Now THAT'S a headline!
Here's the lead in from the story:
"U.S. productivity data due out on Tuesday could shatter the belief in a 'new paradigm' economy of high growth and low inflation, triggering a stock market crash, a leading investment bank has predicted."
We know it must be important - it's right up there on the front page of The Drudge Report. The web page on Yahoo where the story is placed is named "markets_crash.html". Oh dear!
Who would have thought that the U.S. government would EVER release any economic statistics which had the potential to "shatter" the belief in high growth and low inflation? Well, the investment bank Dresdner Kleinwort Wasserstein has now given them fair warning. "Better not announce this one, boys, or all hell is liable to break loose."
The spokesman for the bank quoted in the story was apparently not available to comment on how soon he expects the "crash" to take place.
As Privateer subscribers know, the "new paradigm" U.S. economy of high "growth" with low "inflation" has ALWAYS been a mirage, even when the markets were lapping it all up throughout the late 1990s. What actually happened was low "growth" and VERY high INFLATION. That is, if one measures inflation the way it SHOULD be measured, by looking at the increase in the stock of money.
What has been known for years is that the growth in the stock of money has far outstripped any measure of economic "growth" for at least the past decade. But what the economic powers that be have chosen to do is to "measure" inflation by means of following some carefully-selected prices of real goods and services.
Inflation is supposed to be "rising prices". But WHICH "rising prices". No one considered for a moment that the blast off in STOCK prices might be in any way indicative of "inflation". Rising prices on the stock market "inflationary". Don't be ridiculous!
And now, according to the investment bank, the U.S. and the world is about to awaken to the realisation that all that has "grown" through this U.S. economic "miracle" is the huge pile of paper which is U.S. Dollars and all the various financial "assets" denominated in U.S. Dollars. Well, better late than never.
It will, however, be extremely interesting to see if there is any type of reply to this warning - either from Wall Street, from other investment banks, or for that matter from the Bush Administration and/or the Fed. It will be even more interesting to see if the productivity data due out on Tuesday is in any way "doctored" to discredit this warning.
One thing is certain. The Bush Administration and the Fed have been laboring mightily throughout the year to make sure that the CRASH which has already happened on the Nasdaq does NOT spread to "Wall Street proper". They are still working at it, but the job is not getting any easier, especially with "loose cannons" like this one starting to go off.
The term "bubble" is a useful one in financial analysis, referring as it does to any market which has seen prices blown up to disproportionate levels. But, in this context, what is the opposite of a "bubble"? We don't know of a convenient word to use, but if one wants to describe the present $US Gold "price", that is what we are seeing. How about an "elbbub"? Kinda catchy - don't you think?
A "bubble" has nowhere to go but DOWN. An "elbbub" has nowhere to go but UP.
Ah Gold - that pre-eminent "inflation indicator" - duly dead in the water this week with a rise since July 27 of a princely 50 cents in $US terms. One thing that we are all damn sure is NOT "growing" is the Gold price.
If we cast our minds back to the utterances from Fed governors and other scions of the investment pantheon over the past year, we will quickly lose track of the number of times we have heard variations on this theme:
"There is NO inflation - look at the GOLD price."
The Gold "price" is doing precisely nothing. And with lease rates at their lows for the year and total open interest on the Comex threatening to go BELOW 100000 contracts (it hasn't been that low in at least the past decade), it is hard to find ANY activity going on with Gold at all.
What HAS been going on is that investors inside and outside the U.S. are clinging with unblinking tenacity to an illusion. They still want to believe that the U.S. economy has invented a brand new way of growing. They still want to believe that all that is necessary is to borrow more and we will all "grow" more. They still refuse to know that the only thing that is growing - inexorably - is their DEBTS.
We don't know whether this facade will crack with the release of the "productivity numbers" on August 7, or whether it will be the release of some other statistic that does it, or whether the capacity of illusion will simply prove unequal to the situation. We do know that the present situation is NOT sustainable.
If Gold was going to be hammered back towards its ulitmate support levels around the low $US 250s, it would almost certainly have happened by now. If the facade of U.S. economic "growth" is about to be ripped aside, then Gold has literally nowhere to go but up
Yes, it takes patience. Illusions die hard - always. But console yourself by realising that right now, physical Gold is the safest investment there is. And it will get a lot safer once the illusion of economic prosperity through borrowing is finally cracked, however that crack ultimately takes place.
