Thursday, May 21, 2009

Dollar Weakens; S&P's British Outlook, TED Back From Dead

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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Minutes for the Federal Reserves April 28-29th meeting were released yesterday and they revealed that the Fed thought that more purchases of long-term debt might be necessary to spur the economy into recovery (and uncontrolled inflation... but they left that part out). More quantitative easing would require the 'printing' of additional currency and debase the dollar even further. Not surprisingly the dollar fell on the news and hit a 7-month low of 80.002 (if it breaks key support of 79, watch out below). While the condition of the U.S. government's finances are in worse shape than Britain's, S&P revised Britain's credit rating outlook to negative this morning. While the pound fell for a short time, it is way above its lows against the dollar. Even though the central banks are flooding the world with more fiat money, the TED spread, a measure of stability in the global financial system, has returned to normal levels - this is a necessary, but not sufficient condition for recovery.

The need for the U.S. to print more money well into the future could easily be determined by anyone with knowledge of elementary arithmetic. Nevertheless, the market is constantly surprised such a thing will be necessary. Bonds and the dollar should sell off on this news, but stocks and oil are getting hit today as well. Oil, which has to be purchased in U.S. dollars, should automatically go up if the dollar falls or if there is news about increasing inflation. NYMEX crude closed at $62.04 yesterday and is still above its breakout point of 60. Gold was flat this morning and silver down slightly. They should be zooming.

Although S&P changed Britain's credit outlook to negative, this is not as bad as being on credit watch. S&P reaffirmed Britain's triple A credit (they also rated a large number of subprime mortgage bonds triple A, so take that into account when considering the accuracy of this rating). S&P is worried that Britain's government debt will rise to 100% of GDP by 2013. If the U.S. doesn't beat Britain to this milestone, we will indeed be lucky. If there was an accurate measure of both out national debt (it's understated) and our GDP (it's overstated), we might indeed already be there. Perhaps S&P will be making an announcement on this matter soon?

The TED spread was mentioned frequently in this blog last fall. When the financial system is in stress it zooms upwards. Its long term average is around 50 basis points. It went over 450 last October, substantially exceeding its peak during the 1987 market meltdown. It was 48 this morning. This indicates that the global banking system has returned to normal interbank operations. This was an important goal of central bank policy that they have been successful in accomplishing it. Now that stabilizing the banking system has been achieved, the possibility of economic recovery exists.

NEXT: A Golden Opportunity with a Silver Lining

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.

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