Special Note to Subscribers: Congressional Testimony

I have been invited to testify before the United States House of Representatives Committee on Financial Services on "Implications of a Weaker Dollar for Oil Prices and the U.S. Economy." The hearing is scheduled for 2:00 p.m. on July 24th (Thursday). Anyone who is a regular reader of the newsletter and Flash Updates (see the June 30th update in particular) will have a fair sense of what I shall be discussing. For anyone interested, a live webcast of the event should be available at: http://financialservices.house.gov/schedule.html

Let me update you as to what is happening with the newsletter in terms of the pending regular full missive, as well as some product development. First, I apologize for the delay in publishing the pending newsletter. I research and write the various missives by myself and unexpected developments, such as one the above, can throw off my writing schedule. A variety of nonrecurring events in the last couple of months have contributed to pushing the current writing back to the point where I am close to overlapping the next newsletter’s timing. 

Here is what will happen in the next several weeks. What had been planned in the pending newsletter as a Reporting/Market Focus on monetary theory and its practical measurement and analytical uses in today’s environment, has been expanded and will be published as a Special Report in the week of July 28th. Special reports on a variety of topics will be published with increasing frequency in the year ahead, but not with regular timing.

The next full newsletter will be something of a double-issue, planned for the week of August 4th. The included Reporting/Market Focus will review the GDP benchmark revisions (due for release on July 31st), as well as the July employment report on the 1st of August (see separate discussions below).

Flash Updates and Alerts are used to keep key economic and market developments up to date, in between newsletters. Irrespective of where we were in the publication cycle, if there were a meaningful change in outlook, such would be advised immediately using an Alert. Separately, subscribers who have questions on particular issues, or who just would like to communicate in general, are invited to contact me directly either by e-mail at johnwilliams@shadowstats.com, or by phone at (510) 836-0272. I do my best to get questions answered.

– Best wishes to all, John Williams

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June Broad Money Growth at 15.8%

Money seems to be moving from some of the broader money supply accounts to cash or checking accounts. For June 2008, annual change for monthly M1 was reported at an annual growth rate of 1.5%, a significant positive swing versus a 0.6% contraction in May. June M2 annual growth slowed to 6.1% from 6.4% in May.

Annual growth in seasonally-adjusted SGS-Ongoing M3 is estimated at 15.8% in June, also slower, down from 15.9% in May, 16.4% in April and a record-high 17.4% in March. Despite positive month-to-month change (unlike M2), the continued slowing in annual M3 growth during June likely was tied to intensifying problems in the banking system, and well may foreshadow needed further liquidity expansion by the Fed in the near future.  

Outside of the last several months, the prior historic high of 16.4% was seen in June of 1971, two months before President Nixon closed the gold window and imposed wage and price controls. While June growth remains shy of the 1971 high, it still promises significant upside inflation pressure in the next several months and into first-half 2009.

Housing Starts Data Compromised. The Census Bureau’s measures of building permits and housing starts have been seriously distorted by changes in New York City construction codes that led to a surge in reported activity that was little more than renewed paperwork. Where seasonally-adjusted June housing starts was reported up by 9.1% for the month, such would appear to have been a contraction net of the New York City activity. May’s monthly change revised to a 0.4% decline from an initial report of a 1.8% drop. Annual change likewise was distorted, down 26.9% versus May’s revised 35.7% decline. I am working on a temporary adjustment to the series so to as allow for more-meaningful, period-to-period comparisons. 

Upcoming Reports. With consensus forecasters tending to overestimate current economic activity, reporting in most upcoming economic series should offer some downside surprises.

Durable Goods Orders Should Show Continued Annual Contraction.Expectations are for a small monthly contraction in the regularly volatile new orders for durable goods series, due July 25th (Friday). The best bet is for continued annual contraction, a feature common to recessions.

GDP Benchmark Revisions Should Show Weaker Historical Economy.With consensus expectations running around 1.8% (briefing.com) for the "advance" estimate of annualized real (inflation-adjusted) second-quarter GDP growth — up from 1.0% in the first quarter — such likely will be targeted by the Bureau of Economic Analysis (BEA). The report, due on July 31st (next Thursday), however, will include annual revisions back through the first quarter of 2005. The revisions should show historically weaker growth in the GDP than previously reported by the BEA. The current recession even could show up in the detail.

Nonetheless, despite nearly every economic series — except the GDP — showing quarterly contractions, the politicized nonsense being generated for this series likely will continue through initial third-quarter reporting and the November election.

July’s Annual Payroll Contraction Should Deepen.Consensus expectations for roughly a 70,000 monthly decline in July payrolls and a small increase in the unemployment rate are in the right direction. The report is due for release on August 1st (next Friday). While jobless claims, help-wanted advertising and the purchasing managers surveys all suggest a monthly employment contraction in excess of 100,000, something close to or slightly better than consensus estimates likely would be preferred by the Fed.

Without significant revisions, a consensus payroll contraction would take annual growth clearly negative for both seasonally-adjusted and unadjusted series (the unadjusted series went negative last month). Payrolls never have contracted year-to-year without a recession being in place.  

General Outlook Unchanged: All factors considered, the broad outlook remains the same: further intensification of the inflationary recession and a deepening systemic and banking solvency crisis. Near-term market recognition of same and risks for unstable market conditions are intensifying, albeit erratically.

Over the shorter term, major market displacements likely will follow or be accompanied by intense, broad selling of the U.S. dollar. An increasing flight-to-safety outside of the U.S. dollar also should include flight-to-safety into gold. Despite volatility ongoing in oil prices, current levels remain highly inflationary. The gold and currency markets also remain subject to extreme near-term volatility, jawboning and both covert and overt central bank intervention. Over the longer term, U.S. equities, bonds and the greenback should suffer terribly, while gold and silver prices should boom.