Wednesday, March 25, 2009

'Good' News Drives Market Higher

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 market rally continues today and is likely to do so for awhile because the momentum is on the upside. The mainstream media is doing its best to help continue the rally with the usual bullish hype. Today's bullish stories include a 3.4% rise in durable goods, the first after a six month record decline. U.S. mortgage applications are also up on the lowest mortgage rates since records have been kept. Such 'minor' bad news as Japan's exports falling 49%, with the biggest drops in exports to the U.S., and China calling for a new reserve currency to replace the dollar have been mostly ignored by the market.

The durable goods report is being interpreted as indicating the economy is improving. You can only believe this as long as you don't look beyond the headline number (most traders don't by the way, they just react immediately without getting the details). The big rise in durable goods was led by military aircraft and parts which were up 32.4% - this is 100% the result of government demand and not likely to be repeated. Heavy machinery was the next big gainer and was up 13.5% - not exactly a consumer item. Computers were up 10.1% and this would partially be accounted for by consumer purchases, although businesses are the major buyers of computers. Fabricated metal products were the only other item with a significant gain being up 1.5%. Autos and auto parts are still in heavy decline, but there was a little noticed $5 billion government bailout of the auto parts industry a few days ago that will act to prop up the industry.

The Japanese trade numbers for February gainsay any rosy interpretation for the U.S. economy that could be garnered from the Durable Goods report. While Japanese exports overall declined 49%, the biggest drop was exports to the U.S., with exports dropping 58%. Next biggest was the EU countries where exports dropped 55%. The drop in exports to China was less than 40%. While these numbers indicate a collapsing global economy, the collapse is by no means even. The U.S. is doing the worst and Europe is a close second, but Asia is holding up somewhat better.

The Chinese released a proposal a couple of days ago to replace the U.S. dollar as the world reserve currency with a Special Drawing Rights (SDR) linked currency system. Russia supports the idea. The U.S. dollar losing its reserve currency status would be devastating to the U.S. Reserve currency status keeps the value of the dollar much higher than it would be otherwise. The impact would be extremely inflationary since we would have to pay higher prices for all imports. Nevertheless, Treasury Secretary Geithner remarked this morning that the U.S. was "quite open" to the Chinese proposal. The dollar dropped like a rock for a short time thereafter. In case you have yet to realize that Geithner isn't exactly the most brilliant Treasury Secretary that the U.S. has ever had, this should remove all doubt. Someone should also tell China that a globally neutral currency has already existed for the last 5000 years - it's called gold.

The final piece of 'good' news today was U.S. mortgage applications were up 32%. Unfortunately, 79% of those application were refinancings for already existing mortgages. New purchases were only a small part of this number. Average mortgage rates fell to a record low of 4.63% last week. U.S. policy is doing its best to try to get housing prices back up to economically absurd and unsustainable levels (doing so the first time only led to the current Credit Crisis that has threatened the stability of the world financial system). The only way this can be accomplished is to create enough inflation so nominal house prices stay the same or go up. This will cause even bigger economic problems, so you should assume that this is one area where government policy will be 'successful'.

NEXT: No Longer Gilt Edged - the Inflation Implications

Daryl Montgomery
Organizer,New York Investing meetup

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.

1 comment:

Anonymous said...

I have been following your blog for several months now and it's about time I said THANKS...

Thanks for taking the time to keep Jo public informed.