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Truth About the Economy Leaks Out Through Cracks in the Mainstream Narrative

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Last week, Jim Grant argued that the US manufacturing economy is flirting with recession, if it isn’t there already.  He said the horse of speculation is ahead of the cart of enterprise. In other words, even though asset prices such as the stock market and real estate are rising, creating the illusion of economic prosperity, the actual underlying economy is a mess.

This reflects the views of a few other people like Peter Schiff and Mike Maloney who have argued that the US has already entered a recession. But by-and-large, these are voices crying in the wilderness. For the most part, mainstream analysts and government officials have not acknowledged the underlying problems in the economy. Even so, every once in a while, the truth leaks out through cracks in the mainstream narrative.

CNBC recently published an article by Pento Portfolio Strategies president Michael Pento arguing that a recession has already arrived:

Pento 1 - copper

While investors have been focused on the perennial failed hope for a second half economic recovery, they have been missing the most salient point: the US most likely entered into a recession at the end of last quarter.”

Pento highlights five generally overlooked data-points to make his case.

  1. The plunging price of copper.
  2. The downward trending Baltic Dry Index. (Measures the demand to transport dry commodities overseas.)
  3. The narrowing spread between 2 and 10-year Treasury notes. (At the tightest level since November 2007.)
  4. Declining industrial production.
  5. Falling non-farm payroll. (In decline since October of last year.)

Pento 4 - industrial production

Pento sums it up this way:

The falling copper price, tumbling global trade, a flattening yield curve, weakening industrial production, and the rolling over of monthly job creation all point to an economy headed into contraction.”

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Many will argue that the US can’t be in a recession because we have not had two consecutive quarters of negative real GDP. During Q4 2015 and Q1 2016, real GDP posted 1.4% and 0.8% growth. But Pento dug deeper into the numbers:

When deflating nominal GDP by the core rate of Consumer Price Inflation (CPI) published by the BLS, you get real GDP of just 0.3% in Q4, and negative 0.8% during Q1. Therefore, the economy is dangerously close to a contractionary phase; and is already in one when averaging the prior two quarters (at minus 0.25% when adjusted by core inflation).”

This explains the Fed’s reluctance to raise interest rates. It can’t. And as Pento points out, it raises an even bigger question: what will the Fed do when it finally wakes up and faces the facts?

The Fed already has a bloated balance sheet in relation to GDP and only a few basis points to reduce borrowing costs before short-term rates hit zero percent. Therefore, there just isn’t much the Fed can do this time around. Therefore, this next recession could last even longer than the previous one.”

But Peter says that won’t stop the Fed from trying. In fact, he believes Janet Yellen and company will ultimately sacrifice the dollar on the altar of the stock market through another round of quantitative easing.

No matter what the Fed ends up doing, it seems clear we’re in for some rough economic times ahead.

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25 thoughts on “Truth About the Economy Leaks Out Through Cracks in the Mainstream Narrative

  1. William Smith says:

    I tend to agree….just wonder when the bottom is going to fall out in stock prices and real estate. they seem way over priced.

    • Michael says:

      They are way overpriced – but as the dollar loses the indexes will continue to go up from the amount of dollars the fed will create (lessening their value) the stock market may be a little bit of a safe haven compared to the dollar. Ultimately gold and silver stocks is where you will want to be.

      That is my understanding

    • Right William. Timing is always the mystery. Right now there are so many black swans out there,no one knows where the collapse will come from or where it will start but it will come.

    • John says:

      Sense when, that’s quite a profound observation, you should be nominated for the Nostradamus genius award.

  2. Hello Peter,

    Thank you for your listserv in this case, with these assessments of the US economy. For years I have been saying we’ve been in and have a pus economy. Infected wounds when swollen, look like they’ve ‘grown’ and that’s when in my analogy of the sick economy, likening that ‘growth’ and ‘heat’ to pus in an infected wound.

    Moreover, The Fed is more concerned about banks’ balance sheets with their derivative and swaps exposures that are ‘fair market valued’ and/or relying on the financial markets, their direction and levels to help those large (with much synthetic-financial engineering exposures) to stay relatively status quo. It’s for this reason as well as keeping the financial markets the main game or as Will Lyons, my F&M Keynes professor said of the financial ie the ‘stock’ market, “the only game in town” and action mostly by way of Fed enabled liquidity to give the banks’ balance sheets and those balance sheets full of their own synthetic financial products with some market access for trading and thus valuation purposes. but yes, all of this has been hiding 1. Germany’s taking over (using the Euro and the EU ‘free’ trade zone) of Europe and the associated cost of that, 2) all of the large exposures the large financial counterparties have to that going on in Europe and those financial institutions and the condition of those 3) and all of THAT tied up in the synthetics -swaps and derivatives embedded in much of the lending and other financial markets products to the institutional as well as well retail investor class. Even municipalities, trusts, endowments all of this synthetic instrument exposure all of which in some way looks to the financial markets for the valuations of those synthetics.

    It is a mess in its linkings and the fragilities of what’s now the content of the banks’ balance sheets and multilateralism such as indulging Germany’s (and its silent partner the Vatican looking for it’s 1,600 year slog of Holy Roman Empire when in this era using Germany as its contemporary secular state partner) takeover. GHWB’s era G8 agreement made us a signatory and a conspirator to this against most else of Europe. Britain cutting away from subsidizing the cost of Germany’s take over of Europe, and in effect bailing out Germany and ‘Core’ EU Members, is a right step for Britain.

    Early this morning while listening to Bloomberg radio, a Brit who was interviewed said that with the cheaper pound sterling and the potential for diminished profits and clout of the Service Engine that Britain has enjoyed, it would make sense to manufacture now in the UK.

    I agree with this. It will employ more people that the white collar services institutions, meanwhile the positive ripple effect of increasing production in the UK/GB in the long run will be better for that society.

  3. Walter says:

    Peter,
    If gold is so valuable, why are you selling yours to everyone.

    • Jared says:

      What kind of question is that? His business brokers gold for people. It’s not like he his personally selling his own stack. Wouldn’t you want to help other people get involved in something you strongly believe in? I’m sure the proceeds he gets from his business allow him to personally buy lots of it!

    • That would be a fair question if Peter Schiff was not in the business of making profits off transactions and not just as a fellow stacker and stockpiler of assets in anticipation of appreciation. Peter makes a marginal gain on every unit he sells and generates current income for him that he can use to pay his bills. There is nothing inconsistent with doing that if his own personal savings are in the form of precious metals. Even if he has a few thousand bucks in feral reserve notes stashed in his underwear drawer would not prove he was perpetrating a con job on us. But, if all Peter Schiff’s personal portfolio were in US Treasury bonds, notes, and bills, then, I’d say, hey, what’s going on here?

    • Richard says:

      Walter,
      If Mercedes Benz are so valuable, why is my local car dealer selling his to everyone?
      I don’t want to sound mean or nasty, but if you don’t know the difference between an investment and stock-in-trade, then perhaps you should avoid the former.

    • Pete says:

      Walter,

      I’m not Peter but I have to let you know that’s a stupid question. You need a remedial economics class taught by the Bernank. If that’s your “A” game question your a real Douche.

    • David says:

      @walter – Peter is a dealer. When you buy, he gets the gold from a wholesaler. i.e. It is NOT “his” gold.

    • AU / AG says:

      What a ignorant question. I’m sure Peter is not selling his gold… He is selling your gold that you are not purchasing. LOL

    • Peter Schiff says:

      …because its not my personal stash.

    • Charley Z says:

      This is dumber than a crumbly rock.
      Walter, you are an embarrassment to everybody else named Walter.
      Or you are LYAO.

      Walter says:
      June 24, 2016 at 2:47 pm

      Peter,
      If gold is so valuable, why are you selling yours to everyone.

    • goober says:

      He’s using the profits to acquire gold for himself.

    • Joe says:

      How would Schiff have enough cash to buy it all himself. Not like he is taking it from his personal safe and selling it to the highest bidder. The gold is mined and Peter distributes it to people with cash who want to buy it. Is that hard to understand? I am sure that if Peter had enough money, he would buy it all. Until then, he has to get a commission for providing it to people like yourself and when he makes enough commission, he can buy more for himself.

    • Firehose says:

      Walter, there is a type of business called retail distribution. You can have a retail distribution business and profit from each transaction standing between the mint and the retail purchaser. You can have such a business while at the same time you have your own personal store of gold and silver which is separate from said business. In fact you can increase your own personal store of gold and silver using the profits from said business. So you see, he is not selling his “own” gold and silver in his retail distribution business. The question is idiotic, not “cute”.

  4. Adam says:

    Thats a good question…. I bet Mr. Schiff will say that he is not selling his gold… but he is sourcing it from miners/producers/suppliers etc. and providing a service to the public – so that they can buy gold….. and why does these sellers need the money.. the answer would be to pay their employees/financial obligations and fund their costs of business etc.

  5. Adam says:

    Thats a good question…. I bet Mr. Schiff will say that he is not selling his gold… but he is sourcing it from miners/producers/suppliers etc. and providing a service to the public – so that they can buy gold….. and why do these sellers of gold need the money.. the answer would be to pay their employees/financial obligations and fund their costs of business etc.

  6. RalphB says:

    Walter,

    Why don’t you ask a fuel retailer why, if petroleum is so valuable, are you selling yours to everyone?

    It’s called retailing — You buy in large quantities at a lower price and sell in smaller quantities at a higher price. The retailer cannot afford to hold his inventory because it does not generate income unless sold or traded for some needed good or service.

    If gold appreciates it’s owners may profit — but only when they SELL or TRADE it for something they want more. Peter Schiff is not Uncle Scrooge — he sells it, he doesn’t swim in it.

    By the way, I know yours was a rhetorical question but it’s based on an economic premise that is too ignorant to let pass.

    • Or maybe Peter is acting as a broker, and doesn’t actually sell the gold out of his own inventory but merely facilitates the transaction. That’s how I would try to do it. And then I’d use my broker fee income to make my own stash of gold and silver, using both hands.

      • RalphB says:

        Right, James, the same basic principle. For example, the owner of a brand name affiliated gas station doesn’t always own the fuel in his tanks but rather, depending on his contract with the refiner, may be selling on consignment and receiving a commission.

  7. mike says:

    Hi Peter, love the info. but a major concern i have is trusting government.
    locally they commit felony on contract, deed, conveyance, payment, property and property tax law, in Michigan, they break all related laws, then they want to take guns, talk about Treason or terrorism.!!!! steel from the people directly then better steel the guns too so they cant fight back .
    how do we know there not minting zink or some other crap coin and calling it gold and silver , would not put it past them.!!!

  8. Charley Z says:

    If, as Peter says, they ultimately sacrifice the dollar, it will be good for American exporters.. I have friends who run a high tech company in which they build and sell scientific instruments all over the world. They are struggling because of the high dollar.

    An ideal situation might be for the dollar to depreciate steadily (to be sacrificed) just as China is doing with their yuan. A lower dollar would mean higher prices for all imported goods, including oil. And because of the higher dollar price of oil, we would have incentive to speed up alternate energy production and natural gas production. That means more jobs. More American jobs with a living wage.

  9. HYMN says:

    I believe Jim Grant and Michael Pento tell it exactly as it is and explain why very clearly. Peter Schiff goes as far as to tell this directions end game. These guys are smarter than a lot, this stuff is their lifes work. It would be prudent to purchase some gold bullion, while there is still some to be had.

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