U.S. Economic Lies, Bad weather (?), and China’s Yuan as World’s Reserve Currency

by Curmudgeon with Victor Sperandeo   


Lies, lies, and more lies...

Richard Russell is "mad as hell."  The venerable author of Dow Theory Letters - the granddaddy of all stock market newsletters- has told his subscribers that the U.S. government economic numbers are bogus, that "the world is in a continuing depression, and only the vanishing US middle class is aware of it," and that "The Fed and the government are feeding an unending parade of lies to the American people."  Heavy stuff!


But Russell goes a lot further in his current message to subscribers.  He writes:

"We're being told bold lies about the US economy.  From what I hear and what I can dig out, the US is in recession and has been since late 2007.   The big picture is really that the US has been undergoing deleveraging and deflation.  Meanwhile the Fed, which is terrified of deflation, has been trying to create its beloved two percent inflation.  But so far the Fed has failed. The Fed has failed in its frantic attempt to produce inflation because the current forces of deflation are overwhelming the Fed's inflationary efforts."


Continuing, he writes, "I'm wondering how long it will be until news of the ongoing U.S. recession bursts out in the open.  Unemployment in the US is embarrassingly poor, retail sales are weak, hey, and it’s easy to blame the weather." 


Bad Weather Causes Bad Economic Reports- or NOT?

And that brings us to the Pollyanna view that all the bad economic reports over the past three months have been caused by bad weather.  Evidently, the Fed believes that's the case.  In its anecdotal Beige Book report, the Fed said economic activity in January and February shrank slightly in two of its 12 districts, New York and Philadelphia, mostly due to "unusually severe weather."  Amazingly, the word "weather" is used 119 times in the report, compiled by the Federal Reserve Bank of Atlanta from data collected before Feb. 24, and "snow" or a derivative of snow is used 24 times. The word "ice" appeared twice.


The Center for American Progress takes a different point of view. In a post titled, "Bad Policy Choices, Not Bad Weather, Restraining Job Growth,"     Adam Hersh writes: "Parts of the economy that were likely most affected by weather, such as construction and temporary help, actually increased employment over the past three months faster than in the summer of 2013. Parts of the economy less affected by weather, such as the financial sector, actually expanded employment at a slower pace in the past three months than last summer. Bad weather also did not significantly affect those already employed: Average weekly work hours were basically unchanged in the sectors of the economy that produce goods and services."


But bad weather is only a recent excuse for a remarkably weak U.S. economy, that is supposedly five years into a so called "economic recovery" (if one assumes the great recession really ended in June 2009).  What's the straight scoop?  Is Russell correct in his assertion that the U.S. is still really in recession?


For several years now, Shadow Stats editor John Williams has been digging up the true facts about the American economy in his excellent on-line publication.  In response to last Friday (March 7, 2013) job report, Shadow Stats says that there's nothing there to suggest an economic rebound.  In particular:

·         Payroll Jobs Increased by 175,000, but the Number Employed Rose by 42,000; Neither February 2014 Statistic Was Meaningful

·         Deliberate BLS Misreporting Showed December Payrolls up by 84,000, Where 67,000 Was the Consistent Number

In a note to subscribers, Williams wrote:

"Today’s (March 7th) reporting of February 2014 employment and unemployment detail still were consistent with a renewed slowing in economic activity. Where payrolls rose more than expected, the data were not meaningful. Where the unemployment rate rose unexpectedly, the numbers there were not meaningful, either. Of some substance, the year-to-year growth in not-seasonally-adjusted payrolls slowed markedly."


To justify his assertion of deliberate misreporting, Williams writes: "The Bureau of Labor Statistics (BLS) deliberately publishes its seasonally-adjusted historical payroll-employment and household-survey (unemployment) data so that the numbers are neither consistent nor comparable with current headline reporting. The issues here have the potential of enabling near-term manipulation of the headline labor data, should someone choose to do so."


Continuing this theme, "This morning’s (March 7, 2014) headline story that seasonally-adjusted unemployment rose to 6.7% in February, from 6.6% in January, is nonsense. January’s headline unemployment rate was recalculated and revised, along with the estimation process that was used in generating the February number. Where February’s headline rate was 6.7%, the revised January number could have been 6.5%, 6.7%, 6.9% ... no one but the BLS knows for sure, and the BLS is not talking. It deliberately will not publish consistent prior numbers, for the expressed fear of "confusing" data users."


A New World Reserve Currency?


Williams has also written that the U.S. dollar would crash (perhaps as early as the end of 2014) and therefore a new world currency would then be needed.  Could that be China's Yuan (AKA Remnibi)?   Richard Russell writes: 


"China is doing two things: it is building up its gold reserves, and it is building up its military.  Furthermore, I believe China is getting ready to make its currency, the yuan, convertible.  I've been saying this for years, and I'll say it once more: China is preparing to make the yuan the world's next reserve currency.  And I'll ask this question once more -- would you rather own a yuan which is backed by gold and a powerful military, or would you rather own a dollar, which is backed by debt and a shrinking military?" 


John Williams concurs.  He wrote the Curmudgeon in an email: "China certainly is moving in the direction Russell is suggesting" and that was yet another reason to own physical gold. 


The Sovereign Investor  thinks that China may be trying to corner the global gold market.  "The Chinese are methodically accumulating more and more gold. The chart below shows that in every single month of 2013, the Chinese imported more gold than they did in the same month a year earlier. And the 102 tons this past January is an ongoing extension of that trend."


                   Gold flowing into China through Hong Kong


 (Source: Hong Kong Census and Statistics Department)


Meanwhile, Stansberry Research reports that in October 2013, a Chinese entity bought the Chase Manhattan Plaza in lower Manhattan – a 60-story tower built by banking legend David Rockefeller.  The buyer-Fosun International Ltd. is the investment arm of China’s biggest closely held industrial group.  They might be perceived as an agent for China's government. 


Stansberry claims this was no ordinary real estate transaction.  Five stories below the city streets, the Chase Plaza building houses the largest bank vault in the world.  It’s larger than a football field and anchored to the bedrock with steel rods. It was built to withstand a nuclear bomb.  What might that bank vault be used for?  As an alternate store for China's huge and growing hoard of gold.  China also owns the London Metal Exchange- the largest such metals exchange in the world. 


Why has China built up its Gold stockpile?  Answer: to back the Yuan/Remnibi that China wants to use to replace the U.S. dollar as the world's reserve currency.  Stansberry claims China is engaged in a "full-fledged currency war with the U.S."  They claim China does not want to buy any more U.S. government debt with the U.S. dollars they earn from their growing global exports. 


Editor's Note:  China is already the world's largest holder of U.S. Treasuries at $1.27 Trillion.


According to Stansberry, as long as the U.S. continues to print money via debt monetization, China will buy more real assets (like real estate and physical gold), which can't be depreciated by increasing the money supply. China, with over $3.8 trillion in foreign exchange reserves, wants to back the Yuan/Remnibi with gold, so that (at some future time) they will have the world's reserve currency and so won't have to recycle any more U.S. dollars into Treasuries (i.e. payment for China's exports would then be in Yuan/Remnibi so no need to buy U.S. government debt).


Victor's Comments and Analysis:

In an abstract conceptual analysis, China must fail in the long run as "Central Planning" is impossible to manage a large population much less a population of over 1.35 billion people. However, failure may not come quickly.  The USSR (Soviet Union) took 73 years to disintegrate and dissolve . Also, China has some mixed freedoms within the economy which will likely lead to a longer life time for their current mixed communist/capitalist economic system.


In the short run (which is all anyone seems to focus on these days), there are good and unknown consequences of China's economy.  Their current economic growth of 7.5% is certainly noteworthy, but are the Chinese government provided economic numbers true?  I don't believe the numbers of the U.S. government (see below) and certainly not the numbers reported by China.


However, the fact is that China is accumulating Gold (i.e. real wealth).  And thereby accumulating the power to back their currency.  That means I'd bet on China's Yuan/Remnibi at the moment vs the U.S. dollar.  This may change due to whom the American people vote into power in the 2014 to 2016 elections.


As to any question of the reported U.S. government economic numbers being fabricated, one should first ask why government employees can get away with either lying or not testifying at Congressional hearings, while the average American certainly can't.


Four official heads of the U.S. government demonstrably lied under oath, e.g. from the DOJ, IRS {two Commissioners} and James Clapper- the U.S. "Director of National Intelligence."   Yet none were penalized in any way!  Let's look at one example.


Mr. Clapper has admitted lying under oath in March 2013 to the Senate about the NSA spying, later saying that he told the "least untruthful answer possible." That's called "perjury" for anyone outside of the U.S. government and is a felony. Yet Clapper is still walking around free without any charges brought against him by our government.  Is that credible or honest?


Editor’s Note: A group of Congressmen led by Rep. Darrell Issa (Republican -CA) is pushing President Obama to fire James Clapper as "Director of National Intelligence," because they say he misled Congress about the extent of the NSA's surveillance activity.  "Director Clapper continues to hold his position despite lying to Congress under oath about the existence of bulk data collection programs in March 2013," the letter states.


Lois Lerner, former Director of the IRS Tax-Exempt Unit, exemplifies the lack of transparency in our government.  This past week, Ms. Lerner again pleaded the 5th amendment in a House hearing where Congressmen wanted to ask her questions about why her IRS unit gave heightened scrutiny to conservative groups with the words "tea party" or "patriot" in their names when reviewing applications for tax-exempt status. 

Hopes were high that she'd testify on Wednesday, March 5, 2013, at that Congressional hearing.  She didn't.  "On the advice of my counsel, I respectfully exercise my Fifth Amendment right and decline to answer that question," she said in response to several questions. Yet the government refuses to prosecute her for contempt or force her to testify.  Would that be the case if she wasn't a former government official?  You be the judge.


Editor's Note: The Washington Post reported that Ms. Lerner retired from the IRS in September 2013, after an internal IRS review board determined that she should be removed from the agency for “neglect of duties.” Yet she still collects her U.S. government pension.


Do you believe reporting (untruthful) data or statistics gets in the way of manipulating public perception of the economy for political purposes?  Think about the U.S. government's favoritism of its officials and lack of transparency as referenced and documented above. 


Going forward, I don't think economic weakness will always be blamed on bad weather.  In the near future, the Affordable Care Act (ACA) may finally affect "the people."  Its high costs will likely reduce U.S. consumer discretionary spending, which will produce less economic growth (i.e. consumer spending accounts for 70% of U.S. GDP).  And that won't be due to bad weather!


In my humble opinion, the U.S. needs more Freedom and Capitalism, instead of Socialism, lying politicians and government corruption (of economic statistics and other things).


When the confidence in the U.S. is lost, the effects on the dollar will be very quickly adjusted (downward), as will be the expectation for corporate profits and U.S. equities.  But for now, enjoy the "Bull market" (in stocks) as it’s up and away with the Fed covering your back.   But don't think that will go on indefinitely. At some point the piper will be paid and the results won't be pretty.


Till next time........................


The Curmudgeon

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1979) to profit in the ever changing and arcane world of markets, economies and government policies.  As President and CEO of Alpha Financial Technologies LLC, Sperandeo overseas the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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