By Economist Peter Schiff                                                                                     

In recent months, investors have been unjustly chastised for their lack of consistency. In truth, they have an unblemished record of drawing the wrong conclusions. Last week's 2nd quarter GDP report provides the freshest evidence of market cluelessness.

In its report, the Commerce Department stunned economy watchers by showing a 3.3% annualized increase in 2nd Quarter GDP. The robust growth apparently wrong-footed those expecting further recessionary signals, lent further strength to the current dollar rally, and encouraged previously cautious investors to take another look at U.S. stocks. The strong number also bolstered claims by the Bush administration and the McCain campaign that a recession is primarily a psychological phenomenon. These conclusions would be at least quasi-logical if they were not based on a complete misreading of the report.

Without raising an eyebrow on Wall Street or in the press, the GDP deflator, used in the report to downwardly adjust GDP to account for inflation, was shown at just 1.2% annualized.... the lowest deflator in ten years. In other words, to arrive at a 3.3% growth rate, the government assumed that inflation is running at a ten-year low! In contrast, the latest reading on consumer prices (CPI) in the second quarter shows year-on-year inflation running at a 5.6% rate, a seventeen-year high! In fact, for the second quarter, the same time period measured by the GDP deflator, prices actually rose at an even faster pace of 8.0% annualized. How can it be that inflation is simultaneously running at a seventeen-year high and a ten-year low? Welcome to the Alice in Wonderland world of government statistics.

You would think that this statistical bombshell would raise the hackles of the press. Think again. Not only did the hawk-eyed media completely miss the story last week, they have totally ignored our subsequent attempts to show them the light (with the exception of the N.Y. Post's John Crudele - who has long suspected a ruse). Although none of the reporters we spoke with could explain why inflation could run at a 10 year low and a 17 year high at the same time, they did not deem the anomaly sufficiently noteworthy. Having been ignored by reporters, I then tried the opinion pages. Unfortunately the piece that we prepared on the subject was rejected this week by all the leading national newspapers.

Reporter Michael Mandel did note the head scratcher on a Businessweek blog posting last Friday. As a partial explanation he pointed out the CPI measures the prices of what we buy, and the GDP deflator measures the prices of what we make. Although this certainly sheds some light, it offers no real explanation. Excluding imports and exports, both measures are determined by the same forces, and should move in relative harmony. If anything, the costs of what we make should be outpacing the costs of what we buy. Producer prices are now rising faster than consumer prices (the latest annual reading of the Producer Price Index 'PPI' being 13.2% annualized from the 2nd quarter), which helps explain why corporate profits have fallen drastically. In addition, from July 2007 through July 2008 (the latest data available) import and export prices have risen 21.6% and 10.2% respectively. In other words, no matter what numbers you use, the 1.2% GDP deflator simply doesn't add up.

I have often argued that government statics are dubious, particularly those related to inflation. But here is an example where they are not even consistent! If we simply use second quarter CPI to adjust nominal second quarter GDP for inflation, the number would have registered a 3.5% annualized decline.

Such horrific GDP numbers are much more consistent with the anecdotal recession evidence that Wall Street and Washington want us to ignore (confirmed by today's weak jobs report which included the unemployment rate spiking to 6.1%, a five-year high). However, with Orwellian propaganda, our government fabricates GDP growth out of thin air without the smoke and mirrors traditionally required for such an elaborate illusion. All that is required is to put out ludicrous statistics and hope no one notices. Given that this strategy appears to be working, expect future government numbers to get even more outrageous. After all, if they can get away with this, they can likely get away with anything.

Investors relying on this data and reacting to the global economic slowdown by buying dollars and other U.S. based assets while selling gold, commodities, and foreign assets, are jumping out of the frying pan right into the fire. My guess is that it will not be much longer before they feel the heat.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book "Crash Proof: How to Profit from the Coming Economic Collapse." 

 

(Sep 18, 2007)- "If the dollar loses value too quickly, it could wreak havoc on the economy and financial markets - driving up interest rates and inflation and slashing Americans' purchasing power" -Peter Schiff 

 

(Sep 19, 2007)- "People keep talking about Fed bailouts as if there is no cost. All the Fed can do is create new dollars. What that does is diminish the value of all the dollars everybody already has. They try to socialize the losses among all the holders of dollars" -Peter Schiff

 

Sep 2 - Kids may be worried about homework, teachers and that pesky bully this school year. But parents? They're leery about lunches. With food prices rising and packages shrinking, parents are wondering how they'll stretch their food budgets. Children are going to get an unwitting lesson in economics, analysts say, as parents change their food-buying habits to keep costs down. Some kids will eat more hot lunches this year. Some will carry baggies full of snacks like home-packed chips and crackers rather than prepackaged ones. This year's lunchroom will be less about convenience and more about the bottom line, said Marcia Mogelonsky, senior research analyst with Mintel International in Chicago. Parents will be shopping for deals but still wanting all the basics - fruits, veggies, proteins and fun things like chips and cookies. It won't be easy............................
 
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(Aug 16, 2007)- "The housing bubble has burst. Prices are going to collapse and sales are going to fall through the floor." -Peter Schiff 

 

Sep 5 -- A record 1.2 million homes were in foreclosure during the second quarter of 2008. That represents 2.8% of all outstanding loans, up from 1.4% of all loans during the same period a year ago, according to a report released Friday by the Mortgage Bankers Association (MBA).
And 490,000 of the 45 million home mortgages serviced by MBA members began new foreclosure proceedings. That's up 9% from the 448,000 starts recorded in the previous quarter, and marked the seventh straight quarter that foreclosure starts increased........................

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(Sep 21, 2007)- "With the Federal Funds Rate cut, the Fed revealed that it has no interest in defending the dollar or containing inflation. This kind of irresponsibility is all gold needs to move higher from its current levels unless the Fed somehow finds its backbone within a year or two, then gold has a good chance to take out its inflation-adjusted high of nearly $2,000 per ounce within this decade." -Peter Schiff

 

 

(July 31, 2007)- "It's going to soon hit $90 and go north of $100 next year. We should see $150 to $200 oil in the next two to three years because of the drop in the dollar.'' -Peter Schiff