Stagflation Sets In

"At that point, nothing is left but gold. Now trading at $1790, it could zoom right past $2000 to $3000 an ounce"  LINK

"Inventories to result in big hit to Q3 GDP" - It looks like wheels are falling off the U.S. economy.   Of course, those of us who have been paying attention to the details beneath the headlines were expecting that the lipstick that the Government and Wall Street have been putting on the proverbial pig would soon wear off.  This was the first inventory decline since September 2009.  Here's the report: LINK

Recall that the Government has estimated that the 3rd quarter GDP had grown by 2.5%  Notwithstanding all of the problems we know about with this metric, the decline in inventory build-up - when the expectation was for another gain in inventory - will cause the revision of that 2.5% number to be lowered quite a bit.  Several forecasters are already reducing that 2.5% initial estimate by 25-30% down to 1.7-1.8%.  When you start to factor in the grossly underestimated inflation factor - the "GDP deflator" - you can pretty much assume that the GDP was negative on a real basis in Q3.

Another sign of the big decline in economic activity was the earnings report issued by GM today.  As has been detailed by zerohedge.com, GM has generated a large portion of its sales growth by stuffing its network of dealers with inventory.  Recall, GM itself books a sale when the car leaves the factory floor and is shipped to the dealer, who uses Government supported "warehouse financing" to pay for the car.  Sales reported by GM do not directly translate into actual sales to the end user, which means that the GM's sales are not necessarily indicative of true organic economic activity.   Despite "beating" Wall Street earnings estimates, GM's stock is down over 8% 10% today, as GM warned of future weakness and of course blamed Europe.  But I would also speculate that we will see greater than expected weakness in auto sales in the U.S. as well.  Note:  I would also bet that if I had the time to go through GM's financials and the footnotes to those financials that I would would an absolute accounting nightmare.  In my view GM stock is a great short-play here.

The inventory/GDP dynamic has been that large manufacturing companies like GM have been "pulling forward" sales using pricing and financing incentives.  This is de rigueur with the auto manufacturers, but pretty much permeates the entire manufacturing sector.  Eventually the end purchaser slows down and the distributor in the economic chain - the auto dealer or retailer - reduces its inventory stocking which causes the manufacturer to slow down.  The manufacturing to final sales cycle can be "sticky," but once it gets going in one direction it tends to have snowball effect.  So any kind of economic strength was exaggerated and now the slowdown could be ugly.

Why do I say this?  Let's take a look at the financial condition of the "end-user," the middle class.  To begin with, while most people were scrutinizing the problems in Europe because the media wants us to believe that's the real problem in the world, I noticed this report:  The figures from payroll taxes reported to the Social Security Administration on jobs and pay are, in a word, awful.  LINK  This particular data report is something that you won't see on CNBC or Bloomberg or Fox News.  The Government doesn't issue a press release and they want you to keep your eye on the European "ball."  But those numbers tell you that less Americans are working and they are earning less money.  A bit different story than the payroll and earnings numbers that are highly statistically massaged and released for CNBC to promote, huh?

So Americans in reality have less money to spend going forward and we know banks are not lending because the average credit profile of the average American sucks.  Here's proof of that:  The national mortgage delinquency rate (the rate of borrowers 60 or more days past due) increased for the first time since the end of 2009.  Here's that LINK  Call me crazy, but I'm guessing that if your neighbor isn't making his mortgage payments, he ain't rushing out to buy a sparkling new GM or Ford either.

Ultimately, the Government's response to all of this will be to print more money.  A former Bank of Japan board member is calling for Japan to put its printing press into overdrive:  LINK  This will be followed by the ECB and the Fed cranking up their Heidelbergs.  So we have the perfect recipe for much higher gold and silver prices:  negative GDP, negative interest rates, money printing and higher inflation.  Don't pay attention to the day to day or week to week price action in the metals - it's mostly traders and manipulators.  One of the board members of the CFTC is now openly admitting that the silver market is highly manipulated.  The price of gold and silver six months from now will be substantially higher than where it is now.