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The Daily Reckoning | Friday, May 6, 2011 New York, New York... A helluva town with some strange conversations... An in-depth interview with Shadowstats' John Williams... Plus, Bill Bonner on the rise of online shoppers and the markets' anticipation of more quantitative easing... ------------------------------------------------------- Total Cash Growth in Just Four Months? Due to a hidden "multiplier effect" in the markets, you could grow your cash every four months. Take a look at this briefing for all the details. But you must hurry. Something big is about to happen on Saturday, May 21... Conversations in New York Musings on the Markets from the City that Never Sleeps Joel Bowman Reporting from Manhattan, New York... If there is a city better suited to watching the strange goings on of everyday life than this one, we haven't found it yet. We spent a few minutes on a Midtown street corner catching snippets of passing conversations earlier this morning. "I've worked too long and hard to have this fall over now. If he doesn't get it together by..." (An aging man with an ornately carved walking cane who may or may not be involved in organized crime.) "He's not even aware of the signals he's sending her, of what he's doing. I want to be able to say something, but..." (A twenty-something woman who may or may not be about to ruin a good friendship.) "I F#&king own Hollywood! You tell them to talk to me. Only me. I F#&King own that town!" (A crazed lunatic in patchy, torn clothing who may or may not own Hollywood.) Strange goings on, indeed. It is certainly true that nothing in New York is done by half measures. Extreme dating. Extreme riches. Extreme professions. And, further down the island, extremely extreme markets. Last we checked, the major indexes were down a half and one percent for the week. Not much excitement there. But they're up more than 6.5% for the year. And, they've about doubled since their March '09 lows. That's pretty extreme. In the commodity markets, too, there has been plenty of motion sickness to go around. Your editor has been carefully trying to avoid the news for the past few days, so you can imagine our amazement at discovering today that oil had shed $15 per barrel. Less than $100 today, a barrel of the world's grease was going for over $112 less than a week ago. Silver is down by as much too. We left it at near $50 last week. Today an ounce changes hands for thirty-five and change. Gold is swinging $20, $30 per day. Looking like it was going to charge through $1,600 last week, it's now slid well into the $1,400s. Is this the end of a ten-year, epic bull market for the anti-dollar investment? Or is it time to "back the truck up," as Vancouverfavorite, Rick Rule, might say? "Who knows?" is our short answer. A friend we had dinner with earlier in the week offered as good of an explanation for uncertainty as we've heard. "You can learn to trade markets, but you can't learn to trade politicians. In truth, it'd probably be for the best if we just traded them all in." Volatility, as we are now seeing, is the ugly lovechild of well- intentioned meddling and do-gooder policy. It expresses itself in bubbles, busts and then, more bubbles. Inflation...deflation...then Fed-conjured reflation. In such cyclonic, unpredictable markets, it's difficult to know what's real and what's make-believe. Perhaps this time next week all will be reversed; silver, gold and crude back on track to higher highs; and the dollar descending ever-quicker toward fiat currency purgatory. We'll see. In the meantime, please enjoy a slightly longer-than-usual feature column: an interview with Shadowstats founder, John Williams. We'll leave you to it, below... URGENT NEWS... Breakthrough: New "Magic Bullet" Technology Could Zap Deadly Cancer Cells at Will In the latest clinical trial, over 85% of cancer patients achieved complete or partial remissions of their symptoms using the "magic bullet" technology. This is a rare opportunity to get in early on a little-known Biotech Company that's making medical history... Click here for full details. The Daily Reckoning Presents Hyperinflation and Double-Dip Recession Ahead The Casey Research Team "The US is really in the worst condition of any major economy or country in the world," says ShadowStats Editor John Williams. In the following interview with The Gold Report, John concludes the nation is in the midst of a multiple-dip recession and headed for hyperinflation. The Gold Report: Standard & Poor's (S&P) has given a warning to the US government that it may downgrade its rating by 2013 if nothing is done to address the debt and deficit. What's the real impact of this announcement? John Williams: S&P is noting the US government's long-range fiscal problems. Generally, you'll find that the accounting for unfunded liabilities for Social Security, Medicare and other programs on a net- present-value (NPV) basis indicates total federal debt and obligations of about $75 trillion. That's 5 times the gross domestic product (GDP). The debt and obligations are increasing at a pace of about $5 trillion a year, which is neither sustainable nor containable. If the US was a corporation on a parallel basis, it would be headed into bankruptcy rather quickly. There's good reason for fear about the debt, but it would be a tremendous shock if either S&P or Moody's Investor Service actually downgraded the US sovereign-debt rating. The AAA rating on US Treasuries is the benchmark for AAA, the highest rating, meaning the lowest risk of default. With US Treasuries denominated in US dollars and the benchmark AAA security, how can you downgrade your benchmark security? That's a very awkward situation for rating agencies. As long as the US dollar retains its reserve currency status and is able to issue debt in US dollars, you'll continue to see a triple-A rating for US Treasuries. Having the US Treasuries denominated in US dollars means the government always can print the money it needs to pay off the securities, which means no default. TGR: With the US Treasury rated AAA, everything else is rated against that. But what if another AAA-rated entity is about to default? JW: That's the problem that rating agencies will have if they start playing around with the US rating. But there's virtually no risk of the US defaulting on its debt as long as the debt's denominated in dollars. Let's say the US wants to sell debt to Japan, but Japan doesn't like the way the US is running fiscal operations. It can say, "We don't trust the US dollar. We'll lend you money, but we'll lend it in yen." Then, the US has a real problem because it no longer has the ability to print the currency needed to pay off the debt. And if you're looking at US debt denominated in yen, most likely you would have a very different and much lower rating. TGR: Is there a possibility that people would not buy US debt unless it's in their currency? JW: It is possible lenders would not buy the Treasuries unless denominated in a strong and stable currency. As the USD loses its value and becomes less attractive, people will increasingly dump dollar- denominated assets and move into currencies they consider safer. And you'll see other things; OPEC might decide it no longer wants to have oil denominated in US dollars. There's been some talk about moving it to some kind of basket of currencies - something other than the US dollar, possibly including gold. This would be devastating to the US consumer. You'd get a double whammy from an inflation standpoint on oil prices in the US because the dollar would be shrinking in value against that basket of currencies. TGR: Different countries are starting to discuss the creation of an alternative to the USD as reserve currency. How rapidly could an alternative currency appear? JW: That would involve a consensus of major global trading countries; but just how that would break remains to be seen. Let's say OPEC decides it no longer wants to accept dollars for oil. Instead, it wants to be paid in yen. It's done. It's not a matter of creating a new currency - it's a matter of how things get shifted around...Part of the weakness in the dollar now is due to the way the world views what's happening in Washington and the ability of the government to control itself. That's a factor that may have forced S&P to make a comment. So, even having a weaker economy in Europe would not necessarily lead to relative dollar strength. TGR: If the US experiences a continued, or even greater, recession, doesn't that impact spill over into Canada? JW: The Canadian economy is closely tied to the US economy, and bad times here will be reflected in bad times in Canada. However, I'm not looking for a hyperinflation in Canada. Its currency will tend to remain relatively stronger than the US dollar. Canada is more fiscally sound; it generally has a better trade picture and has a lot of natural resources. Keep in mind that economic times tend to get addressed by private industry's creativity and, thus, new markets can be developed. For instance, you're already seeing significant shifts of lumber sales to China instead of to the US. TGR: What about the effect on other countries? JW: The world economy is going to have a difficult time. You do have ups and downs in the domestic, as well as the global, economy. People survive that. They find ways of getting around problems if a market is cut off or suffers. I view most of the factors in Canada, Australia and Switzerland as being much stronger than in the U.S Even when you look at the euro and the pound, they're generally stronger than in the US. Japan is dealing with the financial impacts of the earthquake. There's going to be a lot of rebuilding there. But, generally, it's a more stable economy with better fiscal and trade pictures. I would look for the yen to continue to be stronger. Shy of any short-term gyrations, the US is really in the worst condition of any major economy and any major country in the world and, therefore, in a weaker currency circumstance. TGR: Then why are media analysts talking about the US being in a recovery? JW: You're not getting a fair analysis. There's nothing new about that. No one in the popular media predicted the recession that was clearly coming upon us, and the downturn wasn't even recognized until well after the average guy on Main Street knew things were getting bad. We have some particularly poor-quality economic reporting right now. The economy has not been as strong as it advertised. Yes, there has been some upside bouncing in certain areas, but it's largely tied to short- lived stimulus factors. Are we really seeing a surge in retail sales? If so, you should be seeing growth in consumer income or consumer borrowing - but we're not seeing that. The consumer is strapped. An average consumer's income cannot keep up with inflation. The recent credit crisis also constrained consumer credit. Without significant growth in credit or a big pick-up in consumer income, there's no way the consumer can sustain positive economic growth or personal consumption, which is more than 70% of the GDP. So, you haven't started to see a shift in the underlying fundamentals that would support stronger economic activity. That's why you're not going to have a recovery; in fact, it's beginning to turn down again as shown in the housing sales volume numbers, which are down 75% from where it was in normal times. TGR: But we were in a housing boom. Doesn't that make those numbers reasonable? JW: Housing starts have never been this low. Right now, they are running around 500,000 a year. We're at the lowest levels since World War II - down 75% from 2006 - and it's getting worse. I mean the bottom bouncing has turned down again. We're already seeing a second dip in the housing industry. There's been no recovery there. In March, all the gain in retail sales was in inflation. Retail sales are turning down. You're going to see a weaker GDP number for Q111. The GDP number is probably the most valueless of the major series put out; but, as the press will have to report, growth will drop from 3.1% in Q410 to something like 1.7% in Q111. TGR: You've stated that the most significant factors driving the inflation rate are currency- and commodity-price distortions - not economic recovery. Why is that distinction important? JW: The popular media have stated that the only time you have to worry about inflation is when you have a strong economy, and that a strong economy drives inflation. There's such a thing as healthy inflation when it comes from a strong economy. I would much rather be in an economy that's overheating with too much demand and prices that rise. That's a relatively healthy inflation. Today, the weak dollar has spiked oil prices. Higher oil prices are driving gasoline prices higher - the average person is paying a lot more per gallon of gas. For those who can't make ends meet, they cut back in other areas. You also have higher food prices. It's not due to stronger food or gasoline demand - it's due to monetary distortions. Unemployment is still high, even if you believe the numbers. I'll contend the economy really isn't recovering. At the same time, you're seeing a big increase in inflation that's killing the average guy. TGR: Why isn't there more pressure on the US government to reduce the debt deficit? JW: When you get into areas like debt and deficit, it's a little difficult to understand. The average person, though, should be feeling enough financial pain that political pressure will tend to mount before the 2012 election; but whether or not the average person will take political action remains to be seen. I don't think you have until 2012 before this gets out of control and there's hyperinflation. It could go past that to 2014, but we're seeing all sorts of things happening now that are accelerating the inflation process. TGR: Like the dollar at an all-time low. JW: If you compare the US dollar against the stronger currencies, such as the Australian dollar, Canadian dollar and Swiss franc, you're looking at historic lows. You're not far from historic lows in the broader dollar measure. TGR: In your April 19 newsletter, you stated, "Though not yet commonly recognized, there is both an intensifying double-dip recession and a rapidly escalating inflation problem. Until such time as financial market expectations catch up with the underlying reality, reporting generally will continue to show higher-than-expected inflation and weaker-than-expected economic results." What do you mean by "until such time as financial market expectations catch up with the underlying reality?" JW: A lot of people look closely at and follow the consensus of economists, which is looking at (or at least still touting) an economic recovery with contained inflation. I'm contending that the underlying reality is a weaker economy and rising inflation. I think the expectation of rising inflation is beginning to sink in. Given another month or two, I think you'll find all of a sudden the economists making projections will start lowering their economic forecasts. TGR: Do you think economists will shift their outlooks before we get into hyperinflation or a depression? JW: In terms of economists who have to answer to Wall Street, work for the government or hold an office like the Federal Reserve chairman, by and large, they'll err on the side of being overly optimistic. People prefer good news to bad news. If Fed Chairman Ben Bernanke said we were headed into a deeper recession, it would rattle the market. People on Wall Street want to have a happy sales pitch. What results may have little to do with underlying reality...According to the National Bureau of Economic Research, the defining authority in timing of the US business cycle, the last recession ended in June 2009. So, this current recession will be recognized as a double-dip recession. The Bureau doesn't change its timing periods. I'll contend that we're really seeing reintensification of the downturn that began in 2007. Although it's not obvious in the headline numbers of the popular media, you'll find that September/October 2010 is when the housing market started to turn down again. That is beginning to intensify. We'll see how the retail sales look when they're revised. When all the dust settles, I think you'll see that the economy did start to turn down again in latter 2010. Somewhere in that timeframe, they'll start counting the second or next leg of a multiple-dip recession. TGR: This has been very informative, John. Thank you for your time. Regards, The Casey Research Team, for The Daily Reckoning Joel's Note: Is it too late to prepare for what's coming? Not if you listen to the all-star cast of the just-concluded Casey Research Summit. From the right allocation of gold, silver and cash in your portfolio, to the top stocks and sectors that will weather the coming economic storm, to easy-to-execute offshore solutions for guarding your wealth - you'll hear it all, in 20 hours of audio recordings on CD straight from the summit. Order now, while supply lasts! Walter J. "John" Williams has been a private consulting economist and a specialist in government economic reporting for 30 years, working with individuals and Fortune 500 companies alike. He received his AB in economics, cum laude, from Dartmouth College in 1971 and earned his MBA from Dartmouth's Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. John, whose early work prompted him to study economic reporting and interview key government officials involved in the process, also surveyed business economists for their thinking about the quality of government statistics. What he learned led to front-page stories in the New York Times and Investor's Business Daily, considerable coverage in the broadcast media and a joint meeting with representatives of all of the government's statistical agencies. Despite a number of changes to the system since those days, John says that government reporting has deteriorated sharply in the last decade or so. His analyses and commentaries, which are available on hisShadowStats website have been featured widely in the popular domestic and international media. Want to read more exclusive Gold Report interviews like this? Visit our website here. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insightspage. Have We Really Reached "PEAK GOLD"? Global gold production has been declining for the last 10 years and is now on a permanent downward slope. It's becoming extremely difficult to find the yellow metal. And one tiny penny stock has secured rights to what could be one of the world's last remaining big finds... The news could send it soaring from $1.73... Bill Bonner Are Markets Selling Off in Anticipation of More QE? Bill Bonner Reckoning from Baltimore, Maryland... We're finally getting some action on Wall Street! The Dow has lost more than 200 points in the last two days. Gold is down more than $50. And oil closed below $100 yesterday. Could this be the sell-off we've been waiting for? Maybe. Why do we expect a sell-off? Because we're still in a Great Correction. And in a correction, prices tend to go down. Deflation is the underlying trend...not inflation. Debt gets marked down...defaulted on...and written off. By our reckoning, the beginning of the correction actually began more than 10 years ago when the NASDAQ cracked wide open in January 2000. Since then, the US economy and stock markets have gone nowhere, in real terms. Who noticed? The feds poured on so much liquidity - beginning in '02...with a huge flood in '08-'09 - everything was swamped. Trash floated. But households drowned...they were shackled to sinking incomes, while the cost of living rose with the tide. And their costs are still rising. On the radio last night we heard about how hard $4 gasoline has hit America's lower and middle classes. These people live on tight budgets. If their fuel costs go up $20 a week...they feel it. The Wall Street Journal: LONDON - Consumer prices in developed economies rose in March at the fastest pace since October 2008, driven by energy and food inflation. A couple of reports in The Financial Times have focused on how they cope. One tells us that they aren't driving to malls the way they used to. "Online shopping jumps in US as cost of fuel curbs trips to malls," says the headline. No report from the malls yet...but online sales are said to rising at a 7% rate. Meanwhile, "Americans ditch TV is move to save money," says another headline. "Lower and middle classes are giving up their televisions and unplugging their landline telephones..." it begins. Hey, there's some good news. The TV has probably done far more damage than drugs and alcohol. And certainly a lot more damage than terrorism. Yet, the feds spent $2 trillion fighting terrorism (according to another FT report). How much did they spend fighting TV? But let's think more about what happens to investors. If we're in a Great Correction... ..and if liquidity from the feds is the only thing that keeps the correction from dragging prices down... ..then, you'd expect prices to go down whenever the feds ease up, right? Well, get ready. When the feds stop pouring on liquidity, the correction reasserts itself. That's what happened last summer. QE1 ran dry. Stocks fell throughout the summer...leading Ben Bernanke to announce QE2 in August. What's happening now? Is the market anticipating another QE end? Are prices headed down until another QE is announced? We'll find out... And more thoughts... The US grew and prospered in an era of cheap energy, cheap land, cheap wood, cheap everything. What if everything isn't so cheap in the future? What if the cheap oil has been pumped? What if the cheap land has been plowed and irrigated with cheap water? What if steel, copper, zinc...not to mention cotton and cattle...are in a major upswing? What if Jim Rogers is right? Here's our old friend on CNBC yesterday: "Where is the oil? I still want to know where is the oil? You know why the price of oil is going up? Because there is no oil," he said. But if the price is going too high, the race to find the last drops of crude will accentuate, before the search for alternative energy resources yields results, according to Rogers. "At $300 a barrel they would be drilling for oil under Buckingham palace," he said. The International Energy Agency "has come to the conclusion that the world's oil reserves decline by six percent a year," and that is an argument for the rising price of crude, Rogers said. "Say they don't decline by six percent, say they decline by four percent. That means in 25 years there's no oil at any price," he said, adding that rising oil prices will "hurt some people very badly" and some companies will go out of business. "We will certainly have dips (in oil prices), we will certainly have consolidation, I hope we do. If oil goes into a spike, if it goes parabolic, you have to sell it," Rogers said. The world uses 86 million barrels of oil every day, he pointed out, adding: "we found some big oil fields in Brazil and let's say the bull estimates there are correct, that's still only two years worth." Bloomberg is in the case too: (Bloomberg) Across the road from Zhao Yuanyi's wheat field in China's Shandong province, Beijing-based Chonche Group is expanding a rail car factory on what used to be 227 hectares of farmland. Nearby, Geely Automobile Holdings makes sedans on an 87-hectare (215-acre) site that four years ago was covered by crops. A five-minute drive away, farmland cedes to dozens of gray-tiled villas for wealthy residents of the city of Jinan, 220 miles south of Beijing. "This year, maybe next, they'll develop my field," the 63-year-old Zhao says, gazing at the land he has tended all his life. If that happens, Zhao would receive modest compensation. Without the farm, he says, "I don't know what I'll do." The factories sprawling from Jinan, 15 miles to the west, put Zhao on the front line of a clash between a policy of food self-sufficiency and the industrial growth that has made China the world's No. 2 economy. Grain production is "on a shaky base," says Qian Keming, head of the Agriculture Ministry's market and economic information division. "With rising living standards and more consumption of meat, eggs, and dairy, grain consumption is inevitably on the rise." Growing cities, expanding deserts from years of overgrazing, and a reforestation effort have helped shrink China's farmland by 8.3 million hectares in the past 12 years, the government says. With most factories rising in temperate, grain-growing coastal regions, the drier north must take up the slack. "Food production is increasingly focused in northern areas that have water shortages," Chen Xiwen, top agricultural adviser to Premier Wen Jiabao, wrote in Caijing magazine in December. That's "very worrying for food security." With less land under cultivation, Chinese farmers are unable to boost production of corn and wheat fast enough to cool surging domestic prices, so the country is importing more. "China's increased demand for agricultural commodities will mean an increase in prices for the entire world," says David Stroud, chief executive officer of New York hedge fund TS Capital Partners. China, the world's biggest grain producer, was a net exporter of soybeans until 1995. This year it's forecast to import 57 million tons, or almost 60 percent of global trade in the oilseed used in animal feed and tofu, according to data from the US Agriculture Dept. China's food imports as a percentage of domestic consumption is "tiny" - about 3 percent, says Frederic Neumann, a Hong Kong-based economist for HSBC Holdings (HBC). "If you doubled that to 6 percent, that implies enormous purchases on the world market," he says. "The guy with the most financial firepower is going to drive up the price." Making up for a 5 percent shortfall in China's grain harvest could consume 20 percent of current global grain exports, says Abah Ofon, a Singapore-based commodities analyst at Standard Chartered Bank. In February wheat on the Chicago Commodities Exchange reached its highest level since 2008 as traders fretted that drought was damaging China's crop, raising the risk the country would drain the world market. "As China continues to grow, demand and supply will struggle to keep up," Ofon says. "For China, the world's biggest consumer and producer, a small deficit can result in huge demand for imports." Regards, Bill Bonner for The Daily Reckoning