Why GDP Impacts Your Entire Life

Email agenda:

Estimated read time: 3 minutes 12 seconds

1. Why GDP impacts your entire life

2. 60/40 portfolio stinks out loud

Good morning and happy Monday - let's get smarter

Why GDP impacts your entire life

GDP or Gross Domestic Product is something you learn about in economics 101

I think of it as output produced from goods and services

It’s one of those things you learn for a test in college and then forget happily and hope it never comes back

But

GDP growth (or lack thereof) effects every aspect your life

How so?

US GDP is an indicator of how the US economy is doing

Like checking the economies pulse

When real GDP peaks and then starts to slow, everything around you changes

This is the economic cycle

In order for businesses to grow, they have to invest in people or technology to increase their output (production)

When the economic cycle peaks (it has as you will see below) companies stop investing in growth

They cut jobs, they slow their spending, and everything around you changes

As production slows and spending slows, you'll see:

higher unemployment = less consumer spending = less company earnings = stock prices down

You see the economic cycle, and slowing real GDP, literally change your life

They can change your job status, your 401(k), your bank account

If you are a founder you may not be able to raise a round at a higher valuation

If you are an employee your yearly raise % might not happen or may be a fraction of what it was

If you sell software your customers might end their contracts to try and consolidate vendors and decrease spend

We are at the part of the US economic cycle where GDP is slowing for multiple quarters

Actually - throughout most of Europe GDP will ALSO be slowing throughout 2023

Yes - despite what Joe Biden or any other politician tells you, that is a recession regardless of if they change the definition

The chart below shows YoY (year over year) US real GDP projections. As you can see, GDP is expected to continue to slow through Q2 of 2023

Below is QoQ (quarter over quarter) US Real GDP projections. Also, continuing to slow through Q2 2023

So when you see pundits on CNBC or other places telling you the market has bottomed or to keep buying stocks because they are cheap, just know that they have ZERO idea about where GDP is going

And if they did, and they knew the impact it has on markets, they wouldn't be buying the dip, because the dip will keep dipping

Real GDP impacts your bank account, your job, your portfolio

The more in the know you are about where GDP is going, you can make smarter and more informed decisions on your personal spend and your personal portfolio compared to 99% of the world

The 60/40 Portfolio Stinks Out Loud

As Mississippi State's head football coach Mike Leach once said: “There’s nothing balanced about the 50% run, 50% pass because that’s 50% stupid"

A common portfolio diversification methodology is the 60/40 portfolio

60% stocks and 40% bonds

The assumption is that bonds will play defense for you while your stocks play offense

During recessions, bonds go up, and during periods of economic growth, your stocks will drive your portfolio

The main issue?

Stocks and bonds have been directly CORRELATED (move in the same direction) more often in the past 100 years than inversely correlated

Meaning stocks and bonds more often go up and down together than not

A couple times throughout the past 4-5 months I have started small bond positions

However - bond yields (prices and bond yields move inversely) are up and continuing to move up with a lot of volatility

Until the volatility comes down, and yields show they are done moving up - I will stay out

My portfolio remains as HEAVY cash (80%) and the US dollar ($UUP)

On days when there are bear market bounces and stocks rise (like today), I continue to re-load my US dollar position and sell US equity exposure to the extent I have any

Risk assets (stocks, crypto) HATE when real GDP is slowing, and that's not stopping anytime soon

Until we are on the other side of slowing GDP, the US dollar, (potentially bonds), and cash will be defensive players that people think bonds are in the 60/40 portfolio

- Dev

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.