Blog Wrap Up for 2009

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

I would like to thank all the readers of this blog and the members of the New York Investing meetup for their support throughout 2009. It has been a great year for us. We have encouraged you to take positions in a number of investments that have returned well over 100%. Some of our best choices for 2009 were: DXO, HWD, FCX, TCK, AA, PWE, HTE, PDS, KOL, HUN, UYM, XME, NG, AGQ and DGP. Hopefully you have profited from them.

The New York Investing meetup had only a handful of members before I took over the organizer position in October 2006. At the end of 2009, we are approaching 2500. We feel we have offered the public the best deal in investing education anywhere and we appreciate the response that has turned us into the largest investing meetup in the world by far. We are not only the largest, but we are also the best and it was nice to hear that from Dutch Radio. In their coverage of the group, they stated that based on their research we were the only investing meetup that had consistently profitable investing ideas throughout the Credit Crisis.

Toward the end of the year, a number of websites started picking up one or more of my blog posts. Seeking Alpha has published 31 posts from me during the last five weeks. My editor there, Sarit Gelberg, has done an excellent job with the material. Project Shining City has also been picking up my economic posts thanks to its dynamic leader Jeff Bruzzo. Because of New York Investing meetup member Jack Kemp, material from this blog has been published in BirdNow.com and Jack and I co-authored an original piece for American Thinker. Just a couple of days ago, the Eco Investing Guide published one of my blog posts for the first time. Material from one of my blogs about a month ago was used in a Newsmax story and just this morning, I was interviewed by ABC News because of material they saw on my blog. So the word is getting out.

Thanks once again for your loyal readership. Best wishes to everyone for a profitable investing year in 2010.

NEXT: Interest Rate Rally Portends Inflation in 2010

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Commodities Versus Stocks: A Decade Performance Review

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The French saying, 'the more things change, the more they remain the same' is an excellent description of the performance of the Dow Jones Industrial Average in the first decade of the twenty-first century. The Dow closed at 11,497.12 on December 31, 1999. It will close out 2009 at almost the same price. This lack of progress has been seen before between 1966 and 1982 when the Dow kept reaching the 1000 level, but couldn't break through it. While the Dow ultimately went sideways during the last decade, the S&P 500 was down approximately 23% and the tech heavy Nasdaq fell about 44%. So much for buy and hold. The small cap Russell 2000 was up 24%, but this was minimal compared to the money that could have been earned in commodities. Many emerging stock markets outperformed both the U.S. markets and commodities.

The CRB (Commodity Research Bureau) index, a broad basket of commodities, ended 1999 just above 200. It will close out 2009 around 490 for a decade gain of 141%. Copper, the leading industrial metal, was up 276%, substantially outperforming the overall sector. Oil traded at $26 a barrel at the end of the 1990s and closed out the 2000s around $79.00 for an approximate gain of 204% . Gold, the most inflation-sensitive commodity, was up approximately 279%. Silver rose around 220%.

It is easiest for investors to use ETFs and ETNs to get exposure to commodities, since these trade as stocks. There is no need to get involved directly with futures. DBC, GCC, GSG, DJP, and RJI offer exposure to a basket of various commodities. DBB offers a means to invest in industrial metals and JJC to invest in copper. Aggressive investors can buy BDD, a leveraged industrial metal ETF. Gold ETFs include GLD, IAU and SGOL and DGP, which offers an approximate 200% exposure to the movement in price of gold. For silver, SLV, DBS and leveraged ETF AGQ are good choices. Oil exposure can be gotten through OIL, DBO, USO, and USL.

While U.S. stocks were mostly flat to down in ten years of trading, a number of emerging stock markets had major rallies during that time. The Ukrainian PFTS Index was up around 900%. Two Russian indices, the RTS and MICEX, were up in the 700% range. The Lima General Index in Peru was up over 800%. While these may be seen as too risky by many investors, stocks on the more mainstream Hang Seng Index in Hong Kong were up over 500% on growth in China. Emerging markets definitely offered the stock investor much more opportunity for profit between 2000 and 2009 than did the American stock market.

It is not easy or even possible for the average investor to get exposure to many of these smaller countries however. Broad exposure to emerging markets can be obtained by buying EEM and VWO. EWH can be used to track the Hong Kong market. Investors should consider the big four emerging markets the BRIC countries are likely to continue to do well in the next decade - Brazil, China, India, and Russia. EWB, FXI, IFN, and RSX respectively can be used to invest in these markets. Commodity heavy markets such as Australia (EWA) and Canada (EWC) have the potential to do much better than the U.S. stock market in the next decade as well.

It should be kept in mind that markets are cyclical, so good performance in one decade doesn't necessarily mean a repeat performance in the next. Long-term trends in the market tend to last about 20 years though and the commodity rally has only lasted for half that time. So there is a good chance that commodities will outperform again in the decade ahead. The biggest gains are usually toward the end of a long move up. This doesn't mean that commodities will go up every year, there will certainly be periods where significant drops take place as happened in the second half of 2008. Only gold managed managed to still be up for the year back then. As of 2009, gold was the most consistently profitable asset during the first decade of the 2000s, having gone up nine years in a row. While buy and hold wouldn't have worked for U.S. stocks after 1999, it worked quite well for gold and a number of other commodity plays.

Disclosure: Long gold, silver.

NEXT: Blog Wrap Up for 2009

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Energy Investing Guide for 2010

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

As has been the case for many years now, oil was once again one of the best investments in 2009. While oil has a leadership position in energy, it is only one part of a very large and complex sector that includes natural gas, coal, nuclear power, biofuels and renewables. Ultimately, the price of everything else in the sector will be influenced by the price of oil. All sources also have an easy to determine cost per unit of energy generated and these at least in theory should be somewhat similar across the sector. In reality, that price can become significantly different from one energy commodity to another and this can indicate severe over or under pricing. Price moves in oil and the other commodities in the sector don't necesarily take place at the same time, but can be considerably lagged.

While oil and coal (both the commodity and their stocks) and wind energy and natural gas stocks had significant rallies from their respective price bottoms in February and March 2009 , the natural gas commodity, uranium and nuclear-related stocks, and many solar stocks remained depressed throughout the year. While almost every commodity rallied strongly in 2009, natural gas and uranium were the two glaring exceptions. Natural gas prices literally collapsed and at the low were trading at price levels that were seen earlier in the decade and in the later 1990s. Natural gas futures fell to around $2.40 and spot prices were even lower. Uranium had a strong rally from 2003 to 2007 when it rose from around $10 to over $130. It fell to around $40 at its low in 2009 and hovered just above that price throughout the rest of the year. The solar industry is a more complex story. It is only an economically viable source of energy when oil prices are high. At lower oil prices, government subsidies are key. While a few solar stocks have rallied nicely from their lows, most had not gone up much by the end of the year.

In 2009, prices for both natural gas and uranium fell below estimates for their production costs. No commodity can trade in that range for long since production closes down to bring supply and demand back into balance. By the spring, 50% of natural gas rigs in the U.S. had already closed down. In must be kept in mind that prices in both the natural gas and nuclear industries are influenced by the government. The CFTC (Commodities Futures Trading Commission) held hearings this summer about trading in the oil and natural gas markets. Along with the SEC, the CFTC interfered with access to trading vehicles in these markets that were used by the small investor. Natural gas ETF, UNG was effectively turned into a closed-end fund because of the actions of these two government bodies. Leveraged oil ETF, DXO, closed down as a consequence of their interference. As for the nuclear market, the U.S. Department of Energy has a stockpile of 158 million pounds of uranium and it occasionally sells some of this on the open market and depresses prices, just as central bank selling of gold occasionally depresses gold prices.

While prices were down for natural gas and uranium, they are not likely to go lower in 2010, at least for any extended period of time. They will be supported because they are too close to their production cost levels. This does not mean a major rally is imminent however. Prices can get low and stay low for a long time, as was the case in the 1990s. A number of commentators claim that this will be the what happens now because oil, natural gas, uranium and solar stocks were in a bubble that lasted into the 2007 and 2008 period and once the price goes down it will not recover again for many years. Similar arguments were made in 1974 when oil hit $12 a barrel. It's ultimate high was still several years off and several times higher. Energy was in a bullish period back then just as it is now.

Oil looks like it will be strong again in 2010, based on its price behavior in the fall of 2009. Oil prices, like many commodities, have a strong seasonal component. For oil, the bottom tends to be in the winter between January and March and the yearly peak between June and September. Light sweet crude rallied 9% in October 2009, at a time of the year when it should have been selling off. This indicated unusual strength. Crude ended the year near its yearly high, which was somewhat above $80. While seasonal selling pressure will exist for the first couple of months of 2010, buying pressure will then cause the price of oil to rise. It would not be unreasonable to assume that it will get above $100 a barrel during the year. It is not likely however that price will go up enough in 2010 to break the old high of $147. That will have to wait until the following year. Oil and many oil stocks should continue to be good investments in 2010.

ETFs/ETNs, exchange traded funds and exchange traded notes, are the easiest way for investors to get oil and oil stock exposure in their portfolios. The ETF/ETNs: OIL, DBO, USO and USL can be used to invest in oil as a commodity. For those who are more aggressive and want as much as 200% long exposure through leverage, UCO, HOU or LOIL, which trade in the U.S., Canada, and the UK respectively, can be bought. For ETFs that hold stocks of oil and gas companies, XLE, IYE, and IXC are possible choices. Investors bullish on oil stocks can get leverage on them by purchasing DIG and ERX.

While oil should be doing well in 2010, natural gas does not look as promising. There is an incredible glut in the market and new supplies are coming online through the global shipping of compressed natural gas. Still the price of natural gas is relatively low compared to oil on a historical basis. It will take some time to work out the excesses however and fully restore balance between these two commodities. Natural gas tends to have sharp price rises every four to five years and the last peak was 2008, so another really big move up shouldn't be expected until around 2012. Trading opportunities will of course exist in 2010 and low prices will be available for those who want to slowly accumulate and hold their positions for a while. A good ETF for the natural gas commodity is GAZ. Leveraged natural gas ETFs HNU and LNGA trade in Canada and the UK. The leveraged ETFs are a better choice for shorter-term investors.

The supply demand picture of uranium is bullish in the intermediate term. A number of new reactors will be coming online in Asia over the next several years. Growth in the use of uranium usage is expected to be over 2% a year until 2030 according to the World Nuclear Association. The market is thought to be in deficit of 60 million pounds a year. It is estimated that uranium prices would have to move up to around $75/$80 to improve supply. Miners in particular will benefit when this happens. ETFs for nuclear power include NLR, NUCL and PKN. Only NLR has any significant trading volume however.

As for solar power, a few of the leaders had good rallies in the second half of 2009. This is an indication the whole sector is in the beginning stages of a market recovery. Investors should keep in mind though that this is a new industry and there will be a period of consolidation. Some companies will not last. Longer-term investors should avoid stocks with bad financials. The two solar ETFs are TAN and KWT, but these have partially rallied already in 2009 because the leaders in the sector started moving up. Individual stocks which have not rallied too much yet and which investors might want to consider are ENER, JASO, SPWRA, and WFR.

Commodities have been in a longer-term secular bull market since around 2000. This type of bull market tends to last around 20 years. So, there is still a lot of time left and good investments to be made. Buying stocks and commodities on intermediate term drops is the correct strategy in such markets. Buying oil in the spring of 2009 produced quick and substantial profits. Prices in other parts of the energy sector haven't moved as fast as oil did in 2009 and this is giving investors another chance to profit in 2010.

Disclosure: Long ENER, WFR, natural gas.

NEXT: Conmodities Versus Stocks: A Decade Performance Review

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Investing Themes for the Next Decade: 2010 to 2020

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Investors make the most consistent money by following bigger trends and going long in uptrends or shorting into downtrends. Longer term trends are not unidirectional however, but subject to either sharp or intermediate term reversals. At those points, it is best to get out of the market until the uptrend or downtrend resumes. Of course all trends eventually come to an end and it is important to recognize this when it happens and to close out your positions. Failing to protect profits is perhaps the biggest mistake that investors make. While it is not possible to predict the future with complete accuracy, it is possible to make some useful projections that can be used as a general investing guide for the next decade.

The way to see into the future is to look into the past. Human behavior hasn't changed in the last many thousands of years and this is what is mostly responsible for repeating market boom and bust cycles. History has shown that government leaders in particular are prone to making the same monetary and fiscal errors over and over again. People who run governments have a tendency toward megalomania and a belief that things that happened consistently in the past (assuming that they are even aware of them) because of certain financial policy actions won't happen again in the present. They are invariably wrong. Central bankers can and do evidence this behavior to an extreme. They have repeatedly claimed that they have the ability to control the economy. The Credit Crisis makes it very clear that they do not - otherwise it would not have happened. Real world events have not shaken their faith in their own omnipotence however. Their arrogance combined with denial indicates that workable solutions to the Credit Crisis are many years off and only likely to take place once extreme conditions have been reached.

Repeating cycles and the historically oft repeated government responses to them provide us with a lot of information about what can happen in the markets during the next ten years. Just like everything else, the cycles will behave as they have in the past because the fundamental driving forces behind them are the same as they always have been. Before the decade even begins, we can clearly see three major factors that will impact the market until at least 2012. These are: the lag between monetary stimulus and inflation, the steep yield curve, and price cycles in certain commodities. These predict that a peak in the inflation rate, long-term interest rates and commodities prices is probable between December 2012 and July 2013. This will not be the ultimate peak however. There will be at least one additional peak that follows this one and two extra peaks are even more likely.

The exact high for commodity prices and interest rates of course can't be stated yet. It can be said however that they will be much higher than the beginning of the decade and be at levels that would currently be considered extremely high by most investors. Sharp price acceleration is likely to be evidenced in the last several weeks to few months of the move with as much as 20% to 25% gains for commodities such as gold and oil possible during this end phase. While an inflation investing strategy centered around precious metals, energy, agricultural commodities and shorting long-term bonds will be highly profitable up to early 2013, investors will then need to sell these holdings to protect their profits. Either switching to cash or engaging in a deflationary investing strategy will then become the best option, at least for a while.

This first inflation peak will end because it will become politically untenable for governments to allow it to go on. Investors should expect the typical government responses from the past. These include price and wage controls, currency intervention and cross border currency controls, import/export controls, rationing, punitive taxation policy on certain investments, changes in investing rules and regulations and either indirect or direct government forced dissolution of certain investment vehicles. As has happened in the past, these policy initiatives will work quite well - in creating shortages, black markets, general disrespect for the law, and in preventing the economy from fixing itself. Inflation will remain controlled for approximately 18 months at most. At that point, there will either be a de facto or de jure dissolution of many of the policy initiatives because of lack of support among businesses and the public. By 2015, inflation will on the rise again and investors will need to switch back to precious metals, energy, agricultural commodities and shorting long-term bonds.

Some ultimate resolution to rising prices will likely take place toward the end of the decade between the 2017 and 2019 time frame. Prices for most commodities will reach levels that would be considered unimaginable in 2009. U.S. interest rates will be somewhere well into the double digits (if not higher) and the U.S. dollar will have lost most of its value. By that point, the world financial system will have to be restructured. The dollar will have to be given some backing to regain credibility. There will probably only exist a narrow window of time for inflation investors to sell their holdings so that they keep most of their spectacular profits. They must then switch their investing strategies to approaches that work in a disinflationary or deflationary environment. For an update on how to do this, check back in 2020.

Disclosure: Long precious metals, agricultural commodities, short long-term bonds.

Next: Energy Investing Guide for 2010

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

New Homes Reveal Old Problems With Government Statistics

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The U.S. New Home Sales report released on December 23rd indicated a drop of 11.3% in November. Analysts had expected a gain. According to the previous Commerce Department reports, new homes sales had risen every month since April. They were expected to rise again in November because a government tax credit for new home buyers was originally scheduled to end in the beginning of the month (it was extended to June 2010), so analysts had assumed that there would be a rush of last minute buyers. There may have been and without them the drop might have been much greater than 11%.

New Home Sales is almost certainly the most inaccurate of the economic reports issued by the U.S. government. I can say this with some certainty because it would be almost impossible to produce something more error ridden. One of the major news services stated in their coverage of the November report, "Government statisticians have low confidence in the monthly report, which is subject to large revisions and large sampling and other statistical errors. In most months the government isn't sure whether sales rose or fell." Read that last sentence again and then consider that if the U.S. government is willing to issue an official report on housing that is about as accurate as picking numbers randomly out of a hat, how much can you trust the GDP, CPI, PPI (the two major inflation reports) and Non-Farms Payroll reports. Also note that the mainstream financial media seems to be well aware of the lack of reliability, but doesn't mention it except on very rare occasions when the news is particularly bad.

If the New Homes Sales report is so prone to inaccuracy why not just fix the problem? This is indeed a good question. The statistical tools to make this report better have been known for decades and yet the U.S. Commerce department doesn't seem to be able to apply them. It can be assumed that this isn't done because they don't want to do it. Statistically sloppy work is extremely prone to manipulation after all, solidly done work is not.

When confronted with this problem, you will get a more accurate picture of what is taking place by looking at many months of data in aggregate and comparing it to the previous year (the errors will cancel out at least to some extent). In the first 11 months of 2009, new home sales are down 24% from the first 11 months in 2008. Inventories have been falling throughout 2009 and are now at 38 year lows. The number of homes under construction or planned for construction have fallen to a record low. If new home sales were rising between April to October as the Commerce Department reported, why are home builders building fewer and fewer homes? That doesn't look like an industry in recovery as the public has been repeatedly told. For some reason, we seem to have gotten a glimpse of the true state of the housing market in the November New Home Sales report. Perhaps the guy in charge of producing cheerful statistics was on vacation? Somehow, I'm sure he'll be back soon.

Disclosure: Not relevant.

NEXT: Investing Themes for the Next Decade

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

NovaGold Leads Mining Group on Acquistion

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

While gold has been struggling recently, NovaGold (NG) went up 15% on December 23rd. The previous day, the company purchased a 100% interest in the Ambler property in Alaska and this set off the rally. It is not the first time that NovaGold has lead the miners in the market. The stock is highly volatile and the company is a magnet for controversy. It is also one of the potentially biggest money makers among the mining stocks.

Like most of NovaGold's properties, Ambler is resource rich and remote. Its contains some of the largest and highest-grade known VMS (volcanogenic massive sulfide) deposits in the world, both in terms of total metal and value per tonne. The deposits consist of copper, zinc, gold and silver. Nova already had a 51% stake in the property and paid $29 million to obtain complete ownership. NovaGold also has a half interest in Donlin Creek, one of the largest untapped gold deposits globally, a half interest in Galore Creek and full ownership of Rock Creek, Big Hurrah, and Nome Gold.

How much you think NovaGold is worth depends on your view for the future prices of gold, silver, copper and other metals. If you think these prices will be going up significantly, and that has been my view for several years now, then NovaGold is one of the cheapest stocks in the market. If you think those prices will be going down in the future, then you are not as impressed with the stock because most of its assets are sitting in the ground and won't be mined for several years. As someone who thinks that there will be significant inflation and dollar devaluation in the next decade, I am quite happy with the company's current mining schedule.

Before the Ambler acquisition, NovaGold stated that it had 15.2 million ounces in proven and probable gold reserves. At $1000 an ounce those reserves are worth $15 billion and at $2000 an ounce they are worth $30 billion. The company also had 78 million ounces of measured and indicated silver reserves, worth over $1 billion at current prices and 5.2 billion ounces of copper reserves worth over $10 billion at current prices. Plug in your own estimates of future silver and copper prices to obtain a likely value of Nova's deposits. The market cap of NovaGold has been in the $1 billion range during December trading. So for $1 of stock, you are getting somewhere around $30 in gold, silver and copper assets at today's prices with the possibility of a much higher value in the future.

While the stock is cheap on a valuation basis, it is not without risk. Mining the substantial deposits in Nova's properties is not without its difficulties and this accounts for why its shares sell at a discount. Proponents argue that this discount is much too large however. Nova is also a favorite of day traders from both the long and the short side and this increases its volatility. While NovaGold has been trading in the $5 to $6 range in December, it sold for over $20 in late 2007. Its all-time high was over $50 in 1987. Nova doesn't have to go back to those levels though to make investors money.

Disclosure: Long NG and GDX.

NEXT: New Homes Reveal Old Problems with Government Statistics

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Santa Claus Rally and the January Effect

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The Santa Claus rally is a move up in stocks that takes place around December 25th. This rally was already part of Wall Street lore in the 1800s, and was memorialized in the ditty: 'If Santa fails to make a call, the bear will come to Broad and Wall'. There is no general agreement on the exact dates of the rally. It is defined as beginning from a few to several days before Christmas or immediately thereafter. It ends either in the current year or two or three days into the next year. It is most useful to think about it as two separate phenomenon. The first as the trading period around Christmas day and the second as the first four trading days of the new year. Each has its own message.

The bullishness in stocks around December 25th probably doesn't have much to do with the holiday per se, but with year end adjustments within the financial system. Instead of calling it the Santa Claus Rally, it would probably be more accurate to refer to it as the Year End Rally. If you look at long-term charts, you will note that the VIX, the volatility index, is either low or drops around the end of the most years. This is bullish for stocks. The VIX hit a yearly low on December 22nd in 2009 trading below 20 for the first time since the summer of 2008. An exceptionally low VIX while bullish in the short term sets the stock market up for eventual selling however.

What happens at the end of the year and at the beginning of the year can be quite different however and the two shouldn't be lumped together. Investment money tends to be reallocated at the beginning of a quarter and this is most pronounced in the first quarter. Investors should watch closely what sectors rally and what sectors of the market experience selling during the first four trading days of the year. This tells you where money is flowing. If the stock market overall sells off in the first four days, this is a bearish signal at least for the first quarter. It indicates big money is withdrawing its support from stocks.

The first four days trading signal is sometimes lumped in with the January Effect, but shouldn't be. The January Effect is a tendency for stocks to rally during the first month of the year, with small caps outperforming big and mid-caps. The January Effect was noted in the U.S. by the 1920s and perhaps even earlier. It has been observed in a number of stock markets throughout the world. The effect seems to have become dampened in recent years.

Trading volume tends to be low around the end of the year because many people are away because of the holidays. This can exaggerate price movements. Liquidity coming from the Fed and other central banks will have a more pronounced impact than usual. If you look at a chart for the U.S. Monetary Base, you will see that it has been rising vertically in the last few months. It is not surprising that the current liquidity fueled rally in stocks is continuing.

NEXT: NovaGold Leads Mining Group on Takeover

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

GDP Revision Indicates Recession Isn't Over

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The final report for third quarter GDP was released on December 22nd. The numbers were revised down ... again. According to the latest government figures, GDP grew by 2.2% last quarter. Previously it was 2.8%. Before that, it was 3.5%. Do you note a pattern here? The rosy 3.5% number got the most media attention as the first release always does. Far fewer people pay attention to the final number. Even this number is likely to be revised downward in future multi-year revisions as were the numbers for all of 2008.

There were three major sources of growth in third quarter GDP. In order of importance they were: government stimulus, government stimulus and government stimulus. The Cash for Clunkers program, a government give-away to the auto industry and people who were foolish enough to buy gas guzzling vehicles, added 1.7% to the GDP total. Government backed housing initiatives, including tax credits for home buyers and FHA mortgage insurance, may have added another 1.0%. Those were only two small components of government spending however. Overall, increases in federal spending were up 7.9%. Subtract all of these components and there was negative GDP growth in the third quarter and the recession is ongoing.

While the government spending component of GDP is robust, the consumer and business components are still weak. Since they are essentially most of the real economy, this should be cause for concern. The latest revisions had consumer spending, commercial construction, and business investment (now down 5.9%) as weaker. Consumer spending, which accounted for 72% of the economy before the Credit Crisis, was still listed as up 2.8%. How this is possible with double digit unemployment, record drops in available consumer credit, and a rising savings rate is one of the mysteries of our time. There is no obvious source of money to fund this supposed increase in spending.

The sad state of the economy is evidenced by the business inventory number, if not by the headline GDP number. Inventories dropped by $139.2 billion in the third quarter compared to a drop of $160.2 billion in the second quarter. This lower drop added almost 0.7% to the 2.2% GDP total. Yes, when it comes to inventories, all it takes if for things to get less worse for GDP to go up. Keep this in mind when you see a positive GDP number. Don't assume it means that things are getting better.

Mainstream economists are now forecasting GDP growth in the strong 4% range for the 4th quarter. Meanwhile, the Fed is stating that it is keeping interest rates at zero for the foreseeable future. The Obama administration proposed a new stimulus package less than two weeks ago and the House passed an additional $100 billion in economic aid last week. While the powers that be keep telling the public everything is not just fine but getting better with the economy, their actions indicate that there is still panic on the Potomac. Perhaps they know something that they're not telling us?

Disclosure: Not applicable.

NEXT: The Santa Claus Rally and the January Effect

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Why Interest Rates Will Rise in 2010

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

While stocks were rallying, long-term U.S. treasuries were selling off sharply and interest rates climbing on December 21st. The rally was particularly noteable because 10-year bonds were selling down more strongly that 30-years - the opposite of the normal pattern. As part of its quantitative easing program, the U.S. Fed was purchasing 10-year treasuries up to October 31st of this year and this kept their yield artificially low. This trade now seems to be unwinding. Interest rates on consumer loans in the U.S., including mortgages and credit cards, are usually tied to the the 10-year treasury rate. Higher rates will dampen consumer spending going forward and this will be a negative for the economy in 2010. Investors can take advantage of rising rates though by buying ETFs that short longer-term bonds.

Long-term rates need to be examined in context. The yield spread, or the difference in interest rates, between them and short-dated paper provides significant information. The yield spread between 30-year treasuries and the 3-month t-bill has gotten to around 4.50%. This is much larger than normal. The spread was even bigger this June and in 1992. In the last two recessions in the early 1990s and 2000s, yield spreads didn't peak until about 18-months after the recession was over. They already got to those previous peak levels this June, during the recent recession. This indicates that the peak in the current cycle is going to be higher than it was previously. Assuming the current recession ended in July, as would be inferred from government GDP figures, this would indicate that there will be a peak in the yield spread around January 2011. Note that this is not the same as a peak in rates. The spread will narrow if long-term rates continue to go up, but short-term rates go up even faster.

While it looks like long-term rates are going to be higher in 2010, the exact amount is not predictable from yield spread analysis. From a technical perspective, the 10-year treasury will have a significant breakout if its yield rises above 4.00% and stays there. For the 30-year treasury, the key rate is 5.00%. Possible interest rate targets for the 10-year after a breakout are 4.75% to 5.50% and for the 30-year 6.00% to 7.00%. A breakout is not taking place just yet however. As of now, some time in the first couple of months of 2010 looks like the most likely time frame for this to occur. Investors who want to short 7 to 10 year treasuries can buy TBF (100% short), PST (200% short) or TYO (300% short). Investors who want to short 20 to 30 year treasuries can buy TBT (200% short) or TMV (300% short of 30-years only).

A wide yield spread between short and long term bonds is usually cited as an indication of strong future economic growth. Others say it is an indication of rising inflation expectations. Both views can be correct. The pattern is caused by central banks pumping substantial amounts of liquidity into the financial system. This shows up in the economy and inflation at different points in time. Liquidity first pushes up the stock market (we have already seen that), next impacts the economy, and then shows up as inflation. When there is overlap between the economic growth and inflation phases, stagflation results. It can take as much as three to four years for the first wave of inflation to peak. That would take us to at least 2012 in the current cycle - so we have a long interest rate rally ahead of us.

Disclosure: Long TBT and TMV.

NEXT: GDP Revisons Indicate Recession Isn't Over

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Three Big Economic Lies of 2009

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Investors have trouble making money in the markets because the information they receive from the government is not a reliable accounting of what is actually going on. The mainstream media then repeats this information, no matter how absurd it is, without critical commentary or analysis. While financial media reporting has been filled with misinformation this year, there are three major ongoing themes in 2009 that investors especially need to realize don't hold up under scrutiny. These are: The economy is in recovery; Unemployment is a lagging indicator; and Inflation is not a problem. Let's examine why each one of them is not true.

1. The U.S. economy is in recovery.

This is based on the U.S. GDP going up in the third quarter (by 2.8%) and the contention that a reported increase in GDP indicates the end of a recession. This would be the case if the numbers were reliable - they are not - and they didn't turn positive as the result of government stimulus programs - which they did.

There have been a number of changes in how U.S. GDP has been calculated in the last three decades. These changes have caused better numbers to be reported. Consequently, it is now almost impossible for U.S. GDP to be negative. The original numbers published for 2008, indicated an economy doing well, not one that was in the worst recession since the 1930s. After an extensive revision of GDP numbers in mid-2009, the much reduced GPD number for 2008 was still positive - a theoretical impossibility - and absolute proof that the U.S. GDP numbers are unreliable and should not be believed.

Even with the extensive manipulation of the GDP figures, if you removed the impact of government stimulus programs for autos and housing and other forms of government spending, there still wouldn't have been a positive number in the third quarter. This game has been played before in Japan. Government spending brought the country out of recession in 1993, 1997,1998,1999, 2001, 2004 and 2009. Did they have a septuple dip recession? No, they have had one long two-decade recession masked by government stimulus programs - the modern version of a depression when Keynesian economic policies are pursued. The Japanese learned that an economy that does well solely due to government stimulus is not an economy in recovery. The U.S. should pay attention to this lesson. So far, it hasn't.

For a fuller discussion of the recent U.S. GDP numbers, please see my blog post: Mark to Model GDP at http://nyinvestingmeetup.blogspot.com/2009/10/mark-to-model-gdp.html.

2. Employment is a lagging indicator.

It would actually be more correct to state that GDP is a leading indicator of economic recovery (if things go right that is). The lag of employment to GPD only became very noticeable during the minor recessions in the early 1990s and 2000s and was a result of statistical 'adjustments' that made GDP look better so that it gave premature readings of economic improvement. In the major recessions in 1973-1975 and the double dip recession in 1981-1982, unemployment bottomed the quarter that GDP turned positive. It did not do so in the third quarter of this year. If unemployment was a lagging indicator, the lag should be much greater after major recessions than it is after less serious recessions. This is not the case and is a major contradiction to this viewpoint. What has actually happened is that statistical 'adjustments' made by the U.S. government to improve unemployment calculations have lagged the 'adjustments' made to improve the GDP numbers.

For my blog post on the latest U.S. unemployment figures please see: http://nyinvestingmeetup.blogspot.com/2009/12/us-employment-figures-dont-add-up.html.

3. Inflation is not a problem:

This oft repeated mantra from the Federal Reserve will prove in the future to be the biggest lie of all. Their argument that low capacity utilization prevents inflation is not true based on historical analysis. Nor are there any cases in the past when governments have 'printed' large excess quantities of money as the Fed is doing now and inflation didn't follow. The Fed's own figures also indicate that massive future inflation is possible. The Adjusted Monetary Base, a measure of future inflation potential, has gone up more in the last year than it has in the entire preceding 50 years. The rise of the Adjusted Monetary Base in the 1970s, when U.S. inflation reached 15% on a monthly basis at it height, is a mere blip compared to the current vertical rise.

The Fed has hinted that it will be able to take care of any potential inflation problem. This is the same Fed that didn't realize sub-prime loans were a problem almost up to the moment they started to bring down the financial system and the same Fed that was claiming in the spring of 2008 that it thought it could prevent the U.S. from sinking into a recession. Unfortunately, the recession had begun months before. The Fed was unaware of it however. The Fed will also be unaware that inflation is a problem right up to the point where every dog in the street knows about it.

For a thorough debunking of the inflation news, please see my blog post:
http://nyinvestingmeetup.blogspot.com/2009/12/why-inflation-is-and-will-be-problem.html.

Lack of honest government statements to the public about the economy is nothing new. Governments almost always try to hide the bad news. More than once in history, manipulation of the economic numbers has evolved into outright fabrication. It is also common for the mainstream economic community to support the government's view with fanciful obfuscations. When things have gotten to this point, the situation is already very bad and likely to get much worse. As usual, things will not be different this time. They never are.

NEXT: Why Interest Rates Will Rise in 2010

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Gold Rally Still Holding Up

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Gold had a horrendous day on Thursday, December 17th. The price dropped below $1100 for the first time in many weeks. In mid-day trading in New York, there was a sudden vertical drop that was bound to give most investors pause. While gold went up almost every day in November, it has been mostly on a downward path since the beginning of December. Does this mean the gold rally is over? No, not at all. It just means that gold doesn't go up every day.

The cause of the recent volatility is Friday, December 18th's quadruple witching. Stock index futures, stock index options, stock options and single stock futures all expire on the same day in a quadruple witch and this only happens once every three months. The impact of the expiration can frequently be seen a day or two before and that is what investors were witnessing on Thursday. Prices will tend to move to minimize the value of the outstanding options. The big trading houses are major options sellers and they lose a lot of money otherwise if this doesn't happen. This has been an important factor lately in driving gold down and the U.S. dollar up.

The bears of course have been claiming the gold rally is over. They started doing so the first day gold dropped. The price action we are seeing now is reminiscent of the pull-back in December 2007. GLD, the major gold ETF, broke the 50-day moving average line then, just as it did now on December 17th. Gold had trouble rallying for four weeks during the month, but then the second phase of the rally followed. This took GLD up to much higher highs before it peaked in March. January and February are traditionally two of the strongest months for gold.

Spot gold hit key support which is around $1100 on the 17th. The 61.8% Fibonacci retracement for the rally that started in early October is in that area. That rally is still in effect until there is a significant break of that level. Just as gold was overbought on the daily charts before the recent sell off began, it is now oversold. The U.S. trade-weighted dollar was oversold and it is now overbought. Gold and the dollar usually move in opposite directions. Oversold conditions in bull markets are more important than overbought conditions and the opposite is true for bear markets. Therefore a good possibility exists that there will be some price reversal in both bullish gold and the bearish U.S. dollar soon.

Spot gold was around $1110 at the end of floor trading in New York on Friday. As long as it closes at or above $1100, especially at the end of the week, claims that the current rally is over are premature. Even if there is some pause to the rally, nothing has changed in the longer term picture. As long as there is easy money from the Fed - and raising interest rates from zero to a half a point or even a point or more - is still easy money and the federal government continues its spending spree, the backdrop for a gold rally is still in place. Don't expect this to change any time soon.

Disclosure: Long gold.

NEXT: The Three Big Economic Lies of 2009

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

U.S. Plays Shell Game with Bailout Money

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Citibank is planning on paying back $20 billion of the $45 billion in TARP funds that it received last year. In exchange for the $20 billion in repayment, the U.S. government is giving it $38 billion in tax credits. So of course Citi is actually receiving an additional $18 billion in bailout money, but this is being delivered indirectly and not through an official bailout program. For once, and this happens only on the rarest of occasions, one of the U.S. governments behind the scenes funding scams has been revealed. Investors should assume that this is only the tip of a very huge iceberg that includes changes in accounting rules that have allowed the big banks to unjustifiably report rosy income numbers, off-balance sheet items in the federal budget, slight of hand reporting of who is actually buying U.S. treasuries, and doctored government economic statistics.

Citi's motivation for paying back the $20 billion of TARP funding is to remove executive pay limits imposed on TARP recipients. To make it happen, American taxpayers will have to pay higher taxes to make up for the lost $38 billion in government revenue and have less disposable income so rich Wall Street bankers can get higher salaries. The other $25 billion Citi received from the government doesn't count for the pay restrictions because it was converted to a 34% equity stake in the bank. Citi is a partially nationalized company. Citi is issuing new stock at $3.15 to pay off the $20 billion and this is therefore diluting the equity stake of existing shareholders. The stock offering was poorly received however. This is not surprising. What is surpising is that anyone would buy it. Citi traded as low as 97 cents last year, a price level the U.S. market reserves for impending bankruptcies.

The Federal Reserve said in its post-meeting statement on December 16th that it expects to wind down several emergency lending programs that are set to expire next year. TARP was supposed to expire this year, but it was extended another year when the time came. Even if the programs are closed down, the recent Citi incident indicates that the bailouts won't be reduced, but merely shifted elsewhere in the hopes of misleading the public about what is really going on.

Fed chair Bernanke said last month that " we'll be showing the taxpayers fairly significant extra income" when discussing the bailout programs (read that statement very carefully). What he meant was that money would be showing up on the Fed's books. He didn't claim that the taxpayers would be receiving those gains. It should be kept in mind that the Fed is only a quasi-governmental organization (claims that is completely private are overstatements). The Fed was funded by the big U.S. banks originally, who still hold stock in it and have seats on its regional boards of directors. These banks receive yearly dividend payments from the Fed for their investments. If the Fed is making money, the big banks will be the beneficiary, not the American public.

Bernanke failed to see the Credit Crisis coming and then when it blew up, he used it as an opportunity for a Fed power grab and a chance to loot the U.S. Treasury and transfer taxpayer money to Wall Street firms. This sterling record has caused Time Magazine to just name him person of the year. Bernanke joins previous illustrious winners, such as Adolf Hitler (1938) and Joseph Stalin (1939 and 1942). The notice of the award was conveniently released the day before the U.S. senate banking committee was to vote on Bernanke's reconfirmation. Bernanke was of course confirmed by the panel.

Disclosure: No positions in Citibank.

NEXT: Gold Rally Still Holding Up

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Why Inflation Is and Will Be a Problem

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

In December 2008, I predicted at the New York Investing meetup that inflation would reappear in the U.S. by the end of this year. The just released PPI report for November had wholesale prices up 1.8% (a 21.6% rate annualized). Year over year PPI was up 2.4%, the first positive reading in a number of months. The CPI report for November had prices up 0.4%. Year over year was up 1.8%. I made last year's prediction that inflation would be turning just about now based on another prediction that oil prices would be much higher today than they were in late 2008. Both government reports cited higher energy prices as the main driver of the uptick in inflation.

As would be expected, many mainstream economists (who as group significantly underestimated the PPI number) and Fed Chair Bernanke quickly told the public not to worry. They argue that this has to be just a temporary blip because inflation can't have a sustained rise unless the economy is expanding strongly. They point out that the most recent U.S. capacity utilization rate is 71.3% and claim that inflation can only become a problem if this number is over 80%. The capacity utilization argument might have some validity if the U.S. was a self-sustained economy that didn't engage in trade (something I refer to as a non real-world condition). The U.S. not only engages in trade though, but imports much more than it exports. The country has run a trade deficit with the rest of the world continually since the 1970s. One thing that we import a lot of is oil. Like almost all commodities (natural gas is the exception), the price of oil is set globally. The U.S. capacity utilization rate has only an indirect and minor impact on oil and other commodity prices. The error that many mainstream economists have made in their thinking is that the U.S. inflation rate is controlled by conditions that exist solely within the U.S. In actuality, markets outside the U.S. are the key determinant of the how much inflation American consumers experience.

The capacity utilization argument can also be debunked through historical analysis. Not only have there been cases of major inflation in countries with low capacity utilization, but this condition invariably accompanies hyperinflation. The most extreme example of this took place in the last few years in Zimbabwe. The unemployment rate there rose to 94%. With almost the entire nation not working, presumably capacity utilization was as low as it possibly could get under any circumstance. According to many mainstream economists and the U.S. Fed, Zimbabwe couldn't possibly have had inflation. Instead, it had sextillion percent inflation, the second highest rate ever recorded.

While capacity utilization is a red herring when analyzing inflation, currency policy is not.Commodity prices are affected by the strength of the U.S. dollar since all commodities are priced in dollars. A weaker dollar means higher commodity prices and higher inflation in the U.S. This is merely a specific example of a declining currency being the actual correct definition of inflation. Central bank easy money policy with excessive government borrowing backed up by money-printing is what causes a currency to decline.

Many economists refuse to accept that the declining value of a currency is the root cause of inflation though. When not using the capacity utilization argument, inflation-denying economists and other Fed apologists resort to defining inflation as a rise in credit and deflation as a drop in credit. Like capacity utilization, this viewpoint doesn't stand up to real world analysis either. For this to be true, there would have to be ever increasing amounts of credit in real terms in hyperinflationary environments. Not only does this not happen, but credit availability tends to implode during hyperinflation - the exact opposite of what would be predicted. The one thing that all hyperinflations do have in common though is excess money-printing.

Inflation is not a new phenomenon. There have been hundreds of inflationary episodes over time. The one thing they all have in common is that there is too much money (currency actually) for the size of the economy. Central banks in most major economies are currently engaging in excess money creation with abandon. At the same time, they are telling the public not to worry because things will be different this time. They also said that last time and the time before by the way.

Disclosure: Long gold.

NEXT: U.S. Plays Shell Game with Bailout Money

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Are Solar Stocks Waking From the Dead?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

While stocks and commodities have had spectacular rallies since last March, a few groups have been left behind. Solar stocks are one such group. While they rallied early in the year, they have been mostly flat to down since this spring, while almost everything else in the market was going up. Solar stocks hit their historical peaks between December 2007 and June 2008 (before oil peaked at $147 in July 2008). Some of them dropped more than 90% from their all-time highs until they hit lows at the end of 2008 and early this year. At the very least, they are due for a major technical rally from severely oversold levels.

How far that rally goes and whether or not it turns into something that can last longer than a few months remains to be seen. Some good fundamental news is starting to appear. JA Solar (JASO) hiked guidance on December 14th. The company now expects 2010 shipments to increase by greater than 50%. This made for a good day for solar stocks in general. JASO itself was up 16% during market trading and another 8% after hours.

While some improvement seems to be taking place in the short-term, the longer-term prospects for solar power depend on the future price of oil. Even a cursory supply and demand analysis indicates that oil will be rising in price for many years. According to an rigorous IEA (International Energy Administration) study released at the end of 2008, world production from existing wells is falling at a 6.7% annual rate. New discoveries and new wells coming on line are not keeping up with this loss, so supply is falling. At the same time, the demand destruction from the Credit Crisis is turning around. Forecasts now predict global oil demand will now be 86.3 million barrels per day in 2010, up 1. 7% from 2009. The impending supply/demand imbalance in the oil market will cause prices to rise once again, probably in the not too distant future. For the moment however oil is in a seasonally weak period which will last to around February or so and this should temporarily keep a lid on prices.

Just as solar stocks peaked before oil did, they can also start to rally before the price of oil goes up. A list of solar stocks (ticker symbols in parenthesis) that are at toward the lower end of their price range includes:

China Sunergy (CSUN)
Energy Conversion Devices (ENER)
LDK Solar (LDK)
JA Solar (JASO)
Renesola (SOL)
Suntech Power (STP)

There are also two solar power company ETFs: TAN and KWT.

If you think energy prices will be rising in the long-term, then solar stocks today are among the biggest bargains in the market. The sun should indeed be shining on them in the future.

Disclosure: Long ENER, LDK.

NEXT: Why Inflation is and Will be a Problem

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Five Reasons That Gold is Going to Rise: A Response to Nouriel Roubini

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The U.S. Senate passed a $1.1 trillion spending bill this Sunday, December 13th. Five other appropriation bills for fiscal year 2010 were previously passed earlier this year and one more still remains, a $626 defense appropriation. The defense appropriation bill will contain a clause to raise the national debt ceiling. The national debt ceiling is currently $12.1 trillion and the U.S. is tapped out once again. As of now, it looks like congress will raise the debt ceiling by $1.8 trillion to $13.9 trillion. The last increase was only $0.8 trillion, but that would only last months at this point. Even with a $1.8 trillion increase, the U.S. congress will be fortunate if it doesn't have to raise the ceiling again before 2010 runs out.

The increase in the U.S. national debt is now so great that the monthly rise can be as high as the entire debt load in the 1960s (before the U.S. went off the gold standard). The U.S. is also by no means unique. The spending spree taking place is global and includes all major economies. In the midst of this spending and money printing orgy, there are a number of economists who claim it will not hurt the U.S. dollar and will be a negative for gold. In order to come to this conclusion, they have had to ignore a greater than 2000 year history that indicates otherwise. The Romans engaged in long-term debasement of their coinage and paid for it with out of control inflation. Since then, the use of paper money has made currency debasement much easier and quicker. Nowadays, central banks can create any amount of currency they want through a simple computer entry. What they can't create out of thin air is actual money.

History is littered with fiat currencies (currencies not backed by hard assets) that have failed. There is no fiat currency that has survived over time. There is also no case of currency creation that significantly exceeds economic growth that hasn't lead to inflation. This idea is by no means new. Copernicus the famous astronomer was one of the first to articulate it in the 1500s. It is based on simple arithmetic. If you double the amount of currency in circulation, but the economy doesn't change in size, goods and services will approximately double in price. This does not happen instantly however. There is a delay from when a government increases money supply and when consumer prices rise. In the 1970s, money supply in the U.S. increased by the largest amount in 1971, inflation peaked 9 years later, as did the price of gold. So don't expect to see the full impact of today's monetary policy actions until late in the next decade.

Economist Nouriel Roubini has just released an article on why the price of gold will fall. It should be kept in mind that Professor Roubini is an economist and not a professional investor. Unlike myself and a number of other bloggers, he does not publish when he buys and sells assets, but tends to make broad sweeping generalized comments. This approach is rarely helpful to investors who are trying to make money in the market and usually works to accomplish the opposite. Let's look at Roubini's five reasons gold will fall and deal with them point by point:

Point 1: The U.S. dollar carry trade will unravel.

Indeed this will happen eventually. I heard similar arguments made about the Japanese yen carry trade unraveling for about 15 years. It was finally replaced by the U.S. dollar carry trade. So if you are investing now based on how the world might look in the 2020s, pay attention to this point and just hope you don't go broke while waiting.

Point 2: Central banks will have to exit their quantitative easing strategies and jettison their effectively zero rate interest rate policies.

For governments to keep spending, they will have to continue to print money. National debts are now so huge that a significant increase in interest rates will cause the interest payments on the debt to skyrocket. Even assuming Credit Crisis bailouts and related economic damage no longer necessitate massive government budget deficits after a few more years, rising payments for government retirement and health programs will. There will be no respite. If unfunded liabilities for social security and medicaid are taking into account (which is required when using GAAP - generally accepted accounting principals), the U.S national debt is not $12 trillion, but somewhere between $60 trillion and $100 trillion. The official GDP is approximately $14 trillion.

As for interest rates, real interest rates are not zero, they are negative. Only highly massaged government statistics which understate the inflation rate make it look otherwise.

Point 3: Global risk aversion indicates that the U.S. dollar will rise and drive down the price of gold in dollar terms.

There are a number of problems with this assertion. First of all there are periods when both the U.S. dollar and gold rise, as happened at the end of the 1970s. Secondly, there is an implication that gold will be rising in non-dollar currencies (gold has been hitting new all-time highs in dollars, pounds, euros and Swiss francs lately). Thirdly, the statement essentially means that gold will not go straight up in price and the U.S. dollar will not go straight down, like every other major asset in history. So what else is new?

Point 4: The carry trade and the wall of liquidity from central banks is causing a global asset bubble and all bubbles eventually crash.

Indeed we are in the early stages of an asset bubble, with early being the operative word. People said the same things about stocks for years throughout the 1990s and eventually the bubble did peak. You of course make the most money by investing in bubbles. How can you tell when they are ending? This happens when there is a meteoric rise after many years of strong rallying. We know the history (or at least some of us do) of how the 1970s gold bubble ended. Gold went up 400% the last year. Silver rose almost a 1000%. Double digit annual price rises like we are currently witnessing are simply ordinary bull markets. While there may be a peak in gold prices in ten years, we are not anywhere near that point yet.

Point 5: The price of gold could be pushed up if there are expectations that central banks will monetize their countries' debts, but this increases investors risk aversion and will lead them to sell gold.

There is no way that most major economies can pay off their government debts. Monetizing them by creating inflation is the only alternative that will avoid default. One only needs to employ elementary school arithmetic to figure this out. The price of gold goes up with inflation. Yet Roubini contends the investor risk aversion will trump this factor. This could also be restated as theory will be more important than reality in the markets - the essence of all of Roubini's arguments in a nutshell. Investors and traders know better since they have to put real money on the line every day.

Roubini's current missive on gold prices is not a new view. Only a couple of months ago he made some highly negative comments on gold just as it started to rally 20%. He was wrong then, but being wrong in the economics profession has never damaged any one's career. Roubini is not unique in his views, but is one of a group of economic alchemists who repeatedly tell the public that government can create more and more of a currency and this is going to lead to an increase in the currencies value (also stated as deflation). In other words, actual money and value can be created out of thin air and by implication there is a free lunch. Considering the amount of inflation that history tells us is about to take place, there had better be a free lunch because few people will be able to pay for the real one.

Disclosure: Long gold, silver.

NEXT:

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Short Bonds When Retail Sales Improve

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

U.S. November retail sales were released on December 11th. The mainstream media described the positive numbers as a 'surprise', which has been the operative word for a number of better than expected government reports lately. The reason they have been a surprise and better than expected is that evidence from non-government sources contradict them. Same store sales for major retailers in the month of November have been generally dismal. Yet U.S. government statisticians somehow found a 1.3% increase in overall retail sales. As I have said many times, the statistics are recovering, it's just the economy that's not doing well.

The November retail sales report is the first one issued using a 'revised' sample. The sample is changed every two and a half years. While reported sales improved after changing the sample (government changes frequently seem to produce better numbers), they were doing well in the preceding few months before the revision. Retail sales were up 1.1% last month and 2.4% in August. The August numbers were the result of the U.S. government's 'Cash for Clunkers' program, a free-money giveaway to U.S. consumers so they could buy cars. Interestingly, the October numbers were up because of auto sales as well, these supposedly increased by 7.1% - and this was after 'Cash for Clunkers' was long over. It is quite amazing the American consumers can keep buying cars and trucks despite high unemployment, an already huge debt load and reduced credit availability. Where does the money come from?

U.S. retail sales numbers are based on a mail survey to 5,000 retail establishments out of a total of as many as three million. The numbers are adjusted for seasonal variation and holiday and trading day differences. Amazingly, they are not adjusted for inflation. So reported retail sales can be higher if the number of sales are decreasing, but prices have gone up. They therefore can indicate more inflation, improved economic activity, or a combination of the two. The place to look to see if inflation is the impetus behind increasing retail sales numbers is gasoline sales. These are approximately steady in volume at this time of year, so a big rise indicates higher prices. And what item in the retails sales report had the largest rise? It was gasoline sales by far. As a further check, U.S. import price numbers for November can be examined. These were released the same day as the retail sales report and are a pure measure of inflation. They were up 1.7%, even more than the 1.3% increase in retail sales.

While the retail sales figures are somewhere between suspicious and a good confirmation of inflation, the market did not react that way. In the short-term traders believe any number published by the U.S. government, no matter how absurd. Gold had a sharp drop when the report came out, although it should have risen on the inflation implications. Stocks and the U.S. dollar went up, although inflation is a negative for them. Bonds sold off and interest rates rose. This is the one safe haven for investors on higher retail sales news, since interest rates will go up because of a better economy and because of inflation, so the reason for the higher retail sales numbers is not important. The long-end of the yield curve will move the most. There are a number of ETFs that the average investor can use to short bonds (or go long on interest rates since interest rates move up when the price of bonds go down), such as SHV, PST, TBT and TMV (listed from least to most aggressive). Interest rates are starting to move up so it looks like shorting bonds is are a win/win trade.

Disclosure: Long gold, TBT, TMV

NEXT: Five Reasons That Gold is Going to Rise: A Response to Nouriel Roubini

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Common Roots of Hyperinflation

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Rating agency S&P lowered its outlook for Spanish government debt on December 9th. Fitch lowered its long-term debt rating for Greece to BBB+ from A- the day before. In the eurozone, there are concerns about Portugal also being in trouble, although Portugal's debt to GDP ratio is no worse than the United States and a case can be made that the U.S. is actually in much worse shape - the U.S. has a large money printing press however and Portugal does not. No country can compare to Japan however with its debt to GDP ratio currently over 200%. An examination of the CIA Factbook figures for 2008 estimated that only Zimbabwe had a worse debt to GDP ratio than Japan's. Zimbabwe also had the second largest hyperinflation in world history.

The roots of all hyperinflations are governments not being able to fund their operations. Government's first borrow money to do so and this can go on for years or even many decades (the more powerful the government, the longer it can live off of borrowed money). At some point, the credit either starts to run out or the expenditures get so high that the amount that can be borrowed is no longer enough. It is then that governments resort to printing money (not literally done in advanced economies where money is simply created by pressing the enter button on a computer) and this devalues the currency. The devaluation is the result of simple arithmetic. Currency increasing at a faster rate than the size of the economy means each unit of currency is worth less and it takes more money to buy any given good or service than it would have otherwise. The price rises that result are consumer inflation. Many economists do not use this obvious definition of inflation, which is one reason why their inflation predictions are frequently highly inaccurate. Central banks particularly don't like it because it would prevent them from engaging in politically popular, but potentially disastrous monetary policy.

The Credit Crisis has led to a lot of money printing (frequently referred to as quantitative easing) globally and this is taking place after decades of increased borrowing in most countries. While money printing will lead to inflation, it only leads to hyperinflation when it spirals out of control. The preconditions for this are that borrowing power has been maxed out (which is now the case for many countries, but was not true in the 1970s and this is why it was possible to tame inflation back then) and it no longer becomes politically possible to match government expenditures with revenues. In the modern era, this is always a problem during wars since no state is capable of raising enough money through taxes to pay for any major or prolonged military effort (the U.S. accounts for over 40% of global military expenditures by the way). Contemporary democracies also get caught between the need for large outlays for social expenditures and the resistance of rich individuals and corporations to paying the taxes necessary for funding them, so they compromise and give both sides what they want. This problem is by no means brand new. It is essentially what lead to the hyperinflation in Germany in the early 1920s.

Once the preconditions for hyperinflation exist, a major economic shock can then become the precipitating incident. Governments will always assume that the problem is temporary and the economy can be righted quickly through a little money printing. In deep economic shocks like that depression in the 1930s and the Japanese banking crisis in the 1990s, and the Credit Crisis today, this is not the case. The problem will take at least a decade and possibly multiple decades to solve. The possibility for long-term money printing then exists (the U.S. did not engage in this in the 1930s). Zero or close to zero interest rates will mask the damage that is being created. This is what has allowed Japan's government finances to spiral out of control (combined with a huge pool of personal savings of the Japanese people that it could tap into) and is now enabling the U.S. and UK to do the same. At some point though interest rates have to rise and when they do, interest payments on the national debt can equal or exceed the government's tax receipts. The game is up long before that occurs however with a hyperinflationary spiral becoming inevitable. For this reason, it is now no longer possible to solve a future inflationary problem by raising interest rates to high levels as was done in the U.S. at the end of the 1970s. This approach now would be disastrous.

The U.S national debt increased by a $1 trillion in 2008 and $1.9 trillion in 2009. The damaged economy and the after effects of the Credit Crisis are likely to keep the increase elevated for many more years. After that, increased outlays from Social Security and Medicare caused by the Baby Boomers retiring will kick in, so there will be no respite. At some point the whole scheme will fall apart. When interest rates rise well off the zero level, this will be the tipping point that means that an inflationary spiral has started.

Disclosure: Not applicable.

NEXT: Short Bonds When Retail Sales Improve

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.