Subprime Housing Leads to Subprime Financial Institutions

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

The housing reports released in October 2007 which indicated the state of the market in September were even more dismal than those of the prior month. Nationally, foreclosures had doubled year over year and they had gone up as much as 500% to a 1000% in the worst hit bubble areas of the housing market. Existing Home Sales were down 23% nationally. Although also down substantially, New Home Sales were nevertheless reported as increasing (huh?).

The September 2007 New Home Sales report was a classic example of how the financial media frequently reports bad news as good and hopes people only read the headlines and not the fine print. The New Home Sales report originally indicated that there had been 795,000 houses sold in August. The report then indicated 770,000 houses sold in September. This drop of 25,000 was heralded by the media as a increase of 4.8%. This happened because the sales figures for August were revised downward to 735,000 (by almost 8%, an incredible error for a statistical report) and the September figure was above this number, so this indicated that sales were going up! The first thought of any rational person should of course have been, 'if the numbers for August were actually much lower, why shouldn't the ones for September be much lower as well?' Even a casual look inside the September report lent substantial support that this was indeed the case. Sales in the West, probably the worst hit housing area in the U.S., were supposedly up 38% - a completely absurd number and an indication that the September numbers were being overstated just as the August numbers had been.

Despite the complete devastation in housing sales., median house prices were reported up 2.5%. The statistical tricks that led to this impossible outcome were discussed previously in this blog in the posting, "Housing Market Collapses, but the Statistics Hold Up".

House sales were falling off a cliff because mortgage money was disappearing. By October 2007, 183 mortgage lenders had already closed their doors since the previous December. One that didn't was Countrywide, the largest mortgage lender in the United States and therefore presumably too big to fail. What kept Countrywide afloat was a $2 billion capital infusion in August from Bank of America. Barron's reported that there were rumors that this bailout had been secretly arranged by the U.S. federal government. If so, it would only be the first of many bailouts that the Feds would have to arrange to prop up failing American financial institutions. Shortly thereafter, one of the major British mortgage lenders, Northern Rock, experienced a run on the bank - the first in England since the 19th century. Northern Rock had been known for it 125% mortgages and when word got out that it needed an emergency loan from the Bank of England, depositors queued up for blocks desperate to get their money out. While the Bank of England directly provided capital to keep Northern Rock going, this approach would prove to be no more successful than the more circumspect American one. Both Countrywide and Northern Rock would barely survive into 2008.

Next: What Banks and Enron Had Common

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please go to: http://investing.meetup.com/21

Australian and Canadian - the Only Dollars Worth Holding

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

By the November 14, 2007 meeting of the New York Investing meetup, deterioration of the U.S. dollar had become pronounced. The trade-weighted dollar had fallen further through its long-term support level and hit a series of new all time lows. Not surprisingly, the euro hit a series of new highs reaching an exchange rate of 1.47 to the dollar. The rallies in the Australian and Canadian dollars (both economies are based on food and commodity production) were even stronger however. At one point, it had taken approximately two Australian dollars to get one U.S. dollar, by November of 2007 only around 1.1 Australian dollars were necessary to get an American dollar. In the early 2000s, one U.S. dollar got you 1.61 Canadian dollars, but by November you would only get 91 Canadian cents.

There were two talks that month at New York Investing that dealt with what was going on in the currency market and the implications for investing, "Investing Like It's 1979" and "How to Profit from the Falling Dollar" (see http://investing.meetup.com/21/files). Currency movement don't exist in a vacuum of course, but affects the price of commodities because they are priced in U.S. dollars. By November 2007, Oil had gotten to $97 a barrel making a series of all time highs, although it first broke its nominal 1980 high of $39.50 a barrel in 2004. While oil was a leader in reacting to the value of a declining U.S. dollar (the dollar had been falling since 2002), gold's reactions were more coincident to changes in the American currency. Gold had reached $848 an ounce getting close to its nominal intraday high of $875 in 1980, but not enough to establish a new record. Of the three inflation-related commodities, silver was by far the laggard, reaching only $16 plus and ounce, not even near its $50 an ounce high from 27 years earlier.

The specifics of how to invest in currencies and commodities, such as ETFs (exchange traded funds) and foreign currency denominated CDs and accounts were not only handled in the talk, "How to Profit from the Falling Dollar", but in three videos produced by the New York Investing meetup. These videos represented an investing blueprint for the average investor on how to handle the new inflationary environment the Federal Reserve had created. Please see these video for more on this topic:

Currencies I – How to Profit From the Falling Dollar
http://www.youtube.com/watch?v=dTImG1dWT4k

Currencies II – How to Profit From the Falling Dollar
http://www.youtube.com/watch?v=XhfwatOCx_k

Commodity Investing – How to Profit From the Falling Dollar
http://www.youtube.com/watch?v=IG5zApWcOk0

Next: Sub-prime Housing Leads to Sub-prime Financial Institutions

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please go to: http://investing.meetup.com/21

All The Glitters Isn't Gold, It's Also Silver

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Commodities are priced in U.S. dollars. When the Fed began its rate cutting campaign in earnest on September 18, 2007, it became inevitable that the U.S. dollar would fall. While the value of the dollar goes up and down all the time, this time the drop would have serious consequences. The trade-weighted dollar was hoovering just above all time lows in August and would fall through multi-decade support by the end of September to reach levels never before seen. Since the dollar was hitting all time lows and commodities were priced in dollars, everything else being equal, it was reasonable to assume many commodities would subsequently be hitting all time highs. This is exactly what happened to commodities that were consumer necessities or that were currency substitutes.

The biggest price rises took place in food commodities. Wheat had already started rallying in mid-2007. Once it became clear that the Fed was beginning a new easing policy in mid August, the price of wheat on the charts started to move straight up. By the end of September its price would almost be double what it had been only three months before. Major rallies in soybeans, corn, and rice also occurred taking them to multi-decade or all time highs as well. These rallies in turn showed up in rising global food prices, up 20% for 2007 and 75% since the lows of 2000. While U.S. consumers were paying more at the supermarket just like consumers elsewhere, the Federal Reserve continued it long term policy of generally ignoring rising food (and energy) prices because they were 'volatile'. While food prices can indeed be volatile, a report by Bloomberg News found there had not been a year over year drop in food prices in the United States for at least 40 years.

Like food, energy prices were also not a part of core inflation, so the Fed tried its best to ignore them as well. U.S. consumers unfortunately did not have this option. By the end of September, oil had broken through it's all time high set in mid-2006 and headed toward a $100 a barrel, which it reached around the turn of the year. While this was a new nominal high, it was approximately only the 1980 high adjusted for (official) inflation. Interestingly, the price of gasoline at the pump did not break its 2005 post-Katrina high, when oil was only $70 a barrel, until March of 2008.

Finally, the money-substitute commodities, gold and silver, also had significant rallies. Gold broke its April 2006 high before the end of September, while silver lagged by several weeks. Gold would break its January 1980 nominal closing spot-price high in November and the all-time intraday high of $875 an ounce somewhat thereafter. Gold would reach 1000 in March 2008. Unlike oil, gold was not even near its (official) inflation-adjusted high of approximately $2200 an ounce. While percentage wise, Silver had an even bigger rally than gold, reaching $21 an ounce in March of 2008. This was not even near its approximately $50 nominal price high in January 1980, not to mention its over $130 inflation adjusted high.

For more on this topic, please see notes for the talks, "Thinking Outside the Bucks - Inflationary Investing" and "How to Profit from the Falling Dollar" at: http://invesing.meetup.com/21/files
and our video, "Commodity Investing - How to Profit From the Falling Dollar" at:
http://www.youtube.com/watch?v=IG5zApWcOk0.

Next: Australian and Canadian - the Only Dollars Worth Holding

Daryl Montgomery
Organizer, New York Investing meetup

Please see our web site for more about our group: http://investing.meetup.com/21.

China's Olympic Sized Bubble

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

The credit bubble in the U.S. did not exist in isolation, but was inextricably linked to a bubble in China U.S. trade. One of the many manifestations of this bubble was a Chinese stock market that started going straight up in late 2006, reaching extreme valuation levels based on any historical standard. The New York Investing meetup discussed this issue in its October 2007 meeting in a presentation entitled, "Thinking Outside the Bucks" (please see: http://investing.meetup.com/21/files).

In the 1990s and early 2000s, China was the most significant economic success story in the world. Rapid industrialization and trade grew the Chinese economy and kept consumer prices down in the West. This was accomplished by utilizing China's large pool of inexpensive labor to produce an increasingly greater number of goods for export. Since labor is the largest cost component for almost all manufactured goods, this lowered prices globally for a number of items. However, China went one step further to insure it could continue to sell its exports at low prices - it pegged its currency to the U.S. dollar (an idea originally suggested by the American monetary authorities, much to the later regret of U.S. politicians). The dollar peg allowed China to keep its currency undervalued, just as Japan had done during its decades of spectacular growth, and provided its exports with a huge advantage in world markets. It also insured the creation of a massive bubble.

As Chinese exports to the U.S. increased, China accumulated a growing hoard of dollars that it used to purchase U.S. treasury bonds. This in turn kept interest rates low in the U.S. and allowed Americans to borrow ever greater sums to finance a purchasing-based consumer economy and for the U.S. government to borrow cheaply to finance a ballooning national debt.
Pegged currencies are not without their downsides, however, as China eventually found out when its internal rate of inflation began rising. In July of 2005, China officially, but not actually depegged the Yuan from the U.S. dollar. The Yuan was allowed to float in such a narrow trading band that by September 2007 it had fallen only to 7.50 from 8.28 to the dollar. Since the Yuan wasn't allowed to float to a realistic level, inflation started taking off in the mainland and the Chinese government announced price controls that month to try to halt it.

Meanwhile, the greater wealth created within the Chinese economy led to an exploding stock market. This bubble in stocks was further fueled by asset controls that prevented most Chinese investors from moving their money outside of China. The effects of this could be seen by examining prices of Chinese stocks that traded in both the mainland and Hong Kong. The prices on the mainland exchanges were much higher than those in Hong Kong. In August of 2007, the Chinese government announced a policy shift that would allow mainland investors to buy and sell stocks in Hong Kong. The effect of stock prices in Hong Kong was explosive and only days later the Chinese government announced this policy change would be on hold for the foreseeable future.

For more on this topic, please see the video: "Global Perspectives on the Decline and Fall of the U.S. Dollar" at: http://www.youtube.com/watch?v=dbHxbOvjYis&NR=1

Next: All that Glitters Isn't Gold, It's Also Silver

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please go to our web site at: http://investing.meetup.com/21.

Bubble, Bubble, Toil, and Trouble

The 'Helicopter Economics Guide Investing' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

The Subprime Crisis that began causing turmoil in the U.S. markets in July 2007 was merely a small part of a massive and pervasive credit bubble that reached into every nook and cranny of the U.S. financial system. A huge excess in credit had been extended and utilized everywhere and to almost everyone. Government, consumers, market players, and businesses had borrowed beyond the hilt to maintain a system that required an ever-increasing amount of credit to sustain itself. Subprime debt was merely the weakest link in this credit chain, so it broke first.

The origins of the subprime bubble can be traced back to events in the 1980s, Early in the decade the idea that less regulation of financial institutions was a good idea took hold. The Savings and Loan industry was deregulated and it turned into a monumental failure that wound up costing the U.S. taxpayer $200 billion because of the out of control corruption, theft, and financial incompetence that deregulation allowed to occur. Nevertheless, deregulation of the financial industry continued and regulation of financial instruments such as derivatives or new industry players, such as hedge funds did not take place because 'regulation was too costly'. Federal Reserve chair Alan Greenspan was generally opposed to regulation and not only did everything possible to prevent new regulations, but didn't utilize the Fed's existing powers to regulate during the years he controlled the Fed from 1987 to 2006.

Decreasing regulation was then combined with a huge increase in liquidity provided by the Federal Reserve. This process began during the 1987 stock market crash, which Alan Greenspan handled successfully with a sharp drop in interest rates and by pumping money into the financial system. This set the tone for the next 19 years of the Greenspan Fed. In order to bailout the U.S. banking system from the Savings and Loan Crisis, interest rates were lowered
too much and for too long in the early 1990s. This excess in liquidity in turn led to the stock market bubble later in the decade. When the tech-stock bubble collapsed, interest rates were eventually lowered to one percent and this inflated a real estate bubble - something that Greenspan continually denied existed.

The conditions that led to these bubbles were no different than the ones the created all bubbles throughout history. Declining yields combined with an excess of capital (both are created simultaneously by the Fed), lack of regulation which allows for widespread fraud and corruption, and a technical or financial innovation. In the case of the tech stock bubble, the Internet was the technical innovation and for the real estate bubble, it was packaging subprime loans into bonds which could be sold, transferring the risk to other parties and providing capital to make more loans. As more and more loans were made, the quality of those loans by necessity deteriorated.

Bubbles always have feedback mechanisms as well and once started they become almost impossible to stop until they burst. Once they burst however, an anti-bubble forms with the original feedback mechanism operating in reverse. This anti-bubble in itself becomes almost impossible to stop until it exhausts itself. The feedback mechanism is what allows prices in bubbles to go way beyond anything reasonable or even imaginable when they start and then to the drop on the downside to levels that are incredibly low.

Ben Bernanke was desperately trying to reflate the real estate centric bubble with his rates cuts in the fall of 2007. This was a hopeless task, since once a bubble begins collapsing it usually takes many, many years before it can be reflated. What does occur is another bubble gets created elsewhere in the financial system. The Bernanke bubble would turn out to be in inflation.

Next: China's Olympic Size Bubble

Daryl Montgomery
Organizer, New York Investing meetup

Please see our web site for more about us: http://investing.meetup.com/21

Housing Market Collapses, but the Statistics Hold Up

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

The August housing sales figures released in September 2007 indicated that housing sales had fallen off a cliff in most of the areas of the U.S. that had been at the center of irresponsible mortgage lending. Los Angeles county California lead the way with a 50% decline in houses sales from the previous year. Orlando, Florida and Phoenix, Arizona were not far behind with a 40% drop. House sales in Las Vegas, Nevada were 37% lower than a year before. The collapse in the U.S. housing market would be led by these four housing bubble states: Arizona, California, Florida and Nevada plus two others: Michigan and Ohio, which were suffering economic hardship from declines in U.S. manufacturing.

One of the most fundamental tenants of economics is that price is determined by supply and demand. When demand drops or supply rises, prices should fall. When demand drops a lot, prices usually fall a lot. While there were anecdotal reports of housing prices falling 50% or more at bank auctions in various parts of the country, the overall statistics indicated only modest drops in housing prices in most communities, and even small increases in others. How was this possible, assuming there was no fraudulent manipulation of the numbers (something that should always be considered when two and two doesn't add up to four)? As with many of the U.S. government reports, statistical sleight of hand by the number crunchers was at work .

When housing prices were being compared year over year, there were in reality two different markets being measured. In other words, the comparison was being made between apples and oranges and was therefore effectively meaningless. When housing sales fall dramatically, they don't fall evenly across the economic spectrum. People who buy more expensive homes are more likely to be able to get a mortgage and the high-end of the housing market holds up. People at the lower end get shut out and sales for cheaper homes fall much more than those of expensive homes. The most recent housing market statistics will have a lot more high-priced homes in them proportionately than the previous years statistics and this skews the average and median prices up. It is in fact easy to come up with examples where every house price in a market falls by a significant amount and yet the average and median house price goes up! This was exactly what was happening in the summer and fall of 2007. While the plummeting housing sales numbers were accurate, the officially reported prices in no way reflected actual pricing trends in the market.

Next: Bubble, Bubble, Toil and Trouble

Daryl Montgomery,
Organizer, New York Investing meetup

For more about us, please go to our web site: http://investing.meetup.com/21

The Myth About the U.S. Dollar and the Trade Deficit

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

One of the most widespread pieces of misinformation that is believed in and broadcast by the financial community is that as the U.S. dollar falls, the trade deficit will improve and by implication even disappear. It is almost impossible to view financial TV or read the press without seeing this incorrect piece of information being cited with great certainty and authority by the 'experts'. While this idea was indeed true when the U.S. was on the gold standard, it is not true in a monetary regime where where the dollar floats instead of having a fixed value.

It is only necessary to look at two charts to see that the generally accepted relationship between the U.S. dollar and the trade deficit is false. Those charts are the value of the trade-weight dollar (the value of the U.S. dollar based on the currencies of its major trading partners) and the trade deficit itself. It becomes immediately obvious when examining these charts the declining dollar has had less and less positive impact on the trade deficit over time and seems to have actually made the trade deficit worse since 2000. New York Investing meetup thought this issue was so important that we made one of our first videos about it (please see: "The U.S. Dollar Relationship to Inflation and the Economy" at: http://www.youtube.com/watch?v=3amH-T1B9pQ).

The U.S. went off the gold standard in 1971. There has been a continual trade deficit since 1977 and the amount of the deficit has gotten bigger and bigger over time. Classical economics would infer from this that the value of the dollar has been steadily rising. Instead the value of the dollar has been in a long-term downtrend since 1984. The trade-weighted dollar in fact lost around half its value between 1984 and 1992 and while the trade deficit decreased at the end of this period, at no point did it disappear. The dollar has been in a sharp decline since 2002 and the trade deficit, in total contradiction to classical economic theory, has skyrocketed during that time.

A hint as to how the U.S. trade deficit has managed to grow while the dollar was in sharp decline appeared in the report on the January 2008 trade deficit. Even though the U.S. dollar had been almost in free fall for the preceding several months because of Federal Reserve easy money policy, the trade deficit once again defied classical economic thought and increased instead of decreasing. An explanation in the report mentioned that the price of oil had gone up so much (and the U.S. is a major oil importer and has imported an increasing amount of oil since the early 1970s), that it had more than wiped out any benefits from the falling dollar elsewhere. Since the falling dollar itself makes the price of oil go up, a possible destructive feedback mechanism could be at work. In this scenario a falling dollar causes oil prices to rise and overwhelm the benefits elsewhere of the falling dollar, so the trade deficit goes up. In turn, the rising trade deficit damages the U.S. dollar (since the U.S. has to borrow money from foreigners to fund the trade deficit) and the dollar goes down further. The cycle then repeats itself over and over again.

Next: Housing Market Collapses, but the Statistics Hold Up

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please go to our web site: http://investing.meetup.com/21

The U.S. Government Goes From Lying with Statistics to Just Lying

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

In the first Friday of October 2007, the U.S. government released a revision for its employment report for August. It was in this revision that federal government statisticians made a key transition from lying with statistics to simply lying. The original figures indicated a loss of 4000 jobs and that 300,000 workers had vanished from the work force. A month later the workers who had mysteriously disappeared, just as mysteriously reappeared. Instead of a loss of 4000 jobs, there was suddenly a gain of 89,000 jobs. Almost all the newly found jobs were government workers. The government statisticians claimed they had trouble 'estimating' correctly the number of government jobs that were created. Cynics wondered if the same people who had claimed the non-existent weapons of masss destruction existed in Iraq were now working for the Bureau of Labor statistics.

The purposeful fudging of Federal government statistical was by no means a new thing and had been honed to a fine art when it came to producing U.S. inflation numbers that made the people in charge look good (Please see our video on the topic: "America's Perfect Little Goldilocks Economy - Or is it? at: http://www.youtube.com/watch?v=puC4_6OV3p8). For about 25 years, 'improvements' had been added to U.S. inflation calculations that reduced the official reported level of inflation (interestingly no 'improvement' wound up increasing reported inflation). First, instead of measuring the cost of housing by comparing house prices from one period to another, owners-equivalent rent was introduced to measure housing inflation (rents usually go down on a relative basis when house prices go up). While no reputable statistician would use a substitute number for something that could easily be directly measured, government statisticians had no such qualms.

The concept of substitution effects and geometric weighting was then introduced. The idea behind a substitution effect is that when the price of some items goes up, consumers will buy less of it and more of something else. Geometric weighting means the cheaper item gets more importance in a basket of goods and the more expensive item less. This approach lowers reported inflation significantly because items go up in price at different rates and the ones that go up the fastest get less and less importance as they do. The classic example for a substitution effect is hamburger versus steak. Steak becomes expensive, eat more hamburger. So in the case of substitution and geometric weighting, if your quality of life goes down, inflation goes down as well.

The government then introduced hedonics into inflation calculations, where if your quality of your life goes up, inflation also goes down as is does with substitution. In hedonics, if you get a better product (which in an modern economy continually happens for many products), even though you pay the same price, you are considered to have paid less. For instance, if the new car you bought has more functionality than the previous car you bought several years ago, even though the actual price may have gone up, the government will say it went down because the new car is 'better' than your old car. So when hedonics is combined with substitution effects and geometric weighting, essentially no matter what prices you are paying for what combination of products, officially reported government inflation stays under control through statistical trickery. Unfortunately, the money you need to support your lifestyle is determined by the actual inflation rate and not the fantasy government figures.

Next: The Myth About the Trade Deficit and the U.S. Dollar

Daryl Montgomery
Please see the New York Investing meetup web site for more information about us: http://investing.meetup.com/21.

More Collateral Damage from the Fed's First Helicopter Drop

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

The impact of the Fed's September 18, 2007 rate cut was not limited to the panic sell off in the dollar and the incipient bubble in gold, silver, oil, and food commodities. The lower rates that were supposed to help the housing market didn't materialize. By the end of the month, mortgage rates were actually higher than they had been before the Fed's action. Instead of helping the beleaguered housing industry and homeowners , the Fed's rate cut was actually ineffective at best and did nothing to decrease costs for those struggling to deal with ballooning mortgage debt.
Of course, in reality it was the big banks and broker-dealers that were stuck with increasingly worthless securities backed by subprime loans that were the real target of the Fed's beneficence. It would prove to be too little too late however. By October, the first of a series of multi-billion dollar quarterly write offs would start - $5.5 billion for Merrill Lynch, $3.4 billion for UBS, $3.3 billion for Citibank, and $3.1 billion for Deutsche Bank. As bad as these write offs looked at the time, they were not nearly as bad as what was to come.

The Fed cuts also gave the Wall Street Pollyannas ammunition to game up the market, since Fed cuts were traditionally bullish for stocks. The financial media had wall to wall coverage of talking heads urging viewers to buy stocks now because they were at fantastic bargain prices (of course at a real bottom no one appearing in the media urges viewers to buy stocks). Any experienced trader looking at the market rally that ensued knew something was terribly wrong however. While the market had sold off in heavy volume in late July and the first half of August, it rallied on light volume and then hit new highs on even lighter volume. Trends on low volume are usually soon reversed and the September rally would prove to be no exception.

Next: The U.S. Government Goes from Lying with Statistics to Just Lying

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please see our web site: http://investing.meetup.com/21

The Markets React to Helicopternomics and so does New York Investing

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

The U.S. Federal Reserves 50 basis point rate cut on September 18, 2007 would prove to be a seminal event in U.S. economic history. As is the case for many actions that have potentially disastrous impacts, there was a swift and stupendously negative reaction after the Fed lowered rates. It was clear immediately to almost everyone except the Fed and its Wall Street supplicants that the rate cut decision had been the wrong one.

Starting that day, the trade-weighted dollar (the value of the dollar against the currencies of the Americas largest trading partners) already down 33% from its peak level during the Bush administration, started selling off and looked like it was setting itself up for a potential collapse. On the Monday following the Fed’s move, the U.S. dollar hit the first of a series of all time lows By the end of September, the value of dollar would be down against almost every currency on the planet, including the Philippine peso, the Brazilian real, the Turkish lira and the Botswanan pula. People everywhere were desperate to get rid of their dollars and even preferred to hold currencies from countries that had previously been so monetarily irresponsible that they had experienced hyperinflation.

In the future, people would see this episode as the beginning of the end of the U.S. dollar as the reserve currency for the world. Years of excessive government, consumer and business borrowing and irresponsible U.S. monetary policy were finally turning the dollar into a currency that people wanted to avoid rather than hold. Loss of reserve currency status would be definitive once the world oil producers stopped pricing their wares in dollars. While this was still some time in the future, the inevitability of this outcome had now become a certainty.

The fallout from the Fed's monetary easing was unfortunately not limited to its impact on the U.S. currency. The falling dollar acted as the spark that ignited a rally in the commodity markets. Since most commodities were priced in dollars, everything else being equal, their prices had to go up as the dollar fell. A large basket of commodities tracked by the CRB index rallied over 8% during the month of the Fed rate cut, the biggest such increase since the high-inflation 1970s. It was perhaps even more disturbing that the commodities most sensitive to inflation, gold and oil, had some of the strongest rallies. Only three days after the Fed’s cut, gold hit a 27-year high. Oil hit a series of all time highs breaking through $80 a barrel and then $90 a barrel only weeks later. Most investors were so euphoric at the Fed’s largess to Wall Street, that they failed to notice that the markets were not just saying there was serious inflation on the horizon, they were screaming it.

The seriousness of the damage the Fed was causing and was intending to cause to the U.S. economy motivated the New York Investing meetup to spread it's message beyond its membership. After the September Fed meeting, New York Investing did its first videos on the topics of inflation and the falling dollar (See, "Protecting Yourself From Inflation and the Credit Bubble", http://www.youtube.com/watch?v=2d8k75N0qpA). The first of these five videos were done with Alex Paul Morris from MoMoney.TV interviewing organizer Daryl Montgomery. Subsequently, the New York Investing meetup would do its own videos and publish them on You Tube and in a number of other venues.

Next: More Collateral Damage from the Fed's First Helicopter Drop

Daryl Montgomery
Organizer, New York Investing meetup

For more information about the New York Investing meetup, please go to: http://investing.meetup.com/21

Bernanke Shoots Down the Dollar; New York Investing Predicts Out of Control Inflation

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

After the Federal Reserves surprise discount rate cut on August 17, 2007, oil and wheat hit all time highs. The U.S. dollar hit an all time low against the euro. Even though these markets were screaming rising inflation to anyone who would listen, two Fed governors gave speeches emphasizing that "inflation is under control". One talking-head economist after another made appearances in the financial media supporting the Fed's reality denying view. Spokesmen for Wall Street's special interests and politicians of both political parties started to loudly demand a flood of easy money from the Fed to 'save the economy' (and more importantly, their own personal skins). The Fed gladly complied and lowered both the funds rate and the discount rate by 50 basis points on September 18th.

It was clear to the New York Investing meetup that the Fed had chosen to try to save the economy in the short-term, no matter what the cost to the U.S. dollar and no matter how much inflation resulted from their actions. At the meeting held the very evening of the rate cut, it was stated flatly that, "The Fed lowering interest rates will cause the U.S. dollar to drop further and inflation to get out of hand" and "Lower Fed rates mean higher gold and oil prices" going forward (see: http://investing.meetup.com/files). This was followed up by an impassioned plea to get out of the U.S. stock market, get out of the U.S. dollar, and get into gold and silver.

While the New York Investing meetup had little confidence in the Fed's ability to rescue the economy or hold up the stock market, it was convinced that the Fed's liquidity binge would be the death knell for the reserve currency status of the U.S. dollar (Please see our video about this, "Saving the Economy be Destroying the Dollar" at: http://www.youtube.com/watch?v=s9K1lSA9AHE). The long-term implications for inflation hedges such as gold, silver, oil and food commodities were obvious. Even though the Fed and many mainstream economists were worried about potential deflation from collapsing housing prices and the stalled bond market, New York Investing staked out a clear position that the falling dollar was highly inflationary (also denied by many mainstream economists) and that this was the important investment theme for well into the future.

Next: The Markets React to Helicopternomics and so does the New York Investing meetup

Daryl Montgomery
Organizer, New York Investing meetup

For more information about the New York Investing meetup, please go to: http://investing.meetup.com/21

Bernanke Gets in His Heliocopter and Does His First Money Drop on Wall Street

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

On August 17th 2007, one hour before stock futures expired, the Fed announced a surprise cut in the discount rate beginning a new cycle of easing. While allegedly meant to help the financial system, which was reeling from the fallout from the subprime crisis, the immediate purpose of the Fed's action was to prop up a teetering U.S. stock market (it was not clear that even at this
point Bernanke and the FOMC realized how serious the subprime contagion was). There had been a mini-crash in Japan the night before and stock futures were pointing to a large drop in the U.S. markets.

The Fed's announcement of it's discount rate cut had the desired impact. Stocks futures on the Dow rallied multi-hundreds of points by the opening, wiping out the profits of the shorts and transferring that money to the sellers of the future's contracts (could this huge transfer of wealth have been a gift from Bernanke to the broker-dealers?). If the Fed had waited one hour for its announcement, there of course would have been no difference in the impact of the discount cut on the economy, but the impact on markets would have been considerably different. The message to market participants was quite clear, from now on the Fed will be trading against the shorts and its actions can wipe you out whenever we chose to do so. By February 2008, the New York Investing meetup would document approximately a dozen times when the Fed engaged in similar extralegal activity in the U.S. stock markets ( put on video , which can be found at: http://www.youtube.com/watch?v=Sobq7wCXjUw). This of course leads to the obvious question, "When a powerful government agency like the Federal Reserve acts outside the law, who is going to stop it?" Based on recent history, apparently no one.

The U.S. Federal Reserve under Bernanke was not the first central bank to try to manipulate the stock market, nor was Bernanke the first Fed chair to engage in this behavior. Greenspan himself was not above using Fed policy to drive the markets up, but he would let the markets reach some clearing price first before stepping in. He would not try to use Fed policy to prevent the markets from selling off, the crude approach clearly being used by Bernanke, realizing how risky this this could be for the financial system. It was in fact, Greenspan's policy of doing away with Fed secrecy that opened the way for Federal Reserve manipulation of the U.S. stock market. Once the markets knew instantly what the Fed was doing, traders would adjust their actions just as quickly instead of over a longer period of time as people gradually figured out that the Fed had made a significant rate move as had been the case in the past.

Perhaps the most egregious example of stock market manipulation in the recent times was by the Japanese financial authorities in the late 1980s and early 1990s. While interference in the free operation of the stock market, was beneficial in the short-term, the consequences in the long-term proved disastrous. A buy and hold strategy in Japanese stocks would have earned an investor nothing from 1992 to 2007. A similar result in the U.S. stock markets from 2007 to 2222 would mean the huge population of Baby Boomers retiring in that time period and counting on stock market gains to fund their retirement would be in for a very rude awakening.

Perhaps, the ancient Greeks had it right after all, when those in power acted like the gods, a tragic ending was always inevitable.

Next: Bernanke Shoots the Dollar Down; New York Investing Predicts Out of Control Inflation

Daryl Montgomery
Organizer, New York Investing meetup

For more about the New York Investing meetup, please go to our web site: http://investing.meetup.com/21

The New York Investing meetup predicts the current bear market in Aug 2007

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

After having warned its members that the subprime crisis would soon start impacting the stock market in July 2007 (days before it actually happened), the New York Investing meetup followed this up in the August 8, 2007 meeting with a prediction of a crash or Bear Market. By January 23, 2008 both the Nasdaq and the Russell 2000 had fallen over 20% and were officially in Bear markets.

The August meeting emphasized that the Bull Market was over, that earnings wouldn't save the Market (a common claim by the financial media pundits at the time), the hardest hit sectors would be the bubble sectors of the Bull Market, real estate and financials, and short-covering rallies would be the key to profits on the long side in the future. It was even predicted that one or more broker-dealers would fail, with Bear Stearns name mentioned. The most important point made in the talk "Crash or Bear Market" (http://investing.meetup.com/21/files/) was that the Federal Reserve would not be able to save the stock market with its usual liquidity injections into the financial system. It was emphasized quite strongly that the U.S. dollar was in precarious shape and that any attempt to save the U.S. stock market with rate cuts would ultimately fail because of the damage it caused to the dollar. Future events would more than bear out this prediction.

Next: Bernanke Get in His Helicopter and Does His First Money Drop on Wall Street

Daryl Montgomery

For more information about the New York Investing meetup, please see: http://investing.meetup.com/21

The New York Investing meetup predicts the subprime disaster in July 2007

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.


While Federal Reserve chairman Ben Bernanke was making repeated announcements that the subprime problem was contained and wouldn't have far reaching effects, the New York Investing meetup had other thoughts.

In his now famous June 5, 2007 speech to the International Monetary Conference, Bernanke stated, "... at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or financial system." The New York Investing meetup, which doesn't automatically accept any pronouncements from Washington or Wall Street, quickly came to
the opposite conclusion. Cyberspace was filling up with stories of rapidly rising foreclosures, dropping housing prices, faltering hedge funds, and problems in the debt market. In the July 11, 2007 meeting, the New York Investing meetup warned its membership that the subprime crisis was about to explode and would cause serious damage to the stock market. In less than two weeks, the accuracy of the New York Investing meetup's take on the subprime crises was vindicated. The stock market would fall until mid-August.

Daryl Montgomery

Next: The New York Investing meetup predicts a crash of bear market in August 2007

For more information about the New York Investing meetup, please go to:
http://investing.meetup.com/21