Thursday, September 10, 2015

A sobering analysis of the US and world economies

By now I'm sure most readers are familiar with John Williams' Shadowstats Web site.  I have a great deal of respect for Mr. Williams, who for years has measured our economy using 'classic' statistical analyses and techniques as applied by former US administrations.  More recent government statistics have been 'massaged' to be more 'politically correct', as we've pointed out on numerous occasions.  If official statistics were too negative, the basis for calculating those statistics was simply changed in order to reflect what the politicians wanted the public to hear.  This makes current US government statistics more than a little questionable.

Mr. Williams recently gave an interview in which he analyzed the current state of the economy.  Here are some excerpts.  Bold, underlined text is my emphasis.

In a normal economic recovery, people who have lost their jobs start working again as the economy improves. That hasn't happened this time, at least not to the extent suggested by a 5.4% unemployment rate (U3), where the government's headline definition of "unemployed" is quite narrow ... If you haven't looked for work in more than a year, even if you would like to work, then the government just doesn't count you in even its broadest measure of unemployment (U6); you just disappear from any of the unemployment measures ... My broad unemployment estimate includes those no longer tracked by the government, those who cannot find a job, who have given up looking for work for more than a year because nothing is available, yet they still would like to find a job, even though they may be doing other things—like taking care of grandkids. That broader unemployment number is around 23%.

. . .

We have a consumer-based economy. Seventy percent of our gross domestic product (GDP) relies on the consumer. If income is not growing, if consumer debt expansion is limited and if confidence is weak, then the consumer does not have the ability to fuel sustained growth in consumption. There's no way the economy has recovered, nor is it about to recover.

. . .

The GDP numbers are nonsense. They're very heavily inflated. They're gimmicked. Government agencies long have put a little upside bias into the numbers to avoid the political embarrassment of understating actual economic activity. After a few years, those numbers usually get revised lower, as happened in this year's benchmark revisions to the GDP. The next big comprehensive GDP revision will be in 2018, so it may be that long before we start to see headline details approaching reality.

The patterns of revision show consistently that the economy has not been as strong as it's been reported. Effectively, we're seeing a broad, multiple-dip economic downturn that began in the housing industry in 2005. It's not a happy circumstance. Separately, headline GDP growth is overstated by the use of too low an inflation rate in deflating the series. Use of understated inflation results in overstated real, or inflation-adjusted, growth. Corrected for the inflation issues, actual GDP plunged into 2008 and 2009 and has been in low-level stagnation since. Official GDP plunged into 2008 and 2009 and then fully recovered, despite a number of key related series not following suit.

. . .

... the underlying problem is that the U.S. economy is not recovering. Again, we are looking at a new recession, although I'll contend it is an ongoing element of the economic collapse into 2008–2009. Once that becomes apparent, there will be massive dollar selling, a big spike in gold prices and oil prices will again move higher as the dollar weakens.

. . .

We are going to see increasing pressures to dump the dollar as the world's primary reserve currency. Who in the world is going to buy U.S. Treasuries? The Fed was a big buyer, but it has exited that part of QE3. China was a big buyer, but it has had to sell because of its market problems. Much of the rest of the world also has been moving out of the dollar.

. . .

The Fed is trying to prevent a stock crash, but there is no fundamental strength underneath the economy, stocks or the U.S. dollar. In terms of economic reality, consider corporate revenues. Sales of the companies in the S&P 500 were down year-over-year in the first two quarters of 2015. Again, that doesn't happen outside of a recession. We're in a recession. The stock market will recognize it, along with the global financial community. That is why I am avoiding the market and the U.S. dollar.

There's more at the link, including some eye-opening graphics illustrating the scale of the economic problems we face.

I urge you, in the strongest possible terms, to read the full interview for yourselves.  I believe Mr. Williams.  I think we're in for a hell of a tough time in the not too distant future.  In fact, I'm so convinced of it that this week, I took the step of converting 10% of my (admittedly small) cash reserves into precious metals, a traditional hedge against hard times.  A great many people appear to be doing likewise these days, leading to reports of a severe silver shortage and correspondingly high premiums over 'spot' prices for immediate delivery of physical metal.  I'm a very small-time investor - so small as to be not even a blip on anyone's radar screen - but I can read the writing on the wall.  I think even a tiny holding in precious metals can be a worthwhile security blanket when fiat currencies run headlong into economic reality, as I believe they're doing right now.

Keep your powder dry, friends.



genericviews said...

I am also a small investor. I have holdings in a few hundred pounds of lead and steel. and another few hundred pounds in the commodities markets with things like Rice, canned food, first aid supplies, and toilet paper.

al said...

I would buy US Treasuries, if they offered a decent coupon (10% would be adequate)

Failing that, 5 cents on the dollar will also generate an acceptable coupon

Anonymous said...

I've seen a few stories lately about counterfeiting of precious metals -- plating over some other metal.

So where does the small investor go for those items - precious metals you actually keep in your possession - without the worry of getting something that's been adulterated? Whom can you trust?


ZerCool said...

Counterfeiting is wildly prevalent in silver 1oz coins and rounds, especially things like Chinese Pandas. American Silver Eagles are not immune by any means, but aren't quite as common. (Perhaps because counterfeiting US money attracts the USSS?)
One of the most commonly counterfeited pieces of silver are one-ounce generic bars, often sold via AliBaba or ebay for a couple bucks per sheet of ten.

I avoid counterfeits as best I can by buying via reputable dealers (APMEX and JMBullion are my go-to dealers) OR their ebay storefronts (APMEX via ebay is fine). I have so far been lucky and haven't been dinged on counterfeits, but I am VERY cautious about it with private sellers; I tend to only buy 90% "junk" silver from them and not bullion silver.

Learn to do specific gravity testing as well; it's one of the best ways to detect a counterfeit piece of silver:

Peter said...

@Anonymous at 11:46 AM: Yes, counterfeiting is getting more prevalent, particularly when dealing in larger items such as gold bars. See these reports, for example:

The primary way I try to avoid such problems is to buy silver or gold bullion in the form of legal tender coins (e.g. US gold and silver eagles and buffaloes, the Canadian Silver Maple, etc.). I buy them only from reputable dealers that have paper trails from mint, to wholesaler, to themselves - in other words, no place in the chain where counterfeits might creep in. I also avoid coins from countries such as Venezuela or Somalia - they may be OK, because they're produced by mints who license the national identity, but those nations hardly inspire confidence, do they?

I may get hit with a counterfeit coin here or there, but by taking the precautions outlined above, I expect that to happen relatively seldom. By buying (say) 30 or 40 silver coins at a time, most of them are likely to be the real thing, limiting my potential losses.

I hope this helps.