Collapse of the U.S. Economy

Are You Ready for How Bad It Will Get?

August 16, 2010

Graham Summers - Last week I shared an excerpt from my paid newsletter Private Wealth Advisory, concerning a major divergence occurring in the markets. In it, I lay out precisely why I believed stocks would collapse shortly. This week’s action has proven, yet again, I was right while the vast majority of commentators thought stocks would continue to rally.

Given that we are now officially into the REAL Fireworks for stocks… I thought it best to present another excerpt from Private Wealth Advisory in which I explain just how bad things will get in the US economy going forward...

For months now I have averred that the US economy was not in recovery and that in point of fact all talk of “recovery” was a load of BS.

I realize this view is far from the consensus. Even those who are in the bear camp aver that the Stimulus did in fact bring us out of recession at least temporarily.

However, I would strongly contend that the recovery was in fact non-existent for the following reasons:

1. The Government data used to validate the recovery (GPD, unemployment, etc) is clearly massaged if not bordering on outright propaganda.


2. We are in fact in a depression and the “recovery” was simply a bounce in economic activity taking place within the context of a larger economy contraction.

Regarding #1, every Government data point used in promoting the “recovery” had some degree of fudging in it. Let’s consider GDP for instance.

There are numerous devious tactics used to overstate GDP growth, however, the most obvious gimmick the BLS uses is overstating GPD growth in the present and then revising it lower in the subsequent quarters.

A perfect example of this is the latest GDP numbers which featured large revisions of the first two quarters of the alleged “recovery”: 3Q09’s GDP growth was revised down from 2.2% to 1.6% and 4Q09’s GDP growth was revised down from 5.6% to 5%.

In my opinion, these revisions occur because the Feds greatly overstate GDP growth via numerous gimmicks and then revise the numbers to be more in-line with reality after the fact.

For an example of how the Feds overstate GDP in the present, consider the recent 2Q10 GDP growth numbers. According to last Friday’s announcement, second quarter GDP growth came in at 2.4%. However, several portions of this growth are questionable to say the least.

For starters, the report claimed there was a 21.9% increase in equipment and software purchases. How on earth the Feds can claim this kind of growth in those sectors when durable goods orders decreased 1% across the board in June is beyond me? Were April and May both blockbuster months? No both were already showing signs of a downturn.

So how do we get a 21% increase in equipment and software purchases? There is no explanation for this. We’re meant to simply assume it happened because the Feds say so.

Another glaring issue is the BLS’s claims that real residential fixed investment jumped an astounding 27.9% in 2Q10. This would mean that we just put in the fastest Quarter over Quarter growth in the residential fixed income market in over 20 years. And this is at a time when housing prices are rolling over along with home sales?

My primary point is that there are numerous components in the latest GDP number that are extremely suspect. For this reason I am confident in stating that the second quarter’s GDP growth, like all GDP growth in this great “recovery,” is in fact greatly overstated and will be revised downward later this year.

One can apply this same analysis to the unemployment numbers, CPI numbers, and virtually every other major statistic put out by the BLS and Federal Reserve and find similar, large glaring holes in the data.

Thus, right from the get go, the data used to justify all claims of “recovery” are suspect if not clearly fudged. Moreover, by revising the data lower after the fact, it’s clear that whatever economic upturn actually occurred was overstated.

If you want to split hairs, yes you could claim we had an economic recovery in the sense that things got less bad for a while, however this recovery took place within the context of a larger economic contraction or Depression.

A decent analogy would be to throw a rubber ball off the edge of the Grand Canyon. If the ball hit a ledge on the way down, it might bounce upwards temporarily, but unless it somehow cleared the edge from which you threw it, the ball’s trajectory remains “down.”

Put another way, this contraction is a DE-Bounce/ Recovery- PRESSION.

You can see this clearly in the context of some larger numbers. Indeed, when you account for inflation you can clearly see that this “recovery” was in fact a bounce that only brought us back to early 2007 GPD levels, not the former GDP peak (bear in mind that I am using the Feds’ own data which, as stated previously, overstates GDP growth dramatically).

The above chart is extremely significant as it reveals that we are likely entering into a new recession without having bested the previous GDP peak. This is the FIRST time this has happened since the Great Depression. After every recession of the 20th century we saw a recovery that took GDP to new highs before the next recession began.

Indeed, when we depict the recent contraction in the context of GDP growth post 1929, it is clear that this latest contraction is sharper and more severe than even the post-WWII contraction when the US was shutting down its war-time production.

In plain terms, this latest economic contraction is a different beast than anything we’ve seen before. Placing it in the context of a normal recession, particularly a “double dip” recession, is ridiculous as it is clearly a full-scale Depression broken up by a brief bounce (which was brought about by Global stimulus spending greater than that of WWI, WWII, and the New Deal combined).

Indeed, take out Government Spending, and it is clear that all talk of recovery is gibberish. If not for Uncle Sam’s spending the US economy would be in a near virtual free-fall.

Now, with Uncle Sam’s spend wearing off, we’re going back over the cliff. And stocks, which are pricing in a flawless recovery without the slightest hiccup (not the FIRST recession in US history to occur with unemployment already at 9.5% and GDP levels BELOW the former peak preceding the recession), are set for a horrific collapse.

The vast majority of investors have no clue what they’re in for. And they’re going to be taken to the cleaners. As I've mentioned countless times on these pages, every Crash follows the same pattern:

1) the initial drop
2) the corrective rally or bounce
3) the REAL fireworks

The collapse from April through July was #1. The rally from July to today was #2... and judging by yesterday’s action (the Fed announced $340 billion in additional monetization and the market STILL closed in the red)…#3 is likely around the corner.

Indeed, if $340 billion in additional funding can't even kick start a market rally that closes in the green for the day, then we are fast heading into very dark times for the markets.

If you have not already taken steps to prepare your portfolio for another round of serious deflation (this includes what to do about your gold holdings), you absolutely need to do so now.

I've already shown subscribers of Private Wealth Advisory how to turn market volatility into profits during the initial collapse from mid-May to early July. Indeed, my portfolio outperformed the S&P 500 by a whopping 15% during that time.

We just opened another seven trades to profit from the REAL fireworks yesterday. During the Crash of 2008, these positions all returned triple digit gains in a matter of weeks. I expect we'll see similar gains this time around as stocks come totally unhinged. Indeed, all seven of these trades are already up in the last 24 hours.

If you'd like to find out what they are, take steps to prepare your portfolio for what's coming, and join us in the profit taking…

Good Investing!