Warns Of Severe And Violent Sell-Off

Legendary economist John Williams have just released his probably strongest warnings about the economic conditions of the US so far. In the latest newsletter from Shadow Government Statistics he describes the Federal Reserve’s monetary policy, and the markets reactions to it, as euphoric inflation insanity. According to Williams, a severe and violent sell-off in stocks and US currency could come with minimal, if any, warning.

“Who cares about risk? The FED will never let anything drop in price ever again.”

Zero Hedge

“Buying US stocks because the FED says it will proactively debase the US dollar is like sitting on the beach in order to get a great view of an incoming tsunami. Any pleasure so derived should be short-lived, when the terror of underlying reality quickly takes hold,” John Williams at Shadow Government Statistics writes in Friday’s newsletter.

“If one were to view movement in the price of gold as a surrogate for anticipated inflation, for example, the issues begin to come into focus,” Williams continues.

“Consider that last night’s respective S&P 500, Dow Jones Industrial Average and NASDAQ Composite closing levels were up by 7.5%, 10.8%, 12.1% from a year ago, but the price of gold was up by 29.6% in the same period,” he points out.

“Relative to gold, which tends to hold its purchasing power over time — albeit sometimes in an anticipatory manner — the S&P 500, Dow Jones Industrial Average and NASDAQ Composite have declined respectively by 22.1%, 18.8% and 17.5% year-to-year. This is against the prospective inflation environment being discounted by the gold market.”

While stock prices do tend to rise in an inflationary environment – where revenues and profits are inflated – rising stock prices do not always stay ahead of inflation.

On a constant-dollar or real, inflation-adjusted basis, stocks go through bull and bear markets, just as they do otherwise, Williams explains.

“If prices do not stay ahead of inflation, investors lose value in terms of the purchasing power of their assets.”

The equity markets may rally in the upcoming inflation, but the systemic implications and current gold behavior suggest that the circumstance will not give investors a positive real return, Shadow Government Statistics writes in their “Hyperinflation Special Report”.

Severe And Violent Sell-Off

“Given the current systemic distortions and extreme irrationality in the equity markets, a severe and violent sell-off in stocks would not be a shock, and it could come with minimal, if any, warning. It also might be coincident with a U.S. dollar-selling panic,” Williams writes.

There is particular risk of recent dollar selling, according to Williams, which has been closing in on historic lows.

This could easily turn into an outright dollar-dumping panic, which not only would roil the domestic U.S. markets, but also would set the stage for a rapid acceleration of domestic consumer inflation.

“Irrespective of any near-term market volatility, gold and silver, as well as the stronger currencies, remain the best long-term liquid hedges against loss in purchasing power of the U.S. dollar.”

Who Cares?

However, no warnings are taken seriously amongst the market participants these days, as most remains convinced that we’ll have a repetition of the 60% stock market rally of 2009 when the Federal Reserve conducted the first round of quantitative easing, the QE1.

Now, everyone is expecting another crazy rally on the wave of QE2.

As Tyler Durden at Zero Hedge insolent and accurate points out:

“We sympathize with John’s sentiment, but who cares about risk? The FED will never let anything drop in price ever again. It is now far too late to prevent the biggest bubble in the history of the world, and its subsequent collapse.”

Shadow Statistics

Walter J. “John” Williams was born in 1949. He received an A.B. in Economics, cum laude, from Dartmouth College in 1971, and was awarded a M.B.A. from Dartmouth’s Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. During his career as a consulting economist, John has worked with individuals as well as Fortune 500 companies.


John Williams


For nearly 30 years, Williams has been a private consulting economist and become a specialist in government economic reporting.

One of his first clients was a large manufacturer of commercial airplanes who had developed an econometric model for predicting revenue passenger miles.

The level of revenue passenger miles was their primary sales forecasting tool, and the model was heavily dependent on the GNP (now GDP) as reported by the Department of Commerce. Suddenly, their model stopped working.

Williams realized the GNP numbers were faulty, corrected them for the company, and the model worked again, at least for a while.

This was the beginning of a long process of exploring the history and nature of economic reporting and in interviewing key people involved in the process from the early days of government reporting through the present.

For a number of years, Williams conducted surveys among business economists as to the quality of government statistics. The results led to front page stories in the New York Times, Investors Business Daily, considerable coverage in the broadcast media, including several meetings with representatives of the government’s statistical agencies.

“Despite minor changes to the system, government reporting has deteriorated sharply in the last decade or so,” John Williams says.

Alternative Data

Here’s a few examples of Shadow Government Statistics alternative data, with courtesy of ShadowStats.com.


Related by The Swapper:

Here Comes The QE2!

Global Economic Growth Slows For 5th Month Running

Financial Markets: Bulls Ready To Repeat 09 Rally

Betting On The FED

Currency: The Weapon of Choice in Trade Wars

QE Expectations Continues To Fuel The Risk Rally

Commodities: Dollar Movements And QE2 Sets The Agenda

Why Gold & Silver Prices Will Continue to Explode Higher


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