Flash Update
FLASH UPDATE
October 14, 2007
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Gimmicked Data Appear Aimed at Reducing Pressures on Fed for Another Easing
September M3 Annual Growth Hit 14.7%
Watch Out for CPI Annual Inflation Surge!
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PLEASE NOTE: The SGS-Ongoing M3 for September (based on full-month reporting and recent data revisions) has been updated on the Alternate Data Series tab at www.shadowstats.com. -- Best wishes to all, John Williams
Twenty years ago this coming week, a new Federal Reserve Chairman faced a financial panic that included the worst one-day stock market crash ever seen in the U.S. markets. Alan Greenspan had become the U.S. central banker in August of 1987, raised rates in September in an effort to bolster the flailing U.S. dollar, and the markets crashed in October. The crash was due to an extraordinary confluence of factors, some of which were of Mr. Greenspan's making, some of which were of Treasury Secretary James Baker's making, and some of which came to a head after festering for decades. Whatever one may think of the former Fed chairman, his actions following the panic did help to contain it and likely side-stepped a total financial-market meltdown, at that time. As will be discussed in greater detail in the upcoming October SGS, those same actions, however, also underlie and ultimately set-up the even greater crisis faced by current Fed Chairman Ben Bernanke. The roiling of the U.S. dollar market following the Fed's recent easing is why the Fed now likely will try to avoid further interest rate cuts. At risk is the financial-market meltdown that Alan Greenspan carried for so long in his nightmares. The liquidity crisis still is unfolding, the economy remains in a deteriorating inflationary recession, and the Fed has few if any viable options open to it. One tool remaining in the Fed's and Administration's arsenal of financial market manipulating gadgets, however, is the rigging of key economic reporting. It was used back in 1987; it appears to be in play, today.
With this circumstance in mind, last week's Flash Update indicated, "Underlying reality would suggest a larger trade deficit (Thursday, October 11), a weaker retail sales change (Friday, October 12), and a stronger PPI (Friday, October 12) than consensus expectations. If the Fed's concerns in the still unfolding liquidity crisis indeed are tempered by fears of U.S. dollar dumping, both the trade and retail data will be particularly vulnerable to 'positive' massaging." That appears to be what happened.
When the liquidity crisis hit in August and September, it acted as a stall mechanism in already slowing economic activity. Accordingly, it is incredible (as in unbelievable) that reported economic activity jumped in the early reporting of that period. What seems to be at work here is an effort to remove pressure from the U.S. central bank to ease at the end of this month and to reinforce the relative positive impact of such inaction on the value of the U.S. dollar (albeit short-lived). Look for eventual revisions to the September jobs data and retail sales that will reflect more accurately at least a brief acceleration to the downside in business activity.
Seasonally-adjusted September retail sales gained 0.6% (0.8% net of revisions) +/- 0.6% for the month, after a 0.3% monthly gain in August. Underlying reality suggests a possible upside surprise to the September CPI, which could wipe out much of the reported sales gain, after adjustment for pricing increases. Year-to-year change in September retail sales was a gain of 5.0% versus 3.8% in August, also before any inflation adjustments.
Further lacking credibility was the monthly trade deficit report. The seasonally-adjusted August shortfall of $57.6 billion was down from July’s revised $59.0 billion (previously reported at $59.2 billion), despite surging oil imports (both in terms of price and physical volume). The average crude oil price in August was up to $68.09 per barrel, from $65.56 in July, still somewhat shy of current prices that are well over $80 per barrel. These recent "too good to be true" reports will get a more detailed review in the upcoming newsletter.
On the inflation front, the seasonally-adjusted September PPI rose by a stronger than expected 1.1% (1.0% unadjusted) for the month, against a 1.4% contraction for August. Annual PPI inflation jumped to 4.4% in September, up from 2.2% in August.
As to the happy news that the gimmicked federal deficit for fiscal year 2007 was just $162.8 billion, versus $248.2 billion in 2006, keep in mind that the gross federal debt rose by $500.7 billion in the same fiscal 2007, to $9.008 trillion, and that the financial statements for the year will show a deficit based on generally accepted accounting principles likely well in excess of $4 trillion, come mid-December. Then there was September M3.
Broad Money Growth Hit 14.7% in September. Based on the full month's reporting of underlying data and the Federal Reserve's recent revisions to same, estimated year-to-year growth in the SGS-Ongoing M3 measure rose to 14.7% in September, up from 13.9% in August. The reading, indeed, was at its highest since November 1971, in the wake of the U.S. dollar crisis, when President Richard Nixon closed the gold window.
For those who follow the SGS estimates of M3 level, here are the updated and revised, seasonally-adjusted monthly averages since February 2006. They are subject to all the caveats published along with them in the regular monthly newsletter. In trillions of dollars:
Feb 06 10.349 Jul 06 10.643 Dec 06 11.228 May 07 11.877 Mar 10.366 Aug 10.750 Jan 07 11.318 Jun 11.930 Apr 10.436 Sep 10.867 Feb 11.419 Jul 12.014 May 10.509 Oct 11.002 Mar 11.563 Aug 12.243 Jun 10.565 Nov 11.112 Apr 11.738 Sep 12.461
Annual M2 growth for September was 6.7%, up from 6.6% in August, with M1 up by 0.3% on an annual basis. The M1 growth was against a 0.2% contraction in August and was the first annual gain seen since July 2006.
Week Ahead. Underlying reality again would suggest weaker than consensus results for industrial production (Tuesday, October 16) and for housing starts/building permits (Wednesday, October 17), and a stronger CPI (Wednesday, October 17). With the vulnerability of the U.S. dollar to massive selling pressure apparently moving more toward center stage of Fed concerns, however, both the industrial production and housing numbers will be particularly vulnerable to "positive" massaging.
September CPI Caution Consensus forecasts are for seasonally-adjusted month-to-month CPI inflation of 0.2% for September. A variety of factors, including gasoline sales in the retail sales report, suggests a higher number. Regardless, the monthly CPI dropped 0.5% in September 2006. That means that a consensus monthly gain of 0.2% would add roughly 0.7% to the annual CPI inflation, taking it from 2.1% in August to 2.8% or so in September, a 33% increase, depending on the actual September monthly gain.
Further details will follow in the October SGS newsletter.
The October SGS is targeted for late this week, or over next weekend, so as to include the September CPI and housing starts data. An e-mail advice will be made of its and any intervening Flash Update/Alert postings.