Book Review: "SuperCycles" by Arun Motianey

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.


It is common knowledge among market historians and even many traders that there tends to be alternating twenty-year cycles of rallies in commodities and stocks. These long-term rallies and the sell offs that follow them are referred to as secular bull and bear markets respectively. In his new book, “SuperCycles”, Arun Motianey produces an economic theory that ties together these alternating cycles putting them into an even longer-term context and places central bank monetary policy as the originator of the phenomenon.

While superficially, Motianey’s supercycles appear similar to Russian economist Nikolai Kondratiev’s long waves, they differ in important aspects. They agree that the length of the supercycle can range from forty to sixty years and that it is global in scope. Kondratiev’s long cycles were an empirical observation though, not a theoretical explanation and they included socio-political as well as economic behavior. Motianey, on the other hand, creates a model to explain why the cycles take place. Their cycles also have different beginning and end points. Kondratiev began his first cycle in 1790 and his second long wave lasted between 1850 and 1896. Motianey begins his first supercycle in 1873, in the middle of Kondratiev’s second cycle. The key for Motianey is the point where the major world economies increasingly adopted the gold standard.

Motianey’s supercycles begin with the arrival of a new monetary regime that promises price stability. The breakdown of that regime ultimately ends the supercycle many decades later. His first supercycle begins with the gold standard years in 1873 and ends in 1930 when many countries were forced to leave the gold standard because of the Great Depression. The second one is Keynesian based and it terminated  in 1979 when U.S. Fed chair Paul Volcker stopped the inflation that began with the breakdown of Bretton Woods in 1971 by imposing high interest rates. Motianey defines the current supercycle as the era of enlightened fiat money – a term that seems inherently oxymoronic. It should end somewhere around 2020 to 2030. The breakdown of our current monetary regime seems to have begun with the Credit Crisis.

In the Motianey model of supercycles, central banks and their mistakes are driving force of the deflationary and inflationary periods that seem to repeat over and over again. Instead of producing their stated goal of price stability, they wind up going too far in one direction or the other and exaggerate the price movements that would have taken place without their intervention. Motianey’s supercycles begin with a period of deflation, as occurred in the late 1800s and the 1930s, or disinflation, which characterized the 1980s. Inflation appears toward the end. Inflation in the 1910s because of World War I and in the 1970s because of the breakdown of the dollar were the two major inflationary episodes in the previous two supercycles. We are now about to head into the inflationary years in the current cycle.

Motianey does nevertheless examine three possible outcomes in his book for the next decade or so. He thinks deflation is highly unlikely as this would indicate a premature ending to the third supercycle and it would make it the only one without an inflationary episode. Motianey considers two ways governments might handle inflation – with indexation and without. While Motianey thinks indexing could be a good idea, history indicates it rarely if ever works out as I pointed out when I interviewed him at the February meeting of the New York Investing meetup (http://investing.meetup.com/21). Brazil implemented a completely comprehensive indexation system starting in the 1960s and this only served to entrench inflation and many years later eventually led to hyperinflation. The U.S. already has minor indexation in Social Security cost of living increases and of tax brackets. An expansion of indexation is actually quite likely to take place; it is not a good idea however.

Motianey is an engaging writer and “Supercycles” should be considered a must read for economic junkies. His ideas are fresh and innovative and he attempts to avoid the dogma that frequently leads those in the profession astray. I highly recommend it for those who want to gain greater perspective on the Credit Crisis and where we might be heading in its aftermath.

Disclosure: McGraw-Hill provided a copy of the book for review purposes.

NEXT:

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Impossible Contradictions of U.S. Consumer Spending

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.


Consumers are the key to any U.S. economic recovery since they account for around 70% of GDP. Revised 2009 fourth quarter GDP figures just released indicate that consumer spending rose 1.7% on an annualized basis. This was after a reported 3.8% rise in the third quarter. These numbers are certainly good and indicate an economy on the mend if they are accurate. Unfortunately, there is little likelihood that they are.

To spend more money, consumers have to have more money. They can get the extra money through higher compensation (such as wages), larger interest and dividends payments, by drawing down savings or by being given additional credit. All of these numbers for 2009 indicate that consumers had less money to spend. According to BEA (Bureau of Economic Analysis) figures updated as of February 26, 2010 and the latest Federal Reserve credit statistics, the following changes took place during 2009:

Employee Compensation     Down    3.2%
Interest Income                   Down    4.9%
Dividend Income                 Down  16.4%
Revolving Credit                 Down     9.5%
(mostly Credit Cards)

Consumers not only had less income and credit available, they also saved more. The U.S. savings rate went up from 3.8% at the end of 2008 to 4.1% at the end of 2009. So consumers earned less money and then on top of that they saved more of that smaller amount of money. Their borrowing power dropped as well. Yet, while this is happening the government keeps reporting consumer spending is going up. There seems to be some sort of contradiction here.

The recent GDP figures indicate that this mystery can be explained by a huge drop in personal tax payments in 2009. The government claims that individual taxes dropped 25.8% during the year, an amount that is much, much bigger than the decline in income and which occurred during a period when there was no major federal tax cut (there were numerous small ones for certain groups in the stimulus package). The supposed large drop in taxes paid gave U.S.consumers an increase in disposable income. They apparently went out and spent it all immediately.

Based on the above information, there are those who might not believe that U.S. consumer spending is actually increasing. For instance, people who took first grade arithmetic and have at least some minimal attachment to reality are likely to be skeptical. If on the other hand, the average U.S. taxpayer cut their tax bill by 26% last year (presumably a number of people got 30% and even 40% reductions) while experiencing only a small drop of income, I am obviously out of the loop. In that case, please send me the name of your accountant ... unless of course he or she has been indicted or is already in prison.

Disclosure: None

NEXT: Greek Crisis Impacts World Currencies and Gold

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

U.S. Economy Continues to Deteriorate Despite 'Recovery'

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.


A number of economic reports in the last few days indicate that the U.S. economy has not only not failed to recover from the recession, but continues to fall deeper into a hole. Banking, consumer confidence, employment numbers, durable goods and the housing industry - each representing a different aspect of the economy - are all sending out troubling signs. Despite the onslaught of negative data, mainstream economists continue to echo the official U.S. government view that "the recovery is still on track".

Updated statistics from the FDIC indicate that there were 702 banks on the troubled list as the end of 2009. This is an increase of 27% from the third quarter. FDIC numbers also show that U.S. banks cut lending by 7.5% in the fourth quarter of last year. Since lending is the lifeblood of the economy this doesn't bode well for the future. The FDIC also had to put aside an additional $17.8 billion for future bank failures. Its deposit insurance fund is now at a negative $20.9 billion. Despite statements that it has enough cash to keep operating (Bear Stearns and Lehman Brothers made similar claims), it is only a matter of time before the FDIC is bailed out. This will take place before the end of the year and will be done by tapping a line of credit from the Treasury department. Expect this event to be downplayed by mainstream media reports with claims that it is not really a bailout.

While the U.S. banking system continues to dissolve, consumers are losing confidence in the economy. The Conference Board numbers for February fell a whopping 10.5 points to 46 (around 100 is a good number). The present situation subindex fell to 19.4, the lowest level since February 1983 when the U.S. was trying to recover from a severe double dip recession. Before the Credit Crisis, consumer spending represented 72% of the U.S. economy. Without their participation, a sustainable recovery is not possible. Other reports indicate there is no way in the near future that consumers can resume their vital economic role. Consumers not only don't have credit, credit card debt was dropping at close to a 20% annual rate at the end of last year, but they are worried about the job market as well.

The weekly jobless claims indicate why the job picture is still troubling. Initial claims were up 22,000 last week to 496,000 (a number around 400,000 indicates recession and 300,000 indicates a healthy economy).  These numbers are highly volatile because they come from state unemployment offices that are notorious for backlogs in processing the claims. This problem occurred during the holiday season and the claim numbers were consequently lower. The mainstream media then fell all over itself to report the tremendous improvement in the employment picture, instead of the real story of bureaucratic incompetence that was preventing accurate numbers from being produced.  Market watchers usually only pay attention to the four-week moving average to get around this problem. This number has risen by 30,000 to 473,750 in the last four-weeks.

The just released Durable Goods report got major headlines about how bullish the number was. This is only the case as long as you don't look at the details of the report. Responsible for the good headline number was a 126% increase in civilian aircraft orders (these orders can be cancelled by the way). Outside of transportation, orders fell 0.6%. Core capital equipment and machinery orders dropped 2.9% and 9.7% respectively. These two numbers are the important ones that determine the direction of the economy. For all of 2009, durable goods fell a record 20%.

Finally, housing doesn't look like it is in recovery mode either. Housing was the epicenter of the Credit Crisis and it will be years before all the damage wrought by the bubble will be worked out. According to the Mortgage Bankers Association, mortgage applications for home purchases have just fallen to a 13-year low. New home sales in the U.S. fell to the lowest level on record in January (records go back almost 50 years). Government nationalized Freddie Mac reported it lost another $7.8 billion in the fourth quarter. That brings its total loss to $25.7 billion for all of 2009. Freddie Mac purchased or guaranteed one in four U.S. home loans in 2009. The Obama administration has promised a blank check to Freddie along with its companion housing entity Fannie Mae, also nationalized and bleeding money, to cover losses up until 2012.

This is little evidence that the U.S. economy has recovered from the recession or is going to recover from the recession any time soon. The support for the recovery viewpoint comes from government statistics that have been highly manipulated. All governments of course want to present a rosy picture of their handling of the economy for political reasons and it is much easier to make the numbers better than it is to actually make the economy better. Eventually the public catches on to this game however. The recent consumer confidence numbers indicate that the American public is no longer buying the public relations story, but is starting to pay more attention to the realities they have to face on a day to day basis.

Disclosure: No positions

NEXT: The Impossible Contradictions of U.S. Consumer Spending

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

New York State Comptroller's Wall Street Bonus Update

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.


I attended the February 23rd press conference given by New York State Comptroller Thomas DiNapoli where he announced Wall Street bonuses tallied at least $20.3 billion in 2009 and industry profits could exceed $55 billion for the year - nearly three times the previous record. While a blogger or two from a major political website is occasionally included in such events, this may have been the first time a blogger for an investing/economics site was invited.

The Wall Street bonuses revealed by the comptroller were literally that - compensation paid to employees working in New York City. All of these firms are international in scope so payments made to employees working elsewhere, and these could be considerable, were not included in the totals. Moreover, the bonus numbers were based on cash payments or recognized deferred compensation, options that were cashed in during 2009 for instance. Stock options granted, but still outstanding are not part of the numbers.

The comptroller's office noted that many Wall Street firms delayed cash bonus payments and increased stock and other forms of deferred compensation in 2009. Many top executives received no cash bonuses last year, but got stock options instead. This made the bonus amount for 2009 to appear to grow less than it actually did, keeping the apparent increase to only 17%. Wall Street executives received larger salaries as well as part of their compensation.

In 2008, Wall Street firms lost $42.6 billion and granted at least $17 billion in bonuses according to the comptroller's figures. Never in history has incompetence proved to be so lucrative. If you screwed up at work and almost drove your company out of business would you get a big cash reward for doing so? Yet, the perpetrators of the biggest financial collapse in history were richly rewarded for their efforts. How is this possible and where did the money come from?  Government bailouts are the answer to both questions. Wall Street got money from the Federal Reserve and the U.S. Treasury and then funneled that money into its executive's pockets. The government in turn got that money from your bank account. The other question that needs to be answered is how did Wall Street triple its profits from the previous high in 2007 when U.S. unemployment reached 10% and the GDP was negative in 2009?

The New York State Comptroller is the sole trustee for a $128 billion pension fund. New York State, along with the other major state and city pension funds, is responsible for a huge amount of market investment. While Wall Street knows about what goes on in the nation's comptroller's offices, most of the activity remains unknown and unseen by the investing public.  Investors have a right to know what is going on with public money. Including bloggers, who are the people's press after all, in the news flow is a major step in the right direction. Comptroller DiNapoli deserves credit for opening the process.

Disclosure: No positions.

NEXT: U.S Economy Continues to Deteriorate Despite 'Recovery'

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.

Greece's Statistical Lies - Are the Numbers Any Better in the U.S.?

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.


The only difference between Greece's blatant manipulation and falsification of its government statistics and what takes place in a number of other countries is that Greece got caught.

Greece's phony numbers have finally blown up in its face and this has led to the current crisis in the euro zone and an approximate 10% sell off in the euro since early December. There were obvious problems with the numbers from the earliest days when Greece joined the European currency union, but these were brushed aside. The economic and budget numbers aren't much more reliable in the U.S. and even though this is an open secret, it is also generally ignored.

The rules of the euro zone require a maximum annual budget deficit of 3% and a maximum debt to GDP ratio of 60%. Greece managed to 'hide' that its budget deficit was above the acceptable limit in the early 2000s by engaging in at least 12 currency swaps with Goldman Sachs between 1998 and 2001. Greece also seems to have done business with Credit Suisse. Italy, one small step behind Greece in the budget mess race, reportedly engaged in similar activity, but its business was first done with the infamous Long Term Capital Management. Goldman earned $4.95 billion last quarter and has been super-profitable in the aftermath of the 2008 Credit Crisis blowup (how exactly has it been earning all of that money?) The transactions with Greece were covered by RISK Magazine (an appropriately named platform to say the least) at the time. Even before the current brouhaha, there seems to have been a Wikipedia article on the subject. Not exactly a well-kept secret, but apparently the EU's central office wasn't exactly working day and night to ferret out the truth.

Currency swaps were just part of Greece's attempt to finagle its way around EU regulations. In 2004, it was revealed that Greece's budget didn't exactly reveal all of its expenditures. It turned out that it hadn't reported a large share of its military expenditures and this was used to reduce its budget deficit considerably. The EU decided the Greek budget deficit still met its criteria however. It didn't seem to occur to anyone that a government that was less than honest about one set of numbers would easily lie about another. For those who are unaware of it, the U.S. has funded its operations in Iraq and Afghanistan mostly through supplementary spending bills and this has kept the costs, estimated to be around a trillion dollars so far, out of the military budget.

More recently, Greece's problems with its reported budget deficit numbers occurred when it revised its 2009 deficit from 3.7% to 12.7%. The crack sleuths at EU central were not the ones to catch this rather gaping error. Greece elected a new government toward the end of 2009 and the correction to the blatantly ridiculous figures was politically motivated. The new government didn't want to wind up being blamed for the mess the previous government left behind. The 'excessive optimism' of the previous government was blamed for the discrepancy in the numbers. In January 2010, an EU report saw the situation differently and lambasted Greece for significant weakness related to data gathering, submission of incorrect data, disregard of accounting rules and a lack of timeliness of providing the numbers. U.S. government numbers also suffer from all of these problems.

U.S. budget figures don't look particularly good at the moment. There will be as much as a $1.6 trillion dollar deficit in fiscal year 2010, which ends on September 30th. The official national debt could easily reach $14 trillion by the end of the year, almost as much as the claimed GDP. The U.S. has a lot of potential off-balance sheet items however. These include obligations from Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Home Loan Bank, the FHA, the FDIC and the Federal Reserve. Together these obligations are potentially well over $10 trillion. At its current rate of spending, the FDIC is likely to run out of money before the end of 2010. Obligations for future social security and Medicare payments, which GAAP (generally accepted accounting principles) would require a company to report, are somewhere between 50 to 100 trillion dollars. The U.S. government does not follow the rules that it insists are necessary for honest accounting from from its companies however.

The economic soundness of the state is not just dependent on government expenditures, but on the strength of a country's GDP. Only the most naive would assume that even though the budget numbers have been fudged, the GDP figures are honest. Once it exists, dishonesty motivated by self-interest tends to become pervasive in government reporting.

There are at least two major problems with U.S. GDP figures. First, there could be as much as $2 trillion, if not more, in illusory economic activity included in the calculations. Secondly, the numbers are adjusted for inflation, but the inflation numbers are grossly understated. This makes the final GDP number larger. Regardless of the sources of overstatement, the overstatement itself is obvious. The U.S. originally reported GDP numbers indicating close to a decent 3% growth rate in 2008, even though the economy was in the worst decline since the Great Depression (the numbers were subsequently revised down to a growth rate just above zero) . A declining economy means there should be a negative change in GDP. Where was the outrage from the economic community and the press when these impossible numbers were released? There was none. Just as in the case of Greece, the problems will not be generally acknowledged until there is some big blow up. Investors should stay tuned.

Disclosure: No positions.

NEXT: New York State Comptroller's Wall Street Bonus Update

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.

Fed Sends a Message With Discount Rate Hike

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.


The U.S. Fed raised its discount rate after the market close on Thursday, February 18th. The rise in rates from 0.50% to 0.75% was characterized by the central bank as further normalization of the Fed's lending facilities. While the Fed's discount rate action is mostly symbolic, it raises the question of when the historically ultra-low fed funds rate will be normalized. As would be expected, the U.S. dollar rallied and gold sold down on the news.

The discount rate is not an important factor in control of money supply, but is the Fed's mechanism for getting money to banks when they are in crisis, either individually or because of a systemic shock. During the Credit Crisis the Fed created a number of new programs to temporarily accomplish this goal. Five of those programs were ended on February 1st. Another one, the TAF (Term Auction Facility), will have its final auction on March 8th. Prior to the Credit Crisis, the discount rate was usually a full percentage point above the fed funds rate. Even with the recent rise, it is only half to three-quarters point higher. We are still not yet back to the way things were pre-Credit Crisis. Fed Chair Bernanke has been saying the U.S. banking system was fixed for many months now. If that is the case, why has he waited so long to get the Fed's operations back to the way they have been historically when there is no crisis?

The last time the Fed began a major policy change was with a move in the discount rate. The Fed first cut this rate by 50 basis points in August 2007. One month later, it started lowering the fed funds rate and continued doing so until instituting its current zero to 0.25% rate policy in December 2008. While Bernanke's signature approach is to change the discount rate first, the time lag is likely to be longer than one month this time. Members of the Open Market Committe may already be losing their patience for ultra-low rates however. The Kansas City Fed Governor dissented at the January meeting on the fed's message of "exceptionally low levels of fed funds rates for an extended period". He wanted language that indicated something briefer.

Higher U.S. interest rates are of course bullish for the dollar. Although the U.S. will have to raise rates by 0.50% to be higher than Great Britain's rates, by 1.00% to outdo the euro zone, and by 3.75% to challenge Australian rates. The U.S. trade-weighted dollar continued its rally on the Fed news and is flirting with nine-month highs. The euro on the other hand fell as low as 1.3443 on the news. Technically, the dollar confirmed its rally with the 50-day moving average moving above the 200-day - a classic buy signal.  The euro has the opposite chart pattern and the 50-day average having dropped below the 200-day earlier this month. Gold held up better than expected. February is a month of strong seasonal buying for the metal and this has provided enough buying pressure to prevent significant drops for now.

Disclosure: No positions.

NEXT: Greece's Statistical Lies - Are the Numbers Any Better in the U.S.?

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Gold Down on IMF Sales, Then Up on 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.


Two pieces of news are affecting gold's price currently.  First, the IMF just announced that it will soon begin phased sales of 191.3 metric tons of gold and this pressured the market causing a sudden sharp sell off. Shortly thereafter, the U.S. released the PPI, the Producer Price Index, for January and there was a very inflationary 1.4% rise from December. This caused gold to rally sharply. While the longer-term direction for gold is unquestionably up, the shorter-term picture is murkier.

The 191.3 metric tons (also known as tonnes or long tons) of gold that the IMF is planning on putting on the market is part of their sale of 403.3 tonnes that they announced last year. Central banks bought 212 tonnes, with India buying over 90% of that amount. Central banks still have the option of participating in the gold sale and this would keep the gold off the open market. The IMF has stated that any sale outside of those to central banks "will be conducted in a phased manner over time". While this is a positive, the IMF has missed the heavy market demand months for gold - November, January and February, and looks like it will be selling during low demand periods. The 191.3 tonnes is part of the Central Bank Gold Agreement, which limits total sales to 400 tonnes a year.

While IMF sales are a negative for the gold market, inflation is always a positive. The 1.4% rise in U.S. wholesale prices in January follows a rise of 1.5% last November. Core PPI, which excludes food and energy, was up 0.3%. Core inflation was a concept implemented by Fed Chair Arthur Burns in the 1970s as a public relations gambit to take attention away from the two major causes of inflation - food and energy. Core inflation is only relevant if food and energy prices remain relatively flat in the long term, but are volatile in the short term. This is not the case; food and energy both go up over time. A Bloomberg study done in 2008 found that not once in a forty-year period did U.S. food prices decline on a year over year basis. Oil prices are choppier, but the $147 high in 2008 was almost four times the high of $39.50 in 1980.

Over the last year PPI is up 4.6%. Almost all of the increase is being blamed on oil. The figures bear this out. However, oil prices affect the price of food and any good or service in the economy that requires transportation, so increases in energy prices percolate through the economy. The Fed's response to this inflation threat is that wage pressures remain tame in the U.S., so there can't be inflation. The wage pressure argument was also common in the 1970s and was used as an excuse by industry to justify not raising salaries. It is a politically based argument that has little to do with the realities of inflation. Inflation is caused by excessive government money creation. There is no case in history though where a government blamed itself for causing inflation even though in each and every case government actions were the root cause.

IMF gold sales will be with us for a while. After the current sale, there are likely to be others, so this could be a multi-year process. The heyday of central bank gold sales is over however. European banks sold large amounts of their gold reserves in the 1990s and early 2000s. There could still be more sales, but Asian banks are now buying. Gold is moving from Europe to Asia and this is a reflection of a greater movement of wealth moving from one continent to another. Gold sales will become less important to the market over time, while inflation is going to become more important.

Disclosure: None

NEXT: Fed Sends a Message with Discount Rate Hike

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The U.S. Imports 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.


U.S. import price data for January indicates a rise of 1.4% from December and a 11.5% rise year over year. The price rise in January was the sixth one in a row. Higher energy prices were the major cause of both the monthly and yearly increases. The implications are inflationary.

Prices for imported oil were up 4.8% in January (the U.S. imports approximately two-thirds of its oil). Non-fuel imports were up 0.4%, led by a 1.5% price increase in industrial materials. Metals and chemicals were responsible for most of that rise. The price for foods, feeds, and beverages were up 1.3%. The report clearly indicated that commodities were responsible for almost all of the rise in U.S. import prices in January. Since all commodities are priced in U.S. dollars and the dollar rallied 0.7% during the month, the jump in import prices could have been worse - and will be if the dollar continues selling off as it did for most of 2009.

There was indeed a stark contrast between price changes for commodities and manufactured goods in January's report. Consumer goods were up only 0.2%, while capital goods and automotive vehicles decreased by 0.1%. Inflation has yet to filter into manufactured goods, which are at the end of the chain for price increases. Commodities are at the beginning. The report also indicated significant drops in air fare and air freight prices, both of which will reverse if oil prices stay high.

Over the last year there has been a dramatic change in the inflation picture based on import prices. Year over year price changes were negative and dropped each month from January to July 2009. Yearly prices decreased 12.5% in January and were down 19.1% in July. Since then, a major reversal from deflation to inflation has taken place. In November the yearly import price change became positive and was up 3.4%. It increased to 8.6% in December. In only six months from July 2009 to January 2010, the yearly change in U.S. import prices went from -19.1% to +11.5%. These are truly shocking figures.

In the last month, central banks have indicated they are starting to worry about inflation - China increased required bank reserves twice, the U.S. Fed halted five Credit Crisis liquidity programs and the Bank of England paused its quantitative easing (read money printing) program. All in all though these actions are merely very minor adjustments in monetary policies that are still highly expansionary. Inflation takes years to work its way through the financial system and by the time it is recognized, it is well-entrenched and it is too late to stop it without taking drastic action. Investors should consider the U.S. import price figures as a warning of things to come.

Disclosure: None

NEXT: Gold Down on IMF Sales, Then Up on 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.

China is Selling its U.S. Bond Holdings

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.


China was a net seller of U.S. treasuries in December. It was also a net seller in November. Figures from the U.S. Treasury department indicate that China lost its position as top holder of U.S. government debt to Japan at the end of 2009. Despite China's selling, foreigners overall were nevertheless net purchasers of U.S. treasuries and notes in December. They were however net sellers of U.S. corporate debt for the seventh straight month in a row.

Chinese lending to the U.S. government was a key source of funding to support the U.S. spending spree in the first decade of the 2000s.  This is what allowed the U.S. to run budget deficits of around $400 billion in 2003, 2004 and 2008. These deficits were a record at the time and were considered outrageous. The U.S. is now facing a deficit of around $1.6 billion in fiscal 2010 - four times larger. Even if the Chinese substantially increased their lending to the U.S., it isn't likely they could do so by enough to fund this amount of U.S. borrowing. If the last two months of 2009 are any indication, it looks like China is not going to increase its purchases of U.S. treasuries at all, but will be selling them instead.

There is no other major external source for funding for the U.S. deficit. Every large economy has its own economic and bailout problems that it needs to worry about. The EU, which has flat GDP growth, will be putting together a bailout of Greece this week. Italy, Portugal, Ireland and Spain are waiting in line and will be looking for handouts in the future. Great Britain also has a weak economy and has been funding its operations with money printing. Japan has still not recovered from its 20-year economic malaise.  The U.S. has to compete with the needs of these countries for international capital.

There are two likely outcomes that will allow the U.S. to fund its deficit. Higher interest rates on U.S. government debt will bring more money into the U.S. bonds. Rates would have to be a lot higher than current levels though to bring in enough money though. The other option is more money printing or quantitative easing - the U.S. government purchasing its own bonds. Some combination of the two will take place. U.S. treasuries already lost 3.9% in 2009; bigger losses should be expected in 2010. Inflation protected TIPS were up 10% on the year however (not nearly as much as inflation sensitive gold's 25% rise). It looks like U.S. bond investors were already anticipating this year's funding problems last year.

Disclosure: None.

NEXT: The U.S. Imports 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.

China Worries About Inflation, The EU Needs to Worry About Growth

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.


The Chinese just announced a second increase in reserve levels for their banks. The first increase took place less than a month ago. That announcement was the earliest of three major withdrawals of liquidity from global markets. The other two were the U.S. Fed closing down five of its Credit Crisis liquidity injection programs on February 1st and the Bank of England temporarily halting its quantitative easing (read money printing) program shortly thereafter. Stocks and commodities started selling down with the first Chinese announcement and continued selling off with the others. Global markets got hit again with the second announcement and adding to their worries was a poor GDP report coming out of the euro zone.

China has been leading the world out of the global recession. This hasn't occurred by magic. It has engaged in a huge amount of stimulus to reeve up its economy. While doing so it also froze the value of its currency, the yuan, and this has kept it tremendously under valued compared to a free market price (some estimates are that the yuan should be 40% higher, even a greater amount is possible). Economic stimulus and undervalued currencies are both in and of themselves inflationary. The combination of the two in large amounts can be explosive. So China is understandably trying to lower liquidity in its economy by reigning in bank lending. While these efforts are minimal so far, traders are anticipating more serious efforts down the road. Food inflation is a particular danger for the Chinese and too much of it can risk political destabilization. Food prices are already rising in many parts of the world and reached over 19% in next-door India at one point in December.

While the Chinese have probably engaged in the most significant stimulus measures globally for any sizable economy, the euro zone has not been as nearly aggressive. While the U.S. lowered its funds rate to zero, and the UK to 0.5%, the interest rates in the euro zone were only dropped to 1.0%. Less stimulus in the euro zone means less inflation in the future, but also means less economic recovery now. Fourth quarter GDP figures came in at 0.1%, indicating overall growth is flat. Leading economy Germany had a zero percent quarter over quarter growth rate. Much troubled Greece's economy sank 0.8% from the previous quarter. Italy was down 0.2%. For all of 2009, the size of the 16-nation euro zone economy fell 4%. Growth in the 27 member EU (a number of countries in the EU don't use the euro) was also only 0.1% last quarter. No matter how you look at it, Europe is economically weak.

In mainstream media reporting of Europe's predicament, one major news service stated, "the recovery in the third quarter now appears likely to have been due to temporary factors like government spending boosts, a build-up in inventory levels and car scrappage schemes that pay people to trade in old cars". The exact same factors have boosted GDP in the U.S., although that wasn't mentioned. The U.S. reported 1.4% quarterly GDP growth for the last quarter of 2009 and this was triumphed in news coverage. Investors can expect that number to be revised downward as was the case with the original third quarter figure. Greater stimulus in the U.S. has been one reason that American GDP numbers have been better than in Europe. Another reason is that the U.S. is willing to engage in more blatant manipulation of its economic statistics.It's a lot easy to 'fix' the economic numbers after all than it is to actually fix the economy.

A slow down in the Chinese economy will have a strong impact on the Western industrialized nations. Much of the improvement that has taken place since the depths of the Credit Crisis in the fall of 2008 has been because of increased demand from China.  The economies in the U.S., UK, Japan and Europe are still very weak. Based on recent actions, the powers that be in the US and UK seem oblvious to this. European leaders seem to be no sharper. Proposed austerity programs in the troubled euro zone economies - Greece, Ireland, Italy, Portugal and Spain will only cause further economic contraction. The fix for the Greece's debt problems - details are still forthcoming - is likely to be a win/lose situation.

Investors should expect that industrialized countries will be on inflation watch for a while longer. At some point even the incredibly oblivious U.S. Fed Chair Ben Bernanke will realize that there are still economic problems that have yet to be solved. More stimulus will follow. Stimulus is what has been behind the global market rallies that began in March 2009. Reduction of stimulus is what is behind the sell off that started in January. Investors should watch for signs that stimulus is returning. Until then, stock and commodity prices are likely to be pressured.

Disclosure: No positions.

NEXT: China is Selling Its U.S. Bond Holdings

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.

World Economic Leaders Need IQ Bailout

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.


There are few things investors can count on during our current era of financial turmoil. One of them is the unerring obliviousness and incompetence of the world's elected leaders and central banks. Somehow they both manage to find the highest cost, least effective solution for every Credit Crisis problem they try to solve. Moreover they usually don't bother to act until every dog in the street has been aware of the problem for some time. There was more than enough support for this view on both sides of the Atlantic today.

There was a summit meeting in the EU today, where the leaders of the 16-nation block struck a deal, at least in principle, on assisting Greece with its debt problems. No details of the rescue package were forthcoming, but there were suggestions of some form of loan program. This is enough to open up the Pandora's box of 'moral hazard', but probably won't be enough to fix the problem - at least not with the initial measures. The final cost for any help to Greece will be much more than early expectations and this will pale in comparison to the cost of future bailouts for other member states such as Spain and Italy.

The whole scenario currently taking place in the EU should seem vaguely familiar to Americans. The much maligned TARP bailout program was initially only supposed to be loans, so it wasn't really costing the taxpayers anything. A number of other bailout programs mushroomed around it and by some estimates reached $11 trillion in promised money (compared to $700 billion for TARP).  While it has been claimed that some TARP money was returned, it is not clear how much actually was. When Citibank announced it was paying back $20 billion (of the $45 billion it received), the U.S. government agreed to give it a $38 billion tax break. It's not clear how many similar deals were worked out to shift the burden from a loan program to a direct cost for the American taxpayer, who after all would have to pay extra taxes to make up for the federal government tax breaks given to the big banks.

While the EU leaders were busy sowing the seeds of future financial disaster for their currency union, the ever out of touch U.S. Fed chair Ben Bernanke was testifying on Capitol Hill about a proposed exit strategy from his easy money policy. As a reminder, Bernanke didn't realize that subprime loans would cause a problem, didn't realize the U.S. was in a recession months after it had begun, and didn't realize that not bailing out Lehman would lead to a possible collapse of the world financial system. Now he doesn't realize the recession and economic problems caused by the Credit Crisis are still not over.  At least he's consistent.

Those who think the U.S. economy is healthy only have to look at the state of the housing market. Almost one in three borrowers have mortgages that are for more than the value of their property. As of November 2009, 5.3% of U.S. home mortgages are three or more months behind in their payments. A year earlier in 2008, it was only 2.1%. In 2009, 2.8 million mortgage holders received a foreclosure notice. Current estimates are this number will rise as high as 3.5 million in 2010. Fannie Mae and Freddie Mac, both nationalized by the U.S. government, have just announced that they will buy back troubled loans contained in securities they have sold to investors (this is a major bailout for the big money players, although the mainstream media did not report it as such). Last year, the Obama administration pledged to cover unlimited losses for both companies through 2012. Draining liquidity from an economy with these conditions in the housing market would send the U.S. into a major depression.

The U.S. experience in the Credit Crisis shows that once you start bailouts, there is potentially no end in sight for how many there will be, nor any limit to the final cost. The disaster precipitated by not bailing out Lehman Brothers also indicates that you must bail out everyone once you start the process. Of course, bailing out no one is the other option. Half and half measures don't work and produce the worst results at the greatest costs. The EU seems not to be aware of this lesson. Maybe they're getting their advice from Ben Bernanke?

Disclosure: No positions

NEXT: China Worries About Inflation, The EU Needs to Worry About Growth

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.

Economists and Governments Pave the Way for Global 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.


In a just given speech at the London School of Economics, famed economist Joseph Stiglitz stated that the U.S. and UK should keep on spending and printing money to prop up their economies. Stiglitz apparently did not mention that recent hyperinflation basket case Zimbabwe followed this same approach. Meanwhile, plans for either an EU or German bailout of Greece continue to swirl about, taking the EU down the road of Moral Hazard and truly huge future bailouts for its member states. Government spending, bailouts, and money printing all go hand in hand.

The Stiglitz speech will be seen as a historically significant event. Stiglitz is not some minor, unknown economist, but is an insider's insider. Stiglitz is a winner of a Nobel Prize in Economics, former Chief Economist at the World Bank, former Chair of the Council of Economic Advisors, and has held economic professorships at a number of top universities. In his speech, he essentially stated that it is impossible for the US and UK to default on their debt because they have unlimited ability to print money. While this is certainly true, it is also simplistic, self-destructive, and immoral.

Money printing erodes the value of a currency and governments that engage in it are acting dishonestly since it is essentially legalized counterfeiting. Yes, they will give their lenders back the same nominal amount of money as was originally given to them, but lenders won't be able to buy as much with it as they could have previously. Lenders usually catch on to this scam pretty quickly and demand increasingly higher interest rates to compensate for the loss in value of the government bonds they are buying. Needing to pay more interest, the government then prints more money. An inflationary spiral results and the government can't stop the printing because doing so risks an economic collapse.

Stiglitz's approach is hardly original. This is the strategy that every country in history has followed that has experienced hyperinflation. Zimbabwe is only the most recent example; there are dozens of others in the last hundred years, with Greece being one of them. In all cases, the only thing that stopped the inflation was when the money printing stopped. This was most blatantly demonstrated in Zaire in 1997 when the government couldn't pay the outside printer of its currency. It received no new paper money and its hyperinflation ended abruptly. The Weimar Republic in 1920s Germany managed to stop its money printing by creating a new currency (a common solution) and backing it with hard assets. Top German economists during the Weimar Republic backed the government's money printing plans, just as Stiglitz is doing today for the U.S and the UK. 

While the U.S. and UK are well along on their money printing agendas, the EU has lagged behind. The impending bailout of Greece will help them catch up. Greece, in and of itself, is not that big. It is only 2% of the euro zone economy. The implications of a bailout for the future are enormous however. There are a number of other countries in the euro zone that will need their own bailouts. While Ireland, Portugal and Spain are on the list, the most serious problem by far is Italy. Italy is perhaps one year behind Greece in the deterioration of its financial condition. Its economy is approximately the same size as the UK's. How is it possible to bail out an economy that large?  How much money would have to be printed to accomplish this? It would take quite a lot obviously and the euro would be damaged considerably.

We are living in times when almost every government is engaging in policies that will devalue their paper currencies. Hard assets unquestionably become more valuable under such circumstances. How much the U.S. dollar, the British pound, the euro and the yen devalue in relationship to each other remains to be seen. The Japanese have the worst debt to GDP ratio of any major economy in the world and are approaching levels last seen in Zimbabwe. The UK and the US have been the biggest money printers so far, but the euro zone might catch up and surpass them. The best approach for investors would be to avoid keeping any significant amount of liquid assets in any of these currencies.

Disclosure: No positions.

NEXT: World Economic Leaders Need IQ Bailout

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.

Will EU Accept Greece's Trojan Horse of Debt?

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.


International markets are looking for resolution to the debt crisis in Greece. European Union leaders have a summit meeting on February 11th and either a debt restructuring or a bailout of some type is on the wish list of traders. Whatever happens however will only be at best a temporary solution that will delay the day of reckoning for the global financial system. In the short-term, it will not undo the damage done to the euro nor to the stocks and commodities that have been impacted by the currencies current drop.

The problem in Greece is neither new nor exceptional for the EU. The conditions of the currency union in the euro zone have been violated from day one. The Maastricht Treaty set a limit for budget deficits of 3% of GDP and a 60% limit for the debt to GDP ratio of participating countries. The euro was launched in 1999 and replaced individual country currencies in 2002. Germany itself, the economic powerhouse of Europe, had a budget deficit of at least 3.7% between 2002 and 2004. France also violated the treaty conditions within the first three years, as did Portugal. The Netherlands did so in 2003. Initially Greece appeared to be in compliance, but was later accused of manipulating its statistics (a historical commonplace for fiscally irresponsible governments) and later admitted that its budget deficit averaged 4.3% between 2000 and 2004.

The euro currency union actually helped countries reduce their budget deficits by lowering their borrowing costs. When the debt to GDP ratio becomes large, reducing interest payments can reduce the budget deficit considerably. This phenomenon benefited Italy tremendously. Interest rates on Italian government bonds fell from around 12% in 1994 to 4% in 2004. It also improved the situation in Belgium. Belgium's debt to GDP ratio was 134% in 1993, but only 90% in 2008. It has never gotten anywhere close to the 60% limit. Italy's debt to GDP ratio in 2008 was 106% and is growing rapidly. It will not be long before it reaches Greece's 120% level. Yet, the market is focused more on Portugal with an 85% ratio - equivalent to the official numbers in the United States (the actual numbers are similar to Greece's) and Spain which has only a 66% debt to GDP ratio.

The EU rules don't have any provisions for bailing out one of the members of the currency union. Such legal niceties though can easily be ignored during a crisis. The EU executive committee has furthermore previously maintained that no bailout of Greece will be needed. Mid-day on February 9th however, news was released stating that the euro zone countries have decided in principle to aid the debt-stricken country. Reports indicated that the EU authorities were considering a range of possible actions, but no specifics were given. The euro of course rallied strongly on the news.

The euro has traded down from a high around 1.51 to the U.S. dollar in late November to the 1.36 level on February 5th. It is trading well below its 200-day moving average at the 143 level. The 50-day moving average, also at the 143 level, is about to cross the 200-day and trade below it, giving a classic bear trading signal.  The euro will not be able to recover from this technical damage overnight. Nevertheless, sharp counter rallies are inevitable since short positions on the euro have reached a record. This will create conditions for a nice longer-term rally in the future, but a period of volatility is more likely first. Commodities, particularly the precious metals, and U.S. stocks tend to trade with the euro, so investors should expect them to follow this pattern as well.

Disclosure: No Positions

NEXT: Economists and Governments Pave the Way for Global 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.

U.S. Consumer Credit - Being Held Up by Government Loans

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.


Consumer spending is the lifeblood of the American economy. Before the Credit Crisis, it was responsible for 72% of U.S. GDP. American consumers don't spend the money they have though, but depend on the money they can borrow. Aggregate U.S. household debt (including mortgages) is actually so large that it is bigger than the enormous government national debt. Consumer Credit has been crimped however since the recession began in December 2007 and experienced the longest continual drop in on record in 2009 and the biggest single month drop ever last November (records go back to 1943). Without a big increase in credit from government loans, things would have been even worse.

The Consumer Credit figures don't include mortgages and other real estate related loans. The total outstanding for these other loans was $2.7 trillion as of December 2009. The total in December 2007 was also $2.7 trillion (there was actually a minor $23 billion increase between the two periods). While it looks like Consumer Credit managed to remain flat for the last two years, this doesn't tell the whole story by any means. A big drop in one area was offset by a rise in another, and that took place only because of federal lending. 

There are two types of consumer credit - revolving and nonrevolving. Revolving is mostly credit card debt. Nonrevolving loans are for fixed periods, such as auto loans and student loans. Credit for revolving loans fell 8% between December 2007 and December 2009. The drop was even bigger from December 2008 to December 2009. While credit card debt was falling (there was a period of 15 months with consecutive drops), nonrevolving loans were increasing and have grown 7% so far since the beginning of the recession. While the Cash for Clunkers program certainly fueled car loans in this category, these are not counted as government loans in the credit statistics. Those government loans that are counted, such as student loans, increased by 89% between the end of 2007 and the end of 2009.  All government loans are in the nonrevolving category, without them revolving credit would have experienced a two-year drop, not a 7% gain.

Decreasing Consumer Credit is not surprising. American consumers were over leveraged before the recession began. Banks have been encouraged by regulators to tighten their lending standards and reports indicate that consumers are having trouble getting bank loans. Unemployment has soared, so this should be the case since fewer consumers are credit worthy. The February employment report indicated that approximately a million workers left the labor force between December 2009 and the early part of 2010 (this is the only way the numbers add up). Consumers have also been saving more because of the poor economy.
Despite less credit, a loss of income from less employment, and less money available for spending because of increased savings, the U.S. government has been reporting that consumers are spending more. The Consumer Credit figures indicate that it's not the consumer, but the government that's spending more.

Disclosure: None

NEXT: Will EU Accept Greece's Trojan Horse of Debt?

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

U.S. Employment Report: 617,000 Extra Unemployed in 2009

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.


The Bureau of Labor Statistics (BLS) just revised its figures for 2009 and these now show that there was an extra 617,000 jobs lost in the U.S. economy last year. This works out to 51,000 more jobs lost on average per month than the U.S. government reported. Since there is no reason as of yet to think the Bureau is doing a better job in 2010, investors might want to subtract this number from future employment reports to get a more accurate read of what is really going on in the U.S. labor market.

The numbers being reported are bad enough as is. January Non-Farm Payrolls showed a loss of 20,000 jobs (perhaps that should be minus 71,000). According to the Bureau's recent numbers, jobs have been lost every month since the recession began in December 2007, except for last November. While the job losses for the other eleven months of 2009 were revised to show a greater loss of 38,000 to 101,000 jobs, November was inexplicably adjusted upward by 60,000. One major media outlet emphasized this one positive number while neglecting to mention that December had an extra loss of 65,000 jobs, which more than offset the increase in November.  Something similar happened in the December 2009 employment report where an extra 15,000 jobs appeared in November, but at the same time 16,000 jobs disappeared in October. Some might find this activity an indication of manipulation.

With today's revisions for 2009, the U.S. government now admits that 8.4 million jobs were lost during the recession. Even though there was more than an extra 600,000 people who lost jobs in 2009 than was previously acknowledged, the BLS reported that the total number of unemployed decreased and that the unemployment rate fell from 10.0% in December to 9.7% in January.  The BLS specifically stated that the "number of persons unemployed due to job loss decreased by 378,000 to 9.3 million". They further stated, "In January, the civilian labor force participation rate was little changed". Those who took first grade arithmetic might be puzzled by these highly inconsistent numbers and statements.

The key to how well the U.S. economy is doing is how many jobs are being created in the private sector. To get a ballpark figure, investors should not just subtract the 51,000 job error rate from the BLS monthly numbers, but also the number of jobs that the government has created - reported as 33,000 in January. This would indicate that the private sector lost 104,000 jobs last month. It has been more than two years since the recession began and the U.S. economy is still bleeding jobs, although the government is doing its best to hide the true extent of the problem. To actually reduce unemployment, the U.S. economy will have to add 200,000 or more jobs a month to compensate for new entrants into the labor force and the return of discouraged workers. There is no reason to believe that this will be happening anytime soon.

Disclosure: None

NEXT: U.S. Consumer Credit - Being Held Up by Government Loans

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.

Withdrawal of Liquidity Threatens Second Global Meltdown

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.


A global market sell off began today, February 4th, when the British Central Bank announced that it was calling a temporary halt to its quantitative easing (also known as money printing) program to gage the impact it was having on the British economy. This follows the U.S. Federal Reserve's announcement during its late January meeting that on February 1st it would be closing down five of its programs that have been providing liquidity to the financial system. The market rally since March 2009 has been based on liquidity and even a small reduction can cause a market drop, a large reduction can cause a crash.

Major European bourses were all down over 2% on the news. The U.S. stock market sold off strongly. All the major indices - the Dow, the S&P 500, the Nasdaq and the Russell 2000 - were already below their 50-day moving averages and are now almost certain to fall to their 200-day moving averages in future trading. If they don't hold at that level, the bull market that began last spring will be over.

The U.S. dollar rose as is common when the financial system is threatened, as was the case in the fall of 2008. The trade-weighted dollar almost hit 80.00 and has been over its 200-day moving average since last week. It's 50-day is rising and a cross of the 200-day from below would announce a new bull period. The  euro is breaking down even further, despite progress having been made with Greek debt, which has been weighing on it for the past month. The charts indicate that the British pound is entering a new bear period today.

When the dollar starts rising for deflationary reasons, commodities will be hit. Silver gapped down and broke below a lower support line established in 2008 and also fell below its 200-day moving average. Gold then followed and broke below recent support. Expect Gold to test its 200-day, which is around other key support at $1000.

The global market collapse in the fall of 2008 was caused by a massive withdrawal of liquidity from the financial system. The world's central banks stopped it with a massive and unprecedented money pumping operation. This stabilized the system and lead to the rally in stocks and commodities. It did not however fix the underlying problems. It merely neutralized them. The industrialized economies are still heavily damaged and yet to recover, even though the central banks are acting as if they have. This will be their key mistake this time.

In the Great Depression of the 1930s, the U.S. Fed withdrew liquidity from the system as the crisis began and this worsened the collapse. While our current central bankers have learned the lesson to pump money into the financial system initially, they don't seem to realize that they need to continue to do so. They will get the idea sooner or later because the impact of liquidity withdrawal will become more than obvious and a political firestorm will follow if it goes on too long.

It looks like we are beginning the second phase of the great global meltdown. In this phase, central bankers will realize they must continue to print money to keep their economies functioning. Massive inflation is the ultimate outcome of this scenario. If they don't, ongoing recession that can morph into a depression is the alternative. Investors need to shift their porfolios with central banker's policy moves.


Disclosure: No positions.

NEXT: U.S. Employment Report: 617,000 More Jobs Lost in 2009

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.

Currency Markets - California Dreaming is Greek to Me

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.


The trade-weighted U.S. dollar has been rallying since early December 2009. Except for a sell off after the beginning of this year, the rally continued because of trouble in the euro zone centered around Greece. The euro, representing more than 50% by weight of the basket of currencies that make up the trade-weighted dollar, hit a seven-month low and lost more than 7% of its value from its recent high. It takes a huge leap of logic to think that fiscal troubles in the euro zone are bigger those in the United States, but this is what the mainstream media has dished up as the explanation for what is going on. The invisible hand of the ECB (European Central Bank) manipulating the currency markets would offer a more rational explanation.

Greece represents 2% of the euro zone economy, compared to California which represent 13% of the U.S. economy. Both are in fiscal trouble. Neither can print their own money to get out of that trouble because they are both part of currency unions. While it is generally not recognized, U.S. states are de facto part of a currency union for the dollar, which was established in the 1800s. Their fiscal problems should be considered as analagous to european countries that are part of the euro zone. California is essentially in default and is only being kept afloat by constant cash infusions from a number of federal stimulus programs. It represents a much bigger drain on the U.S. dollar, than Greece does for the euro.

Selling the euro and buying the U.S. dollar because of the fiscal profligacy of countries like Greece is also absurd considering that the U.S federal government is just, if not more profligate, than the most fiscally irresponsible euro zone countries. It is considered outrageous that Greece had a budget deficit that represents 13% of its GDP. The 2011 U.S. federal budget submitted by president Obama on February 1st has a deficit of 11% of GDP (U.S. GDP figures are grossly overstated). For every dollar the U.S. intends to spend in 2011, 40 cents will have to be borrowed or printed.  Does that sound like a country that is protecting the value of its currency?

Greece has submitted a plan to the European Union (EU) for slashing its budget deficit to 3% by 2012 - the maximum allowed by the EU. While many people think that this is unlikely to happen, the U.S. has no intention whatsoever of slashing its budget deficit to that level in 2012 and will be fortunate if it is even lower than current levels. As for California, there seems to be no path to fixing the problem there without a massive federal government bailout - and it is only one of several U.S. states that have serious fiscal problems. Yet, the markets are selling the euro and buying the U.S. dollar because the U.S. is viewed as being in better fiscal shape that the euro zone? Perhaps I missed something when I took Logic 101.

Disclosure: None

NEXT: Withdrawal of Liquidity Threatens Second Global Meltdown

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Gold Rallies Off Support; Inflation Threat Hasn't Gone Away

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.


Gold had a strong rally the first trading day of February. This rally was significant for two reasons. First gold hit a significant support level last Friday and needed to bounce at that point if it is going to form a double bottom. Secondly, assets in bull markets should rally the first few trading days of the month. Despite a barrage of press coverage during the last several weeks, the threat of inflation hasn't diminished, nor are the world's governments likely to return to fiscal and monetary responsibility for many years into the future. Gold will continue its long-term rally until that happens.

The Credit Crisis has forced the U.S. and a number of other industrialized countries to risk either a long prolonged recessionary period or massive inflation. Modern democracies will always chose inflation because the voters will turn on any government that allows a recession to continue for a long time (unemployment rates will be what voters make their judgment on, not manipulated GDP numbers). While the Obama administration spent the last three weeks trumpeting deficit control, the 2011 proposed budget submitted by his administration on February 1st indicated deficit out-of-control instead. While there were supposedly an item here and an item there that would save $20 billion or so in the next many years, this is laughable. The budget deficit for fiscal 2010, which ends this Sept 30th, was revised downward on January 26th by $150 billion and then upward by $190 billion on February 1st. These people can't predict 10 days in advance, let alone 10 years and yet the mainstream press treated their multi-year predictions as something that should be taken seriously instead of as an item worthy of the comic pages.

Gold was also selling down because the trade-weighted U.S. dollar has been rallying since early December. The dollar rally first began because Japan and China were acting in concert to drive down the Japanese yen. In January, the euro has had the major sell off because of fears of a sovereign default by Greece. There is a real risk of this, but can the ECB let Greece default? It should be kept in mind that Greece represents only 2% of the euro zone economy. The euro has fallen by over 7% against the U.S. dollar because of the crisis. A sovereign default in Greece is likely to be much more costly than a bailout and so a bailout should be expected. It will also only be more expensive as time goes on, so an obvious question is why have the ECB leaders avoided it so far?  When this problem is resolved, both the euro and gold will rally strongly.

The press has also released items lately that are obviously meant to drive the price of gold down. The most interesting of these concerned comments made by legendary investor George Soros at the recent Davos conclave. Speaking about the excess money creation and govenment spending taking place globally, Soros said that gold would be the ultimate bubble because of these. Soros did not indicate that the bubble he foresaw was going to peak anytime soon, although the press slanted its coverage to indicate otherwise. Gold rose 25% in 2009 versus around 400% in its last year of the 1970s rally. Bubbles end in massive rallies and we have an approximate measurement of how large that rally amount is for gold because it previously ended a bubble three decades ago. When investors see gold going up several hundred percent in one year, they should worry about gold being in a bubble that is about to burst. Before then, they shouldn't. Expect to continually hear that gold is in a bubble for the next several years, especially every time it hits a new high.

In the short-term, gold is not out of the woods just yet. Investors should watch the $105.00 level on GLD. Any significant break of this would indicate that  GLD will drop to its 200-day moving average, which is around $100.00 and that spot gold would test the $1000 level. Silver would also break down from its trading range, roughly between the $16 to $19 an ounce level for spot (slightly lower for SLV). Seasonals are generally strong for both gold and silver in February, but weak in late spring. In any given short-term period, price drops are possible because of temporary liquidity restrictions from the central bank or government policy changes. Investors should particularly watch out for the increase in capital gains taxes that will take place in the U.S. on January 1, 2011. Many American long-term holders of the precious metals have big profits and if they want them taxed at a lower rate, they will have to sell before the end of 2010. Bargain hunters should take advantage of this as well as any other major sell offs in the precious metals. Gold has maintained its value for over 5000 years; paper currencies are usually lucky if they last 100 years.

Disclosure: Long gold and silver.

NEXT: Currency Markets - California Dreaming is Greek to Me

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.