International Forecaster Weekly

Cook Those Books

For years now we’ve been mired in this recession. They have to cook the books like mad genius’s to get us anywhere near a 2% GDP. But here’s this guy screaming about a 5% GDP which on the surface would look like the economy is really firing on all cylinders and actually flirting with “too hot”.

Bob Rinear | March 19, 2014

I’ve been penning these Newsletters now for the better part of 20 years if you include the starting days when I used to address investment clubs. In all those thousands of letters, one theme reoccurs more than just about any other. The blatant “cooking” of the financial information we’re fed daily.

Obviously the most outrageous of the misinformation is spewed by CNBC. I honestly don’t know how these people can live with themselves after the lies they regurgitate day after day. I couldn’t do it. If I say something that turns out to be completely wrong, it is because I made a mistake, NOT because I tried to fool anyone. These psychopaths make their living belching blatant falsehoods, disguised as fact.

On Monday, I think everyone woke up wondering what had happened in Ukraine. Well as they said they would, they held their referendum vote and the majority voted to be a Russian Federation satellite. That prompted Obama to place some sanctions on several Russian officials. Okay, no big deal. But I sure didn’t expect to see the market gain 200 points on it, just because there weren’t “sweeping” sanctions placed. The market was obviously betting that “what was done, was done” and there wouldn’t be much more.

It was when the CNBC hosts that were interviewing the so called “guests” that I developed some synaptic misfiring. Naturally after such a tense weekend, seeing the DOW up 200 points they wanted some one to explain it. According to one “gent” the market was up because we were probably looking at a 5% GDP print coming up soon, and that the economy was “much stronger” than the winter numbers told us. See, all the weakness was weather, and we were seeing the market up - ahead of all this great news that’s coming.

As usual I started screaming obscenities at my TV. I’m sure my neighbors all think I have turrets syndrome as I am often accustomed to “going off” at the TV. But it wasn’t just that this person had put out the “5%” GDP that bothered me. It was the fact that they announce something like that, as if it “was as it always was” and folks… it isn’t. Stay with me here…

For years now we’ve been mired in this recession. They have to cook the books like mad genius’s to get us anywhere near a 2% GDP. But here’s this guy screaming about a 5% GDP which on the surface would look like the economy is really firing on all cylinders and actually flirting with “too hot”. But wait a minute. What he didn’t expound on was that not long ago they decided to change the way the GDP is calculated. I remember when that news first hit, that I was gasping for breath because I was laughing so hard. Why? Because it was so obvious that they were doing anything they could dream up, to make things look better. Sort of like when they say there’s no inflation because if steak gets too expensive people will switch to hamburger ( and presumably then… dog food because hamburger has hit record highs )

So, lets take a bit of a walk down history lane and see how they’ve added to some of 2013’s GDP reads and a big portion of the “gains” we’ll see in 2014… Here’s Rob’s snapshot….

The Bureau of Economic Analysis (BEA) announced new methods of calculating Gross Domestic Product GDP) that will immediately make the economy "bigger' than it used to be. The changes focus heavily on how money spent on research and development (R&D) and the production of "intangible" assets like movies, music, and television programs will be accounted for. Declaring such expenditures to be "investments" will immediately increase U.S. GDP by about three percent. Such an upgrade would immediately increase the theoretic size of the U.S economy and may well lead to the perception of faster growth.

Business spending on R&D, a portion of which comes in the form of salaries, has traditionally been considered an expense that does not explicitly add to GDP. But now, the United States will lead the rest of the world in redefining GDP. The argument goes that, for example, the GDP generated by iPhones has far exceeded the cost spent by Apple to develop the product. Therefore, Apple's R&D is not an expense but an investment.

The BEA also argues that the cost of producing television shows, movies, and music should count as investments that add to GDP. Supporters of the change often hold up the blockbuster television comedy Seinfeld as an example. Given that the show's billions in earnings far exceeded its initial costs, they argue that the production expenses should be considered "investments" (like R&D) and be added into GDP.

In essence, the new methodology is an exercise in double accounting. For instance, suppose a company employs an accountant who works in the sales department, who is then transferred to the R&D department at the same salary. He still counts beans but now his salary will be billed to the R&D budget rather than sales. In the old methodology, the accountant's impact on GDP would come only from the personal consumption that his salary allows. Going forward, he will add to GDP in two ways: from his personal consumption and his salary's addition to his company's R&D budget.

These double shots are different from traditional investments, which inject savings (or idle cash) back into the marketplace. Until money from personal or corporate savings is invested, it is not adding to GDP.

The new system magnifies the GDP impact of government pensions, which are a principal component of public sector compensation. Going forward, the pensions will be calculated not from actual contributions, but from what governments have promised. Under the old system, if a state had a $10,000 pension obligation but only contributed $1,000, only the $1,000 would be added to GDP. Under the new system the entire $10,000 would be counted. So now governments can magically grow the economy simply by making promises they can't keep

Do any of you remember that little sleight of hand? How much GDP is there from watching old batman reruns? Or from pension obligations they promise but can’t make?? The word None comes to mind.

But another so called “guest” which you could more expertly call a paid shill for Wall street came on and declared that between auto sales, housing sales, and the tail wind from China, we’re going to see a “much stronger than anyone anticipates” economy. Oh really? Housing sales eh? With mortgage applications at decade lows? With auto sales sucking wind, as companies channel stuff the dealerships with cars they don’t want? With the resurgence of the sub prime credit market now responsible for over 50% of all sales? With China supposedly cracking down on credit?

How about just Monday’s headlines sans the Ukraine??… Empire State report misses estimates. Inside the report employment plunged like a rock, while prices received cratered. Housing sentiment misses estimates as they were hoping for a read of 50, but only got 47. How about the Chinese Real Estate developer that defaulted on some 3.5 billion?? All of that was ignored.

Here’s some real world observation of just how sick our Country has become. My 19 year old son is in college studying for a career in radiography. To supplement himself, he took a part time job at a local grocery store. It’s simply your basic low wage “stock boy” sort of thing. Well, he’s a good worker and they like to call him for extra hours to cover sick calls, etc. But the other day his manager had to apologize to him and explain that this week he’d be sent home early one night. It seems that the company rule is ABSOLUTELY no hours past 29.5. It doesn’t matter that the kid wants to work. It doesn’t matter that they need the help. Because of political crap over Obama care, my boy can’t put in a bigger week.

Where does that show up in these so called experts blathering on CNBC?? No where, that’s where. Because frankly, pardon my language, he’s “fulla crap”. Our GDP is a joke. Our Government is a very bad joke. Obama care is crushing thousands, and impacting millions. We prance around the globe sticking our nose where it doesn’t belong and then go deeper into hock to pay for it all.

So what’s my point behind this little rant? Simply this folks. Nothing is as it seems. Nothing is as rosy as they’re telling you. When we’re down to just one last surviving company they’ll tell us that factory output is at 100%. It would have to be, it’s the only one running. Get it? And because things are NOT as they say they are, only two things can happen. One is that we improve to match the crowing/glowing reports, or Two…we roll over and crash, and then the talking heads all have to explain how “no one saw it coming” like they did in 2008. I suggest door number two will win the contest.

I don’t want any of you on the wrong side of this when the wheels fly off. A lady as big as the US doesn’t just slip on a banana peel and fall flat on her back. No, she goes down a little at a time, over a long period of time, and not gracefully. A little sag here, a little there. But eventually she’s flat on her butt and that is indeed where we’re headed. So all this baloney Wall Street is shoveling at us has only one intent.. to keep you thinking things are great, to keep you sending your 401K money in, to make you feel like you should go spend more money. Nothing else.

All of you have to decide to which level of “prepping” you’re willing to do. For some it will mean just having a months cash on hand, a three day supply of dry food and some “hope”. For others they only feel comfortable going “full prep” which means considerably more. (food, shelter, medical, weapons, ammo, water, silver, gold, cash, communications, etc etc). I’m not here to scare anyone and I personally am not “full prep”. But that doesn’t mean I don’t have at least a workable plan that would work for all but a really terrible situation.

But to do absolutely nothing in this environment seems silly. Don’t believe their hype folks. You all know what is really going on in the economy. You all know what’s really going on with our Government. Use your heads and take 90% of what you hear with a grain of salt. Research things. Make your own decisions.

With all that’s going on, I could easily see a flash market crash. I could easily see a bank holiday where ATM’s are down for a few days. I could easily see some form of bizarre false flag attack. I could see Ukraine heat up again. I could see China and Japan push and shove each other. Basically the worlds gone nuts. I wish it weren’t so but it is. By all means, “some” level of planning makes a lot of sense here. So, this coming weekend we’ll look at the weeks developments and then talk about some options you all have to personally weigh. Do you liquidate your 401K because they might try and “take it?” Do you try and install solar or some other “off grid” power situation? Do you buy more silver, or gold, or…both? Stay tuned, it is important “stuff” to consider.