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2013 THESIS - To be released Jan. 14th, 2013 to our Regular and Trial subscribers
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One of the first axioms of analysis is: "Garbage In, Garbage Out"! If your data is flawed, everything you do with it and the decisions stemming from it are flawed and dangerous to your financial health. Experienced analysts will often be found relentlessly checking, rechecking and validating their inputs and assumptions.
If economic practitioners were held to higher standards of accountability, they simply wouldn't accept the raft of fundamental data points that are the pillars of most economic assessment. I am talking specifically about government inflation numbers such as CPI and PPI, the Deflator and GDP growth statistics and true debt levels using sound GAAP accounting principles and reflecting off balance sheet special purpose entities, contingent liabilities and financial guarantees. The list of government reporting irregularities is pervasive and for unknown reasons, simply accepted.
It is incredulous that we can just accept, without challenging, the statistical hyperbole of Hedonics, Substitution, Imputation and Proportional Distribution, justifying inflation numbers that don't even pass the common sense of an unemployed high school dropout. I don't mean to disparage the high school dropout, but I do point the figure at the 'six figure' analysts who accept this tripe as gospel, and from whose analysis fiduciary investment decisions are made with the unsuspecting public's hard earned savings.
This problem has been going on long enough that flawed data has resulted in broad based asset mispricing and malinvestment. Data points have become so distorted, as to be delusional, and have left the markets dysfunctional. How else do you explain $2 trillion excess investor savings over loans now sitting at US banks? How else do you explain Capital Investment (CAPEX) falling faster than Felix Baumgartner from 128,100 feet?
This is the third in a trilogy on Monetary Malpractice, so I will refer a lot of the discussion on the chart to the right, to those wishing to read MONETARY MALPRACTICE: Distortions, Deceptions and Delusions or MONETARY MALPRACTICE: Moral Malady.
I would like instead to focus on the specific mechanism by which Monetary Malpractice has now delivered Dysfunctional Financial Markets. Before I drop you into the 'gearing' of it, let me show you the bottom line results.
Dysfunctional Markets exist when normal and expected 'causes and effects' no longer occur.
Let us therefore start with Inflation, remembering:
The manipulation and distortions presently occurring in the government's CPI & PPI inflation numbers are so significant that it requires an exhaustive discussion. An extensive number of presentations with leading analysts on this specific subject can be found in the Macro Analytics Library. I have compiled the following chart to best summarize the areas that must be covered in such a review.
John Williams at ShadowStats.com has done meticulous and invaluabe service in tracking the insidious changes the government statistians have implemented to effectively achieve what I refer to as Uni-Directional Inflation. Nothing they do ever makes it larger, only smaller. This is so prevalent, that as the chart from ShadowStats illustrates below, the distortions now understate inflation by over 10%, if we assumed that in 1980 we knew what we were doing or even if we didn't, how we have inflation explode on a comparative basis. This has profound implications and cascades through to GDP Growth reporting and the Mispricing and Malinvestment decisons that subsequently result.
Of all the inflation distorted items in the category of "Uni-Directional Inflation" in my chart above, the one that few undertand, and even fewer publically discuss, is the concept of "Imputations". Imputations are fundamentals about dollars that do not exist and dollars that do not even change hands. They are in some instances a replacement measurement of “notional value”.
The following table summarizes the degree to which they are applied and the magnitude of their current distortions. (The details are discussed in: Economic Growth - Fake Numbers, Real Growth, Consequences of Lies.)
This level of distortion will quickly become fatal as corproations make investments based on expected economic growth. As we will show, corporations have been forced to stop believing government numbers. Their revenue and sales have shown reality is simply quite different from government distortions.
The reason John Williams started tracking government statistical adjustments was because his corporate accounts couldn't rationalize the difference. This was years ago and has now grown into an independent business operating a government "ShadowStats" service. Using simply ShadowStats inflation adjusted numbers, GDP growth is overstated by minimally 10.5%.
HOW THE DISTORTIONS GROW
Monetary Malpractice of unsound money will consistently lead to mispricing.
SUSTAINED AND ACCELERATING MISPRICING
Mispricing will continue to occur and worsen due to:
This list is only the tip of the iceberg since sustained Monetary Malpractice with its consequential Moral Hazard and Unintended (or INTENDED) Consequences has resulted in broad based mispricing and dysfunctional markets.
FLAWED & OBSOLETE ACCOUNTING
SAVINGS VERSUS LOAN LEVELS
LEVERAGE REQUIRED AND DEBT HELD
Markets have become so dysfunctional with so much cheap money chasing so few real opportunities, that collateral values within the rehypothecation process are now in jeopardy and exposed to collateral contagion.
Real economic growth cannot return without real top line corporate growth. It simply isn't there as is seen by falling CAPEX and money going into savings.The financialization focus continues to be strictly on bottom line growth and specifically non operating income. This is the area where the financial engineers are employed today. This works for profits in the short term but strangles growth and profits in the long term.
"In America the smartest engineers are primarily engaged in creating financial ways to take money out of the pockets of other"
What would things look like if the Fed wasn't engaged in Monetary Malpractice?
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