Thursday, August 6, 2009

The Latest from Fantasy Land

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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AIG was up as much as 66% yesterday on rumors that it would show a profit for last quarter when it reports its earnings this Friday. For those of you who may not remember, AIG is the derivatives poster child for the Credit Crisis. It was nationalized by the U.S. government, which purchased 80% of its stock and grossly overpaid for it. It was of course impossible not to overpay since the actual value of the stock was well below zero. The feds have had to continue to pour money into AIG to keep it afloat and any 'profit' it shows would be the result of the U.S. government putting more money into the company than it is losing. Now that's a great business model. What investor wouldn't want to get a piece of that action?

Just consider AIG another example of how the economy is 'recovering'. The AP wire service published a piece this weekend about how U.S. real estate prices have bottomed and the market is turning up. According to AP, the crisis is OVER and happy days are here again. Interestingly in the same article, AP projected that U.S. unemployment would be increasing until well into 2010 - just the type of situation that prevents people from buying homes and banks from lending to them. Foreclosures are up too and that of course doesn't create a drag on the housing market. The increase in foreclosures is even worse in Great Britain, although house prices are supposedly going up there as well. The 'recovery' is going so great that the Bank of England announced a big increase in their quantitative easing (aka money printing) program this morning. Yeah, things are really going great when you have to fund government spending with money created out of thin air.

As pathetic as British government finances are, and they are indeed quite pathetic, the pound still has managed to rally against the U.S. dollar during the last two months. What does this say about the market's view of U.S. government finances and our much acclaimed economic 'recovery'? The recovery wasn't looking so good yesterday when the ISM service index came out. It FELL from 47.0 in June to 46.4 in July (anything under 50 is contraction). While the manufacturing index was above 48 (still in contraction), the service component of the U.S. economy is much bigger than the manufacturing component - and it's not doing well. Also not doing well are retail sales (consumer spending is approximately 70% of the economy). Most chain store sales were strongly negative. So the economy is 'recovering', but this doesn't include any of its major components.

The trade-weighted dollar declined again yesterday, making it three days in a row that it has been below it break down price of 78.33. Gold sold off slightly. Oil tanked on the weekly EIA storage report, but then managed to close higher. Mainstream media reported this took place because of dollar weakness. One financial service also had an article that said gold went down because the dollar had been strong in the morning (I missed that). I commented on their website that these two articles were contradictory and this looked like some form of manipulation of the news. That comment was censored - just like much of mainstream financial news reporting.

NEXT: Non-Farm Payrolls and Its Statistical Quirks

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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