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Shadow Statistics

By: Bill Bonner, Chuck Butler & Chris Mayer, The Daily Reckoning

-- Posted Wednesday, 12 April 2006 | Digg This ArticleDigg It!

London, England

Wednesday, April 12, 2006


*** Gold's place in this wickedly delightful world...putting the squeeze on natural resources...

*** Peak Gold...laughable government "statistics" and how to know what to really look for...

*** Trouble in paradise for the dollar/euro relationship...will the real estate market ever "normalize"?...and more!


It is still a wicked, delightful world.

Again this week, the price of gold bubbled over $600 and contracts with a June delivery date came to rest yesterday at $599.40. We began our Trade of the Decade in 2000, with a gold price below $300. Now, the decade is more than half finished. The price of gold has doubled.

We have nothing to complain about. We could sell now and take our profits; it almost seems ungrateful to expect more. But, Daily Reckoning readers pose us a question: What to do now? Today, we throw the question right back at them.

While the rise in the price of gold is delightful to those holding the yellow metal, to many wicked people in many wicked places, it constitutes an attractive nuisance. Like oil, it is in wicked places that reserves tend to be found - and it is wicked people who tend to govern them.

At least that is the way it is beginning to look. The last few days have been marred by several elections. While the world's attention was focused on the land of the popes, ours turned to the old homeland of the Incas.

For it is in Peru, not in Italy, that mining is big business. There, Newmont Mining, the world's largest miner, has 18% of Peru's gold and copper reserves - and there too it gets nearly 40% of its revenue.

We read the paper along with everyone else. From what we can tell the countries that contain the largest reserves of oil and gold are the very countries that seem to have the most crackpot, unstable, and predatory governments. And, the competition for this distinction is nothing if not intense. Even the government of the world's most enlightened empire, the United States of America, seems to be vying for the title.

Nonetheless, the Nigerians, Iranians, Saudis, Venezuelans - and now, it appears even the Peruvians - are still in the lead. All up and down Latin America, from the tippy tip of Tierra del Fuego to the Rio Grande (and perhaps beyond), nationalists, Marxists, Che-worshipping dreamers and peso-grubbing schemers are tightening their fists. Chavez in Venezuela is squeezing oil companies. Morales in Bolivia is squeezing gas companies.

And if Ollanta Humala wins a run-off election in Peru, Newmont Mining is likely to be squeezed, too.

Coaxing the precious stuff out of the grudging ground, under the noses of wicked politicians is one thing both mining companies and oil companies are good at. For both, the work only seems to be getting harder.

"You can't get drill rigs, you can get workers. You can't get skilled workers," says John Hathaway of the Tocqueville Gold Fund. "The time that it takes to put in a new mine is longer than ever. Because of the environmental standards and the hoops you have to jump through on that, some of these things will never get built."

Earlier, we raised the possibility of "Peak Gold" - the idea that gold production is now near its maximum level, and that from here on out new production will be flat or declining - in a previous Daily Reckoning. As is the case with oil, the easy stuff has already been taken. There were gold mines in Virginia in the early 1800s. Then, gold production moved to less hospitable areas - such as California! When that played out, it was on to Peru and deep into South Africa. Likewise, getting oil from Pennsylvania or Texas was a relatively simple matter. Getting oil from Nigeria and Venezuela is another matter altogether.

Peak Oil poses major problems for the world economy. As currently constructed and operated, the world needs oil - and lots of it - just to keep going. As supplies tighten, prices rise. Today's Financial Times tells us that the price of gasoline is likely to be $2.62 per gallon in the United States this summer - 25 cents more than the year before. What will vacationers do...walk the last few miles?

Peak Gold, on the other hand, poses no such problems. The price of gold soars without doing any particular damage to consumers. Most aren't even aware of it.

Will it continue to rise? How high will it go? Those are the questions we can't answer. The only part of history we can read is the part that has already happened. As to the part yet to happen, we are as ignorant as the next man.

But history is a tease. She can't help but raise a hem and drop a hint.

Gold hit $850 an ounce 26 years ago. Since then, consumer prices have more than doubled, the Dow has been multiplied 11 times, and debt, in all its forms, has grown faster than waistlines at Wendy's.

"We're all fat, dumb, and happy," says Intel's chairman. We hardly expect any bad luck...let alone any wickedness.

Buy gold, dear reader; buy gold.

[Ed. Note: We know of one surefire and safe way to invest in the yellow metal...and it's only available for a few more days! Act now to take advantage of EverBank's 5-Year MarketSafe Gold Bullion CD:

MarketSafe Gold CD - available until April 18, 2006

More news from our currency counselor...


Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis:

"Yesterday, we had China showing off their trade surplus. So, to keep up with the Joneses, Japan put their current account surplus on display last night. Japan posted a 6.2% increase in February."

For the rest of this story, and for more insights into today's currency markets, see

The Daily Pfennig


Back over to Bill...

*** Last Friday, the monthly jobs numbers were released - what our friend, Chuck Butler, likes to call the 'Jobs Jamboree.' Chuck laughs and all but dismisses these numbers every month, and with good reason. Capital and Crisis' Chris Mayer explains:

"The government, since the time of the Kennedy administration, has been changing the definition of "unemployed." Again, many small changes over time lead to dramatic end results. According to John Williams' Shadow Government Statistics, ( if you back out the changes, you get an unemployment number closer to 12%!"

[Ed. Note: More from Chris on shadow government statistics and the extensive rot under the floorboards of the U.S. economy, below. In the meantime, check out Chris' latest report - he has found a company that may be the antidote to America's oil addiction. Read all about it here:

The Secret Every Stock Adviser Doesn't Want You to Know

*** There has been no change in the dollar/euro ratio for a very long time. Does that mean it is a stable, long-term relationship? Perhaps the two can get married in the church. But, we sense a problem coming. We might have to hold off on the wedding march, for both the euro countries and the dollar states face the same deeply structural problem: Both have made promises they can't keep. The U.S. dollar is far more at risk than the euro. Too many Americans have no savings and count on rising house prices to keep the bills paid. So far, they've been lucky. The rest of the world still takes U.S. dollars in payment of debt - and house prices in America have not yet noticeably declined.

But along comes the National Association of Realtors with talk of a "normalization" of the property market. By that, they mean that they anticipate fewer sales in 2006 than in 2005.

This seems to be what everyone expects - along with a "soft landing" for housing prices and the economy. In England and Australia, housing prices already turned down, but with no obvious economic damage. The great blimp seems to have touched down without even breaking a champagne flute. So, we can stop worrying about the housing bubble. It won't pop, say the optimists; it will merely go down a bit, like a swollen bee sting. In no time at all, the victim's skin with be silky smooth again.

Maybe they will be right.

Colleague Dan Ferris even thinks he spies an opportunity. All this talk of housing bubble has depressed the shares of the homebuilders, says he. You can now buy them at what could be epochal lows. KB Homes sells for only seven times earnings. Standard Pacific has a P/E of less than six.

Meritage is available for less than seven times earnings.

Of course, if sales go down fast, so will earnings - even faster. Then, these prices may no longer be so cheap. But, Dan thinks they are worth a look, and if the market really did "normalize" rather than fall apart, he'll probably be right.

We have a feeling the American real estate market is long beyond the point where normalization is possible. People depend on taking out equity. When there is no equity to take out, what will they do? They will be stuck, forced to cut back. Then, the consumer economy will cease consuming so much. The trade deficit with China, which just hit another landmark - more than $11 billion in March, twice what experts had expected - will finally shrink like a lumpy sweater. The U.S. economy will go into a slump. Then, we shall see what stuff Mr. Bernanke is made of.

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The Daily Reckoning PRESENTS: We all know to take what politicians have to say with a grain of salt - but do you really know how trumped up the "official government statistics" really are? Chris Mayer explores...


by Chris Mayer

"Listen," I interrupted, "what nationality are you?"

"I'm English," she replied. "That is, I was born in Poland, but my father is Irish."

"That makes you English?"

"Yes," she said...

- Henry Miller, Tropic of Cancer

Ben Bernanke, Fed chairman, recently delivered an upbeat view of the U.S. economy. It was cheerful, optimistic...and delusional.

The official government statistics hide many warts on the face of the U.S economy. Like makeup dabbed on an aging film star, they are an attempt to cover the wrinkles and present a veneer of youth. To most people, this is no revelation. Like plastic surgery and tummy tucks, it is what stars do to keep up appearances.

However, few know the extent of the deceit. What if you learned that inflation were closer to 7% than to the official 3%? What if unemployment were closer to 12%, rather than the official 5%? What if the economy were actually contracting, as opposed to growing?

What follows is a partial peek at the economy - sans makeup. And, more importantly, what it means for you and your hard-earned dough.

It was the genius of writer George Orwell that he chose to build his dystopia on the foundations of language and information - how it is used to deceive, manipulate and control. His chilling novel 1984 stands out precisely because it is only a distortion of things that are happening now and that have always happened. Orwell's dystopia is a mirror in a funhouse, as you see enough of your own world in this disturbing reflection.

Thankfully, there are still some people doing the important work of getting at the truth behind the official statistics - piercing the veil of Newspeak, sweeping away the cobwebs of sham. John Williams is an economist dedicated to doing just that. His Shadow Government Statistics reveals the extensive rot under the floorboards of the U.S. economy.

Let's take the official inflation rate, tracked using the consumer price index, or CPI. The idea behind the CPI is to have a fixed basket of goods and track how the prices of these things change from year to year. It only gained prominence after World War II, as a way to adjust autoworkers' labor contracts, a practice that soon spread.

Over time, its importance grew and more people looked to it as a gauge of general price inflation - and, hence, to get a feel for the health of the economy.

The thing is, the way the CPI is calculated changed dramatically over the years. Politicians have figured out that these statistics are useful in winning elections. Ergo, nearly every administration has altered the calculation. And always, the changes made the CPI lower. Every effort to change the CPI, by design, aims to make the economy look "better" than it looked before the changes.

The accumulation of these changes creates a huge difference over time.

It's like making a series of small changes to a ship's course in the midst of a long voyage. Soon, you wind up way off course, miles and miles from where you think you are. The chart below is from William's Web page. It shows the extent of the difference, which is just massive. The rate of inflation using only the pre-Clinton era CPI is closer to 7%!

The "Experimental C-CPI-U" is another innovation, introduced by the Bush administration to lower the CPI yet again, once again to paint a kinder portrait of the old hag known as the U.S. economy.

But it's about more than just making the economy look better. For example, since increases in Social Security payments link to the CPI, a lower CPI also saves the government money. According to Williams, if you used the CPI when Jimmy Carter was president, you'd get Social Security checks 70% higher than today's levels. Yes, 70% higher.

The government also duped all those people who thought it was such a great idea to buy TIPS (Treasury inflation-protected securities). Changes in the CPI determine the interest paid on these bonds. The higher the CPI, the more interest paid to bondholders. Some people loved the idea, figuring here was a bond that would keep pace with inflation. Given the government manipulates the CPI, you can be sure the interest rate paid will not keep pace with inflation - nor has it ever.

The manipulation of the CPI explains the great disconnect between what the man in the street feels when he pays his bills and what the confident, well-dressed Fed chiefs and politicians try to tell him. The cost of living is rising a lot more than they want you to believe. At a 7% annual rate of inflation, the cost of living would double in about 10 years.

Looked at differently, the purchasing power of your dollar will fall in half.

What about unemployment? The government, since the time of the Kennedy administration, has been changing the definition of "unemployed." Again, many small changes over time lead to dramatic end results. According to Williams, if you back out the changes, you get an unemployment number closer to 12%!

Let's look at the federal deficit - basically, the amount of money the government is losing every year. The official deficit for 2005 was $319 billion. However, this excludes unfunded Social Security and Medicare obligations. Throw them into the mix and calculate the deficit the way a business does in its financial statements - and you get an annual deficit around $3.5 trillion.

That's more than 10 times the so-called "official" deficit. By Williams' calculations, you could raise the tax rate to 100% - dump everyone's salaries into the U.S. Treasury - and still have a deficit.

Years of such deficits have created a mountain of obligations for the U.S. government. As Williams says, "The fiscal 2005 statement shows that total federal obligations at the end of September were $51 trillion; over four times the level of GDP." These debts are unsustainable. The bills must go unpaid. If the U.S. government were a private corporation, its bankruptcy would be beyond dispute.

This is why Social Security and Medicare are not going to exist in the not-too-distant future. As Williams says, "There is no way the government can pay the Social Security or Medicare it has committed to."

Williams believes GDP is contracting now. The government reported only a 1.1% increase in the fourth quarter. Even in an election year, and despite the government's best efforts to paint a pretty face, all it could muster was a measly 1.1%. More likely, the economy actually contracted 2% in the fourth quarter. This means we are in a recession NOW.

This is not conspiracy-theory stuff. As Williams points out, it's all disclosed in the footnotes in the government's reports. All he is doing is backing out many of the changes to more realistically compare these numbers with the numbers of the past.

The great H.L. Mencken, a scathing attack dog of idiocy in all its forms, wrote about "damning politicians up hill and down dale for many years as rogues and vagabonds, frauds and scoundrels." We need more Menckens. In the meantime, we'll have to make do with Williams and his cogent analysis of government skulduggery.

Oddly enough, these insights do not change our approach here in the pages of Capital & Crisis. In fact, Williams' work reinforces several things we've already covered in past letters. To wit:

Yields on real estate investment trusts (REITs) and utilities - to say nothing about the bond market - appear even more pathetic against an inflation rate of 7%. The yield for risks taken is simply not adequate. If the slumbering bond market awoke to the reality of a 7% inflation rate, there would be a sell-off the likes of which this country has never seen.

Interest rates would bolt upward like a frightened cat.

And the U.S. dollar is a doomed currency over the long haul. Bernanke, the self-professed student of the Great Depression, accepts the mainstream view that the Fed's great mistake then was not to flood the system with dollars. He won't make that "mistake" again. Expect the printing presses to run day and night at full capacity when the trouble starts.

Trying to pin down the economy in precise numbers is futile anyway. It's too big, too complex. All macro statistics are severely flawed. This is why I seldom write about them. Investing using macro statistics is like trying to find the nearest post office with a globe. They are so vague as to be useless.

The basic idea I want to leave you with is this: The economy is far weaker than generally portrayed. Most investors ignore the rat's nest of risks and invest indiscriminately in stocks - without proper due diligence. As investors, we need to stick to our fundamentals more carefully than ever.


Chris Mayer

for The Daily Reckoning

P.S. In C&C, our focus is on understanding the individual investments we are in and getting them on the cheap. Even so, this doesn't mean we have to stick our heads in the sand and whistle out of our rear ends.

Our battle plan is largely unchanged: to invest in sturdy businesses with valuable assets, lots of resources and proven capabilities, able to survive and even prosper in difficult environments. It also helps to have smart people at the helm. Do all this at good prices and you'll make a lot of money, even in a soft economic environment, even in a flat market. Our track record proves it. We had a great 2005, even though the market went nowhere.

Find out for yourself...and check out the company who's advanced technology reduces oil consumption and see why it could bring you a profit of 50% or more within the next year:

The End of America's Oil Addiction

-- Posted Wednesday, 12 April 2006 | Digg This Article

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