JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

May 22, 2008

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 U.S. Currency Now Backed by Collateralized Debt Obligations

Seasonal Adjustments Used to Eviscerate Reported Inflation

Recession Deepens

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Best wishes to all for a most enjoyable Memorial Day Weekend! — John Williams

Underlying fundamentals have not changed, with the long-range outlooks for the U.S. dollar and gold, respectively, about as bearish and bullish as possible. The U.S. economy remains in a rapidly intensifying inflationary recession, while the ongoing banking system solvency/liquidity crisis continues to fester. The eventual implications for the U.S. equity and credit markets remain bleak.

Federal Reserve Notes: Sound As The CDOs Backing Them. According to this afternoon’s (May 22nd) reporting by the Fed, U.S. dollar currency in circulation is estimated at $818 billion, the better portion of which circulates outside the geographic confines of the United States. While the U.S. currency has been a fiat currency (not backed by gold) for decades, the Federal Reserve Notes presently in circulation are collateralized by securities held by the Fed. Those securities traditionally are U.S. Treasury securities.

Since the onset of the banking solvency crisis and the establishment of various new lending facilities by the U.S. central bank, however, an increasing portion of the U.S. Treasury securities held as collateral has been lent to troubled financial institutions in exchange for largely illiquid collateralized debt obligations — including mortgage backed securities — that now total in excess of 20% of the collateral backing the Federal Reserve Notes.

 On the money supply front, as expected, the M3 components reported today (M2 and institutional money funds), appear to be surging anew, coincident with the recent expansion of the Term Auction Facility (TAF).

Industrial Production Shows Deepening Recession. Seasonally-adjusted industrial production plunged by 0.7% in April, as reported by the Federal Reserve, following a revised 0.2% (previously 0.3%) increase in March. April’s year-to-year growth ground to a halt, at just 0.2%, down sharply from March’s 1.4%. The series likely will turn negative year-to-year in the next reporting, providing the first annual contraction of this recession.

The seasonally-adjusted first-quarter 2008 production reading contracted at an annualized 0.2% versus the fourth quarter. With production just holding even in May and June, the annualized quarter-to-quarter contraction for the second quarter would be about 3.2%. Legitimate GDP reporting would tend to follow the growth patterns of the quarterly production data. 

Housings Starts Show Ongoing Recession. The regularly-volatile, seasonally-adjusted housing starts rose by a statistically insignificant 8.2% +/- 17% (95% confidence interval) for the month of April, but fell by 30.6% year-to-year, according to the Census Bureau. Such followed the annual benchmark revisions to the series, with the March numbers now showing 13.8% (previously 11.9%) monthly and 36.1% (previously 36.5%) annual declines. The annualized first-quarter 2008 decline was 32.8%, while — assuming May and June reporting held at April levels — the annualized second-quarter decline would narrow to 3.8%.

PPI Inflation Remains Low Thanks to Lack of Food and Energy Inflation!? Consistent with increasing irregularities in the reporting of the government’s most popular economic series (CPI, GDP and employment), the seasonally-adjusted producer price index (PPI) increased by 0.2% (0.7% unadjusted) for the month of April, 6.5% year-to-year, per the Bureau of Labor Statistics (BLS). Such followed 1.1% monthly and 6.9% annual increases in the March reading. April food prices reportedly were unchanged and energy prices declined by 0.2%.

Minimally, the unbelievable numbers were distorted by poor-quality seasonal adjustments, which eventually should reverse (if not revised away). As with the CPI data, however, the actual increases in food and energy prices are far more than can be accounted for by normal seasonal variations, suggesting that other factors — tied perhaps to political or financial-market needs of the Administration and/or Federal Reserve — could be at work.

Week Ahead. Irrespective of any near-term volatility in otherwise soaring oil prices, the levels hit in recent months already assure higher broad inflation readings in the next six months. Separately, Memorial Day likely will cause distorted volatility in the seasonally-adjusted weekly new claims for unemployment numbers, due to the Department of Labor’s general inability to adjust weekly numbers for seasonal variations, adequately.

The "preliminary" estimate revision of first-quarter 2008 GDP is expected to be an upward revision, from 0.6% to about 0.9%. The numbers here are pure fantasy, so I would tend to bet on the consensus forecasts.

Full details on the various economic reporting will be covered in the pending newsletter.

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Continuing market turmoil, central-bank/government intervention (particularly in the currency and gold markets), increasing economic data distortions and ongoing systemic shocks remain within the general outlook, which is unchanged.

Publication of the next regular newsletter is targeted for next week (week of May 26th), within several days of the Monday holiday. Any intervening Flash Updates and Alerts will be posted as needed. All postings will be advised by e-mail.