Guest Post: Inside the New GDP Numbers - Consumer Metrics Institute

"The 2010 contraction is now clearly worse than the "Great Recession" was at the same point in their respective time lines. And we don't see a bottom forming yet."

Consumer Metrics Insitute
Inside the New GDP Numbers
July 30, 2010

On July 30th the Bureau of Economic Analysis ('BEA') released its "advance" estimate of the annualized growth rate of the U.S. Gross Domestic Product ('GDP') during the 2nd quarter of 2010. Per their report, the GDP grew during the quarter at an annualized rate of 2.4%, down from 3.7% in the 1st quarter of 2010. Several points from the report merit comment:

► Readers familiar with prior GDP reports will be more surprised by the reported 1st quarter growth as by the new 2nd quarter number (which had been leaked by Mr. Bernanke last week), since only last month the Q1 of 2010 was supposedly growing at a 2.7% rate. Why did the Q1 number suddenly get altered upward by 1%? The BEA quietly revised the 1st quarter inventory adjustment up to a level that represents a 2.64% component within the revised 3.7% figure, with 1st quarter "real final sales of domestic product" now reported to be growing at a modestly improved 1.06% annualized clip, compared to the 0.9% number reported last month. In short, factories were piling on inventory at a substantially higher rate than previously thought, while the "real final sales" remained anemic.

► The 2.4% figure will garner all of the headlines, but the more important "real final sales of domestic product" continues to be weak, growing at a reported 1.3% annualized rate. The real cause for concern is that the reported inventory adjustments dropped from a 2.64% component in the revised 1st quarter to a 1.05% component during the 2nd quarter. If factories have begun to realize that end user demand remains anemic, the inventory adjustments could well go negative soon, pulling the reported total GDP down with it.

Chart 1




► The BEA revised much more than the first quarter of 2010. They revised down 2009, 2008 and 2007 as well. Apparently the "Great Recession" has been worse than our government has previously reported. And the recovery's brightest moment, Q4 2009, has been revised down from 5.6% to 5.0%. Similarly Q3 2009 dropped from 2.2% to 1.6%. And so on. The bottom of the recession was shifted back one quarter, with Q4 2008 now reported to have contracted at a -6.8% rate, revised down from the previously reported -5.4% rate. Most quarters of 2007, 2008 and 2009 have been revised down substantially, shifting the recession shown in the chart above back in time.

► The new GDP report shows that the current gap between the consumer demand that we measure and the BEA's reported number continues to grow as factories build their inventories in anticipation of a strong recovery. If factories curb their enthusiasm during the third quarter, the BEA's "advance" estimate for Q3 2010 might be brutal, just 4 days before the U.S. mid-term election.

► We understand that economists want to ultimately get the numbers right, even if it is three years after the fact. We applaud the BEA for their efforts. But we also understand people who are concerned about quiet governmental revisions to history.

Back to the real world: our Daily Growth Index has dropped to new recent lows, and it is now contracting at a -3.4% rate.

Chart 2



This contraction rate puts the trailing 'quarter' nearly into the 5th percentile among all quarters since 1947, meaning that only about 1 in 20 quarters officially recorded by the BEA since then has been worse. Our "Contraction Watch" places this movement into the perspective of the 2006 and 2008 contractions:

Chart 3



The 2010 contraction is now clearly worse than the "Great Recession" was at the same point in their respective time lines. And we don't see a bottom forming yet.

SP 500 September Daily Chart; Gold Daily and Weekly Charts; Silver Weekly Chart

SP futures failed at overhead resistance, but still have not yet taken out support, and the important pivot, to the downside.

Still it was a low volume weak ending to the month of July.



Gold held the all important support and came roaring back today, rallying as the selling for the option expiry and Comex contract rollover are done.

It is hanging around the important 1180 level, but taking out 1200 and sticking it is quite important.

So in summary, a very nice rally for the beleaguered bulls, but it is too soon to write home to mother about it.



Gold Weekly

Classic Bull Market



Silver Weekly Chart

Bull market but the trend is wider allowing for greater beta and a wilder ride.

Financial Times Says European Banks Lent Their Customer's Gold to the BIS

Although it does not appear until almost the end of this article in the Financial Times, BIS Gold Swaps Mystery Unravelled, the source of the gold provided in the dollar swaps with BIS is coming from customers of about 10 European banks who are holding their gold at the banks in 'unallocated accounts.'

"The gold used in the swaps came mainly from investors’ deposit accounts at the European commercial banks. Some investors prefer to deposit their gold in so-called “allocated accounts”, which restrict the custodian banks’ ability to use the gold in their market operations by assigning them specific bullion bars. But other investors prefer cheaper “unallocated accounts”, which give banks access to their bullion for their day-to-day operations.

The European Banks, including HSBC, Société Générale and BNP Paribas, were desperately in need of dollars because of a repeat of the eurodollar short squeeze which we had previously identified. Their customers were withdrawing dollars previously on deposit at the banks, which were unable to meet the demand because of the deterioration of the dollar assets they held, and because of the fractional reserve nature of their operations.

So the BIS stepped in, supplementing the swap lines the ECB has with the Fed, and swapped its dollar holdings directly for the some of the banks' customer's gold. Let us be clear about this. The gold is on deposit at the banks, in the same way that customer dollars had been on deposit. I do not wish to fuss too much about it, but at the time that the BIS swaps were revealed, a noted blogger pooh-poohed it with the toss off that 'everyone knows that the European commercial banks own quite a lot of gold.' Well, in this case, the ownership is greatly exaggerated. It is on deposit, owned by other people, but utilized as an asset by the bank. There is a difference.

In lending out the gold to BIS, they were relieved of their dollar short squeeze and were able to supply their customer demands. BIS obtained a fee of some sort in the swap, and so it is happy. But it should be noted that BIS had not done gold swaps for over forty years. So why now?

The question remains unanswered though. What is the duration of the swap, and does BIS intend to hold the gold or use it in other interbank operations?

A secondary question would be: why did the banks go directly to the BIS and swap their customer's gold, rather then to the ECB which is perfectly capable of managing swaplines for currency with the BIS and the Fed. Is the Fed running out of dollars? I have an open tab in my mind that the BIS was seeking gold to balance out demands from other banks for gold, not for dollars, and the eurodollar swaps were a convenient way to do it. This story that 'the BIS had lots of dollar lying around and were itching to use them' strikes me as being of the whole cloth.

Yes, the nice high level chart the FT includes shows the spike in gold holdings at the BIS, but does this mean that it is sitting there in their reserves unencumbered, or are they leasing any or all of it out, 'putting it to work' as they say? Central banks are notorious for making little distinction between unencumbered gold assets and real assets in the vault.

But it is nice to see verification in the mighty Financial Times that if you hold your bullion gold in an 'unallocated account' even with a prestigious bank, it may very well not be there when you wish to have it, and the prices will soar as the banks scurry to cover, just as has happened twice of late with their US dollar assets.

Or you may be asked to settle in cash if there is some clause in the contract, as in the case of the ETFs or the Comex.

Big Drop in Comex Gold Open Interest

The large drop in the August contract open interest (61,257) is to be expected since this is 'roll week' and those who are not standing for delivery will have to close their positions by Thursday night.

The new positions or 'rolls' into the October and December contracts totaled 40,372.

Recall that this was also an option expiration week.

Overall there was a net loss of 21,894 contracts.

It is too soon to tell if this was a capitulation that blew out the weak hands, but it looks as though it might have been one. The momentum traders will likely stand on the sidelines until gold can clear 1180, which was prior support. Traders have their eyes on the 200 DMA which is around 1145.

Comex Daily Bulletin #144

US Weekly Unemployment Claims

SP 500 September Futures; Gold Daily; Gold 200 DMA

SP 500 September Futures; Gold Daily; Gold Weekly

SP 500 Sept Futures

It will be interesting to see if they can keep taking this higher. The McClellan Osciallator is at a extreme reading. But volumes remain light, and while heavy selling is absent, prices on the margins can be lifted higher, in a manner similar to a ponzi scheme. But if selling appears again, particularly if it is driven by exogenous events, prices can therefore fall rather quickly, because of the lack of fundamental underpinnings for the price supported by investors with conviction, rather than the cheap tricks of convicted trading companies.



Gold Daily Chart

It's never easy. This will likely not be over until 'roll week' is finished on Thursday. This is a blatant fraud in my opinion, similar to the roll week frauds perpetrated on holders of ETF's. It is done with at least the passive approval of many traders, exchanges, the media, and investment companies, similar to the manner in which they enabled the mortgage backed securities frauds. The attitude is that investors are not human beings but 'dumb money' deserving of no consideration or protection, even if it is one's job to protect them from control frauds.



Gold Weekly

Important for maintaining perspective. Please notice the periodic severe corrections to trend. In eash case sentiment becomes rather pessimistic, and people tend to say silly, illogical and blatantly incorrect things. When the market turns up again they slink away, waiting for the next opportunity to crawl out of their deep wells of subjectivity. If the trend is decisively broken then we will adjust our trading to accommodate that change.

"Gottes Mühlen mahlen langsam, mahlen aber trefflich klein,
Ob aus Langmut er sich säumet, bringt mit Schärf' er alles ein."

Friedrich von Logau

Goldman's Derivatives Clearing Service: The Better To Cheat You With My Dear

Say, aren't Goldman the fellows that just pled to fraudulent dealing in financial instruments like MBS, and paid a fairly hefty 500+ million dollar fine? The company is starting a centralized clearing facility for derivatives, which may be among those mandated for use by market participants, in the US government mandated efforts to reform.

When one considers the information available to a central clearing facility, somewhat like an exchange, it does give one pause to have the owner of that facility as a somewhat notorious and aggressive market participant with a known penchant for exploiting information for its own ends.

Financial reform and change you can believe in. It pays to have friends in high places.

Economic Policy Journal
If Regulators Say Trade Through a Central Exchange...
By Robert Wenzel

...Goldman Sachs starts a central exchange.

Is it me, or does it just seem that whatever the rules or regulations, Goldman comes out on top and pretty much ends up running the show?

Regulators are preparing rules that will require the majority of privately traded derivatives be cleared through central counterparties.

Goldman Sachs announced today the launch of its Derivatives Clearing Services (DCS) business. The DCS will provide clients with a comprehensive global OTC clearing service for interest rates, credit, foreign exchange, equities and commodities, says Goldman.

“In partnership with our clients, regulators and multiple clearing venues, we are committed to improving market structure for derivatives,” said Michael Dawley, Managing Director and Co-Head of Futures and DCS, Goldman Sachs. “The DCS offering provides our clients with a host of value-added services and multi-product expertise to successfully navigate this dynamically changing environment.”

According to a press release,Goldman Sachs said it recognizes that clients will be faced with new reporting, connectivity, and regulatory requirements. The firm is committed to investing in innovative solutions to help clients address these changes.

“The move to central clearing for OTC derivatives is a significant turning point in the marketplace," said Jack McCabe, Managing Director and Co-Head of Futures and DCS at Goldman Sachs. “Our strong trading franchise, coupled with our market leading futures and prime brokerage services, enables us to provide our clients with the foundation they need to adapt to these important industry developments."

Net Asset Values of Certain Precious Metal Trusts and Funds

Gold Daily Chart; Shock and Awe for Comex Option Expiration

Today is yet another Comex option expiry, and the metals, which have been subject to bear raids for the past week, were hit hard and heavy from the New York crowd. This is also the "roll" week, as anyone not intending or funded to take delivery of August gold has to be out of their long positions by the end of the day Thursday.

Why anyone would bother to invest in Comex options is beyond me, or Comex futures for that matter, given the position abuses it tolerates. While we welcome Bart Chilton's stirring message of reform, we'll have to wait and see what the actions taken by the CFTC in position limits and disruptive manipulation are. I think the traders on the NY commodities exchanges have given Bart their answer to his proposed changes, and put him in his place.



Besides the usual market manipulation generally seen around key events like the end of quarter or an option expiration, what reason is there for this incessant capping and smackdowns of the precious metals? Is it a simple question of confidence in the dollar? Surely it is not because of the $30 billion being made available for subsidized small business lending. Or are their preparations being made for another large round of Quantitative Easing II, or even the pre-emptive bombing of Iran? It is hard to say, since the fraud option has been on the table as an instrument of US policy since the 1990's at least.

Obama has proven to be a good talker for reform but a very poor performer when it comes to curbing the excesses of his supporters and contributors at the large corporations particularly in the financial sector. This taints his entire administration.

At 11:00 AM



Here is an intraday update on the Gold Daily Chart. 1166.50 is an important level because it marks a prior low. We have reached it intraday today, so we would look for some support and a potential double bottom.

The formation as a 'cup and handle' is still valid, with the retracement less than 50% off the final high (1154 would be 50%) but there are other formations worth considering. We'll keep an open mind on that depending on how this week finishes.



Unfortunately for Larry Summers, Ben Bernanke, and their friends at the BIS, they have not yet figured out how to print physical gold, silver, and the world is reaching the point where it might start simply ignoring the New York markets with respect to essential commodities such as basic materials, oil, foodstuffs, metals, and the like, as they become increasingly irrelevant, fraudulent, and Orwellian. And then where will the financial engineers be, except with no more excuses and no place to hide?