first majestic silver

Three Big Lies

June 22, 2005

The financial press & media has promoted three major league gargantuan lies. The lies support the established financial sector. They pertain to bonds, economic growth, and oil supply. The time has come to stand on the rooftops and shout "LIAR LIAR PANTS ON FIRE." Be sure to know that the US population is subjected to hundreds of repeated lies, bold lies. Three big lies stand out as current critical underpinning pillars of propaganda.

  1. Strong foreign demand exists to purchase US Treasury Bonds
  2. The US Economy is expanding at over a 3.5% growth rate
  3. Speculators are driving up the crude oil price

The United States is no longer a place where the truth is held dear, where truth is of paramount importance. In fact, truth has become a tactical tool to deceive and control the masses in the new age of Orwell we find ourselves lodged within. Information is a weapon. The above are major lies, made worse due to their critical importance. If the public comes to learn that foreign central banks have almost lost faith in our government bonds, then both the stock & bond markets will falter, and the housing market will enter a decline. If the economy is in a stall at 2% growth or less, not the robust expansion we are told, then US Federal Reserve tightening is highly likely to lead to accidents, not the least of which is a recession. If crude suffers from severe supply problems, then new capital is urgently required to invest in new production to bring oil to market. Energy producers need their stocks at higher values in order to raise critical capital. The economies need oil like a car needs radiator fluid, like a human body needs blood (and water). The age of disinformation has gone over the edge in boldness. The system is officially at risk from lies, spin, promotional information, vested interest forecasts, political ambition, and the motive to defuse trade war. The truth has sadly become an expedient. Has dishonesty become institutionalized within the USA culture, at least the financial sector? One must wonder.

FOREIGN DEMAND PLUNGES FOR US TREASURY BONDS

This development has been covered in the gold community and bear camps. The TIC Treasury tally of foreign central bank holdings of USTBonds tells a far different story from what we hear repeatedly on CNBC and from supposed experts. Bill Siedman cited strong demand from foreign central banks on a CNBC interview earlier in June. This is a bold total lie, joined by numerous other people. They either speak it in ignorance or with full knowledge of its tactical importance to maintain a false front to the public. Are they misinformed or liars? Interviewed guests on financial networks talk of the risk if Asian central banks withdraw their credit support for USTBonds. They not only own and buy regularly our USGovt bonds called Treasurys, but our mortgage bonds called Agencys. For three years, Asia has underpinned the entire housing mortgage finance industry as they used to purchase 1/3 of all mortgage bonds. Changes are coming. See for yourself. In the first three months, Japan holds $10 billion less than the amount at end 2004. China holds less than $1 billion more. The Caribbean has shot up by almost double. England has shot up by over 20%. These two are central locations for hedge funds and shady agencies operating as proxies for the US banks. If the USFed wished to conceal illicit bond purchases, take a guess where the holdings would be recorded? Probably the Caribbean, where the opposite of disclosure is the advertised practice.

Could early stages of fanning trade war be the motive also? Methinks yes. Asia (principally Japan and China) might be flexing their muscles, but for two wholly different reasons. Japan might be fed up with being a controlled puppet, doing the US bidding for years on end. My description of the Bank of Japan has been "Federal Reserve Far East Outpost" on a few occasions. Strange reports float regarding enforcement of control of the BOJ by US officials using strongarm tactics extended back a few decades. Is Japan involved with cooperation, collusion, or coercion? China, on the other hand, resents pressure on them to remove their yuan currency peg (8.3 per US$), blame for huge trade gaps with the USA and job loss within the USA. My view is that trade war is ratcheting up inevitably and regrettably, precisely as my Hat Trick Letter has forecasted, outlined, and explained in detail for the last year. The drumbeat of trade protection, trade tariffs, trade quotas, leading to trade war are unmistakable. Dockworker strikes and blockage are just over the horizon, maybe even WalMart pickets.

Gold requires a Treasury bond bear market, since they compete as a safe haven asset. An associated housing decline from higher mortgage rates would surely hurt the US Economy. However, investment flows into gold are almost guaranteed, as crises mount.

US ECONOMIC GROWTH RELIES UPON ABSURD DEFLATOR

We all question USGovt official statistics on the economy. We understand easily that price inflation is far more than the CPI indicates in that Constant Price Index. We understand easily that the jobless rate is nothing more than the percentage of former workers who receive state jobless insurance benefits, with the discouraged unemployed not counted. Focus here is on the GDP, which stands for Gross Domestic Product, or is it the Gross Data Pollution? My argument is simple. The CPI overlooks a raft of rising categories with rising prices, like insurance, local taxes, college tuition, health care, cable TV and telephone taxes. The real CPI is perhaps 3% to 4% higher than the reported CPI. The big lie is couched within an obscure GDP Deflator. What the heck is that anyway?

Well, it goes like this. The economic total of goods & services in final transactions (but not inventory), which is a decent measure of economic activity, is tallied by the GDP. The calculation is more complicated, as GDP subtracts imports in order to attain a truly domestic reading. Step back a moment. If the price of everything (costs, incomes, prices) rises by exactly 5% in a given year, and we have absolutely no growth from business expansion, job hiring, and immigration, then the GDP will rise by exactly that 5%, but "real economic growth" would be zero. The USGovt, through its intrepid agency analysts, is supposed to remove price inflation from the nominal (raw untreated) numbers in order to arrive at an accurate measure of real growth. They are tasked with removing price inflation from the numbers. My contention has been that most of US Economic growth, as measured by the GDP, is price inflation, particularly in energy and material costs. At least half of the 3.5% rise in GDP is basic price inflation, called growth. We pay more for gasoline at the pumps, electricity and heating for our homes, and shipping. Businesses pay more for construction materials, industrial metals, and scrap items of all kinds. Everyone pays more for food. As the USGovt removes too small a portion of the increase in nominal GDP growth, it calls what remains robust growth, evidence of strength and resilience. It is a big lie.

The official technique for removing the price inflation error is to apply the GDP Deflator. But that deflator used is even lower than even the absurd CPI. See for yourself in the chart below, where the claim is made that prices have risen systemically by 6.3% in over two years, nine quarters to be exact. This is an absurdity. Most claimed economic growth is price inflation!!!

If we see a pronounced relaxation in energy prices, it will ironically show up as a serious decline in the GDP and economic growth. This is a motive to avoid conservation initiatives, since it would foster a perceived stall or recession. Worse still, tightening interest rates by the USFed, when slow growth or a stall is more the reality, this raises the risk of accidents and triggered recession from policy decisions alone.

Gold desperately requires price inflation to be properly calculated. More importantly, gold requires wage inflation in order to have the households and business ABLE to pay higher prices. Gold needs bond prices to reflect price rises and value erosion. The complication in the last two to three years has been the absence of pricing power, wage growth, and the remainder of the inflation events to unfold. Gold has struggled as a result. Gold competes with US Treasury Bonds. In no way do long-term bond yields properly reward and offset the value erosion from rising prices. Given the nature of the cost inflation without wage growth and imported price pressure from Asia, this is anything but simple. It should be noted that the gold community has yet, in my opinion, to properly analyze how price inflation (rising prices) is evident on the cost side, but price deflation (falling prices) is evident on the finished product and wage side. All inflation effects are not the same. In fact, if most new money goes to debt, that is highly deflationary. As trade protection policies are applied in stepwise fashion, look for widespread price inflation where prices had been falling. The borders will not be closed, but the gateways will not be open as wide. The national export of monetary inflation by the USA will be slowed.

The Hat Trick Letter studies numerous other statistics and measures, which seem to confirm a slowing US Economy, not a robust one. Here is a list of data indexes which run contrary to claimed economic growth through GDP distorted statistics.

  • Leading Economic Index
  • Jobless claims on a weekly basis
  • The controversial Birth-Death model in the Jobs Report
  • Challenger Gray & Christmas on large site layoffs
  • ISM (Institute for Supply Mgmt)
  • Chicago PMI (Purchasing Manager Index)
  • Philly Fed report on regional manufacturing activity

My contention is that the core economy is deteriorating amidst a sick economy highly dependent upon the housing bubble. The highly controversial Birth-Death model has produced far more jobs in the last couple months than the Bureau of Labor Statistics even claim were created.

CRUDE OIL SUPPLY IN DECLINE ON NUMEROUS FRONTS

Speculators, shmeculators!!! Many are the lies behind the energy market hubbub, controversy, geology, politics, and war. Yes, war. The energy arena has quietly morphed into a war zone, the foundation for what might degrade into a world war over energy fields. Later comes the wars over water (see the Iraqi versus Turkey dispute at its border). We may never hear the full story behind the bid and win for Unocal, owner of prized little properties in Asia. If China outbid Chevron for the acquisition, what can be said about backroom threats and agreements? This week, China's National Offshore Oil Corporation raised the Chevron bid, from $17 billion to $20 billion. Most Unocal properties are off the Asian coast. Ironically, if the US firm wins the prize, expect consolidation layoffs in typical US style. If China prevails, expect expansion of jobs. The juggernaut that is the United States relies on job layoffs for growth, and job outsourcing for growth. Hmmm, go figure.

The Hat Trick Letter attempts to debunk the lies, since they are numerous when one examines the energy market with more scrutiny than the brief sound bites and inadequate two-minute clips on the news. Good research seems to be discredited easily by flimsy arguments which are more spin than factual. Some research serves a vested interest. Other research is simply commissioned by government agencies for to drive down the oil price. If markets were more fair, a disclaimer would come with every so-called research report. For instance, "Goldman Sachs holds crude oil contracts and might at any time switch to a net short position upon massive contract selling as the public is duped." Or, "Bear in mind that International Energy Agency reports can be dictated according to political purpose in blatant attempts to control the oil market, since it is a government agency wholly funded by the USGovt." Or, "OPEC comments reflect their increasing inability to produce oil from existing drained and overtaxed oil fields, and issue such statements only after considerable political pressure."

Oil production output is in decline in every single zone of the world. Iraq has no more output than before the fall of Baghdad. Saudi Arabia pumps one barrel of water for every two barrels of oil, and has only sour crude in its arsenal of spare capacity. The Saudis rely upon fourth level and fifth level, if not sixth level methods to extract oil. Translation, they use utterly desperate and extremely costly methods to extract oil by increasing pressure in 40-yr old oil fields. Iran spends a reported $2 billion per day in natural gas injections into their aging overburdened oil fields, in order to maintain the necessary pressure to pump to the surface. Venezuela output is 20% less than before the goomba Marxists came to power, put cronies in management posts, and turned their backs on investment and maintenance. The Nigerian oil fields are the object of both labor disputes and bandit raids, having led to output declines. The North Sea (between England and Norway) has been in decline for years. The Gulf of Mexico has struggled mightily with vast investment, but little to show for it, as output has declined. Alaska is in a slow output decline, long past its prime. Mexico is way down in oil output, long past its prime. Australia is in output decline, long past its prime. And then there is Russia, whose story reads like a mafia story, a soap opera, better yet a Greek tragedy (in the words of Economides) starring Khordorkovsky. In 2003 Russia surpassed Saudi Arabia to supplant them as the top oil producing nation. No more, as foreign partner distrust hinders investment, as confusion in leadership has distracted management on decisions, as properties remain locked in dispute. Russian oil output has recently fallen into decline. Putin might want not only ownership of the national oil treasures (to finance military buildup in counter to USA encirclement) but also a certain higher oil price from lower supply.

OPEC officials have begun to act more like confusing deceptive central bankers. OPEC is like a nation unto itself, with reported trade deficits listed like a nation, with officials seeking a coordinated policy with statements. They have learned to develop FedSpeak as a new language. They also employ the Fed tactic of obfuscation. Saudi oil minister Al Naimi talks about oil refineries being the bounding factor in the oil price, but that is a truly irrelevant factor in balancing supply & demand for the oil price. They attempt to control the oil market price with talk of announced increases in Saudi production, with announced increases in member nation quotas, all pretty much nonsense. OPEC officials should be ignored, as they sell oil. They should be ignored, as they require US Military protection for their corrupt royal regimes to remain in power. They should be ignored, as they will toe the line in what USGovt leaders require them to say. Also, be sure to ignore claims on OPEC member nation oil reserves, since in 1985 they all jumped by roughly 100% without a single oil deposit discovery. Nothing but lies. It is a tough call who is more in the pocket of USGovt leaders, the Bank of Japan on banking matters, or the OPEC leaders on crude oil matters. OPEC has lost credibility. Such is the motive for the new Shanghai Coop Group, a new competing consortium whose nucleus is China, Russia, India, former Soviet Republics, and Iran. Expect the Shanghai Coop NOT to take marching orders from Washington DC, NOR to use the USDollar for its transactions in the sale of oil, natural gas, copper, and even cotton.

China and India are growing, on the move, building modern economies, enjoying modern improvements to lifestyle. They require more and more crude oil, natural gas, and a raft of material supplies. Forecasts call for a needed 2.3 million barrels per day in additional oil output by the 4Q2005, only four months away. Where will it come from? Nobody knows. Probably not from new production. Perhaps from more sour crude hitting the market. For those who are unfamiliar, sour crude has a toxic sulfur content, deadly to humans if ingested, disruptive to refineries for the production of gasoline. Where will it come from? My best guess is from some active conservation initiatives, from some less vacationing, from some less aggressive summertime temperature settings on air conditioners, from some less comfortable wintertime temperature settings in homes and businesses. Worse, the rich will tend not to cut back in energy usage, while the poor will definitely cut back and suffer in home comfort and actual loss of jobs.

Much more can be stated in the oil debate, but the above is enough for here. Respected institutions are in direct opposition to notable experts on the oil debate. To push speculators into the picture is to obscure the complexity of the energy market. Perhaps that is the only thing that makes sense to simpletons, of which the United States is legion. Joe Sixpack and Bubba are very numerous, and they don't often arrive on the scene with thinking caps.

RISKS FROM THE BIG LIES

Bonds are kept levitated by USGovt extraordinary measures, called monetization. The risk is for interest rates to rise, hurting bonds, hurting the economy, hurting household access to cash. Such will provide a fertile favorite environment for gold investors. Trade war changes everything, including Asian support and recycle into US Treasurys. They will gradually form a new Asian credit market designed and devoted to fund and promote Asian growth, not US waste, consumerism, household debts, oversized homes, oversized cars, creeping social medicine (Medicare), and even foreign wars.

The US Economy is stuck in a stall mode, unable to create jobs. The statistics are easily doctored to deceive the public into believing robust growth is evident, when the only robust sector is the much ballyhooed real estate sector. As the USFed hikes interest rates, then run the risk of causing a recession, fully indicated and forecasted by the coming inverted Treasury yield curve. The 2-yr TBill yield is 3.70% while the 10-yr TNote yield is 4.10% today. Additional hikes would by decree send the yield curve into inversion. Greenspan denies the importance of this time-honored signal, but then again, Greenspan has become a banking politician after shrugging off any credible claim as an economic analyst.

The crude oil price is driven even more from stalled world production output than it is from rising demand. To be sure, China and India are emerging powerhouses, with a middle class population size which will surely exceed the entire US population and entire European Union population. Welcome to Hubbert's Peak. Before the outright decline in world oil production comes the stall and flatline in world oil production. We are here. In 2004, big oil firms collectively spent $6 billion on oil discovery initiatives, and found a measly $3 billion in oil deposits. Exxon Mobil spends more on stock buybacks ($3.5 billion) than they do on production budgets ($3.1 billion). Energy will lead the commodity bull market into a profitable hysteria for its investors.

 

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 23 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com.

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website http://www.goldenjackass.com that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

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