It’s Not Even Close to Being Over

Inflationary Recession and Systemic Solvency Crisis Remain

Gold Buying and Dollar Dumping Still Are Nascent

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With Wall Street, Administration and Federal Reserve spinmeisters — and their shills in the popular financial media — putting out tall tales of miraculous cures to the economic and systemic crises, a Flash Update seemed appropriate, despite the regular monthly lull in significant economic reporting. Instead of signals of an economic turnaround, key data continue to signal deepening inflationary recession. Instead of the systemic crisis being over, what the Fed and the Administration have done — and are doing — is to confirm that the financial system will be bailed out irrespective of how much money has to be created. Such, however, always has been a basic component of the crisis outlook; the Fed never had the option of letting the system fail. Beyond the systemic solvency crisis still having a long way to run and evolve, what the markets are missing is the ultimate cost to the system of any government and Fed beneficence: INFLATION.

My general outlook on the economy and broad markets (long-term, not day-to-day) remains unchanged:

- A deepening inflationary recession that eventually will evolve into a hyperinflationary depression;
- A severe bear market in U.S. equities;
- An eventual sharp spike in long-term U.S. Treasury yields, as the flight from the U.S. dollar evolves into flight to safety outside the dollar;
- Massive selling of the U.S. dollar against the major Western currencies;
- An ongoing strong bull market for gold.

Economic Turns Are Signaled in Advance. An economy the size of that of the United States does not reverse direction overnight or on wishful thinking. As a rough rule of thumb, significant changes to underlying fundamentals that drive business activity take at least nine months to start showing up in economic reporting. Not only have underlying fundamentals not been shifted meaningfully, but neither traditional fiscal nor monetary policy is available at present to help turn the economy. Gross mismanagement of fiscal and monetary policy in recent decades by the federal government and Federal Reserve has eliminated all traditional options.

A number of leading indicators will signal pending changes to economic activity six-to-nine months in advance. These indicators include retail sales, housing starts, the purchasing managers manufacturing survey, new orders for durable goods, help-wanted advertising, and new claims for unemployment insurance, among others. With lead times varying from three months to one year, all these indicators signaled the current recession in advance. In like manner the same indicators will signal in advance a pending economic turnaround, at such time as the appropriate underlying fundamentals are in play.

At present, all these indicators are signaling a deepening recession, not a miraculous, overnight recovery. One note of caution, though, on the pending "final" revision to fourth-quarter GDP: If the annualized quarterly real (inflation-adjusted) growth of 0.6% somehow revises sharply to the upside, most other upcoming economic reporting likely also will be heavily manipulated in an effort to confirm the increasingly touted Bush/Bernanke economic miracle.

Uncontrolled Spending of Fiat Money Leads to Inflation. The depth of the systemic solvency crisis only has been hinted at by the magnitude of the emergency actions taken by the Federal Reserve and other central banks. The heavily publicized problems with certain mortgage-backed securities are spreading/have spread into a wide variety of securitized instruments.

The various central governments and central banks have the wherewithal to bailout the financial system by printing money, and the U.S. already has become the primary bailer here. Where the Fed recently moved to bailout non-depository investment banks, the Fed, in like manner, will have to bailout any institution (i.e., credit insurers), where a failure would threaten systemic stability. The problem is not that the system will collapse, but that the cost of preventing the collapse will help to trigger a devastating inflation.

So far, the Fed’s overt actions have been limited to lending good funds for otherwise illiquid assets held by financial institutions. The flood of liquidity relief has enabled banks to behave more normally, lending money and creating money supply. The result has been record growth in the broad money supply as measured by the SGS-Alternate M3 measure. The latest weekly numbers show continued rapid growth in broad money. As the Fed’s available assets get tied up in the process, actual creation of currency is not far down the road.

The bad news in the ongoing, systemic solvency crisis is no more behind us than is the bad news on the economy, shy of outright manipulation of the data and the news media.

All of the preceding has been covered in earlier newsletters and Flash Updates, which should be referred to for greater detail. Please feel free to contact me at johnwilliams@shadowstats.com any time you have any questions on my outlook or otherwise.