FLASH UPDATE - August 25, 2008

 

 

 

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

 

FLASH UPDATE

 

August 25, 2008

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Financial Storm Continues, per Bernanke

Pending GDP Upward Revision Surge Still Nonsense

 

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A Bad Typo in "Inflation and Deflation Good for Gold."  In last Thursday’s (August 21st) Flash Update, there was a misstatement created by leaving out an important "not," as caught by at least one reader. I apologize for any resulting lack of clarity or confusion. The original text has been corrected; the two paragraphs under "Inflation and Deflation Good for Gold" should have read as follows:   

"The purported ‘collapsing M3,’ has triggered excitement in the deflationist camp, which is touting a deflation in financial assets and a credit-collapse-induced implosion of the money supply. It would be helpful if deflationist commentaries differentiated between deflation and inflation in terms of financial assets, versus in terms of prices paid by consumers for goods and services. Deflation in financial assets does NOT require collapsing money growth and has been underway for some time. Indeed, it likely will get much worse (particularly for equities). 

"Inflation in goods and services, however, has been picking up and accelerating for some time and also should get much worse. The two deflation/inflation concerns are not inconsistent, and investor nervousness about instabilities in the first case, and the need for protection from the second, feed into both the safe-haven and wealth-preservation demand for gold."

Expanding on that corrected thought, using the term "deflation" in terms of investment values is something of a misnomer, since declining asset values do not necessarily reflect a change in money supply. While money supply growth patterns can influence the factors key to asset valuations, such as economic activity, goods and services inflation, U.S. dollar value and interest rates, the impact usually is not direct.  

Neither the Financial Storm nor Money Expansion Have Run Their Courses. Federal Reserve Chairman Ben Bernanke noted in Friday’s address at Jackson Hole, Wyoming, that, "Although we have seen improved functioning in some markets, the financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment.  Add to this mix a jump in inflation, in part the product of a global commodity boom, and the result has been one of the most challenging economic and policy environments in memory."

Mr. Bernanke indicated that the banking solvency crisis that broke open last August "has not subsided." Indeed, patterns of money growth (as discussed in the last newsletter) and significant anecdotal evidence suggest that the crisis is deepening. Accordingly, over the next several months, I would expect to see new Fed activity aimed at flooding the system with fresh liquidity.

As discussed regularly in the newsletters of the last year, the Fed and the Administration will do whatever has to be done, create whatever money has to be created, in order to prevent a systemic collapse. Where the Fed has the will and the wherewithal to prevent such collapse, the cost for same is, and will be, in much higher money supply growth and in surging inflation.

While the key components of M3 have seen slower growth in recent months (M3 change has not been negative measured over any recent time span), the most-recent, seasonally-adjusted weekly reporting (Federal Reserve reports H.6, H.8) is showing some short-term pickup in growth. Where M3 growth began to surge with the breaking of the crisis last August, however, current money growth is slower than it was last year, and, barring a renewed growth surge in the next couple of week’s reporting, annual M3 growth for August will slow to below 15.0%, from 15.4% in July.

Week Ahead: GDP. Market expectations are for the "preliminary estimate" revision of second-quarter GDP to show 2.7% annualized real (inflation-adjusted) growth (briefing.com), up from the "advance" estimate of 1.9%. The report is due in Thursday (August 28th). As discussed in the last newsletter, an upward revision will reflect the reporting of an improved trade deficit in March and April, numbers that were unbelievable in their own right. While no recession reporting is likely before the November election, the consensus guesstimates on the GDP revision seem a little high.

New Orders for Durable Goods.  Irrespective of any monthly change in July’s seasonally-adjusted durable goods report on Wednesday (August 27th), a series that is regularly volatile on a random basis, year-to-year change (before inflation) likely will remain in contraction, continuing its deepening recession signal.

Consumer Confidence. Expectations are for some monthly improvement in consumer confidence (Tuesday, August 26th) and consumer sentiment (Friday, August 29th). Those expectations likely are in the correct direction, given the influence of a more-positive tone in the popular media. Yet, year-to-year contractions in the series should remain near recent record levels, despite softening numbers a year ago, when the systemic solvency crisis began to unfold.

General Outlook Remains Unchanged.Large price swings and high volatility continued for gold, as well as for the U.S. dollar and domestic equities. It remains unlikely that we have seen the near-term high in oil prices, and neither has gold topped nor the dollar bottomed. 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 these issues and growing global political tensions intensify the risks for unstable market conditions.

Over the near-term, negative major market displacements likely will follow or be accompanied by intense, broad selling of the U.S. dollar.  An eventual, increasing flight-to-safety outside of the U.S. dollar also should include flight-to-safety into gold.  Despite recent relative softness in oil prices, current levels (anything above $90 per barrel) 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.

 

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The next SGS Newsletter is targeted for the week of September 8th, following the release of the August employment/unemployment report. The posting of the newsletter and all intervening Flash Updates and Alerts will be advised by e-mail.