A GDP twofer

US Stocks Continue Rising On GDP Excitement

U.S. stocks continued moving higher Thursday morning as news of the U.S. economy expanding in the third quarter for the first time in a year, and by a bigger-than-expected amount, gave investors a jolt of confidence.

If the Dow is able to remain higher through the close, it would snap its recent losing streak, which had the Dow posting three triple-digit losses in four sessions.

At the same time, the dollar had been moving higher against the euro for much of the week.

So, it was the strong GDP that got pinned with the credit of boosting the US market. Well, that's a twofer for ya.

You see, the market was making rare strides earlier in September and October on the back of cash pouring in from the government clunker sales and housing credits. And what does the increase in GDP reported today reflect? Those same sales. So the market is up because the market is up?

Don’t Break Out the Champagne Yet: Cause for Concern in GDP

A very large chunk of that [3.4% GDP increase] came from car sales, which accounted for a full percentage point of the overall increase in GDP for the quarter. Home building didn’t just rise; it jumped 23.4%, which contributed another half percentage point to GDP growth.

Mr. Market gets two market boosts -- two, count 'em, two! -- for the price of one.

Guambat reckons this is a technical thing and the proof of the fundamentals vs technical rally will show in the days to come. For Guambat, the key is that last attribution for the rally: the strength in the US dollar.

One of the tips to that was the plundering of the Australian market over the last few days, correlated very strongly with a drop in the Aussie/US dollar rate from around 93 cents to just under 90 over the same period. Indeed, the fall continued in Australia's today in the face of positive US futures numbers all day.

That divergence between the Aussie market and US futures is unusual if not rare, and indicated a bit of fix was on for the US market rally today US time. For Guambat, the US market rally is more technical than fundamental in the sense that it was a great set up for a bear squeeze; so Guambat is calling this rally just a pause in the game, a classic short squeeze on those who tend to get ahead of the pack.

And it has to be pointed out that anyone who has ever followed any Guambat call has rued the day. That is one reason Guambat holes up on a small island in the middle of the Pacific.

Meanwhile, how did that cash for clunkers and housing credit work out in real terms?

Edmunds.com has determined that

Cash for Clunkers cost taxpayers $24,000 per vehicle sold.

Nearly 690,000 vehicles were sold during the Cash for Clunkers program, officially known as CARS, but Edmunds.com analysts calculated that only 125,000 of the sales were incremental. The rest of the sales would have happened anyway, regardless of the existence of the program.

And the bloggers at The BaseLine Scenario come to a similar conclusion about the housing credit:

The home-buyer tax credit: Throwing good money after bad

Seen purely as a stimulus, the tax credit is highly inefficient. The National Association of Realtors claims that the credit created 350,000 new sales; the Calculated Risk blog calculates that this means the government is paying $43,000 for every extra house sold (since most sales would have happened anyway). According to the Wall Street Journal, Goldman Sachs estimates 200,000 new sales, implying a cost of $80,000 per marginal sale.

Putting cash in pockets does have a stimulative effect because some of that cash will turn into consumption. But as far as stimulus measures go, it has a low multiplier (the ratio of new economic activity to stimulus spending). By contrast, we could take the same cash and hire more teachers, police officers or soldiers to fight in Afghanistan. We would get more economic activity, and the government would get something for its money.

But the tax credit stabilizes the housing market, people say. What does this mean? It means that the credit keeps housing prices artificially high.

What happens when you artificially prop up housing prices? Whom does this benefit? Not first-time home buyers. It benefits people who already own houses (and their real estate agents) because it's a one-time boost in housing values.

Congress and the administration seem likely to extend the first-time-home-buyer tax credit. Senate Majority Leader Harry M. Reid wants to extend it through December 2010 but phase out the amount over time; Republican Senator Johnny Isakson, a former real estate agent, wants to extend it through June but double the income limit and make it available to all home buyers.

This is a bad idea.