ALERT - August 12, 2008

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

A L E R T

August 12, 2008

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U.S. Dollar Strength Has No Fundamental Basis Other Than Temporary War Effects

U.S. Dollar Has Not Bottomed

Gold and Oil Prices Have Not Topped

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The ongoing powerful rally in the U.S. Dollar and related heavy sell-offs in the oil and precious metals markets have no basis in the underlying fundamentals that usually drive activity in those arenas.  Accordingly, irrespective of extreme near-term volatility in the various markets, the broad long-term outlook remains unchanged: along with further intensification of the inflationary recession and a deepening systemic and banking solvency crisis, the U.S. dollar, equities and bonds should suffer terribly, while gold and silver prices should boom. As with the longer range outlook for the markets, however, key to the current circumstance is the performance of the U.S. dollar.

Despite orchestrated media and market hype to the contrary, there has been absolutely no positive shift in underlying fundamentals driving the still-unfolding economic, financial-market and systemic-stability crises. The U.S. dollar’s sharp gains reflect instead uncertainties tied to the outbreak of and rapid intensification in war in the Caucasus, with the greenback taking on its traditional flight-to-safety role. Those effects should be relatively short-lived, shy of the circumstance evolving into World War III. If anything, the slightly longer-term impact of that conflict should be bullish for both oil and gold.

Per the financial media, though, the dollar’s strength reflects improving economic conditions in the United States versus the rest of the world.  That is nonsense. Shy of gimmicked GDP reporting that few believe, the U.S. continues to see a deepening recession as evidenced in most other economic reporting. Usually, when the U.S. economy contracts the rest of the world follows. There is little news there.

The other factor at play is related, seen in the nature of finance ministers and central bankers to lie. There has been some heavy, but effective, spinmeistering and jawboning and possibly supportive covert intervention in support of the dollar. Central banks often do their best to trigger or enhance a desired move in currencies. Such factors exaggerate near-term volatility but do not have lasting impact.

Not reflecting any lasting change in real-world conditions, the dollar’s happy gains should prove to be fleeting. Related to dollar buying has been the heavy selling of oil and gold, which also has not been driven by fundamental changes. Oil markets are volatile by nature, and, despite recent sharp swings, prices remain highly inflationary at current levels. The markets and financial system remain vulnerable to the least surprise and are highly unstable, at present. The inflationary recession continues to intensify, and gold remains the best long-term hedge against all the real risks facing investors and the system.

These matters are discussed more completely in the full newsletter, which is near going to press. The markets are moving faster than my writing, which is being finished here at the Outer Banks of North Carolina, hence this quick update in an Alert.   Posting of the newsletter will be within the next day or so and will be advised by e-mail.

Best wishes to all,

John Williams