Citi Dives, GDP Plunges - Both Off the Cliff

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.

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Washington's mantra should be, "if it's broke, don't fix it and when it's not fixed, fudge the numbers". News of the latest government plan to rescue Citigroup came out this morning as did the revised GDP figures for Q4 2008. Today's government rescue of Citi is the third one in five months. Those rescues followed about half a dozen U.S. government assisted rescues that took place earlier. Note to Geithner, Bernanke, and Obama - doesn't look like what you are doing is working guys, you might want to consider Plan B. Citi's rescue isn't the only thing not working either, all the policy moves to prop up the ailing U.S. economy are fizzling as well and apparently the 'just lie about it and no one will notice' approach is falling apart too. The GDP figures for last quarter had a major downward revision (they are still much rosier than the actual numbers however, so don't get too excited just yet).

The Citibank bailout du jour can be summarized as 'U.S. taxpayers get screwed again' (just another example of how the government keeps your interests in mind). Taxpayers are going to get up to a 36% stake in the insolvent bank that has a net negative worth in exchange for the $25 billion (out of a total of $45 billion) of TARP funds that were previously provided to Citi. The remaining $20 billion of taxpayer provided funding will still be in the form of preferred that pays a dividend, but the option exists for also converting this to the worthless common stock. Other holders of 'bailout preferred', such as the Government of Singapore Investment Corp., Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors will be paid $3.25 per share for their preferred, instead of being forced to convert it to common stock that traded as low as $1.55 this morning (a deal that is more than 100% over market price sounds good to me - unfortunately only the well-connected rich and powerful get these arrangements, the small investor and taxpayer get the losses).

To say the least, the market didn't react favorably to the government's latest move on Citi. The stock was down as much as 37% at its low so far. Considering the dilution though, existing shareholders could see their stake fall to only 26% of the bank, this was really not a big drop at all. Still, $1.55 is above the penny level usually reserved for stocks in official bankruptcy and is well more than $1.55 above the real value of the company. New York Investing first said Citi was insolvent in late 2007 and well over a year later, the market is finally catching up with us. We have also said repeatedly that there is no such thing as a single bailout for an insolvent financial institution - Citi has shown just how true that statement is.

Another thing New York Investing has frequently pointed out is how the U.S. government is fudging its GDP reports. This blog scoffed at the original Q4 2008 report of a minus 3.8 decline in the economy and pointed out several absurd figures that were being used to calculate this number. Well, the government started to fess up this morning, when it stated there was actually a 6.2% decline in GDP last quarter (a drop of 8% to 9% is more likely). Certainly a step in the right direction, although the government is still claiming that the U.S. economy grew 1.1% in 2008. Maybe this is possible in some alternate universe, but not in the reality that most of us live in.

The next meeting of the New York Investing meetup is on Tuesday, March 3rd at PS 41, 116 West 11th Street (at 6th Ave) from 6:45 to 8:45PM. Click on the link below my name to RSVP. If you are in the New York metro area, you should attend.

NEXT: Technicals Ugly, Risk of Domino Bank Collapses

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.

Budget Deficit Screams 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.

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The Obama administration released revised estimates for the 2009 budget deficit (the difference between the yearly income and spending of the federal government) today and it now looks like it will come in at $1.75 trillion. The original estimate for the 2009 deficit made by the Bush administration in February 2008 was $407 billion. Yes, the current estimate is now more than four times the original one... and we're not done yet. For a perspective of just how huge this number is, the largest U.S. budget deficit so far according to official figures was in 2004 and it was $413 billion. The current estimate represents over 12% of GDP (the overstated official number), approximately equal to the percentage in the World War II year 1942. As bad as a$1.75 trillion budget deficit is you can assume it is a gross underestimate of the actual number.

How the original 2009 budget deficit figure was obtained is not immediately clear. The Congressional Budget office estimated a deficit of $219 billion, which did not include the $168 billion stimulus plan passed early in the year. Adding those two numbers together, you would get $387 billion. Spending for the Iraq war was also not included in the number. If you use the current absurdly low estimate of only $170 billion that would bring the figure to $557 billion, not $407 billion (much Iraq war spending seems to somehow be kept magically out the budget). I frequently run into arithmetic problems such as these when looking at government reports. Nothing adds up correctly and the final number looks much better than what you should be getting from the component parts.

There were a few voices that were questioning the deficit numbers back in early 2008. Bill Gross from Pimpco warned that the budget deficit could rise to 5% of GDP and be as high as 600, 700, or even 800 billion dollars. We at the New York Investing meetup predicted that the first trillion dollar deficit would take place during the Bush administration. While this was considered an outrageous claim at that time, it was actually too low. As with much of the Credit Crisis, things have turned out to be even worse than the most dire outlook.

No one really knows what the actual budget deficit or national debt (the accumulated debt over time) is. Many items don't appear in either and this is not limited to Iraq war spending. Toward the end of last year, it was estimated that $8.5 trillion has been spent on trying to deal with the Credit Crisis. Most of that money is not included in the budget deficit or national debt. Future obligations for social security and medicare/medicaid are also ignored. Accounting for those could raise the national debt to the $50/$60 trillion level, if not more.

Where is the money coming from to pay for all of this spending? The major source is through 'printing'. While you can not print more and more of your currency and not have it devalue (the correct definition of inflation), this doesn't stop top economists such as Paul Krugman and Noriel Roubini from constantly opining in the media about the dangers of deflation. Just in case the 'experts' are misguided on this one, you might want to pick up some gold and silver during their current pull back. Oil, another inflation hedge, is also a great buy at the moment.

NEXT: Citi Dives, GDP Plunges - Both Off the Cliff

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.

State of the Nation - Denial

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.

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President Obama gave his State of the Nation speech last night and Governor Jindal of Louisiana gave the Republican's rebuttal. Neither indicated any realistic grasp of the extent of the economic/financial crisis that the U.S. is facing or proposed any innovative solutions. Generally, more of the same things that have failed in past were proposed. As per usual, the talks were long on rhetoric and platitudes that almost everyone can agree on and short on details for implementation. Not only doesn't there seem to be a realistic plan for fixing the financial system, there doesn't seem to be any plan at all.

The three cornerstones of Obama's agenda are improved education, health care, and alternative energy - the same items he emphasized during his campaign. Improved education as an agenda item is nothing new and has been emphasized by most recent presidents - the quality of American education has continually deteriorated during those administrations. As for health care, the government is going to extend it to more people, but costs have to come down (how exactly Obama plans on accomplishing these contradictory goals remained unstated). Increasing the use of alternative energy is indeed a good idea, but it will be a long time before this significantly impacts U.S. energy usage (it was not mentioned if the economically absurd corn ethanol program created during the Bush administration will be closed down).

There were a number of allusions to the financial crisis peppered throughout the speech. Obama did say that when large banks failed to function, they would be set right so they could lend again Apparently closing them down isn't an option, but failure will be rewarded instead (it should be remembered that Obama lobbied Democrats in congress to support TARP and without his efforts TARP might not have passed). Obama also stated that the auto industry was not going to disappear in the country that invented the car. At first, I wondered why he was trying to meddle in the internal affairs of Germany, but then realized he meant the U.S. and was planning on bailing out GM, Chrysler and Ford. There will be more aid for the unemployed and struggling homeowners as well. Obama praised congress for its swift passage of his close to $1 trillion economic stimulus package.

The man whose administration opened with a budget busting piece of legislation emphasized how he was going to get the deficit under control by the end of his first term (I have to admit I was laughing uncontrollably during that part of the speech). How is he going to do this? First, it is obvious he plans on ending the war in Iraq. While this is an incredibly expensive waste of money, Obama himself admitted that many of the costs of the war aren't even listed in the budget (the Federal government's off balance sheet items would be the envy of an Enron accountant). There is also a task force being formed to get rid of waste and fraud. If this works (and you be skeptical until you see proof), this could indeed cut the budget deficit significantly. Subsidies for big agribusiness are going to be cut and tax breaks for companies that send jobs overseas (what exactly these tax breaks are has never been clear to me). But one of the most important components in Obama's plan to reduce the deficit is the increase in taxes that is going to take place when the Bush tax cuts expire in 2010. He didn't mention that in his speech. He also didn't mention that only a very small percent of the estimated $8.5 trillion in bailout money as of the end of last year is included in the budget deficit or national debt. So don't hold your breath for increased transparency that is being promised in this arena.

Governor Jindal for his part admitted that the Republicans were irresponsible when they were in power and had reneged on their long standing promises to the American people and their core value of fiscal conservatism. It of course would be hard to deny this. It took over 200 years to create a national debt of $5 trillion. President Bush, with the help of a Republican controlled congress for much of his administration, managed to approximately double that debt to $10 trillion in just eight years (at least those are the official figures, tripling it to $15 trillion is more realistic). This occurred even though there were budget surpluses for the last few years of the Clinton administration and projections that the national debt could be reduced to zero by 2010. Like a husband caught cheating, Governor Jindal assured the American public that the Republicans have learned their lesson and aren't going to do that again.

The essence of the speeches last night can be summed up as follows: When the Democrats are in control, they spend like drunken sailors on shore leave. When the Republicans are in control, they spend like drunken sailors on shore leave. No one in Washington has any new ideas or approaches for dealing with the financial crisis. The problems will be dealt with by spending more money. The economy is likely to revive because of all of this spending, but you can assume that this will eventually catch up with the dollar and its value will fall precipitously. The economy after all, always looks good during the beginning stages of hyperinflation.

NEXT: Budget Deficit Screams Inflation

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.

Dow Breaks Key Support Indicating a Much Lower Low

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.

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The Dow confirmed a break of major support on Monday. Yesterday's low just under 7106 was over one percent lower than the 7181 intraday low on October 10th, 2002. The index is now back to where it was in 1997. It should now be considered inevitable the the Dow will have to fall to the 5600/5800 range where the next strong chart support exists. Below that, support is around the 4000 level. Even at 4000, the Dow would be in much better shape than it was in the 1930s when it dropped 89%. As of yesterday, the index is down only 50% from its bull market high. When it would get to even 6000 is open to question as well. It still might take awhile.

The market is deteriorating at this point not because economic conditions are bad, but because it doesn't look like there is anybody in charge that will be making them better. While the market was falling apart last Friday, Treasury Secretary Geithner was MIA. Word was that he was on vacation. It is certainly understandable that after a whole four or five weeks in his new job where he managed to royally screw up in record time, that he would need some rest. Besides, he knew that president Obama would soon be busy announcing that he would be cutting the budget deficit in half by the end of his first term (Republicans were demanding attempts to get the budget under control, something they never did during the Bush administration). The level of economic obliviousness this indicates is simple off the charts. It's sort of like announcing your new snow removal policy while people are dropping dead in the streets from 135 degree heat... and it has never snowed at any point in history in your country. Some immediate action on the banking crisis should be agenda item number one, not that I am confident that this will be handled intelligently by the government. We are almost guaranteed that it won't be.

Wall Street is understandably upset about the confidence gap with the new administration. While many financials took a big hit as usual, Citigroup and Bank of America were actually up and are still holding above the penny stock level (a deal was being discussed to convert the preferred stock the government owns in Citi to its worthless common stock). Resource stocks were crushed. U.S. Steel feel 13% on Monday alone. It is almost 90% off of its yearly high and it has a P/E of 1. Aluminum producer Alcoa isn't doing much better, falling 8% on the day and is down around 85% on the year. Coal company ANR fell 8% and is also about 85% off of its high. If these stocks seem absurdly undervalued it is because they are, but that doesn't mean they will be going up tomorrow. In a major bear market, there is almost no limit to how cheap stocks with real value can get. It is of course important to differentiate them from stocks that become equally cheap and will remain so because they don't have any value (currently the financials).

The biggest drops frequently happen at the bottom of a move. The monthly charts indicate that the market is likely to bottom sometime during March at the latest. Short covering will propel the rally that follows. A sustainable long term rally is still somewhere in the distant future and is receding further because of the current drop. In the longer term, zero interest rates and the unending bailouts and spending plans will provide the market with the liquidity which is the fuel it uses for its rallies. They will also mean that you will be paying $50 for a cup of coffee at Starbucks.

NEXT: State of the Nation - Denial

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.

Stocks/OIl Trying to Bottom, Gold at Resistance

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.

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The news is filled with a fearful vision of the future. All you see in print and hear on TV is how the economy and financial system are imploding everywhere. It is under exactly such circumstances that market bottoms take place. Once everyone knows the news and agrees on the situation, there is no one left to sell. The opposite happens at market tops. The last time I watched CNBC News on a frequent basis was in September 2007. Everyone was confident. Fed rate cuts were going to fix everything. It was going to be clear sailing ahead. The U.S. stock market peaked three weeks later.

So far the Dow has held above the low of 7181.47 that it reached on October 10, 2002. A significant break of that number would have serious implications, although not necessarily immediately. The Dow is severely oversold on a monthly basis. The monthly RSI has actually fallen a tinge below 20 (where 20/80 are the oversold/overbought extremes). The has not happened since 1971, which is as far back as my data goes. You should assume that this did occur in the 1930s during the Great Depression and that the RSI on the monthly charts dipped even lower. This doesn't mean that the Dow can't go any lower right now, but any major selling would be met with buying almost immediately. An announcement of the newest bank bailout plan will be the impetus for the market to rally (selling could take place first for a short time if the market's reaction is negative).

While the long-term chart picture indicates a rally will be coming soon, this rally is a tradeable event. You can not buy and go on vacation. When you get your profits, you need to take them. The most likely scenario for the next several months is a lot of volatility on the Dow and the other stock indices. Profits one month can disappear the next. The 200-month moving average, around 8600 right now, should be considered strong resistance. The market needs to break above it and stay above this line for a number of months before any type of sustainable rally pattern can be established.

While stocks are are hitting support, gold is hitting resistance and you almost always get selling at resistance. Gold got to at least 1007 in intraday trading on Friday. Just as stocks are in a long-term bear market, gold is in a long-term bull. Its previous all time high is at 1033. When this level is breached, the long term uptrend is confirmed and you should be looking for 1200 as the next stop. Meanwhile, don't take your eye off of oil. The March contract expired on Friday. In the last few months, there has been a lot of selling during the first few days of a new contract. So far today this is not happening and this would be one sign that the oil could be getting ready to turn around.

NEXT: Dow Breaks Key Support Indicating a Much Lower Low

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.

Oil Yes, Financials No

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.

Our Video Related to this Blog:

Suddenly, oil inventories in Cushing, Oklahoma dropped by 200,000 barrels yesterday instead of increasing by 3.5 million barrels that industry 'experts' predicted. While I have predicted that this would happen in this blog and stated so at a class given this Tuesday by the New York Investing meetup, I was a lone voice in the wilderness. Before the news came out, oil ETFs were making new lows as were many financial stocks. While superficially oil and the financials looks like major bargains, only oil should be assumed to be so.

When the 'surprise' (only a surprise to people who get their information from the mass media) news came out that oil stocks had declined, the March contract for Light Sweet Crude jumped $4.86 to close at $39.48. April, which will be the front month after today, closed at $40.18. Anecdotal reports indicate supply is drying up, but you will not see any coverage of this in the American press, other than in relationship to OPEC. For those who are unaware of it (and this presumably includes all reporters on energy topics), every oil and gas lease in the United States contains a term that the producer can stop pumping if the prices aren't high enough. Based on the behavior of the oil futures, which have jumped back to the $40 level over and over again, the market is telling us a price under $40 a barrel just isn't sustainable.

Nevertheless, the coverage in the media today is once again the same old (off-key) song. You will see quotes like, "It was a significant move last night, but there's not much out there that can create a bullish story" . And the reason for this is, "The demand outlook is very weak, and there's nothing to suggest that it will improve in the near term." There is no analysis of the supply side of the equation, despite the news out of Cushing, Oklahoma yesterday. Supply dropping faster than demand is indeed a bullish story. The same reporters who know nothing about how the oil industry functions, also seem to have forgotten to take high school economics. The current coverage of oil is an excellent example of why the average investor who gets his or her (mis)information from the mass media can't make money in the markets.

While oil had a big pop up yesterday, financials hit their lows in many cases and remained at those levels. Citigroup fell to 2.50, Wells Fargo to 11.94 and Amex to 12.74. Bank of America dropped as low as 3.86, only a tinge above its low of 3.77. Collapsing financials led the market down and helped the Dow close at a six-year low. The possibility of a Swedish style bailout of the big banks is becoming more of a reality. This would wipe out the equity holders completely (which include every major pension fund in the United States as well as Wall Street insiders) and has been resisted for that reason. While there is a risk of losing everything if you buy financial stocks, no such risk exists with oil. All commodities have a minimal price which is the cost of production. The minimal price for a troubled stock however is zero.

NEXT: Stocks/Oil Trying to Bottom, Gold at Resistance

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 and Silver Rise, Oil falls

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.

Our Video Related to this Blog:

Gold and silver continued their climb yesterday, while oil scraped along the bottom. The prices of all three are affected by the value of the U.S. dollar and inflation. As we covered in this blog yesterday gold demand hit a record in 2008. You can assume it will hit another record in 2009. Investment buying is the main driver, with the GLD ETF increasing its holdings 200 tons in the last month alone. Demand for oil on the other hand is falling, but not by nearly as much as the press would have you believe. The supply is likely to be falling much faster sometime in the next several months. Oil is a major bargain now, just as gold and silver were last October and November.

Gold closed at 978 in the futures market yesterday and reached 986 in London trading this morning. It should soon reach its all time high just above $1000 an ounce. Expect some selling in that area, but assume it will only be temporary. The current rise in gold is taking place because of a loss in confidence in the global financial system. This is not something that can be fixed over night, it will take many years. Gold and silver will be good investments during that period as people lose faith in paper currency and see that it is continually losing its value. Once gold breaks decisively above 1000, it should move to 1200 in a very short time. The next stop after that should be around 1500. Global governments are likely to try to dampen enthusiasm at that point by announcing an IMF gold sale or engaging in some other manipulation (a chronic problem in the gold market).

Silver always follows gold and is still far from its previous high around 21. Silver closed at 14.29 in the futures market yesterday. It's recent rally has been powerful just like gold's. Silver broke through major resistance in the mid 13's like a knife slicing through hot butter. The next stop is around 16, where the resistance is even more formidable. Expect some problems in that area. Above that there is minor resistance around 19 and then the important old high of 21. Unlike gold, silver has not made a new all time high yet. The old high from 1980 is in the 50s. It will get there eventually.

While gold and silver are operating on all cylinders, oil is languishing in the mid 30s. Light sweet crude (there are many grades of oil) may have doubled bottomed at 33+, only time will tell. Fundamentally, oil is cheap especially since it is priced in U.S. dollars, which are incredibly overvalued. The alleged oversupply of oil doesn't stand up to scrutiny either. While the supply has been building up in the U.S., the price of gasoline has been rising steadily. If there is so much oil supply why isn't it used to produce gasoline, which is obviously in short supply if the price is rising? Either there is no oversupply of oil in the U.S. or some form of manipulation is going on. You can decide for yourself.

NEXT: Oil Yes, Financials No

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.

SEC Discovers Fraud Exists/Smart Money Buys Gold

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.

Our Video Related to this Blog:

Yesterday, SEC officials raided the offices of R. Allen Stanford, a Texas billionaire listed as one of the 400 richest by Forbes magazine, and froze the assets of three companies he controls. The SEC is accusing Stanford of perpetrating an $8 billion investment fraud, something that would have had to have been conducted over many years if not decades because of its size. The fraud was centered around CD's, usually considered the safest of investments, with higher than the going rate of return. Just as with the Madoff investment scam, the too good to be true returns were a fantasy. At the same time that the Standford fraud news appeared, figures for gold consumption in 2008 were released and they indicate that the smart money was loading up on the precious metal last year.

When news of the Madoff scam broke, only the incredibly naive would have thought it was the only one being perpetrated. Madoff's fraud indicated an SEC permeated with corruption. It is not far fetched to say that the SEC itself was in on the Madoff scam. Madoff himself sat on an SEC board. At least one (more likely several) former SEC regulator left the SEC and started a feeder hedge fund that funneled at least $7 billion into Madoff's operations. That fund changed its auditors every year (something which is not done) in an obvious attempt to hide what it was really doing. Even though Madoff's operations would have required that he was conducting more than 100% of the trades in the SP100 futures markets, the SEC didn't see anything suspicious about this. FINRA, the other regulatory agency that investigated Madoff, reported that parts of Madoff's firm had no customers, but was still making money. They didn't find anything impossible about that one either. The head of FINRA at that time is now the current head of the SEC.

The most recent statements from the SEC indicate they believe the Madoff scam began in the 1970s. In over three decades they noticed nothing. How long the $8 billion Standford scam has been going on is not yet known. However, it usually takes a long time to steal $8 billion. Stanford has significant operations in off-shore money haven Antigua, where he has been knighted. It is quite possible Madoff has stashed a lot of money at one or more off-shore locations himself. It takes a lot of money to bribe judges and other U.S. government officials after all.

Lost amidst all the fraud news was that gold demand hit a record in 2008, surpassing the $100 billion mark for the first time ever. Demand for the precious metal in the form of jewelry, for industrial uses, gold bars, coins, and gold exchange-traded funds, hit $102 billion, up 29% from 2007. Many of the buyers of Standford's 'safe' CDs may have shunned gold because it was 'risky' and the wanted 'cash flow'. Many of those people will lose everything. The actual smart money knows that paper assets are now the riskiest of all and has been loading up on gold behind the scenes for awhile now.

NEXT: Gold and Silver Rise, Oil Falls

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.

Dow Testing Low, Gold Testing High

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.

Our Video Related to this Blog:

So far today the Dow has fallen as low as 7553 and is closing in on its November low just under 7400. It is inevitable that it will test it and possibly the slightly lower 7200 area, which was the bottom in 2002/2003. Financial stocks are the culprits that are tanking the market today, with the sell off starting in Europe because of weakness in Eastern European banks. The tech heavy Nasdaq is still well above its November bottom. Gold has hit a 7-month high and oil looks like it has made a double bottom.

The U.S. stock market was actually in very good shape technically and breakouts were taking place until Treasury Secretary Geithner gave his talk on how he plans to deal with the ailing American banking system. The talk came across as Geithner fiddling around while the U.S financial system burned. Wall Street reacted with a sharp sell off and the incipient rally turned into a route for stocks. With friends like Geithner, the American investor doesn't need enemies.

While stocks are falling apart, gold and silver are breaking out through one point of resistance after another. Gold so far today has reached as high as 970 in futures trading and is closing in on its all time high in the 1000 area. Silver has broken above its 200-day moving average, but still needs to do some more work before it establishes a solid bullish pattern. Meanwhile, oil looks like it made a double bottom last Thursday when in fell into the 33's, just as it did on December 19th. Press stories about excessive supplies of oil are greatly exaggerated and are being generated by the big money interests that are short the market - don't believe them.

Problems with the global banking system are serious and are not likely to be solved for years to come. The market shouldn't be surprised by this anymore, but it is and will continue to be. The solution for all the major players will be money printing, more money printing and more money printing. Commodities will be the beneficiaries, while stocks decline or languish.

NEXT: SEC Discovers Fraud Exists/Smart Money Buys Gold

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.

An Alternative View on Art 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.

Today's guest Blogger Dennis Mack gives an alternative view on Investing in Art:

I was glad to see a presentation on art collecting as a form of investing. I would supplement the presentation by reminding people of the many costs of owning art.

First, the markups of the dealers are significantly greater than the markups by a market-maker of a security or someone selling land out of inventory.

Second, as mentioned by one person at the Meetup, art dealers are salespeople, as we must recognize, but they are only the most visible part of a web of people who influence the price of art and create trends in favor of some types of art over others. Almost 40 years ago, I took an art appreciation course with an artist, who was the widow of a well known artist. She regaled us with stories of the relationships among, dealers, galleries, auction houses, museums, critics, the press, appraisers, collectors and artists, themselves to shape the shifting interest of the art world in certain types of work or certain artists. The tools went beyond press releases, gifts to museums, sponsorships of museum shows, holding back on the sale of available works, underwriting puff pieces and the like. She would always ask – and then answer – who stood to gain by a particular museum show or article in an art magazine.

Her advice, like that we hear at the Meetup, was not to buy art for investment but to buy for enjoyment. “Investment” in art takes lots of work to become successful or luck to ride on the efforts of others to pump up a price. “Investment” often risks buying into a bubble, only to watch it collapse as interest moves to another kind of art where prices had been low and someone had built up a significant inventory.

Beyond the markups and risks, there are some real costs that beginning buyers often overlook. These costs include insurance, conservation, restoration, and periodic appraisal. Many owners overlook these costs to the detriment of their collection.

Ordinary people who start to buy when they are young can build up collections worth more than their securities portfolio. But just at the time that the art portfolio should be supporting them, they may find that they have to support the art portfolio. I know an academic who on his sabbaticals bought art, rugs, and jewelry over the years, stopping much of his buying nearly 30 years ago. As a teacher, he was not making major purchases. Many cost less than $200. He and his wife have fewer than 400 pieces. Now in their 80’s, they need to know the value of their collections for estate planning purposes and for considering making gifts to museums. They knew that they needed an appraiser, but because their collections are so unfocused it had to be either many appraisers or a very rare generalist. After 10 years of putting off the appraisal, they finally found an appraiser recommended by their property insurer.

After consulting with other collectors and dealers about appraiser fees, they decided the appraiser’s fees reasonable. The appraiser explained to them how much work it takes to appraise for tax purposes each piece, particularly those of any value (i.e., worth over $5,000). The appraiser reviewed a CD of pictures of their collection and visited them to look things over generally and give his estimate of the amount of work. Taking lots of shortcuts, it looks like the appraisal process alone will cost well over $35,000. This appraiser’s fees are low compared to those of the big auction houses, which might charge $5000 per day. A friend who was giving away a more focused collection of photographs paid $1,500 to have his $40,000 collection appraised before he gave it to a university. Note, that is almost 4% of the value of the collection which if you wish to insure your collection must be done periodically – although updates are cheaper than the first appraisal and authentication.

There will be additional expenses of restoration and conservation of pieces and insurance on the collection. According to something I found on the web, theft/damage insurance for art, added onto home insurance, generally costs $1-$2 annually per $1000 of coverage. A collection that has appreciated to $2 million would cost $4,000 annually, although I have heard much higher rates from reputable companies. Most of the people I know who have collections have not insured them. They, then, are not looking at their collections as a holder of wealth that they can live off. If they were, they have a risk of loss from many causes.

And the insurance may not work for you if you live with your art and it is destroyed by a flood or other uncovered risk. Even storing your collection in a bank vault, a frequent practice, may not be adequate risk protection. A teacher with a passion for middle eastern rugs went on frequent buying trips in Asia, making a market in his rugs but considering the rugs largely as his retirement fund – a comfortable retirement fund. He felt that he could not afford the premiums to insure them but kept them in a large bank vault. Unfortunately the vault was in the World Trade Center.

If a picture is matted and framed, it may have to be rematted and reframed periodically. Works are damaged by sun and humidity or simply having the wrong glass over them. Contemporary art work is notoriously expensive to conserve – more so than paintings that are 100’s of years old. They are often made of materials that were not intended to survive or involve glues that dry up. An art restorer told me of horrendous charges to repair the effects of age of “ordinary” contemporary pieces that were only 35-50 years old. Sadly, much work that was purchased in the 60’s and 70’s is not matted with acid free paper. The result is damaged prints.

For the ordinary “collector” the level of forgeries can be surprisingly high. I have at least one in my collection. It hangs in my home, because I really like the image. I did not pay much for it. Therefore I do not bemoan the fact that it Is not a real Dali.

Collections can lead to wealth if you understand the system and know how to work it, particularly if you are a dealer who knows how to put the shine on base metal and get someone to need it. Unfortunately, if you are the collector, you might end up being the person who “just has to have it.”

NEXT: Dow Testing Low, Gold Testing High

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.

Deepening Global Recession Means More 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.

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The economic news out this morning corroborates a deepening global recession. GDP in the eurozone fell 1.5% during Q4 2008. This is the third drop in the row and the steepest. Predictions are that Japan's Q4 GDP will fall somewhere around a 10% annual rate. Media coveraged emphasized how the U.S. economy was doing better than those overseas, rather than questioning the absurdity of the U.S. GDP figures. Dire warnings of DEFLATION were mixed in with the reporting.

While it is true that declining economic growth leads to falling demand (an economic argument that discusses only demand and not supply is meaningless) and the current declines are rivaling the Great Depression in the 1930s, this doesn't mean there will be deflation this time around. During the Depression, the U.S. monetary authorities contracted the money supply in the beginning, which is a major reason the Depression lasted so long and became so steep. Currently, the monetary authorities are inflating the money supply at a rate worthy of Weimar Germany in the early 1920's or Brazil in its inflationary heyday. Simple common sense indicates the outcome will be different now than it was in the 1930s.

The truth will be found in the markets. While they can be manipulated in the short term, in the long term they have to move to accurate price levels (unless the government bans trading, which has indeed happened many times in the past). Even though constant efforts are made to suppress the price of inflation-indicator gold, it is nevertheless still rising and could easily hit a new all time high sometime within the next several weeks. It reached 950.00 in futures trading yesterday, just a smidge below the 1000 level. Silver has also been rallying strongly in the last two months. Oil is trying to find a bottom at current levels and expect it to put in a good rally once it does.

Anyone who reads this blog knows the alledged deflation that is taking place is accounted for almost completely by falling oil prices. While the manipulations in the gold market are well documented, oil is probably even more manipulated but in different ways. Right now Light Sweet Crude is in extreme contango (prices for futures months are much higher than the current price). While the current oil contract was trading at $34.45 this morning, April was trading at $42.14 and June was trading at $47.62. Also the price of Brent (an inferior grade of oil) is way above Light Sweet Crude, with Brent trading at $45.90. This is the reverse of the usual price relationship and is somewhat analogous to table wine costing more than a good champagne. Light Sweet Crude may have put in a double bottom yesterday (only time will tell), falling to $33.98, close to the low of $33.16 reached last December 19th. Press coverage on oil seems to have changed this morning, with some talk about how supply is going to be reduced at current prices and how this can support prices even though demand is falling (did someone recently give the reporters a basic lesson in economics?).

Ignore all the talk about deflation coming from the press and well-known deflationists like Noriel Roubini (who is predicting a big decline in consumer prices). Yes, global economies are sinking, but monetary and fiscal stimulation (both of which are inflationary) are being applied at historically high levels. It's only a matter of time before they work their (black) magic. Just remember though that it takes many years before the full impact of inflation shows up.

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.

Market Doesn't Believe Retail Sales Report

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.

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As we have reported in this blog many times, the U.S. government has been blatantly manipulating its economic reports for years now. Nevertheless, the market generally believes them despite their internal inconsistency or the existence of other information that is strongly contradictory. This willingness to believe seems to have broken down today with the release of the Retail Sales Report for January. The numbers were good and way above expectations. Instead of rallying as it should have, the stock market tanked.

According to the government statisticians, retail sales rose 1% in January. The forecast among economists (who can't be trusted either) was for a drop of 0.8%. Perhaps this discrepancy was just too great for the market to buy it. The report furthermore had a big gain in apparel purchases, even though same store sales data for clothing chains showed a big decline. A number of retail industry watchers commented on this discrepancy and other anecdotal evidence that seemed to contradict the government's view. There seemed to be a consensus that the numbers would just be revised downward next month.

Looking inside the report, this is indeed what happened for December's numbers. Originally reported down 2.6% (not 2.7% as most media stories stated), the drop for December is now an even more horrendous 3.0%. The January rise of 1.0% would be from this lower number, or only up 0.6% above the number first reported. The news media always fails to point this out and this leaves a gaping loophole for creating good news where none exists. The real numbers, which are much worse, only come out a month or two later and the media pays little attention to them. There have been cases in other government reports where the revisions downward were so significant that even though there was a 'rise' in the numbers for the current month, the total was actually lower than the first number reported the month before. So even though the numbers are actually declining, they were reported as going up. This does not appear to be the case for the January Retail Report however. The good numbers seem to rely more on the falsification of the figures.

There was one another oddity in this Retail Sales Report as well and that is how it was covered by the news services. Articles were unusually short and details limited - this immediately made me suspicious of course. I had to search to find more extensive coverage (filled with negative commentary from everyone interviewed) and this has not happened before. It will be interesting to see if the new scepticism on the market's part spreads to the even more absurd inflation, jobs, and GDP reports. If it does, when the economic news actually does become better, no one will believe it.

NEXT: Deepening Global Recession Means More Inflation

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.

It's Amateur Night at the U.S. Treasury

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.

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Markets hate uncertainty and the U.S. Treasury delivered it in spades yesterday. Several days ago, the Obabma administration floated the idea of a good bank/bad bank policy, where the U.S. government would buy up most of the toxic assets on bank balance sheets in order to get them out of the system. This was essentially the original concept for TARP before Paulson turned it into a direct corporate welfare program for Wall Street. The Street of course loved the idea of more bailout money to clean up their mistakes. In the long awaited for announcement by Treasury Secretary Geithner (who formerly ran the New York Fed and who is an admitted tax cheat) on Tuesday, suddenly a whole new approach was announced. The market, not liking surprises, had an almost crash level drop.

Media coverage blamed the stock sell off on the government's new plan - and for once I agree with the media. A number of articles had comments describing Treasury's new plan as 'muddled' and 'short on details', both of which are accurate descriptions. Essentially, the centerpiece of the plan is that the government will team up with the private sector to buy up to $1 trillion in toxic assets from financial firms (the big-money private sector buyers will get their purchases underwritten by the government, in what seems to be a riskless investment). A separate lending program would be expanded to as much as $1 trillion from $200 billion for consumers and businesses. Add up all the money involved (and it won't be enough by the way) to the $800 billion plus Stimulus Plan passed yesterday and the U.S. government is allocating between $2 to $3 trillion in new expenditures. Just think inflation and devaluation of the dollar.

Having read the speech that Geithner gave yesterday, I would say there is little hope that the current administration's economic team will be any more effective than the previous administration's. Geithner himself has been part of creating the current economic mess that we are in and sees the solution as pursuing the same failed financial policies that have lead to it. One of his comments that were particularly outrageous was that the Credit Crisis we are now in is only obvious in hindsight and could not have been predicted (even though probably hundreds of government throughout history have engaged in similar economic policies with similar results). At another point, Geithner stated that historically 40% of loans have been securitized (bundled into bonds and then sold and traded) and this needs to be continued. Where this 40% figure came from is beyond me, although of course it depends on the definition of 'historically' (Geithner's historical perspective may extend to only the beginning of last week based on these two comments). Securitization is what has led to our current problems, so of course we should continue to take the poison that is killing us. Not surprisingly, Wall Street makes a lot of its money from securitization.

While there is a lot of uncertainty in the government's handling of the Credit Crisis, there are some things which an investor can have great confidence in. The continued creation of money out of thin air to get the U.S. economy out of the economic pit it has fallen into is going to create a lot of inflation and a dollar that isn't worth the paper it's printed on. While the government's actions may fail for their intended purpose, they will be successful in creating this even bigger economic problem down the road.

NEXT: Market Doesn't Believe Retail Sales Report

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 Slippery Slope of Media Oil Coverage

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.

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Most investors have trouble making money in the market because they pay too much attention to the mass media. The financial press is mostly a gigantic PR outlet for Wall Street and whatever bill of goods it is trying to sell the public at the moment. Wall Streeters are of course usually doing just the opposite of the what the media is telling you to do with your investments. This is how they make their money. While Wall Street can mislead through the press, hiding its true intentions is difficult in the charts, which is why everyone should understand at least basic technical analysis.

I am looking closely at oil at the moment. If you relied on the press you wouldn't be paying any attention at all. I have read all sorts of arguments lately about why oil can't go up this year. These include such fantastic claims as a new political stability in Iraq, Iran and Nigeria (yeahh, that can happen), although they usually center around a claim that oil can't rally until the economy improves. This argument in turn relies on the basic economic principle that prices don't rise if demand is falling (certainly happening because of the crashing global economy) and supply stays the same. There is somewhat less than a zero chance that supply will stay the same however. When oil prices drop, production gets cut practically everywhere. OPEC's announced plans for another round of major cuts at its March meeting are just the tip of the iceberg. My sources in Texas tell me oil production is being shut down all over the state. I read the other day, that the tar sands in Alberta need oil to sell in the low 40's to break even. How long will production continue if oil falls and stays below that price? In fact, much of the oil that came online in the last few years is expensive oil that will no longer be produced if oil prices remain low. Given this set of circumstances, oil supply could easily fall below demand and the price of oil would then rise, not go down as all the 'pundits' claim.

The press is also giving a lot of coverage of the Stimulus Plan and whether or not it will be passed. Passage is presumed to be good for oil because the stimulus plan will revive the economy. It will certainly have some positive impact, since it is difficult for a government spending program not to (the TARP is one of those rare exceptions). The media is wasting a lot of ink on whether or not the Stimulus Plan will be passed. This is another absurdity. There is zero chance that it won't be. The vote of the typical member of the U.S. Congress is more available for sale than a crack-addicted street whore. Sure the price is more expensive and usually has to be paid in taxpayer funded giveaways, but no one in Washington cares about that.

Investors should keep in mind that by the time some change in the market is getting a lot of press coverage, it is usually well advanced. When the average person starts to be concerned, Wall Streeters have long ago taken their positions and are probably getting ready to close them out (the old 'buy on the rumor and sell on the news' saw that has been around the Street forever). Markets also don't go straight down or up forever either. Even if a long-term trend is well in place, significant reversals are likely along the way. You can make a lot of money in those reversals, but not if you pay attention to the mainstream media.

NEXT: It's Amateur Night at the U.S. Treasury

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 Term, the Market is Looking Better

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.

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While nothing has changed in the long term outlook for the U.S. stock market, the shorter term picture brightened from a technical perspective somewhat on Friday. Bear market rallies can come out of nowhere and can be highly profitable. They should not be avoided as is currently being advised by the never-made-a-dime-trading 'pundits' who are now pompously announcing 'the long-term trend hasn't changed'. This would be hard to argue with. However it is in the short term that you make quick money.

Examining many charts, you will find a common pattern of almost vertical drops without much or any relief rallies. These drops have gone on for 6 months or more (a common maximum period for selling). The trend has gone sideways for the last two months or so. If you look at moving averages you will see that they have become bunched together on the daily charts. Even looking at these charts for a brief period, it is sometimes impossible to differentiate the 10-day, 20-day, 30-day, etc. moving averages. Bollinger Bands have become very narrow. The tight moving averages and narrow Bollinger Bands frequently precede trend changes.

The Nasdaq is leading the other U.S. stock indices. On Thursday it closed above its bundle of moving averages on the daily chart and then rallied strongly on Friday to the top of its Bollinger Band. Similar behavior took place in early January and Nasdaq traded above the Bollinger Band for one day. That breakout failed however. While the RSI and MACD looked good at that time, the down trend pattern of the DMI was not quite resolved at that point. Things look better now and the moving averages are more tightly intertwined . There is still no guarantee of a rally yet though. The price needs to either ride upward with a rising Bollinger Band or jump above it. The moving averages need to start rising with the 10-day on top, the 20-day just underneath it, the 30-day just underneath that, etc. When the moving averages are all together as they are now even a short rally will start to create this pattern.

The other thing to pay attention to is that there were two major pieces of bad economic news lately - the GDP report and the Jobs Report. The Market rallied both days. When the market does this, the bad news has already been priced in. This doesn't necessarily mean a big rally is coming, but the downside risk during those times is actually relatively low and the upside potential is very high. In addition to the tech stock laden Nasdaq, oil, coal, and non-precious metals are starting to look interesting. The first thing you should be looking for before buying is a close above the 50-day moving average. You also always need to keep in mind that you need to take your profits when you get them.

NEXT: The Slippery Slope of Oil Media Coverage

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. Unemployment Rate Rises to 13.9%

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.

Our Video Related to this Blog:

The Jobs Report for January was out this morning and even the official figures are grim. While the headline number stated an unemployment rate of 7.6%, the report itself had another unemployment rate of 13.9% buried within in. The 13.9% rate includes discouraged workers, those who have given up looking for work, and those who are working part time (even an hour a month), but want to work full time. Keep in mind these are the government's own figures. You can certainly substantially increase the top line 7.6% if you want something more realistic. The BLS (Bureau of Labor Statistics) itself will be doing so in the future as is.

Upward revisions have been the name of the game for job losses and the unemployment rate for many months now. The first figure which gets all the press coverage isn't as bad as the revision that takes place a month later and that in turn isn't as bad as the revision a month after that. As an illustration, October 2008 job losses were first reported as only 240,000, then a month later as 320,000, and then finally as 423,000. November started out as 533,000, then became 584,000 and is now 597,000. December was initially reported as 524,000 and is now 577,000. Expect it to be higher next month. There is almost 100% probability that the 598,000 lost jobs for January will be a bigger number in February and March. It is already the biggest loss since the 602,000 decline in December 1974 (the peak number for the worst recession since the 1930s).

The monthly revisions aren't the only ones conducted by the BLS either. There is also an annual benchmark revision done at the end of the year. This year's revision found that there were 311,000 less employed people than previously reported. This downward revision means that there were 3 million jobs lost last year, instead of the 2.6 million reported last month. This number exceeds the 1945 figure of 2.8 million jobs lost, which happened because of the closing down of defense manufacturing and decommissioning of millions of soldiers. There is no bigger number since that date until 2008. Any greater number would have take place during the Great Depression.

The bad news in today's Jobs Report were presaged by yesterday's Weekly Jobless Claims, which came in at a deep recession level of 626,000 (the highest since October 1982). The figures in this report indicated 4.8 million people were receiving unemployment benefits, even though the actual figure is 6.5 million. The 1.7 million receiving extended benefits are not included in the first number. It should also be kept in mind that a majority of the American labor force does not qualify for unemployment benefits and thus will never show up in these figures. As bad as the U.S. employment situation appears to be, assume it is much worse than the official figures indicate.

NEXT: Short term, the Market is Looking Better

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.

Only TARP Recipients Should Worry About Deflation

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.

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Finally some minor logical restriction has been added to the historically wasteful TARP program. TARP is essentially welfare for Wall Street and companies receiving welfare should be forced to live like people who used to receive it, if they want the handouts. The $700 billion of taxpayer money was supposed to be used for lending, but nothing in the bill mandated that would happen. There aren't even records of where the money is going, although maintaining exorbitant executive salaries and bonuses is obviously one of destinations for the funds. President Obama has now restricted these salaries to a still generous $500,000 (the President of the U.S. is paid only $400,000). Stock options are allowed, but only once the U.S. is paid back the money it has given to these financial companies. This is only likely if major inflation reduces the debt (and your savings and retirement payments) to essentially nothing.

Anyone who reads this blog is well aware that we have been predicting just such an economic scenario for a long time. Central banks throughout the world are engaging in policies that will insure massive inflation is inevitable and they are covering their irresponsible policies by waving the threat of deflation flag. The Bank of England just cut rates to 1.0%, down from 1.5% (which was already the lowest since the late 1600s - yes, 1600s). The BOE has more than hinted that this is just another step on the way to ZIRP (zero interest rate policy), which now exists in the U.S. and Japan. It also stated that it WILL BE expanding the money supply (as if somehow they haven't already been doing this). Like the U.S. central bank, the BOE claims that it is worried about deflation, even though the official inflation rate in Britain is 3.1% (you may assume the actual rate is somewhat to a lot higher) and the pound is dropping precipitously, which is highly inflationary. Lower interest rates and increased money printing will only weaken the currency further. Yet the BOE is worried about deflation.

Central banks are taking the disastrous decisions to create inflation in a desperate attempt to prop up their collapsing economies. The true depth of the economic downturn is being hidden from the public by manipulation of the data and a compliant press that fails to question even the most absurd claims of the government statistical offices. As an example, the U.S. Labor Department released productivity figures for Q4 2008 today. Productivity (the amount of output per hour of work) was allegedly soaring at the end of last year. The claim is that the number of hours worked is dropping a lot faster than output. The alternative (and correct) explanation is that the government has lied about output and overstated it considerably. While there is a lot of evidence to support that U.S. GDP is being overstated, you will not see it in mainstream press coverage of the Productivity story... just an emphasis on the ridiculous headline numbers.

The press articles on Productivity are also being used to prop up the deflation bogeyman. One AP article (likely to be reprinted in hundreds of papers across the U.S.) stated, "The results underscore how the deepening recession has removed the threat of inflation". No AP, the results underscore the depth of lying that the U.S. government will engage in to hide the real economic story from the American public.

NEXT: U.S. Unemployment Rate Rises to 13.9%

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 York Investing Meetup Versus the SEC

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.

Our Video Related to this Blog:

I would like to thank the 145 people who braved a snow storm last night to come to the February general meeting of the New York Investing meetup. In addition to the scheduled talks on the State of the Market (and why gold is looking good and oil could have a pop up in the near future), the Credit Crisis Update and Art Investing, Shelley Gould flew in from San Francisco and gave a couple of minute introduction to her new SmartStops service. While New York Investing meets the needs of the investing public as long as New York City hasn't been shut down, investors unfortunately don't receive such dedication from the watchdog government agencies that are suppose to be protecting their money.

New allegations arose last night against the SEC and FINRA (the the brokerage industry's self-policing organization). Harry Markopolos, the securities industry executive and fraud investigator who brought allegations against Bernard Madoff to the SEC by 2000, if not earlier, is now saying he feared for his personal and family's safety because of the SEC's inaction (and indeed he should have). Markopolos submitted detailed evidence to the SEC in Boston, New York, and Washington about Madoff's scam and as we all know too well, the SEC did nothing. Markopolos will be appearing before a congressional investigatory committee today.

Markopolos was not alone in being suspicious of Madoff. Anyone who examined his trading strategy knew immediately it was a fraud. How? His trading would have been bigger than the entire volume of the markets he claimed to be trading in. While even a casual observer would realize something crooked was going on, the public watchdog SEC couldn't figure it out. While you may think nothing like this could have happened before, you would be mistaken. The 1962 Salad Oil Scandal (a $175 million fraud then or about $1 billion in today's money) required the same suspension of common sense from the 51 Wall Street banks that lent money to the perpetrator, Tino De Angelis. De Angelis borrowed money from these banks based on his inventory of salad oil, stored in huge tanks in New Jersey which actually contained water with a thin layer of salad oil floating on the top (so field inspectors did indeed see oil when they looked into the top of the tanks). However, publicly available information published by the U.S. government indicated there was less salad oil in the entire United States than De Angelis claimed he had in his New Jersey storage facilities. Apparently this wasn't enough to make Wall Street banks avoid lending to him, just as their contemporaries would make loans to people without any income or assets. Consider this the next time you are tempted to follow Wall Street's investing advice.

In case you may also be thinking things are now going to get a lot better, I would advise you not to get too hopeful just yet. The new head of the SEC is Mary Schapiro (replacing See-No-Evil Christopher Cox). Ms. Schapiro was previously the head of FINRA (Financial Industry Regulatory Authority). FINRA at least investigated Madoff several times. They found nothing out of the ordinary and claim they couldn't have because they were only empowered to examine his brokerage business (an almost guaranteed destination of some of the missing $50 billion) and the fraud was perpetrated through his investment business. Congress claims that it was not particularly impressed with It's-Not-My-Job Mary Schapiro's performance in this circumstance. Nevertheless she is now in charge of protecting the public's investments.

NEXT: Only TARP Recipients Should Worry About Deflation

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.

Government Action on Both Sides of the Pacific

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.

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The Japanese are at it again. The Bank of Japan is now instituting yet another program to buy shares of bank stocks. The history of their interference in the Japanese stock market goes way back and has proven to be a failed approach over and over again. Apparently just because something doesn't work is not a good enough reason for the Japanese (or almost any other government for that matter) to abandon it. While the U.S. is close to emulating Japan's disastrous market interference policies, there is a common-sense bill in Congress that would limit Credit Default Swaps. These instruments are more responsible for the financial market collapse worldwide than anything else. The discredited U.S. financial industry of course opposes the bill. Just because it is obvious they have no idea what they are doing, doesn't mean the U.S. government won't follow their suggestions.

When the Japanese government decided it was better than the Free Market in determining stock prices is not clear. It is known that during the 1987 crash, which was less serious in Japan than in other countries, that the Ministry of Finance called all the major brokerage houses to a meeting and told them to buy stocks (with at least a tacit agreement that the government would make good on the losses). After the Nikkei started tanking from its high of 40,000 set the first day of 1990, various schemes were used by the government to funnel money into stock purchases. While these moved the market up for awhile, each one eventually failed, but the market looked like it might have finally hit bottom after a 13 year sell off in spring of 2003 (the Nikkei was in the low 7000s). But this was not the case.

As per usual the Japanese government helped establish the 2003 stock market low by buying banking stocks. This last stock purchase program took place between November 2002 and September 2004. The Bank of Japan began disposing of these holdings in October 2007 (when international stock markets were at their peak). They had to suspend their selling by September 2008 when they still had 1.3 trillion Yen of stock on the books (at least that's the 'official' number). The Nikkei then hit a new 18 year low after that. The Bank of Japan's just released scheme is to buy one trillion Yen of bank shares, but there a plan in the works to add a 20 trillion Yen to that amount. Unfortunately, at some point these Bank of Japan purchased shares will have to be sold, otherwise the Japanese government would eventually wind up owning most, if not all, of the shares of their major banks. It is quite possible any new selling will cause a new market low to be established. If the Japanese government's real objective is to create the longest stock market sell off in history, they might be successful. If it is to fix their financial system, they should realize that they don't know more than the Free Market.

As for the proposed ban on Credit Default Swaps (CDS) in the U.S. This bill would limit the purchase of CDSs to parties that have an underlying economic interest and reduce the size of the market (and associated risk in it) substantially. CDSs, because they allowed huge leverage in the financial system were key components of the implosion that we are currently witnessing. One industry witness testified that this bill could 'collapse' the $31 trillion CDS market. I seem to remember the less than a year ago the CDS market was $62 trillion is size. Looks to me like the CDS market already collapsed by itself.

NEXT: New York Investing Meetup Versus the SEC

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.