It has taken much longer than I would have liked to get this article out and it's been a few weeks since we last talked about GDP. I again want to thank each and every one of you for following me, analyzing what I have to say, and being patient. To get everyone up to speed a few weeks ago I wrote an article titled "The 11th Hour, Moments before A US collapse." That article summarized some thoughts that I had regarding government intervention and its effects on GDP. I followed that feature up with a supporting article the next week titled "GDP Fallacy, Do Governments Willfully Mislead People" in which I supported the first two points of my original thesis. After this I wrote "How to Trade When the Government Controls Investment" and explored the details of my third point in the original article; how the government has worked to control gross investment.

Within each of these articles I have also tried to investigate potential investment opportunities. My thought has been that if we can gain an understanding of the government's intentions within the markets, we may be able to make higher probability trades. Since I've taken so long to put this together, I want to discuss points four through nine of my original theory.

So if you've been following me the whole time let's get started; and if not take some time to read my previous work before moving on. When you read remember to remain mindful of the GDP equation and the fact that GDP is intended to measure economic well being:

GDP = (A) Private Consumption + (B) Gross Investment + (C) Government Spending + ((D) Exports - Imports))

Point Number Four

When originally deciding on the GDP equation, the Government wisely includes part D. Exports less Imports are included as any decline in imports (during a recession) helps to assist overall GDP. Conversely (during boom times) import gains will be offset by the other three components of GDP. Thus including letter D benefits GDP much more than it can hurt it and the equation becomes self moderated for long term growth.

Throughout the recession examples of this have been made readily available. To lay out the type of part D activities that will show mathematical gains to GDP consider the following: Suppose an unemployed person wanted to buy anything that was imported to the US but can't due to their employment situation. Since this person forgoes their purchase imports fall and cause exports to be "less" negative. In addition, since this person will always have basic needs (which will be supported by savings or government assistance) they will still spend domestically on essentials. This spending will support private consumption, and in the case the person is government assisted will also drive government spending or part C. Thus, even though a person doesn't have a job they still able to hold the GDP equation at near level or may even perhaps provide gains under the right scenario.

Now, recall for a moment that real unemployment is likely near 20% (see government U6 and adjust from there) especially when considering those unemployed for more than 26 weeks who are no longer counted. In fact since we know that there are roughly 120 million workers we can say this scenario could apply to as many as 24 million people. On the low side, using the "official" unemployment figure this scenario could apply to as many as 11.28 million people. Either way more than 10 million people being unemployed should not "net" in the GDP equation or even potentially move it forward. Thus by the nature of the GDP formula this component helps more than it hurts. Onward.

Point Number Five

Now that the Government has control of gross investment (B), government spending (C), and since Part D doesn't really matter, in order to move GDP they need to influence consumption or Part A. Knowing that part A can't be controlled, at the beginning of the recession the government uses "stimulus" to encourage private consumption (lowering interest rates, discussing rebate checks, making cash available to banks for next to nothing, disguising government spending as "public investment", trying various ploys such as raising FDIC insurance minimums etc.) in order to lead GDP forward.

It doesn't take a rocket scientist to understand what the Obama Regime and his clan of trusty Keynesians were trying to do; stimulate, stimulate, stimulate. But for what purpose? Since Ben Bernanke is Alan Greenspan's child and a proclaimed Keynesian student of the great depression they did they only thing they knew how to do. They encouraged more debt and more spending from tax payers and became cheer leaders. Do you recall how the Federal Reserve and the Treasury department tried to encourage as much spending from the public as possible this spring? Nearly every day someone from the current administration was on the television clamoring for more lending and easy credit. What you were witnessing was the first attempt by the government to sway public consumption.

The only problem here (besides the fact that spending and stimulating was and remains a horrible idea) is that they completely underestimated the power of the consumer, private businessman, and the overall ability of the American people to hold on to what little money they had left. In implementing this strategy they were trying to fight a problem which had already occurred and to this day cannot be stopped. Which brings us to point number six...

Point Numbers Six through Nine

Over time the government realizes its attempts to influence private consumption aren't working as they had intended. In general, the fallout from gaining control of gross investment takes more of a toll on the economy than expected. Fear driven by government assistance into the banking system forces consumers to spend less, this makes businesses cut back, and this leads to more jobs being lost; a vicious cycle. As private consumption falls, banks have a hard time lending since there is no one available to spend. The government severely underestimates the influence of private consumption and the power of the US consumer in the GDP equation. To make matters worse the government didn't expect American's who had the ability to spend to start saving and fuel the vicious cycle further.

The Government then realizes that this vicious cycle must be broken in order to change private spending sentiment. Knowing that they can't take control of private spending, the Keynesian clan decides to increase the availability, and lower the cost of capital for banks. They do this through their new found control of gross investment assuming that loose credit will flow through to private consumption. Of course this doesn't really work since the banks they control have massive credit losses and write downs which far exceed the infused capital provided to them by the government. In particular, at this time excess funds on deposit at banks sky rocket as lending institutions hold on to capital rather than lend it out to consumers who can't afford loans. As usual item D is of no real concern as the Government knows that through increased spending, Item C will increase, encourage a weak dollar, raise exports, and further pad the GDP stats.

Since spending on gross investment did not go well, the Government recognized that it had to find a new way to get private consumption to move; thus they decide to try and improve overall sentiment. Knowing that directly or indirectly over 50% of CPI weighting consists of housing, energy, or automotive related pricing. The government decides to offer subsidies in the form of a first time home buyer's credit, takes over the auto industry, and promotes cash for clunkers. They continue to hold rates at near zero percent to promote lending in order to assist part B, continue spending at alarming rates to hold part C up, which also drives part D. At the same time they begin to use their influence to effect oil prices through calculated supply and demand decisions related to how the government consumes oil. All of this helps energy, autos, homes, and ultimately boosts CPI.

And then...Presto! Just like magic through stimulus and some fancy footwork the economy begins to look like it is improving, but is it really? Knowing that stimulus money must eventually run out, that the number of American's out of work continues to grow, that Europe's unemployment is at 10 year highs, and that some Asian countries are starting to falter how can we believe this? We shouldn't and through our knowledge of that we should be looking for opportunities to capitalize on the bear market rally's turn around. In particular we should be looking to banking stocks, auto manufacturing stocks, building stocks, and energy stocks for places to get short. We should also look for opportunities to capitalize on commodity prices which are likely to start falling as well. In particular it would be wise to carefully consider the sustainability of oil, platinum, and palladium prices should anything go wrong in the economy. Also consider the levels at which the dollar and Gold are trading right now; will they hold if we retrace? I don't believe the recovery is here, a second dip is coming, and I assure you the S&P 500 will not return to pre "great recession" levels without at least one major retrace. There is no such thing as a jobless recovery and peak credit won't be back any time soon, so to think peak earnings will be at any company in the near future is lunacy.

To hear more details on my contrarian point of view stay tuned for the grand finale, point number 10 in the GDP saga. For all you bulls out there, sometime next week you'll get to hear one of the last remaining bears in the country voice his opinion about why things still aren't ok. I look forward to doing battle with you...