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Jim Willie CB is the editor of the “HAT TRICK LETTER”

For specific detailed analysis of the Gold, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and Fed monetary policy, see instructions for subscription to my newsletter research reports, which include stock recommendations positioned to rise in the commodity bull market. Articles in this series are promotional.

Many investors wonder what the consequence is with a damaged compass for guidance in the economic seas. Assets must be granted a premium benefit in return for risk to capital. First, you see improper risk reward for bonds against erosion of capital via price inflation, which is much higher than regarded. Interest rates are not high enough, surely not versus the higher than stated price inflation. The most important component to a debt soaked USEconomy is clearly borrowing costs. Second, debt service becomes an inordinate burden to bear against the USEconomy, whose strength is less adequate than regarded to handle higher costs. Wages and savings are not high enough, surely not versus the worse situation after proper adjustment for price inflation. Productivity gains come from either more work with similar total hours worked, or similar total work with few workers. We have been seeing the fewer workers dynamic too much lately, much less than reported and certainly less than what the growing population requires. Third, cutting off the process of worker wage increase gains when their living expenses monotonously mount can force a higher number of bankruptcies than expected. Households are under such great strain. The US Federal Reserve insists on holding firm on its heretical notion that wage gains cause price inflation. Try focusing on money supply growth instead, guys! The foundation of the USEconomy precariously rests on the retail sector, where consumption occurs rather than fixed business investment. This structural misalignment is disastrous, despite the assurance given by economists. Fourth, a false sense of security comes from noting that consumer & retail spending stays steady, when a big piece of that spending is devoted to increasingly expensive gasoline. The central source of spendable funds in the USEconomy has been home equity, a perilous condition. Its weakness is simply difficult to lie about. Fifth, the appearance of brisk new home sales (more and more looking doctored) does not testify to strength in housing prices anymore. Additions to supply exacerbate the supply & demand already showing excess inventory. We cannot know truly whether housing prices have fallen when an unsold house bears no specific value, and inventory rises.

The US Federal Reserve monetary policy is charged to set short-term interest rate targets, to authorize liquidity influx & drain, to set bank reserve ratios against loan portfolios. The Chairman and Fed Governors need the best information. THEY DO NOT GET IT. Either they operate under entirely different accurate competent worthwhile statistical information from which to make their decisions, OR ELSE they are at a distinct disadvantage from relying upon faulty distorted inaccurate worthless statistics. They USFed is at great risk to making a serious mistake here and now. On top of the information risk, these bankers and economists are badly trained, in accepting a debt-backed currency and endorsing a debt-dependent economy. By misjudging the dependence of credit, by misjudging even whether the total size of transactions in goods & services (Gross Domestic Product) is in retreat or stalling, the USFed risks sending the USEconomy into a downward spiral. Downward housing momentum is very difficult to halt. We might have already passed that point. A mortgage bond crisis is written in stone, without a doubt certain to occur. Underwater homeowners go hand in hand with underwater mortgage portfolios. The housing sector is the viral body which will infect the bond market. Mortgage finance serves as the umbilical cord. The upcoming crisis is unavoidable, even with VALID STATISTICS.

The US stock market (see SPX = S&P500) has lost at least $1 trillion since its May peak. The Japanese stock market (see Nikkei) has lost roughly $1 trillion since its May peak. The collection of emerging stock markets (see EEM) might have lost one quarter $1 trillion or more since their May peak. Since 2001, the US housing stock has easily lost $1 trillion since its peak in late 2004, with a second $1 trillion mapped out. That is something in the neighborhood of $3 trillion in evaporated capital, and hence lost purchasing power, no longer available to the USEconomy. With bankruptcies and home foreclosures on the rise, downward momentum is here. We see evidence of asset deflation and debt deflation before us. The USFed must halt rate hikes, must assure a torrent of monetary liquidity, and must get the heck out of the way.

THE TRUE USFED ROLE

Does the USFed see the same picture? Do they even rely upon the same faulty statistics disseminated like propaganda to the sheeple masses? Does the USFed use “double booking” on their analytic side, with one set for a bonafide snapshot of reality and another handed down from USGovt agencies like promotional material? Methinks possibly yes. In my always suspicious view, both their ongoing methods and their prevailing motives are very much to remain hidden. Tragically, the USFed does not realize that the biggest problem, the biggest risk, is the USFed itself. Ever since the US Federal Reserve has denied the US Congress critical information, owed from its contractual obligations, we have entered a new era. What Fed Governors tell the public might differ markedly from what they discuss in unofficial meetings. National security has become an issue, since gold is missing from our national treasure, and our USDollar currency is therefore rendered vulnerable. It remains debatable whether the collection of Fed Governors are influenced by external powerful figures.

We certainly know of the USFed failure in its officially stated charter, to maintain stable prices and to further maximum employment. These stated directives are much akin to beauty pageant contestants working toward world peace and the end to world hunger. The perverse actual charter (the authentic world of practicality) is a grand departure, many-fold, more like:

Ø to manage chronic systemic monetary inflation, our primary surviving engine of supposed wealth generation, after the tragic dispatch of the US manufacturing base and erosion to the service sector

Ø to oversee the export of inflation in the form of debt in order to protect the homeland from the direct ravages of price inflation, instead to treat the USEconomy to imported price deflation in indirect fashion

Ø to coordinate foreign central bank policy (e.g. EuroCB, Bank of England, Bank of Japan, Bank of Canada, Bank of Australia) so that the USDollar, crippled by dreadful fundamentals, can benefit from a favorable interest rate differential built into massive bond speculation

Ø to hold gigantic inventories of  USTreasury Bonds on behalf of foreign owners, whose accounts make unnecessary their round-trip electronic voyages across the Pacific and Atlantic oceans

Ø to direct periodic rescue efforts in financial markets, from the Working Group for Financial Markets (a.k.a. Plunge Protection Team) to the Fanny Mae bond laundering process, using both new money and slush money

Ø to orchestrate the USDollar levitation with the collusion of the gold cartel, which organizes raids and other suppression tactics such as naked shorting and falsification of gold bullion certificates

Ø to aid & abet in the deceitful recording of price inflation as reflected in the fraudulent Treasury Investment Protection Securities (TIPS)

Ø to engineer cycles of expansion and recession, as credit is supplied then withdrawn, blaming it on the economic cycle, when it is actually the credit cycle

Ø to confuse the heck out of US Congressional inquisitors during sessions, marred by both bootlicking and reprimands, even as the venerable role of monetary drug dealer is the hidden agenda prime directive

Ø to command and control the corruption of the economics educational process on a nationwide basis, which has led to an entire generation of badly trained institutional economists sitting atop a mushroom like toads, who now serve eagerly as “yes men” sycophants confirming heretical policy

BACKLASH OF STATISTICS

My ongoing theme has been corruption, distortion, and rationalization of economic statistics to such an extreme degree that a quantum shift exists from their fallacious story to the world of reality. Worse, the distortion is so great as to lead to heightened risk for policy errors, as statistics are integral to the decision making process. In order to sell a phony economic story of robust strength, healthy productivity, tame inflation, full employment, and deep pools of funds to perpetuate consumer spending, radically falsified statistics must be engineered and disseminated as so much propaganda. Hardly a shred of truth lies in official statistics, especially those related to price inflation and adjustments to price inflation. In such a climate of deceit, it is impossible to have effective monetary and economic policy when guided by faulty statistics. Effective policy demands accurate information, reliable future indicators, and competent forecasts. This is indisputable. We do not have it. A series of crises is therefore highly likely from policy errors made in succession. Gold bullion and crude oil will benefit, as safe havens from a fractured monetary system and inevitable snafus. Either breakdowns or unstoppable price inflation will result. We must keep ourselves protected.

PRICE INFLATION: The latest three months CPI this spring have delivered a shock which will not go away. The trend will surely continue. The officially published index shows month over month increases in the CPI for March April May June of (+0.6%, +0.9%, +0.5%, +0.2%) which points to annualized price inflation of between 6% and 10%. Recall, this index is heavily suppressed. Niceties aside, the statistics now have begun to backfire from rising rental prices for housing. As the housing market declines, as their residential prices slide downward, rents have risen from simple supply shortages on the rental side. The impact is direct, as rents comprise between 35% and 40% in weight on the CPI statistical calculation. This effect will surely intensify to a worse degree. The effect on the bond market and stock market is assured to cause problems, to lift long-term rates, and to aid gold investment as an inflation hedge. As economic slowdown becomes more clear, long-term rates will fall. More volatility is assured. USFed reaction with more laxity, some accommodation, and actual rate cuts will again lift those long-term rates. Expecting such a reaction will lift long-term rates. We have never escaped the land governed by the motto “INFLATE OR DIE.”

The actual bonafide CPI is more like in the 7% to 8% range, perhaps a full 5% different. The Shadow Statistics group estimates the true CPI is at least 3% higher than reported. For a second independent measurement confirming the infamous shadow group, see the graph below. Stephen Church provided his detailed calculation of price inflation, in “Real Inflation” based upon monetary growth, population increase, productivity improvements, and more. He used no malarkey shell game hokus pokus nonsense bird-brained concoctions typical of USGovt statistics. His work is excellent, original, and convincing.

See my  “Backfire on Corrupted Price Index” from May2006, wherein a review is given on corruption of the CPI. Three past articles were featured, to reveal how the construction of the CPI heavily pushes down the CPI during inflation ridden times, how export of inflation actually used to keep the CPI figure down when we correspondingly import deflation, and lastly, how distortion of economic statistics actually puts at risk policy making decisions.

ECONOMIC GROWTH: At the risk of being repetitive, the US Gross Domestic Product is horribly exaggerated. Ok, ok, give me a break, a broken record in my message. But it is so important that the message be repeated often, even from the hilltops. One cannot accept the CPI as distorted high without concluding the GDP as distorted low. No discussion of falsified statistics is comprehensive without this story cited. The nominal total of US goods & services in transactions, which comprise the GDP, is adjusted down by the GDP Deflator, consistent with the Personal Consumption Expenditure index. The reported 1Q2006 growth in GDP was 5.6%, with absurd 3.3% Deflator yr/yr. My contention is that the adjustment down is wrong by at least 4% and possibly 5%. An additional 1% is entered since information technology hedonic adjustments contribute to the distortion in an indefensible manner.

JOBS GROWTH: The jobs picture is ripe with distortion. The April, May, and June job growth reports incorporated Birth-Death model lifts greater than the total number. June gains of 121k jobs included 175k mythical B-D jobs. May gains of 75k jobs included 211k imaginery B-D jobs. April gains of 138k jobs included 271k fictitious B-D jobs. Of course, the press & media failed to notice this point of embarrassment. Without these convenient B-D modeled new jobs, al three months would have registered a DECLINE in job growth, a point not even mentioned by the sleepy press & media. Moreover, newly created jobs continue to come far under the population growth requirement of 150k jobs monthly. The Birth-Death model remains a principal job producer, without any basis in reality, certainly no scrutiny. Its ARIMA (11-th order autoregressive integrated moving average) statistical model has assumptions tied to the previous irrelevant decade, and a structure which is laughable at worst, and indefensible at best. Here is the tough Birth-Death model question. Does the change from one month to the next in the ratio (of new jobs created to old jobs killed) really tell us anything? Methinks no. How about that change in the same ratio a year ago? Methinks even less, especially when jobs are being outsourced to Asia!!!

The trend toward Asian outsourcing of jobs seems to have slowed, as high profile job export announcements have notably waned. The tepid productivity for 4Q2005 (at +0.5%) and for 1Q2006 (at +3.2%) contain their usual distortion upward. They confirm the slower job export to Asia, the backbone of greater claimed efficiency. Job growth has been and will continue to be harmed, since 20% of the four million jobs created since 2004 originated from the housing sector.

Challenger, Gray & Christmas posts large site employer layoff statistics. The trend is lower, but declines might owe to the fact that large companies have already shed the bulk of workers planned for cuts. CGC layoffs cite 67.2k in June2006, 53.7k in May2006, against 103.5k in Jan2006. Last year, the CGC layoff numbers were larger, at 103.0k in July2005, 110.0k in June2005, and 82.3k in May2005.

PRODUCTIVITY: Given the nature of the productivity statistic, change in output versus change in work, the information technology hedonic adjustments have an even more pronounced effect from their distortion. The statistic is exaggerated by roughly 2%, from such infotech hedonics. There is no way faster speeds of computer processors, disk storage access, network connectivity, or internet transmission materially increases work when human beings sit at consoles and PC’s. Instead, speeds increase available time for lunch, chatting, daydreaming, visits to vending machines, flirting with cute colleagues, going to the bathroom, playing games on the PC, even surfing the internet. More efficient machines stand idle more. Greenspan has several gigantic blind spots and areas of deep ignorance; one is productivity. He did not even use email. The gains in productivity have come hand in hand with job layoff in the last few years, lifting the Asian standard of living. On US shores, productivity gains serve as testimony to flat industrial output with fewer workers. That is, if productivity is positive at all, after a return to reality in its calculation. High productivity directly addresses exploited cheaper Asian labor costs, without US wage benefit. This is confirmed in negative inflation adjusted wages for three years running, a major point of embarrassment, and a critical piece of information. Inflation adjusted wage growth remarkably is still negative EVEN AFTER giant distortion. So imagine how deeply negative wages are in growth in reality terms. Any inflation adjusted statistic, such as wages and GDP growth, must subtract 5% to enter the world of reality in which we live and breathe. This is Enron accounting.

UNEMPLOYMENT RATE: The unemployment rate is the funniest of all deceptive statistics. In the 1990 decade, the Bureau of Labor Statistics had a brilliant idea not to consider a jobless person as unemployed if efforts to find work were abandoned. So if a man is hungry and fallen on his face, having given up scraping garbage cans, he is no longer hungry. The concept of “full employment” is utterly laughable. The June unemployment rate was stated as 4.6%, but after putting back reality, it is actually 7.0% when divided by the “participation rate” of people actively involved in working or looking for work. The irony is that a dire and growing shortage of highly skilled workers is wrecking havoc, as foreign applicants win jobs and must jump green card hurdles. Such is a testament to an inadequate educational system, where a minimum of math & science is taught in the United States. A large swath of public schools have degraded into highly paid revolving doors, detention centers, and nurseries to ensure literacy and minimal technical skills.

RETAIL SALES: Much like the Energizer bunny, retail sales hang in there, but they include gasoline purchases. The official retail sales statistic includes no inflation adjustment. As gasoline prices relentlessly rise, now averaging over $3.00 per gallon, to the tune of 30% higher than a year ago, retail sales growth largely rides on the back of higher gasoline expenses. This is not progress. Restaurant chains openly report slower traffic and revenue. In fact, several chain and brand vendors have responded, noting the threat. Wal-Mart openly mentions fuel costs to explain tame sales growth at 2.1%, slightly lower than the last couple years. However, some companies (Sears dept stores, Kohl furniture, Barnes & Noble books, Maytag appliances) use sales incentives which involve discount credits for gasoline purchases. They detect a connection. The heart of the middle class has finally been affected by higher gasoline costs, made worse by rising electrical utility costs, doubled minimum credit card payments, and for many people, sharp jumps in mortgage monthly payments.

CONCLUSION

Pay little heed to the narrow minded commentary by USGovt officials, which are all replete and drowned in vested interest, whether political or toward debt sales. Sadly, promotion of both the USDollar and USTreasury Bond has led to an endless stream of deceptive, distorted, fallacious, misrepresentative information which has become both chronic and egregious. Bear in mind that the flip side of a USDollar, given its unbacked fiat nature, is a government bond. Some regard the USDollar valuation as dependent upon confidence in USGovt leadership. More accurately, the US$ value depends directly on the quality of US Treasury debt. If not for coercion and direct intimidation of debt rating agencies, the USTBond debt would be downgraded to “B” levels. We gots Third World financial fundamentals here, yet triple “A” ratings !!!

Given faulty statistics and heretical economic beliefs, enormous risks are imposed upon the system of commerce inside the United States, even beyond its borders. Policy cannot be made properly or effectively in such an environment, unless US Federal Reserve decisions scoff at official statistics and ignore the nonsensical sales promotion pablum. My suspicion is that a hidden agenda is being worked by our England-owned Federal Reserve. Some go so far as to claim that England waited 138 years for its revenge after the United States declared and won its independence in 1776. England conned the US Congress into signing away our national financial independence, integrity, and stable future, by subcontracting monetary management in 1914. In just fifteen years, their ineptitude led directly to the Great Depression. Their charter is nothing like what is advertised. A mission of creating stable prices has become an utter joke. Commanding the gigantic sophisticated inflation machinery (think mad professors on crystal meth), complete with gears and levers, ethers and mystique, is central to their current function. Almost nobody really knows much of anything about the field of economics in this misdirected nation. So we are hapless and vulnerable to a sequence of nutcase mythology chapters. No sooner do we dismiss a current chapter, that we are told yet another even goofier, more heretical, new chapter. Every promise of a Soft Landing is met with a failure and painful recession, or financial market crisis, or profound lies on what constitutes a recession.

Pay little heed to self-serving commentary such as from Energy Secy Bodman. He claims something true, that global oil suppliers have lost control of their market. In other words, the Saudis and other sheikdoms no longer control price with actual oil output and vaporous FedSpeak language on increased future supply. How true! But he follows with claims again bordering on the nonsensical, that the USEconomy is surprisingly resilient to higher energy costs. No way is our economy resilient. We relied during the last four years of colossal raids on home equity. When that supply is no longer available, as in now, that resilience is absent. Further, set the record straight. When energy costs rise, we show higher retail sales (higher gasoline costs) and higher GDP growth (inflation labeled falsely as growth). Ironically we claim resilience to higher energy costs, evident in economic strength, but that phony resilience is founded in falsified statistics from inadequately adjusted price inflation from higher energy costs. Read that statement twice. Try not to laugh.

Count on big accidents in the near future. Expect a nearly endless sequence of crises. They will become so regular that investors and citizens alike will grow accustomed to them. Crisis and scandal will be regarded as normal. In my humble opinion, we are there already. The only safe places to hide with money are in yellow gold (gold) and black gold (oil), along with their cousins (silver, natural gas, uranium). A greater whipsaw is likely to be inflicted in stocks capitalizing such commodities. All efforts to forestall the recession urged by a housing decline will benefit these stocks. The USFed might prevent a painful recession, but they will never prevent a serious bout with price inflation. Why? Because they will react to the recession in its early stages. However, since we in the United States import everything under the sun, a continually weak USDollar will keep prices high. Either businesses pass along higher costs into higher final prices, or else the USEconomy goes dark.

The most intriguing element to the housing debate points to housing prices. If a property goes unsold, sits on the market, languishes despite price cuts, wallows in the face of inducements (e.g. paid closing costs, cash under the table, phony projects funded for supposed repairs, subsidized interest rates, even a free in-ground pool), THEN HOW DO WE KNOW ITS VALUE & PRICE ???  The most frightening housing statistic is the inventory data. The June figure for existing housing inventory is up 3.8% to 6.8 months worth of supply. The inventory level for condominiums is at 8.0 months. This bloat represents the highest supply of unsold homes since 1997. In six months we will know what today’s prices are. In twelve months, we will know what prices then will be six months from now. The residential real estate market cannot reveal adequately its prices when a mountain of unsold properties lies in swollen supply.

If a trade war with China is necessary, complete with an entire regime of protectionist measures, then so be it. They might easily be imposed, in the interest of national security. The perverse “benefit” from trade war is that the US corporate non-financial sector finally wins some pricing power, finally can grant some wage increases, and finally can maintain profits. The unfortunate trend in the next few years will be the reversal of globalization. We will have much more regional integration, commerce, cooperation, and legal jurisdictions. The big rub on that trend in progress will be containing maverick loony tunes like Chavez in Venezuela, Morales in Bolivia, and Castro in Cuba. The United States will have trouble keeping order in its own back yard, since it will continue to be preoccupied by keeping the Saudis and their neighboring sheiks in power. In doing so we will protect the core and lose the entire fringe.