Intensifying U.S. Inflation Woes Promise Renewed Surge in Gold and Silver Prices.
Circumstances surrounding the March 2020 Pandemic-shutdown of the U.S. Economy included specific new policies of unlimited Federal Reserve Money Supply creation and unlimited U.S. Treasury Deficit Spending—expansion of the Federal Budget Deficit—all designed to counter pending negative economic impact.
Those initial early policies have been implemented fully, along with continuing meaningful expansion and/or promises of meaningful expansion. Those actions already have spiked domestic inflation, as was suggested would happen in Executive Global’s prior Spring 2020 Issue article “When the Fed and the Government Panic, Physical Gold Is the Likely Safe Haven.”
UNPRECEDENTED ECONOMIC COLLAPSE FACES A LINGERING SHY-OF-FULL-RECOVERY EXPANSION
The current downturn in U.S. activity is an economic collapse—by headline measures it is the worst ever seen—but it is not a standard recession. At least such is not how the defining authority, the National Bureau of Economic Research (NBER) previously defined similar events, which excluded downturns driven by extraneous factors such as a “Truckers Strike.” The Pandemic certainly is an extraneous event, not triggered by or reflecting shifts in underlying economic fundamentals. Nonetheless, the NBER defined the Pandemic-driven shut down as a recession on June 8, 2020.
The Pandemic recession formally is defined as coming off a monthly economic peak of February 2020, and from a quarterly economic peak of Fourth-Quarter 2019. Based on headline reporting of the inflation-adjusted First-Quarter 2020 Real Gross Domestic Product (GDP), activity contracted at an annualised quarterly pace of 5.0%, with year-to-year quarterly growth of 0.3%. The magnitude of that decline was mitigated by March 2020, showing the first heavy Pandemic hit to monthly activity (January and February were about normal). Nonetheless, with just that one monthly downturn, the headline first-quarter drop still was the worst since the Fourth-Quarter 2008 drop of 8.4%, the deepest of the Great Recession.
In Inflation-Adjusted Real Dollars, the Headline Level of Second-Quarter 2020 GDP Retrenched to Its Lowest Level Since Fourth-Quarter 2014.
Second-Quarter 2020 GDP plunged at its worst-ever quarterly pace of 32.9%. It dropped year-to-year by 9.5%, a record annual decline in the history of the quarterly GDP series back to its 1947 beginning. That quarterly year-to-year drop was rivalled, however, in the annual-reporting-only series since 1929. The current annual plunge showed deeper contractions than the 8.5% and 6.4% annual contractions in 1930 and 1931 of the Great Depression. The magnitude of its plunge was topped by annual declines of 12.9% in 1932 (Great Depression), and the 11.6% drop in 1946, as the U.S. economy wound down in the post-World War II environment.
From its peak level of inflation-adjusted (2012 dollars) $19.254 trillion, Fourth-Quarter 2019 Real GDP sank by 10.6% to its headline Second-Quarter 2020 inflation-adjusted level of $17.206 trillion, its lowest level since $17.047 in Third-Quarter 2014, a loss of a full five years of normal economic growth.
THIRD AND FOURTH-QUARTER 2020 GDP INCREASINGLY SHOULD REFLECT A FLATTENED, LINGERING NON-RECOVERY
Contrary to early, hopeful financial market expectations of a rapid reopening of the U.S. economy, with a “V”-shaped recovery, the economy remains well shy of a full reopening, with mounting difficulties tied to the handling of the Pandemic constraints. Recent major U.S. economic series, including the July 2020 Payroll, Unemployment and Industrial Production numbers signalled a protracted, relatively flat “L”-shaped recovery. This outlook foreshadows ever-greater monetary policy accommodation by the Federal Reserve and ever-greater fiscal stimulus from the Congress and the U.S. Treasury, irrespective of the November 3rd national elections, which, as always, have the potential to shift control of the U.S. Executive Branch, the U.S. Senate and/or the U.S. House of Representatives.
Based on the latest headline detail in the better-quality subsidiary numbers, and allowing for some terribly poor quality reporting in recent headline detail for series such as Retail Sales, my forecasts (www.ShadowStats.com) indicate an annualised real Third-Quarter 2020 GDP gain of 9.0%, with a real year-to-year decline of 8.2%, and an annualised real Fourth-Quarter 2020 annual GDP growth of about 3.0%, with an annual decline of 8.0%. Those forecasts combine to generate a predicted real annual decline for the full-year 2020 of 6.4%. That, again, would be the worst full-year annual decline since the 1946 GDP drop of 11.6%, following World War II. It also would match the 6.4% decline seen in 1931, the second year of the Great Depression.
HEADLINE ECONOMIC NUMBERS ARE OF INCREASINGLY POOR QUALITY
One note of caution for analysis here: The quality of government surveying and reporting of the economic numbers admittedly is diminished from pre-Pandemic results (per the reporting agencies), due to limited, or to lack of access to regular sources, with large increases in sampling errors. From what I have found in examining recent headline detail of complex major series, such as the GDP, is that headline government economic reporting appears to be relying more heavily upon the consensus outlook (Wall Street) for their headline numbers than was seen in the recent years, when they depended more heavily on actual underlying sampling and related headline detail.
The Pandemic generated both the headline economic and societal collapse, which disrupted both normal communication lines and the data gathering. For example, consider that pre-Pandemic, the Household Survey (unemployment rate) response rate averaged 83%; it was 67% in July 2020.
Gold and Silver Prices Rallied on Mounting Inflation Fears; Higher (Safe-Haven/U.S. Dollar Purchasing Power Maintenance) Gold and Silver Prices Loom, Despite Any Near-Term Profit Taking. At least partially based on Pandemic-induced accelerating U.S. inflation, both Gold and Silver prices rallied into early August, hitting a respective all-time peak of $2,067.15 per troy ounce on August 6th, and a $28.33 per troy ounce multi-year high on August 7th (please note that I use the afternoon London Gold, and morning Silver fixes, as reported by www.kitco.com, as benchmarks). Corrective market sell offs (or interventions) knocked those prices lower, by 5.9% and 5.7%, respectively to $2,044.75 (still up by 28.5% year to year) and to $26.71, on August 14th (up by 56.0% year-to year).
Recent actions by the U.S. Federal Reserve to accelerate Money Supply growth (to preserve systemic liquidity and to prevent an economic collapse) has pushed year-to-year growth in the most liquid money supply measure M1, to a record level of 41.8%, in the week ended August 3, 2020. Such was in the context of the less-liquid levels of M2 and the ShadowStats Ongoing Estimate of M3 in hot pursuit.
UNSTABLE TIMES FAVOUR PRECIOUS METALS
I do not know of more unstable domestic or global economic and financial circumstances than we face today. Where headline consensus outlooks include unreliable economic reporting and unstable financial system manipulations, there never has been a better or more urgent time to shift one’s liquid assets into the physical holding of precious metals, specifically gold and silver. EG