the Rabbit Hole
Sep 6, 2008
In recent months, investors
have been unjustly chastised for their lack of consistency. In
truth, they have an unblemished record of drawing the wrong conclusions.
Last week's 2nd quarter GDP report provides the freshest evidence
of market cluelessness.
In its report, the Commerce Department stunned economy watchers
by showing a 3.3% annualized increase in 2nd Quarter GDP. The
robust growth apparently wrong-footed those expecting further
recessionary signals, lent further strength to the current dollar
rally, and encouraged previously cautious investors to take another
look at U.S. stocks. The strong number also bolstered claims
by the Bush administration and the McCain campaign that a recession
is primarily a psychological phenomenon. These conclusions would
be at least quasi-logical if they were not based on a complete
misreading of the report.
Without raising an eyebrow on Wall Street or in the press, the
GDP deflator, used in the report to downwardly adjust GDP to
account for inflation, was shown at just 1.2% annualized... the
lowest deflator in ten years. In other words, to arrive at a
3.3% growth rate, the government assumed that inflation is running
at a ten-year low! In contrast, the latest reading on consumer
prices (CPI) in the second quarter shows year-on-year inflation
running at a 5.6% rate, a seventeen-year high! In fact, for the
second quarter, the same time period measured by the GDP deflator,
prices actually rose at an even faster pace of 8.0% annualized.
How can it be that inflation is simultaneously running at a seventeen-year
high and a ten-year low? Welcome to the Alice in Wonderland world
of government statistics.
You would think that this statistical bombshell would raise the
hackles of the press. Think again. Not only did the hawk-eyed
media completely miss the story last week, they have totally
ignored our subsequent attempts to show them the light (with
the exception of the N.Y. Post's John Crudele who has long
suspected a ruse). Although none of the reporters we spoke with
could explain why inflation could run at a 10 year low and a
17 year high at the same time, they did not deem the anomaly
sufficiently noteworthy. Having been ignored by reporters, I
then tried the opinion pages. Unfortunately the piece that we
prepared on the subject was rejected this week by all the leading
Reporter Michael Mandel did note the head scratcher on a Businessweek
blog posting last Friday. As a partial explanation he pointed
out the CPI measures the prices of what we buy, and the GDP deflator
measures the prices of what we make. Although this certainly
sheds some light, it offers no real explanation. Excluding imports
and exports, both measures are determined by the same forces,
and should move in relative harmony. If anything, the costs of
what we make should be outpacing the costs of what we buy. Producer
prices are now rising faster than consumer prices (the latest
annual reading of the Producer Price Index 'PPI' being 13.2%
annualized from the 2nd quarter), which helps explain why corporate
profits have fallen drastically. In addition, from July 2007
through July 2008 (the latest data available) import and export
prices have risen 21.6% and 10.2% respectively. In other words,
no matter what numbers you use, the 1.2% GDP deflator simply
doesn't add up.
I have often argued that government statistics are dubious,
particularly those related to inflation. But here is an example
where they are not even consistent! If we simply use second quarter
CPI to adjust nominal second quarter GDP for inflation, the number
would have registered a 3.5% annualized decline.
Such horrific GDP numbers are much more consistent with the anecdotal
recession evidence that Wall Street and Washington want us to
ignore (confirmed by today's weak jobs report which included
the unemployment rate spiking to 6.1%, a five-year high). However,
with Orwellian propaganda, our government fabricates GDP growth
out of thin air without the smoke and mirrors traditionally required
for such an elaborate illusion. All that is required is to put
out ludicrous statistics and hope no one notices. Given that
this strategy appears to be working, expect future government
numbers to get even more outrageous. After all, if they can get
away with this, they can likely get away with anything.
Investors relying on this data and reacting to the global economic
slowdown by buying dollars and other U.S. based assets while
selling gold, commodities, and foreign assets, are jumping out
of the frying pan right into the fire. My guess is that it will
not be much longer before they feel the heat.
For a more in depth analysis
of our financial problems and the inherent dangers they pose
for the U.S. economy and U.S. dollar denominated investments,
read my book "Crash Proof: How to Profit from the Coming
Economic Collapse." Click here
to buy a copy today.
More importantly, don't wait for reality
to set in. Protect your wealth and preserve your purchasing power
before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com, download my free
research report on the powerful case for investing in foreign
equities available at www.researchreportone.com, and subscribe to
my free, on-line investment
Sep 5, 2008
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.