Monday, November 30, 2009

Dubai Default Damages Denial

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.

Our Video Related to this Blog:

Real estate bubbles and their subsequent collapses frequently accompany financial crises, especially the ones that linger and last a long time. The current Dubai default is merely the latest episode in the unwinding of a global real estate glut. Local authorities denied there was any problem right up to the end. Until the excesses are wrung out of the system, sustainable economic recovery is not possible - and even then it's not guaranteed. The crisis in Japan began 19 years ago and they have yet to get their economy fully functioning again. Japan also provides the worse case scenario for a drop in real estate prices - 90% for residential real estate and 99% for class A office buildings in Tokyo. While Dubai might not get that bad, real estate price drops there could be considerable.

The UAE central bank has pledged to provide funding for both domestic and foreign banks in an attempt to prevent bank runs in the region. It is estimated that a quarter of Dubai's $80 billion in real estate debt came from UAE banks. British and eurozone banks may hold as much as 70% of the remaining $60 billion. Exposure in the U.S. and Japan seems to be fairly minimal. Stock markets have been closed in the Gulf region due to an Islamic holiday since the crisis unfolded on Thanksgiving day. Dubai and Abu Dhabi opened on Monday and were down 7% and 8% respectively. The extent of contagion to other bourses in the region remains to be seen. Dubai is particularly vulnerable because it is not an oil producer, the other oil-rich countries in the region should ultimately be in much better shape.

The price of oil is recovering today and briefly peaked above $77 a barrel . Light sweet crude was down as much as 7% at one point the day after Thanksgiving. Oil is in a seasonally weak period until next March however, so this is likely to keep a cap on any possible rally for the next few months. Even at current levels, oil is causing inflation to return to Western countries. The eurozone just announced that year over year consumer inflation turned positive in November for the first time since last April (this inconvenient news seems to gotten buried in U.S. mainstream media coverage). Rising oil prices were cited as the cause. The inflation figures will start increasing soon in the U.S. for the same reason. The eurozone monetary authorities, just like the U.S. monetary authorities, consistently deny that inflation will be a problem. Nevertheless, the ultimate inflation indicator gold keeps hitting new all-time highs.

The U.S. dollar spiked higher on Thanksgiving day and Friday as a safe-haven trade. The move was exaggerated by low volume with most American traders gone for the holiday. The trade-weighted dollar got well above the 75.00 support level that it broke decisively early last week. However, in early Monday morning trading, it once again fell below this level dropping as low as 74.49 before starting a new rally. The dollar can't seem to stay up for more than a day or two and it consistently hits new yearly lows. The U.S. government denies it has a weak dollar policy. The market seems to disagree.

Disclosure: Long gold.

NEXT: Falling Supply and Rising Demand Cause Gold to Soar

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.






Friday, November 27, 2009

Desert Bubble Bursts, Blows Sand in Market's Face

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.

Our Video Related to this Blog:

America was on holiday for Thanksgiving, but London unexpectedly joined it with a halt in trading for over three hours on Thursday. The LSE (London Stock Exchange) computer system just simply stopped functioning. It couldn't have come at a worse time. Major selling was taking place before the trading halt because Dubai's state-owned Dubai World announced a 6-month 'standstill' for payment of its massive debt. While the mainstream financial media described this action as a potential default, failure to make debt payments in a timely fashion is a default, period. If it walks like a duck and quacks like a duck, it's a duck. It is estimated that Dubai World has $60 billion in foreign debt outstanding with British and European banks holding two-thirds of that. The ever alert U.S. rating agencies Moody's and S&P promptly downgraded Dubai World's debt, once again giving the appearance that they are the last to know when a financial problem exists.

Dubai's problems were already known during Asian trading on Thursday ( Wednesday night in New York) and the Shanghai market dropped 3.6% and the Hang Seng in Hong Kong was down 1.8%. Things got worse in Europe Thanksgiving day. The unexpected technical problems on the LSE (not the first time this happened by the way) caused worry to turn to panic. This is a typical reaction to traders when they can't access a market and there is some bad news floating around. They will sell down other markets which are open and when the closed market reopens, there is a bigger drop than there would have been. Banks stock were particularly crushed on Thursday, bringing back memories of last years Credit Crisis. Royal Bank of Scotland was down 7.6%, Barclay's down 6.7%, ING down 6.4%, Deutsche Bank down 5.7%, and Standard Chartered down 5.7%. The FTSE in England was down 3.2%, the DAX in Germany down 3.3% and the CAC-40 in France down 3.4%

Credit default swaps (insurance on bonds) rates rose precipitously throughout the Gulf region - another blast from the Credit Crisis past. The problems in Dubai have been brewing for a long time and it is hardly the only place in the world where there are financial problems remaining. It is merely the first new blow up. Dubai's faith was sealed with the general global collapse in 2008. The government has been stonewalling its creditors ever since, assuring them everything was fine. Earlier this month, the ruler finally told Dubai's critics to shut up. In February, Dubai received a $10 billion bailout from the UAE central bank. On Wednesday, another $5 billion was forthcoming.

Predictably, money moved into the U.S. dollar as markets reacted to the latest crisis. Considering the the trade-weighted dollar plunged on Wednesday, falling as low as 74.23, a rally was not unexpected as is. The yen hit a 14-year high against the dollar and rumors are rife that the Bank of Japan might intervene to drive the yen down, like the Swiss central bank did on Thursday when it sold francs against the dollar. Spot gold managed to eke out another all time high by a couple of points in early overseas trading Thursday after its strong rally on Wednesday. It then fell as low as $1180, but then bounced back up to $1190.

Stocks in Asia got clocked again in Friday trading. The Nikkei in Japan was down 3.4%, closing at 9082. For those who haven't been paying attention, the Nikkei broke key support at 10,000 a while ago - the weakest stocks market usually sell down first. Shanghai was down 2.4%. Hong Kong and South Korea had the biggest damage though, falling 4.8% and 4.7% respectively. Traditionally, a one drop of 5% or more is considered a crash. .

The global market contagion moved to New York this morning. The Nasdaq gapped down 58 points or 2.7% and the S&P 500 was down 25 points or 2.3%. The Dow, which takes a long time to open when there is major news, was down around 200 points or 2.0% on the first print. The dollar was as high as 75.58 today so far. Oil got hit more than any other asset and was down 5% at one point falling as low as $72.39 a barrel. Gold plummeted to $1139 around 2AM New York time, but has already traded as high as $1178 today. All the major European markets gapped down strongly, but turned positive for the first time around 7:30AM. They will close up nicely.
U.S. markets close early today and volume is incredibly light which allows for large moves in either direction. Monday is the key day to see if there is going to be any long-term impact from the Dubai fallout.

Disclosure: Long gold.

NEXT: Dubai Default Damages 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.






Wednesday, November 25, 2009

Why You Can't Trust U.S. Weekly Jobless Claims

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.

Our Video Related to this Blog:

The market was ecstatic with the November 25th U.S. weekly jobless claims figures. According to the report the number of Americans filing for unemployment fell 35,000 from the week before, dropping to 466,000. Bullish headlines such as "Jobless Claims Plummet to 14-Month Lows" were all over the web. Commentators immediately started gushing about unemployment turning around and job gains being just around the corner. Stock futures perked up, the U.S. dollar continued a sell off already well underway, and gold which had been rallying strongly turned down on the news.

As for myself, I stopped paying attention about 15 years ago to the weekly jobs claim number the week of the release. Why? At that time, there was also an unexpected major drop in the claims figures. The markets went crazy on the news. One week later, the number was revised sharply upward with a statement from the BLS (Bureau of Labor Statistics) that one state had not gotten their figures to the department a week earlier so they hadn't been included in the totals. While the BLS knew this at the time, it did not inform the public of this important inaccuracy. The error was quite substantial as well, since the state that didn't report was obviously California. It should also be noted that the November 25th report was released on a Wednesday, one day earlier than usual, because of the Thanksgiving holiday on Thursday. It is quite possible not all the state data came in early enough to be included.

At the same time the weekly jobless claims were released, the monthly Durable Goods and Personal Spending reports also came out. Durable goods declined 0.6% for October indicating a weakening economy. A drop in defense spending was blamed (just another form of government spending propping up the U.S. economy). However, orders for cars, machinery (needed for factories), computers and communication equipment (both needed for offices) also fell. Personal spending was up 0.7% in October. This is hard to believe considering U.S. consumer credit has had a major drop in the last year and the over 10% unemployment rate has negatively impacted consumer income. Where is the money coming from for the increases in spending?

The most significant market action on the release of all this data was the falling U.S. dollar. The trade-weighted dollar cut through the recently established 75.00 support level and traded as low as 74.40 in early morning New York trading. There is a strong band of support between 72.00 and 74.00. Expect a bounce off the top of that band initially, with an eventual test of the 2008 low around 71.50. While the dollar hit another yearly low, spot gold hit another new all-time high, trading up to $1183.80. Expect to see more of the same in the future.

Disclosure: Long gold, no dollar positions. Long time critic of the BLS.

NEXT: Desert Bubble Bursts, Blows Sand in Market's Face

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.






Tuesday, November 24, 2009

When the Invisible Hand is the Government

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.

Our Video Related to this Blog:

Adam Smith in his Wealth of Nations pictured an invisible hand that operated behind the scenes to make capitalist markets operate efficiently. When that invisible hand becomes the government, you no longer have capitalism, nor do you have efficiency. The self-correcting mechanisms of capitalism are also done away with and the market loses the ability to fix itself. Three pieces of news out recently - China trying to reign in bank lending, the U.S. 3rd Quarter GDP report, and the Bank of England admitting to secret loans to big banks during the Credit Crisis - are representative of how important government's hand in the global economy has become.

China is the growth success story of the world. It's economy is indeed humming along. The tune it seems to be singing however is bubbles are here to stay. Along with freezing the exchange rate of the yuan at artificially low levels in 2008, the government has pumped incredible amounts of money into the financial system in the last year in order to maintain a high growth rate. Anecdotal stories out of China indicate that a lot of the money is is being used to build empty office buildings, unused infrastructure and even empty cities. The government's warning to banks to control lending seems a bit hypocritical to say the least. Markets around the globe sold off on the news however, which tells you just how important Chinese growth is viewed as a cornerstone for recovery from the Credit Crisis.

The U.S. could learn a thing or two from China on how to goose up a flagging economy (as for government hypocrisy, the U.S. is way ahead). Revisions to the third quarter GDP indicate that growth was only 2.8% instead of the originally reported 3.5%. Cited for lowering the numbers were a bigger trade gap, lower commercial construction, consumers didn't spend as much and business inventories fell more than expected. None of these are surprising and they are all probably still considerably overstated. Without Cash for Clunkers program and the federal housing purchasing subsidies, there would have been no economic growth and U.S. government officials wouldn't have been able to shout from the rooftops that the recession is over. This reminds me of the press conference that Herbert Hoover gave in June 1930 announcing the depression was over (there were three more grueling years ahead before the U.S. economy even hit bottom). If he had today's government statisticians, he could have produced the numbers to prove it.

The Bank of England today admitted that it secretly lent over $1 billion dollars to two major banks - the Royal Bank of Scotland (RBS) and HBOS PLC - to keep them afloat during the height of the Credit Crisis in late 2008. HBOS was later merged with Llyods Banking Group (and you can probably guess which invisible hand brought them together). Both banks have since been nationalized with the UK government owning 84% of RBS and 43% of the Lloyds/HBOS combined firm. Lloyds in now in the process of raising a massive amount of new capital. One would have to be pretty naive to believe these were the only secret government dealings during the Credit Crisis. What could have happened in the U.S. boggles the mind. The Federal Reserve is an unaudited entity and operates in secrecy as is. Fed chair Ben Bernanke has refused to provide information requested by congress about the bailouts. If there's nothing to hide, why is he hiding it?

Disclosure: No positions.

NEXT: Why You Can't Trust U.S. Weekly Jobless Claims

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.







Monday, November 23, 2009

For Gold, Overbought Means Overgood

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.

Our Video Related to this Blog:

Gold hit another record high this morning. After closing at $1151.90 (up $6.30) at 5:15PM in New York on Friday, spot gold began rallying in Hong Kong and Sydney trading Sunday night. Shortly after trading began Monday in New York, gold reached $1171.60. Spot silver traded as high as $18.93, above its highest price last week. This is the seventh day in a row that gold has traded higher. Gold rose last Friday, even though the U.S. dollar was rallying.

COMEX December futures expire next Monday, November 30th. There is a lot of talk about the $1200 price point acting as a magnet at the expiration. It may indeed happen, but the ETF GLD has become overbought on the daily charts as of today after gapping up strongly (the price will have to trade down into the blank area of that gap at some point). GLD will hit overbought levels this week on the weekly charts as well. Some give back in price is going to be necessary soon. It may wait until after the first few trading days of December however. SLV stayed overbought on the daily charts and continued rallying for two weeks this September before there was any significant price decline.

GLD itself became overbought on the daily charts and rallied for two weeks also in September of 2007. This was at the beginning of the gold rally that lasted until March 2008. That rally had a midway pause (referred to as a high tight flag by technicians) approximately 7 weeks after GLD first became overbought on the dailies. However, the midway peak began about 1 week after gold became overbought on the weekly charts (four months before the rally ended). Since the overbought conditions are taking place coincidentally this time, we can get the midway pause for the rally starting anywhere from early December to the second week in January. Once this takes place, you can double the amount of rally from $1033 that has preceded it to get an approximation of the coming peak in spring 2010.

The silver ETF SLV has different technical patterns that does GLD. On the weekly charts, SLV isn't even remotely overbought and if silver kept on going straight up it would take approximately two more months before this could happen. A pause with some retracement and it could be another four or five months. A strong overbought condition on the weekly charts was the end of the SLV rally in March 2008. As for the daily charts SLV was overbought in February, late June and September of this year. Each overbought condition caused a temporary peak and SLV then traded higher later on. SLV still has a way to go before being overbought again on the daily charts. Look for this to happen. It will likely mark the beginning of the mid-rally pause for both silver and gold.

Disclosure: Long gold and silver

NEXT: When the Invisible Hand is the Government

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.







Friday, November 20, 2009

U.S. Interest Rates Go Negative Again

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.

Our Video Related to this Blog:

At one point on November 19th, the yield on a new 3-month T-bill fell to 0.005%. A rational person would think you couldn't go lower than that, but a rational person would be wrong. The yield on 3-month bills maturing in January 2010 briefly turned negative. This was not the first time in recent history. It happened last year on December 9th, 2008 at the bottom of the Credit Crisis - or at least what has perceived to be the bottom so far. A 3-month T-bill auction on that date had a high bid equivalent of 0.000%. Apparently not everyone got in at that great rate.

Interest rates below zero are theoretically impossible. After all why not just keep the cash instead of settling for less money after a period of time? They do happen in the real world however and are an indication of extreme risk aversion on the part of banks. They are a marker of severe financial crisis. Before the current Credit Crisis, T-bill yields were only negative in the U.S. in 1940, after years of financial stress from the Great Depression. The auction low for T-bills was 0.01% in January of that year. Rates apparently went negative because of punitive property taxes imposed by a number of U.S. states. T-bills were not taxable and investors kept more of their money by taking a slight loss on T-bills than if they had paid the tax. No such special circumstances exist today to justify negative interest rates. The explanation for current negative rates is that banks are loading up on short term government instruments to improve the appearance of their year-end balance sheets.

Negative interest rates also took place in Japan during their current 19-year (and counting) financial debacle. Short-term interbank lending had a negative return one weekend in January 2003. As was the case in the U.S. during 1940, years of severe financial stress preceded this event. In Japan's case there were a series of rolling recessions - the modern version of depression thanks to government's now common practice of continual economic stimulus programs. There have been other cases of negative interest rates, however these seem to have been utilized (usually officially by the government) as a type of currency control. Switzerland imposed negative interest rates during 1970s after years of appreciation of the franc for instance, but only for foreign depositors.

The appearance of negative interest rates after a long period of financial stress raises the question of when economic problems actually began in the United States. It is reasonable to assume that they started long before the awareness of the Credit Crisis in 2007. Interest rate anomalies may have in fact already existed in 2003. While it is not generally known, between August to November some U.S. government repurchase agreements had negative rates. There is more than enough evidence to indicate that recessionary period actually began in the U.S. in 2000. Manipulated inflation rates and GDP calculations hid the details from the public. The U.S. government, businesses, and consumers lived off ever-increasing borrowing which made up for declining income. The Credit Crisis was merely the unraveling of this scheme, not when the financial problems started. The return of negative rate indicates a deeply entrenched problem within the U.S. financial system - and it doesn't look like it has been fixed yet.

Disclosure: No position in T-bills.

NEXT: For Gold, Overbought Means Overgood

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.






Thursday, November 19, 2009

The Real Story About Gold Supply and Demand

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.

Our Video Related to this Blog:

Just once I would like to see a media article that had a accurate supply and demand analysis for a commodity. Usually reporting is completely one-sided with only supply or demand discussed out of context. No matter how much detail is provided for one, it is meaningless unless you have information on the other. Media coverage of oil is notorious for providing this incomplete picture. The gold market is apparently not immune to it either.

Media reports today include "Gold Demand Falls 34% in 3rd Quarter: World Gold Council". A dire picture of falling demand for gold is painted. Supply issues are at least lightly, albeit very incompletely broached. While you are left with the impression that this news should be devastating for gold prices, if you check you will see that gold had a nice rally between July and September. Anyone who took the first week of economics 101, would immediately conclude the supply versus demand picture must have improved. Reporters are most likely to have been journalism or English majors and may not have even the rudimentary knowledge needed to be aware of this. They frequently miss the real story for the same reason.

Much is made in the gold supply figures about a drop in Indian demand, down 42% to 111.6 metric tons year over year in the third quarter. Not mentioned was that there are times that are considered inauspicious for buying gold in India and that period was twice as long in Q3 2009 as it was in Q3 2008. India consumer demand for gold is followed closely because it has been the number one source of demand for gold from seemingly time immemorial. However, World Gold Council figures indicate that the Chinese bought 128.6 metric tons of gold in the third quarter of this year outpacing the Indians. A little research also reveals that the Chinese bought more gold in the first half of the 2009 than the Indians as well. Retail price controls were only abolished in China in 2001 and since then consumer gold purchases have consistently outpaced GDP growth. China is clearly becoming the top market for gold knocking India off its perch. This is a big story. While that's the the headline you should be seeing, that's not what is being reported.

The World Gold Council also claims that investment in gold coins and bars were down 31% year over year and gold ETF inflows were down 72% year over year in the third quarter. If this is true, something has to be taking up the slack, either more demand elsewhere or decreasing supply. This is some vague reference in their press release about financial instruments and dehedging somehow creating more demand for gold. The specifics are not stated though. Hedging by mining companies is indeed dropping rapidly falling from 530 metric tons in Q3 2008 to 359 metric tons in the third quarter of this year. Barrick Gold (ABX) has been closing out its large hedge book and this has been helping to push gold prices up lately. Closing out hedges has the same effect for commodities as short covering does for stocks.

Miner hedges are only the tip of the iceberg however when it comes to short covering in the gold market. Mining hedges represent only around 20% of central bank leasing for gold. Central banks have been lending out their gold for years to miners, big banks and hedge funds (this is how they make money on their holdings). This usually results in an immediate sale of gold on the market and this was a major factor in keeping gold prices down in the 1980s and 1990s. Leasing has been in rapid decline during the 2000s however and you may have noticed the price of gold has gone up as leasing has diminished. It is estimated that there were 4300 metric tons of gold leased by central banks in 2004 and this was down to 2345 tons by the end of 2008.

The World Gold Council admits gold supply fell 5% in the 3rd quarter. There have been 3 main sources of market supply for gold in the last two decades - mining, scrap and central bank selling. So far gold mine production peaked in 2001 and then dropped year after year. It looks like it will be up this year. Supply from scrap is highly variable. Sales were 569 metric tons in the first quarter of this year, but were down to 283 tons in the third quarter. Central bank selling seems to have turned into net buying. Central banks accounted for 14% of gold market supply just a few years ago. This fell to 8% in 2008. Central banks bought a net 15 metric tons of gold in the third quarter of 2009 (this doesn't have anything to do with the Indian central bank purchase of 200 tons of gold recently, that took place in the 4th quarter). Central banks shifting from being a source of supply to a source of demand represents a major sea change for the economics of the gold market - something else that is worthy of headline coverage.

Spot gold has reached as high as $1153.90 recently and has been hitting one all time high after another in the 4th quarter so far. The market tells you what the actual supply demand picture is quite clearly. If it contradicts the information you are receiving, it is because that information is incomplete or wrong. Believing otherwise is a sure way to lose money.

Disclosure: Long gold, no positions in ABX.

NEXT: U.S. Interest Rates Go Negative Again

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.






Wednesday, November 18, 2009

U.S.Inflation Reports - Contradictions and Absurdity

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.

Our Video Related to this Blog:

The PPI (producer price index) was out Tuesday and the CPI (consumer price index) was out today. Both were up 0.3% for October, but for exactly the opposite reasons. Food prices were up in the PPI with fresh vegetable prices skyrocketing 24%. Fruit and vegetable prices declined for the 4th straight month in the CPI report and helped keep inflation down. New and used motor vehicles were up so much in price that they were responsible for 90% of the increase in core inflation in the CPI report. In the PPI, car and truck prices were down so much that they caused the core to fall 0.6% (an unusually large change for core PPI). So much for consistency in U.S. government reporting of inflation.

Even if they painted a consistent picture, the official U.S. inflation figures can't be trusted as is because of statistical adjustments that were made to the calculations in the 1980s and 1990s. All of these adjustments acted to lower the reported inflation rate and make it nearly impossible for high inflation numbers to appear. Substitution effects and hedonics are just two examples of 'improvements' made to the inflation calculations. Substitution is assumed to take place when the price of something rises a lot. People supposedly buy less of it and buy some cheaper item instead (less steak, more gruel for instance). The higher price item gets less weight in the data and the lower priced item more weight. Consumers are of course getting less pleasure from their purchases. Hedonics is exactly the opposite. Improvements in manufactured items like cars and electronic goods are assumed to lower the price because consumers get more pleasure from them. Sound contradictory? Well, that's because it is. Both make it difficult though for reported inflation numbers to rise too much and that's why they are both used.

There is really no reason to pay attention to the U.S. government's official inflation numbers. All you have to do is watch the currency and gold markets. A falling U.S. dollar means there is more inflation for Americans. Gold prices however are even a better gauge and can give a global read on inflation. While gold has been hitting a series of all time highs in U.S. dollars in the last six weeks, it is also recently started hitting all time highs in a number of other currencies, including the euro, the British pound, the Swiss franc, the Canadian dollar and the Yen. The market is clearly indicating global inflation is taking place and fiat currencies around the world are losing value.

Gold hit another all time high in morning trading in New York today, with spot gold reaching $1153.90. Silver was even stronger reaching $18.86 at one point. The trade-weighted dollar traded as low as 74.90, it's third break of the 75 level. The dollar rallied strongly yesterday on Bernanke's comments that the Fed was watching the level of the dollar. He said the same thing in June 2008 and probably other times as well. Based on the dollar's performance, all the Fed has done is watch it go down. The Fed also constantly says that there is no inflation in the U.S. The markets disagree. You decide which one you want to believe.

Disclosure: Long gold and silver.

NEXT: The Real Story About Gold Supply and Demand

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.






Tuesday, November 17, 2009

Silver Breaks Out of Trading Range

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.

Our Video Related to this Blog:

Precious metals had a spectacular rally on Monday. While spot gold was up 1.9% on the day and hit another all time high at $1140.80, spot silver and palladium were the stars, rising 5.6% and 5.7% respectively (platinum was up 4.2%). At more than one point silver was up over a dollar and ended trading at 5:15PM New York time up 98 cents to close at $18.42. Silver has been stuck in a trading range between $16 and $18 since September and this was the first decisive break and first close above that range. Trading volume on the EFT SLV was approximately double normal levels and was highly supportive of the move up.

Now that silver has made its move higher, the spot price needs to stay above $17.70 (the low for the day) to maintain the breakout. The reason silver was stuck at the $16 to $18 level was because of a band of resistance at those prices established in March to July 2008. There is a further resistance point around $19.00 that still needs to be taken out. After that, a test of the 2008 high just under $21 will be possible. Some more consolidation should be expected around those levels and this is likely to take place in December. Silver and gold are seasonally strong in the early part of the year though and tend to form intermediate tops in March or April, so a move to the $25 area, long-term resistance from the late 1970s, is a target price for silver next spring.

As the precious metals continue to rise, you will hear more and more talk about a bubble. Ignore it. One well-known market guru said gold was in a bubble just yesterday. While gold and silver will eventually be in a bubble, this is a long way off. They are in bull markets. The two should not be confused. The simplest way to distinguish the two is by the price patterns and extent of the rallies. Bubbles have spectacular price rises that have been preceded by long multi-year continual rallies. Silver had a price collapse from almost $21 to under $9 in 2008. It is rallying up from the bottom. This is not a bubble pattern. Gold is up 53% off of its bottom from last year. When it was in a bubble at the end of the 1970s, it went up 400% the last year. Silver was up 1000%. When you see price rises like those in a single year, that is when you need to worry about a bubble. Until then, the trend is your friend.

The other nonsense floating around the media concerning the precious metals is they are not at inflation-adjusted highs and this is somehow a negative. Is it really? The same could have been said about U.S. stocks in the 1980s. Stocks had a major rally from those levels until they reached their inflation adjusted highs in the 1990s. Then, stocks had an even bigger rally after they reached this level. When an asset isn't trading at its inflation-adjusted high, this is a reason to invest in it because it means big profits can be made. Gold and silver have been reminding us of this almost every day lately.

Disclosure: Long gold and silver.

NEXT: U.S. Inflation Reports - Contradictions and Absurdity

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.





Monday, November 16, 2009

The Art of Inflation

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.

Our Video Related to this Blog:

If ever there was an apt metaphor for our times, it was the sale of Andy Warhol's "200 One Dollar Bills" at Sotheby's on Nov 11th. The silkscreen, which is a black and white image of 200 U.S. $1 bills went for $43.7 million (including commissions). It had previously been purchased for $385,000 in 1986, so this sale represented an approximately 100 times increase in value in 23 years. High-end art is a place where inflation shows up first. Only when the big price increases start filtering down to lesser works though is it an indication that inflation is getting really out of control. In hyperinflations, even tertiary works experience big price increases. Art, collectibles, and antiques were favorite investment areas in the U.S. during the high-inflation 1970s.

At the rate the U.S. government is printing money and pumping liquidity into the financial system, it might take $43 million one day to buy what $200 did when Warhol created his artwork. While the Obama administration is making noises about trying to control the U.S. budget deficit by freezing expenditures or even cutting them by 5%, this is simply an empty symbolic gesture meant to placate America's creditors, Spending on the new health plan, likely to be much greater than estimates, will probably more than wipe out possible savings elsewhere and social security outlays will be rising rapidly and continually in the next decade. While budget cuts may be minimal (defense and Veteran's Affairs are excluded from cuts and these account for a big slice of total federal budget), increases in taxes may not be. The most likely outcome is a budget deficit that keeps growing and a damaged economy from higher taxes.

The Chinese have been complaining loudly recently about excessive U.S. spending and its impact on the dollar (they are estimated to hold about $1 trillion in dollar denominated assets in their reserves). Reluctance on their part to continue buying U.S. debt would cause treasury interest rates to rise significantly. Selling even a small part of their dollar hoard would damage the U.S. currency, which is already sinking fast. The trade-weighted dollar fell below 75.00 again this morning and it looks like it's only a matter of time before it test its all time low around 71.50. A falling currency is the very definition of inflation (contrary to what most economists claim).

Gold, our everyday inflation indicator, hit another all time high in early New York trading this morning. Spot gold rose to $1131.10 after having reached the $1133 level overnight. The 5:15PM New York close last Friday was $1119.50. Gold got stuck at it $1120 resistance level for only two days and then cut right through it Sunday night. Spot silver has traded as high as $17.90 so far today and still needs to trade and close above key resistance around $18. Just like high art prices and a falling dollar, gold and silver are making a very clear case that inflation is a problem.

Disclosure: Long gold and silver, short treasuries, don't own any Warhol's, but do own some actual $1 bills

NEXT: Silver Breaks Out of Trading Range

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.






Sunday, November 15, 2009

Future U.S. Bailouts - FHA, FDIC, PBGC, U.S. States

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.

Our Video Related to this Blog:

There is no end in sight for U.S. bailouts stemming from the Credit Crisis. Once you've bailed out wealthy Wall Street bankers (and there are a handful of Federal Reserve programs for this in addition to $700 billion TARP program), it isn't politically tenable to say no to pensioners, savers, homeowners. and local governments. It should be kept in mind that the Credit Crisis didn't create the problems, but merely exposed the rot in the system that had been there for many years. As Warren Buffett most famously said, "you only know who's swimming naked when the tide goes out". Well, a lot of U.S. government operations have been swimming naked for years and the Credit Crisis caused the tide to go out.

The problems center around housing, banking, pensions, and government operations that don't have the money printing ability of the federal government. The government already nationalized massive housing loan entities Fannie Mae and Freddie Mac in 2008 and these have become bottomless pits for government aid. Fannie lost $18.9 billion in the third quarter of this year and requested an additional $15 billion in funding. Things would be even worse, if much of the loans that had previously been handled by Fannie and Freddie weren't now being insured by the FHA (Federal Housing Administration). The FHA is now backing loans that would have made a crooked subprime mortgage broker blush in the heyday of the housing bubble. When it comes to getting FHA insurance these days, bad credit, a spotty work history, and even a previous foreclosure aren't deal breakers. Not surprisingly, FHA finances are spiraling downhill fast and warnings about a need for a bailout are already becoming louder.

The FDIC has temporarily solved its need for a bailout, with temporarily being the operative word. On November 12th the FDIC mandated that banks pay three years of their insurance premiums up front. This will provide the FDIC's insolvent bank deposit insurance program with an immediate cash infusion of $45 billion. Unfortunately, the FDIC itself estimates that its funding needs will be $100 billion in the next four years. Assuming they only need that amount (which is possibly very optimistic), they will still have a serious short fall. There have been 123 U.S bank failures as of mid-November and the ones on November 13th cost the FDIC approximately a billion dollars. That's for just one week. At that rate, the FDIC would be out of money again in 45 weeks.

The PBGC (Pension Benefit Guaranty Corporation), a government chartered company that insures U.S. pensions is another operation which is heading toward a bailout. In its 35 years of operation, it has lost money in 29. Losses have even taken place when the U.S. economy was strong and the stock market rallied. In bad years, the PBGC loses even more money. So far in 2009, it has taken over 144 failed pension programs compared to 67 in 2008. It was $22 billion in the red this year. According to an inspector general's report, the PBGC's former director was alleged to have had improper contacts with Wall Street. When questioned by a congressional panel, he took the Fifth Amendment (refusing to answer because it might incriminate him). Fannie Mae and Freddie Mac executives also had serious ethical problems. Corruption and bailouts seem to go hand in hand.

While California's budget woes are well known, there are nine other U.S. states that are in serious financial trouble and an additional ten not far behind them. California has a $121 billion budget gap and is resorting to IOUs to make payments. According to the Pew Center, the nine other states in serious trouble are Arizona, Michigan, Nevada, Florida (states hit hardest by the housing downturn along with California), Rhode Island, Oregon, New Jersey, Illinois and Wisconsin. High unemployment and reduced business activity have caused tax receipts to plummet and are behind the current fiscal distress. There is little evidence the problem is getting better despite claims by the federal authorities and mainstream economists that the recession is over. The federal government has the same problem as the states, but it just prints money to make ends meet. While the feds can bail out the states, who's going to bail out the U.S. when money printing doesn't work anymore?

NEXT: The Art of 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.






Friday, November 13, 2009

America's Other Deficit - More Borrowing Ahead

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.

Our Video Related to this Blog:

Everyone knows about the huge U.S. budget deficit and ever climbing national debt (now approaching $12 trillion), but much less attention is paid to the Trade Deficit. Both have multi-decade histories at this point. With the exception of the last four years of the Clinton administration, the U.S. has run budget deficits since 1970. There have been continual trade deficits since 1977. While the U.S. budget deficit hit a record high of $455 billion in fiscal year 2008, the Trade Deficit also hit a record by the end of the year and was even larger at $695.9 billion. Both deficits have to be paid for by borrowing, although the trade deficit has be funded by borrowing from foreign sources. This is how the budget deficit has been funded for many years as well, until the U.S. had to start resorting to out and out money printing in 2008. Few people realize though that the Trade Deficit can actually be a bigger drain on U.S. credit than the budget deficit is.

The reason for the current complacency is that the budget deficit soared in fiscal 2009, while the trade deficit is shrinking this year because of the after effects of the Credit Crisis on global trade. The U.S. trade deficit is now projected to come in at annual $366 billion for 2009. The budget deficit for fiscal 2009 (ending on September 30th) was $1.4 trillion. Next year's budget deficit is projected to be over $1 trillion as well. Whether the U.S. trade deficit has bottomed is dependent on the level of global trade and the price of oil. Oil is the key swing factor and if oil prices rise significantly they will overwhelm any benefits in rising exports from a falling U.S. dollar.

U.S. trade deficit figures for September was released on November 13th. The monthly deficit was $36.5 billion, almost $5 billion greater than analysts had expected. One media headline summed up the situation perfectly (a rare event for the mainstream financial press), "Trade deficit jumps more than expected in September as big rise in foreign oil swamps export gain". Rising prices led to oil imports going up 20.1% and imports overall 5.8% higher. Exports did indeed rise on the falling dollar, but were up only 2.9%. They were overwhelmed by the bigger import number thanks to oil.

While economic recovery means a potentially better U.S. budget deficit, it also means a worse U.S. trade deficit. Recovery outside the U.S., but a weak U.S. economy would be the worse of all worlds. Commodities are priced based on global demand and roaring economies in East Asia can drive the price of oil higher and higher. The U.S. trade deficit would rise and so would the budget deficit creating a self-feeding inflationary spiral. The Chinese economy is already much stronger the U.S. economy and yet the September U.S. trade deficit with China was $22.1 billion. China has managed to keep its exports high because it re-pegged its currency to the U.S. dollar in mid-2008 and this keeps the price of Chinese goods low in the West. It is generally believed the Chinese yuan is 40% undervalued because of the government doesn't let it float. While this undervaluation has allowed China to continue its high level of exports, there will be a price to pay down the road. Undervaluing currencies, just like excessively low interest rates and money printing, is inflationary. The market made this point clearly when the trade deficit news was released, gold shot up and the U.S. dollar sold off.

Disclosure: Long gold, no positions in the U.S. dollar

NEXT: Future U.S. Bailouts - FHA, FDIC, PBGC and U.S. States

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.






Thursday, November 12, 2009

Action Speaks Louder than Words for U.S. Dollar

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.

Our Video Related to this Blog:

One of the three great economic lies of our times is the U.S. has a strong dollar policy (the other two are 'inflation is subdued' and 'the economy is recovering'). U.S Treasury Secretary Timothy Geithner has been repeating this oft stated fantasy at the G-20 meeting last weekend and at the APEC (Asia Pacific Economic Forum) on Thursday. It wasn't reported if either audience laughed at him as was the case in China earlier this year. When a country's stated currency policy becomes a standing joke, you know things are going downhill fast.

There is nothing new about U.S. Treasury Secretaries claiming the U.S. has a strong dollar policy. All of president Bush's appointees ran around the world mouthing the same strong dollar mantra as if repeating it often enough would make it come true. The trade-weighted U.S. dollar is now 37% lower than it was since the beginning of the Bush administration. Things have been even worse under Obama so far. The dollar is down 16% since this March. After eight years of decline, you can't blame people for tittering when they hear the U.S. wants a strong currency. Reality indicates otherwise.

Not surprisingly, gold has been going up since 2001 as the U.S. dollar has fallen. There is no question that there is a strong inverse correlation between gold and the dollar in the long term. While the two move in opposite directions over time, this should not be interpreted as they always move in opposite directions. Even a number of high profile investment experts make this mistake. The dollar and gold can move in the same direction for months or even years at a time. Gold and the U.S. dollar moved together from May to December 2005, May to December 2003 and from 1978 to 1980 when gold had its most spectacular price move up ever. So when someone advises selling gold because the dollar is going to rally, they need to be right about two things. First the dollar has to rally and second gold has to not be in or be entering a period when it is trading in the same direction as the dollar.

There is a lot of talk about the U.S. dollar needing to rally because it is severely oversold. This is indeed the case, but a market experiencing a strong decline gets oversold and stays oversold. The trade-weighted dollar is also not at a strong support level on the charts. It is trading around the 75 level where there is no chart support. There is a strong band of support in the 72 to 74 area, with the all time low somewhat below 72. A test of the all time low is inevitable at this point. The only question is does is happen within the next couple of months or after that.

Disclosure: No positions in the U.S. dollar, long gold.

NEXT: America's Other Deficit - More Borrowing Ahead


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.






Wednesday, November 11, 2009

Gold Rumbles as Dollar Crumbles

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.

Our Video Related to this Blog:

If the U.S. dollar chart was a person, it would be a stroke victim. The trade-weighted dollar has been falling since March and can't seem to rise for more than a few days before falling down again. The dollar's latest rally (triumphed by the American mainstream media) in the second half of October took it from 75 to just below 77 where it bounced down from its rapidly declining 50-day moving average. After a major gap down on Monday, instead of rallying strongly to fill the gap, the dollar remained comatose. It broke the 75 level decisively this morning trading as low as 74.77. This is another 18-month low. Comments by Fed officials on Tuesday led to the latest round of selling.

In contrast to the dollar chart, the gold chart looks like someone training for the Olympics. Gold hit another all time record high this morning. Spot gold traded as high as $1117.60 and spot silver as high as $17.71 so far. Technically speaking gold is in a textbook perfect breakout from a solid 18-month base, which is over 300 points deep. A technician would expect the rally to be at least the depth of the base. In a bullish market, double the depth is quite possible. Since the breakout took place at $1025, this would take gold to the $1300 or $1600 level. Gold is in a seasonally strong period until next March, so the rally should last until around then before a significant pause would be needed.

Gold is rising on the flood of liquidity that is being pumped into the global financial system. The same flood of liquidity is drowning the U.S. dollar. A number of Federal Reserve officials made comments Tuesday about U.S. employment likely continuing for a long time and the need for the Fed to maintain super low interest rates. In an eye popping comment, the Dallas Fed president acknowledged that the easy money was damaging the dollar, but he was unconcerned as long as the decline was orderly. So as long as the U.S dollar collapses slowly instead of suddenly, everything is fine. This is the wisdom from the people in charge folks.

The economic geniuses at the Fed are not worried about inflation, as is also the case across the pond in the other quantitative easing powerhouse, the Bank of England. There is no case in history where significant excess money creation didn't lead to inflation, but why be bothered by historical fact. How excessive the money creation is this time is indicated by a gauge kept by Morgan Stanley which measures the amount of cash circulating in the global economy as a percent of total economic activity. It is at a record high by far. Of course, you don't need complex money measures to determine if there is inflation. Gold has been the inflation thermometer throughout the ages and it indicates quite clearly that inflation is heating up.

Disclosure: Long gold, silver. No positions in the U.S. dollar.

NEXT: Action Speaks Louder than Words for U.S. Dollar

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.






Tuesday, November 10, 2009

Bond Auction Puts Focus On Interest Rates

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.

Our Video Related to this Blog:

The U.S. is auctioning off $81 billion in government debt this week. This is just a small part of the never ending supply needed to fund trillion dollar budget deficits as far as the eye can see. The Fed officially stopped its quantitative easing program to buy treasuries on October 31st, so it will be interesting to see what happens to interest rates in the next two or three months. The most vulnerable part of the interest rate curve has always been the 30-year. Foreign central banks have moved their purchases to shorter dated paper and the Fed itself concentrated on buying in the 7 to 10 year range. If the Fed restarts its quantitative easing program (and this is a possibility) it will resume purchases of bonds with those maturities. The 30-year is orphaned without major supporters no matter what happens.

This weeks auction includes $25 billion in 10-years on Tuesday and $16 billion on Thursday. Bonds prices are rallying today (and interest rates going down) even though supply is increasing. This defies free-market behavior and should make it clear that the bond market is regularly highly manipulated in the short term. The Fed notched the usual manipulation up much higher this year however. Figures from the second quarter indicated the Fed bought 48% of newly issued government debt ... and it did so with newly printed money. While the mainstream media has constantly reported that demand for U.S. bonds has remained strong this year, it almost always fails to mention that it is because the Fed is making a substantial percentage of the purchases.

Rising interest rates will be one of the last legs of the inflation trade to kick in because the government has a lot of control over them. The U.S. 30-year interest rate has been in a 27 year downtrend with a yield peak of just over 15% in September 1981 and a bottom last December at just over 2.5%. A rise in interest rates to around 4.8% will break a downtrend line from 1987 (when Alan Greenspan became Fed chair and easy money became the norm for U.S. monetary policy). When 30-year rates can break this level and stay above it, a multi-year rise in interest rates will begin.

In the short term the daily interest rate charts are bullish for the 30-year ($tyx or ^tyx). The 50-day moving average has been trading above the 200-day since last May. Both the 50-day and 200-day are moving up. After the rally from last December to this June when the 30-year rate doubled, the yield fell back to and bounced off the 200-day moving average. So far, this looks like it was the end of the retracement and the perfect buy point. The short-term uptrend is still in place and will remain so as long as the 200-day moving average keeps going up. When it occurs, a decisive break of the 4.8% yield could lead rates up to 6.0%. There are two leveraged ETFs that traders and investors can use to go long 30-year interest rates (the same as shorting the bonds), TBT and TMV. TBT represents a 2X short of 20 to 30-year treasuries and TMV a 3X short of 30-years. Both of these can be highly volatile.

Disclosure: Currently long TBT and TMV.

NEXT: Gold Rumbles as Dollar Crumbles

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.






Monday, November 9, 2009

Market Keeps Going as Stimulus Keeps Flowing

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.

Our Video Related to this Blog:

Spot gold hit another record high on Friday, breaking the $1100 barrier for the first time. While gold hit $1102 intraday, it closed at $1097 at the end of New York trading at 5:15PM. So far this morning, gold has traded as high as $1110.60. This is another record intraday high and perhaps today will be gold's first close ever above $1100. Spot silver traded as high as $17.75 in the early going. It is still stuck in its trading range between $16 and $18. A break and close above $18 will be significant.

As the precious metals go up, the trade-weighted U.S. dollar is going down. So far this morning, the dollar has traded as low as 74.98. It is trying to take out its low of 74.94 from October 21st. There is an approximately 0.75 gap on the DXY chart today. This huge gap will have to be filled eventually. The euro broke above its 1.50 resistance again this morning and once it can remain above this level (this may take awhile), it will head toward its old high of 1.60. The U.S. dollar will in turn head toward its old low of 71.50.

As has been the case with dollar weakness since March, stocks are rallying as well. The technical damage from late October is getting undone on the S&P 500 and Nasdaq charts, both regained their 50-day moving averages last Thursday. It never existed on the Dow chart. The small cap Russell 2000 still has a severe limp however and needs to be watched carefully. Just as the Dow is holding the stock market up and trying to lead it higher, the Russell will take the lead in bringing the market down. The market survived serious technical problems last July and is trying for an encore. Just as was the case this summer, central bank stimulus which is flooding the financial system with liquidity is pushing prices higher.

The market is getting its adrenalin shot today from the G-20 meeting held over the weekend in Scotland. The finance ministers from the world's biggest economies pledged to "continue to provide support for the economy until the recovery is assured". The smart money knows this is some point well into the future. Even more eye opening was a note prepared for the meeting by the IMF. The IMF stated bluntly that the U.S. dollar is "now serving as the funding currency for carry trades" and is "still on the strong side" (so expect it to go lower). Warnings about the abrupt end of the U.S. dollar carry trade have already been appearing in media reports for several weeks now. The same thing happened when the Japanese yen became the source of a global carry trade in the 1990s. I remember hearing warnings year after year after year after year after year that this would end abruptly. Apparently it finally did in 2009. So don't get your hopes up for the dollar carry trade lasting beyond 2024!

NEXT: Bond Auction Puts Focus on Interest Rates

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.






Friday, November 6, 2009

'Recovery' Leads to Double Digit Unemployment

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.

Our Video Related to this Blog:

Just as the mainstream media has lulled the public into thinking we were on a one-way trip to economic happy land, today's U.S Employment Report throws cold water on the whole enterprise. The headline unemployment number came in at 10.2%. October was the first month in 26 years that U.S. unemployment has exceeded 10%. The alternative government unemployment figure, which includes discouraged workers and people who are forced to work part-time, rose to 17.5%. People, such as John Williams from ShadowStats, who adjust the government figures for more realistic numbers, generally add about 3% to that number to get the actual unemployment rate.

There was very little good news in the report. October was the 22nd month in a row that U.S. employment fell. There were large job losses in manufacturing, construction and retail. Retail losing jobs at the beginning of the big holiday selling season tells you just how bad things are. The average workweek is at a record low. The percentage of workers unemployed for over 6 months is at a record high. The labor force participation rate fell and the unemployment rate would have been even higher than 10.2% if this hadn't happened. The good news was that the numbers in August and September were slightly better than originally reported and that temp agencies added 34,000 jobs.

As usual mainstream economists underestimated how bad the report would be. Expectations were for a drop of 150,000 jobs and an unemployment rate of 10.0%. The 190,000 job loss reported is from the payroll survey by the way - and that is the one that is always reported by the media (and the one that shows that the employment situation is better of course). There is a separate household survey (which is a random sample, unlike the payroll survey) and that indicated a loss of 589,000 jobs in October. The government did state that total U.S. unemployment rose by that amount to 15.7 million.

The market reaction to the report was that stock futures, oil and gold dropped (gold had been as high as $1098 in early morning trading). In the long-term, this only means more money pumping, money printing, and dollar pimping by the Federal Reserve. This can only be bullish for gold and the rest of the inflation trade. There is no way that it is politically tenable for the Fed to raise interest rates until the employment picture improves. It is going to be in an increasingly uncomfortable position next year when inflation starts rising, yet unemployment remains high.

NEXT: Market Keeps Going as Stimulus Keeps Flowing

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.






Thursday, November 5, 2009

Inflation Trade Picks 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.

Our Video Related to this Blog:

Spot gold traded as high as $1099 yesterday. Gold is the most sensitive of inflation assets and it keeps hitting new all time highs. Spot gold was at $1092.90, up $7.60 at the 5:15PM close in New York. Silver closed at $17.46 up 23 cents. Nymex oil closed up at $80.40 at the end of pit trading. Interest rates rallied sharply with the 10-year and 30-year treasuries reaching 3.55% and 4.43% respectively. The trade-weighted U.S dollar sank, slicing through key support and falling almost a full percent (a big move for a currency). The major stock indices went nowhere, closing flat after giving up all their gains in the last hour with the exception of the small-cap Russell 2000, which closed down 1.3%. Big rallies in inflation-sensitive assets and stocks going nowhere - it's the same story as what happened in the U.S. markets in the high inflation 1970s.

Only the incredibly dull and oblivious could miss the inflation message of the markets. People who live in Washington, D.C. and are involved with the U.S. government in economic policy positions are the most likely to be in this category. The Federal Reserve rarely disappoints. The FOMC (Federal Open Market Committee) concluded its two day meeting yesterday and added the following sentence to their post-meeting statement: "With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the committee expects that inflation will remain subdued for some time." The committee also expected there wasn't going to be a subprime crisis and that recession could be avoided months after the recession had already begun (apparently nobody had told them).

When I read this sentence, I immediately pictured someone painting themselves into a corner. The committee is going to have to do some explaining early next year when the inflation numbers start picking up. This statement also indicates the committee members complete ignorance of inflation history. Resource slack is a frequent accompaniment of hyperinflation. Our contemporary example of this is Zimbabwe where unemployment reached 94% and inflation reached the sextillion percent level. In Weimar Germany in the early 1920s, unemployment reached 24% and rose along with the inflation, which reached the trillion percent level.

As we have gone over many times at the New York Investing meetup meetings, the inflation trade consists of the precious metals gold and silver and their mining stocks, energy (oil, natural gas, coal, nuclear and alternative) and their stocks and agricultural commodities. Shorting bonds, which is the same as being long on interest rates is also part of the inflation trade as is getting out of the U.S. dollar and into stronger currencies such as the Australian dollar. Some of these assets will be much stronger or much weaker than the others at different points in time and investment money needs to be shifted accordingly. It will probably takes years before the average investor fully adjusts their investing strategies to the inflation trade assets. In all likelihood, the very last people to do so will be the FOMC members.

NEXT: 'Recovery' Leads to Double-Digit Unemployment

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.






Wednesday, November 4, 2009

Gold Rockets Higher

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.

Our Video Related to this Blog:

In a bull market there is always a higher price down the road for those who wait for it. Gold amply demonstrated this concept by hitting a new all time high yesterday (and again this morning). Tuesday's move was sudden and vertical and it took place even though the U.S. dollar was rallying strongly and stocks were selling off. While investors constantly worry about sharp sell offs, they don't usually consider that sharp rallies are also possible for bullish assets. While gold led the way up, silver and then the miners started tagging along shortly thereafter. Eventually all of the inflation trade assets followed. Look for this pattern to repeat.

At the 5:15PM end of New York trading, spot gold closed at $1085.30 yesterday, up almost $25. This took out resistance around the $1070 level. Gold was in a trading range between approximately $1050 and $1070 for awhile before testing its $1025 breakout point. Spot gold has gotten as high as $1094.30 early this morning. This is important implied resistance at $1120. Spot silver closed yesterday at $17.20 up 73 cents. It was up almost a dollar at one point. The 200% leveraged gold ETF DGP was up 4.7% and the 200% silver ETF AGQ was up 10.4% yesterday. Some mining stocks did even better. Novagold (NG) was up 13.2% and Hecla (HL) was up 18%. The U.S. trade-weighted dollar, after rallying strongly in the morning, lost its momentum and essentially closed flat.

What seems to have caused yesterday's gold burst is a story of karma worthy of a Hindi movie. As reported in this blog early Tuesday morning, India bought 200 tonnes of IMF gold. The sale took place during a two-week period that ended on October 30th. This news was generally available in the evening New York time on Monday. Nevertheless, more the one U.S. media outlet reported that India would be or was buying 200 tonnes of gold during the trading day on Tuesday. Gold which had been meandering in price suddenly started moving straight up on the intraday charts blowing out the shorts along the way. The karmic element comes into the story if you know India's past with the IMF. In 1991, during a financial crisis, India had to borrow money from the IMF and was forced to ship its gold reserves to London as collateral. Now they are buying the IMF's gold! Will a future time come, when a Western country has to borrow money from India and in turn be forced to ship their gold to New Delhi?

The movements of gold and the U.S. dollar in the last few days are significant for another reason as well. Since the Credit Crisis began the dollar has rallied before Fed meetings, during the meeting and at least into the day after the meeting. Gold has sold off in response. Things have changed noticeably this time. The Fed met yesterday and is meeting today. The dollar had the usual pre-arranged rally before the meeting and gold was weak, but then things went screwy. Gold suddenly shot to news highs on a big rally and the dollar rally faded as the meeting began. The dollar is already selling off strongly today before the meeting has even ended. Perhaps gold is just too strong and the dollar is just too weak for this manipulaton game to go on any longer.

NEXT: Inflation Trade Picks 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.






Tuesday, November 3, 2009

Markets Roller Coaster Ride Powered by Media Hype

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.

Our Video Related to this Blog:

Yesterday, stocks in the U.S. went on an a roller coaster ride that saw a steady significant move up, followed by an almost vertical descent (which included a 30 point drop in the Dow in just one minute), then a gradual climb back up into a positive close. The European Central Bank seems to have continued interfering in the currency markets (in one way or the other) by supporting the euro behind the scenes and this is what caused the intraday drop in the stocks. One asset though managed to stay in positive territory and gain technical strength yesterday - gold. More hairpin turns and sharp up and down moves should be expected for awhile. The mainstream media seems intent on publishing stories that will keep the volatility going.

Spot gold closed at $1060.60 (up $14.60) at the 5:15PM end of Globex trading yesterday. It broke through the $1050 resistance level and stayed above it all day. Gold traded as high as $1064.00. It then got as high as $1066 overnight on news that the IMF sold 200 metric tons of its gold to India (the price of course dropped the moment New York trading opened). The IMF board voted to sell 403.3 metric tons of its 3,217 tonne gold holdings on Sept 18th after telling the market multiple times over two years (each time driving the price of gold down) that it was going to do this. It was widely believed China would buy the entire amount of the IMF gold for sale using this as an opportunity to get rid of some of its massive dollar reserves. China stupidly didn't do this however. It might buy the remaining 200 tonnes of IMF gold or any number of Gulf oil states could. In general, gold is leaving the central banks for Europe and moving to the central banks of Asia.

Gold went up yesterday in U.S. trading because of inflation concerns. The ISM Manufacturing report for October came in at 55.7, up from 52.6 in September (above 50 indicates expansion). The strongest of the 10 components of the report? - Prices Paid, which is an inflation indicator. This number came in at 65.0, up from 63. 5. It was the highest number in the September report as well. While inflation was the biggest news in this report, I saw no mainstream media article that even mentioned it, let alone headlined it. Instead stories like "Dollar Falls After Strong Factory Data" appeared and claimed the dollar was going down because of heightened risk appetite, the current fantasy the media has spun to take investor's attention away from inflation. This article did hint at inflation though in the 18th paragraph (most people don't read to the end of articles), when it mentioned that a flood of liquidity from central banks might have something to do with the way the market is reacting.

Media coverage reached even lower levels this morning. The glaring headline, "U.S. Stock Futures Drop Sharply", could be found many places online. When I clicked on a major financial website's version, an article with a different headline appeared, " U.S. Stock Futures Off Lows ....". People who didn't click wouldn't know the news had changed though. Traders frequently only see headlines. What was the 'sharp drop' in futures? The Dow was down 61 points, the S&P 500 down 7 points and Nasdaq down 7 points - completely ordinary meaningless moves.

There is risk for stocks today because the euro had a sharp drop overnight after the Australian central bank raised rates by a quarter of a point to 3.5%. Australia was the first central bank to start raising rates last month, which is one reason the Australian dollar is so strong. This move should be more threatening to the U.S. dollar than the euro however, but the trade-weighted dollar is rallying on the euro sell off. Ironically, this could damage U.S. stocks the most because if you check you will see their best correlation has been to movements in the euro since last March (the euro represents over 50% of the trade-weighted dollar). Gold seems to have been hardly impacted by the currency move at all. Traditionally gold and the euro should be moving together and the stock currency relationship should be more tangential.

As if the first two days of the week aren't exciting enough, the end of the week will see the U.S. monthly employment report. I would also like to remind everyone that this is the beginning of the month and the first four days of trading should be positive. At the moment it's hard to say if the bears or bulls will win out. It is easier to predict a lot of volatility, which is a classic sign of a top.

NEXT: Gold Rockets Higher

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.