own opinion on the facts. Getting to the facts here is not simple. From what I can ascertain to date, I do not believe that Geithner, Paulson and company were acting in the best interests of the American tax payers first. Maybe they told themselves that they were; maybe they were wilfully blind and actually believed that they were. But this comes down to the fiduciary duty the government officials owed to the American people who they represented in their deliberations with the banks. They had a duty to put the tax payer ahead of all other interests. They had a duty to declare all conflicts of interest. They had a duty to disclose any secret profits being made. Not only did they not honour these duties in my view, but they sought to keep the details of the dealings confidential and closed from public review until 2018. Those who were footing the bill, where not supposed to see the math.
There is a strong apprehension of bias here. The stink is thick. And in my view, there is so far no clear evidence that bailing out AIG served the best interests of Main Street first.
You can view all segments from today's hearing on CNBC.com. Here are the Paulson clips. Here are the Geithner clips.
We should listen and try to hear the truth as the hearings proceed. But as I had mentioned before, its not enough that the actors believed they were doing the right thing, they had a duty to show that justice was being done and discharged without bias or conflict. No matter what else happens, I would say they failed in this. This will go down in history as a failure of democracy and the experience shouts for the reinstatement of legislated divisions between investment banking and lending, the Federal Reserve and the Government. Quite simply, humans need formal rules and constraints around money and leverage, and between government and private interests. Without them, greed gets the better of people. Its that simple. History has born this out time and again.