Tuesday, June 22, 2010

More Evidence for a Double Dip Recession

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. economy continues to look weaker and serious problems with the financial system are still lurking in Europe. EU countries are trying to outdo each other to see who can increase taxes and cut spending the most. Copper, known as the commodity with a PhD in economics, is in a confirmed sell off.

U.S. Existing Homes Sales were released this morning and they came in well below expectations. This is only one of a number of reports lately where analysts have proven to be much too bullish. Despite the federal government tax credit that was juicing up home sales, they still managed to drop 2.2% (the credit expired on April 30th, but buyers have until June 30th to close and the sales figures are based on closings). The annual sales rate in May was 5.66 million units, compared to over 7 million in 2005. Inventories of homes for sale managed to drop just below 4 million last month. In 2005, they were under 3 million and the year before barely over 2 million. So a lot less homes are being sold now and there are a lot more homes available for sale. A number of sources are claiming that both HUD and the big banks are holding back on foreclosures to prevent the inventory of unsold homes from becoming even worse.

In a separate report, more people have dropped out of the Obama administrations HAMP (Home Affordable Mortgage Program) that have stayed in it. At best, this program is delaying foreclosures and it appears unlikely that it will ultimately prevent very many - all at a huge cost to the American taxpayer of course.

Meanwhile in Europe, the future stall engine for the world economy, the UK announced its plans to eliminate its budget deficit in five years. Higher taxes and big spending cuts are the approach it will be taking. Capital gains taxes will be raised from 18% to 28% (investing capital will flow to countries with lower rates) and the VAT will go up from 17.5% to 20%. Similar moves are taking place throughout the EU.

There seems to be no realization on the other side of the pond that higher taxes are a negative for economic growth. The proposed spending cuts will also have the same impact. Significantly lower economic growth and lower tax receipts are not being projected for the future however by the Europeans. Obviously they are going to be as surprised as they were by the euro crisis. Problems in the region's financial system have not gone away as is.  Fitch today slashed its view on BNP Paribas, the largest bank in the eurozone.

The augurs of a renewed recession can also be found in the ECRI weekly leading indicators, which indicated a growth rate of -5.7% last week (this number shouldn't be interpreted literally) and by looking at the price of copper. It is amusing to see the spokesperson for the ECRI trying to explain away the negative implications of the ECRI's leading indicators after the company has spent decades building up their credibility. It's enough to make one wonder if the company is changing its emphasis to providing economic cheerleading instead of an accurate view of the U.S. economy?

The price behavior of copper is confirming the ECRI data. Copper is more sensitive to economic activity than any other commodity. If you look at a chart of its ETF JJC, you will notice that the 50-day moving average crossed the 200-day on Monday producing a classic technical sell signal. Over time, copper has proven itself to be a lot smarter than the politicians that run the world's economies.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup

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

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