Friday, November 2, 2007

What If "The Fed Said", And Nobody Listened?

Has Wall Street finally awoken to the smell of burning toast? Have we reached the beginning of the end, or the end of the beginning, of the destruction of the US Economy? Or has it already been destroyed, and it's being kept a secret?

The Fed dutifully doles out it's candy [rate cut] on Halloween and the party on Wall Street continues. But wait, that fortune on the Bazooka Joe Comic is not very promising. The Fed says they may be out of candy, and besides, they think you've had enough: "The risks of Inflation and the risks of Recession are in balance, our job is finished." The party is over...

So the Fed coughs up a 25 point hairball on Halloween and then "injects" $41 BILLION dollars into the banking system Thursday to soothe resilient credit jitters. LOL! The Fed pumped those BILLIONS into the banking system because investors quickly saw through the fallacy of Wednesday's GDP report and saw the Economy's future written in blood on the wall.

Yesterday (October 31st), as the dollar fell to new record lows and oil and gold prices surged to new highs, Wall Street remained fixated on wholly meaningless government data that managed to report the lowest inflation in the last half century. These bizarre numbers were integral in allowing the Commerce Department to report 3.9% annualized GDP growth in the third quarter, which was heralded by the bulls as evidence that a resilient U.S. economy had shrugged off the problems in the housing and mortgage markets. However, the government’s ability to make “economic growth” magically appear is based purely on statistical finesse.

To arrive at this rate, the government had to assume that inflation during the quarter ran at an annualized rate of .8% (that’s less than 1%). That is the lowest rate of inflation used to calculate U.S. GDP since the Eisenhower administration. With oil priced at almost $100 per barrel, gold futures trading over $800 per ounce, the dollar hitting record lows, and the Fed printing money like it is going out of style, the government has the nerve to claim that current inflation is the lowest it has been in half a century. Unbelievable!

Just in case there is some confusion, the government adjusts nominal GDP gains using the GDP deflator, which represents the inflation rate during the time period being measured. This is done to strip inflation out of the GDP calculation so that only real growth gets counted: not nominal gains that result purely from inflation.

The consensus estimate for 3rd quarter GDP growth was 3.4%. The reason we beat that number was that the government adjusted the nominal 4.7% gain by a mere .8%. Had the government assumed a higher rate of inflation, say 2.6% (identical to the rate used to deflate second quarter GDP,) the 3rd quarter gain would have been only 2.1%, well shy of the consensus forecast. My guess is that inflation is actually running at an annualized rate closer to 10%. Therefore using a more honest deflator, the U.S. economy is actually contracting, which would explain the recent anecdotal evidence provided by various economic polls, voter dissatisfaction and consumer sentiment numbers. In fact, if one simply measures U.S. GDP using gold or any other currency, it is clear that we are already in a recession.

-- Peter Schiff, Euro Pacific Capital, Inc.

Wall Street Plunges on Fears That Interest Rate Cuts Will End Even As Economy Is Weakening
NEW YORK (AP) -- Wall Street plunged Thursday, pulling the Dow Jones industrial average down more than 360 points as investors found themselves confronted by two uncomfortable prospects: an end to interest rate cuts and a slowing economy.

Mindful of a warning from the Federal Reserve Wednesday about inflation, the market nervously watched the price of oil, which passed $96 a barrel overnight for the first time before dipping on profit-taking. The Fed, which cut interest rates a quarter point, said in a statement that inflation remained a concern, and oil's ascent to another record raised the possibility not only that the Fed might stop cutting rates, but that it might even consider raising them if inflation accelerates.

Meanwhile, Wall Street also had to contend with concerns about a slowing economy. A report from the Commerce Department indicated consumers scaled back their spending in September as worries mounted about a worsening housing market and further credit market turmoil. And a trade group reported that manufacturing in the U.S. grew in October at the weakest pace since March.

The combination of factors led investors to pull back sharply from Wednesday's rally, in which the Dow climbed 137 points after the Fed said the economy had weathered the summer's credit crisis.

With the market growing pessimistic about the economy, the Labor Department's report on October jobs creation, scheduled to be released Friday morning, will be taking on even more importance than it usually has. The data is expected to show unemployment remained steady in October, with payroll growth of 85,000 new jobs, compared with 110,000 in September.

LOOOOOOOOOL! "The Fed said." The great and all powerful Oz has spoken. Give me a break. Go on believing the Fed and when you wake up, it won't be in Oz baby. The Fed, The US Treasury Dept., The White House, CNBC, The Labor Dept. name it, they all lie like cheap rugs in a trailer park. Don't believe ANYTHING the clowns spew. Buy Gold, Buy Silver, and start stocking up on canned goods and ammunition.

Gold and Silver both remained resolute in the face of yesterday's Whoosh on Wall Street. The carnage carried over to Asia overnight, and Gold and Silver held tough over there as well. Quite the opposite reaction as to what we saw back in August as the credit crisis began to erupt around the globe. The speculators in Gold and Silver fueled by the Yen carry trade may have finally been driven from the Precious Metals markets. Buyers the past 7 weeks are, have been, and will continue to be "investors" looking to buy "wealth insurance" to protect the value of their matter the currency. It is doubtful we will see a "whoosh" in the metals anytime soon. Buy the dips from here until the first week of December. $800+ Gold and $16 Silver are closer than you might think.

Gold has defended support around 785 admirably. Silver briefly lost 14 yesterday morning, but for all intents and purposes defended support around 14.10/15 with vigor. All the shorts "under" these markets actually may put a floor under them. As each day passes these shorts become more anxious about there losses and are looking to cover at any opportunity to "duck and cover". Nothing that has occurred this week changes ANYTHING with regards to where the Precious Metals are headed. The Moon is still up there, and that's where we are headed.

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