Eurozone Fiscal Problems Turn Violent

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.


Mass protests against austerity erupted througout the eurozone this week and in some cases turned violent.  Spain had its credit rating downgraded. Some yield spreads on peripheral countries bonds are reaching crisis levels again. Somehow though, the euro managed to rise on all of this negative news.

The left-wing union sponsored protests took place in Spain, Ireland, Greece, Portugal, Slovenia, and Brussels, where an estimated 100,000 people marched on EU headquarters. Spain had its first nationwide strike in eight years and rioters clashed with police who fired rubber bullets into the crowd. Most flights into and out of the country were canceled. Greece already had slowdowns during the past two weeks, but this time the Athens metro was shut down and doctors went on strike. Supermarkets are seeing food shortages there. The Irish parliament was blocked by protesters as a symbolic gesture of closing down the government.

Spain had its credit rating downgraded by Moody's from triple A to Aa1. All the other major rating agencies had already previously downgraded Spanish debt. In Ireland, the government announced that the bailout of the Anglo Irish bank could push the Irish debt to GDP ratio to 32%. EU guidelines call for this number to be 3% or below. Ireland says it will go to the bond market to raise the money. The yield spread between Irish and German government bonds rose sharply on Monday, hitting a record high. Irish and Portuguese yield spreads had already hit record highs on September 7th, when Greek yield spreads were the largest in four months.

Currency markets reacted to the financial chaos and political instability of the eurozone by bidding up the euro and selling down the safe haven U.S. dollar. This sounds totally and completely absurd because it is. No trader in their right mind would buy a currency with the problems of the eurozone. It is more than reasonable to assume the currency purchases came from the government run Euro-TARP bailout fund. While the eurozone member states are telling their respective populations that they are taking away the free lunch they have been serving all these years, they are making it clear that they are still willing to provide a free lunch to the currency markets. Of course, one day the bill for that 'free lunch' will arrive too and when it does the currency markets will turn violent and ugly as well.

Disclosure: No positions.

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

There is no intention to endorse the purchase or sale of any security.

Gold, Bonds, and Currencies Move on Fed Money Printing

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-year Treasury notes sold at a record low auction yield on Monday. Gold hit another all-time high on Tuesday. The Australian dollar hit a two-year high on Wednesday. Excess Fed money printing ties all three events together.

The two-year Treasury has hit a series of all-time low yields in the last few months. The yield at Monday's auction was 0.441%. The two-year traded as low as 0.40% around the auction. How much lower it can go depends on how much money the U.S. Federal Reserve continues to print and what percent of that gets recycled into treasury bond purchases. The U.S. has to fund its massive deficits in some way and this is one way it is doing it.

At the same time that money printing is lowering yields on U.S. treasuries, it is raising the price of gold. Just as the 2-year has hit a series of record low yields, gold has hit a series of record high prices. Money printing devalues currency, so more has to be paid for any given unit of gold. A currency losing value is the very definition of inflation and gold is highly inflation sensitive for that reason.

Of all the currencies in the world, the Australian dollar trades closest to gold. Australia is also a fiscally responsible country compared to the debt ridden basket cases of Japan, the EU and the U.S. So the currency should be strong as is. U.S. money printing policy enhances its value however. Overall, the Australian currency should become and remain the strongest currency in the world thanks to the actions of the American Federal Reserve. The same actions are trashing the U.S. dollar.

While the Federal Reserve and its mainstream economist toadies claim deflation is a problem, the evidence points to the opposite. Excess money printing has always led to inflation and things will be no different this time. The other thing that will be no different this time is that the government bodies responsible for creating inflation will deny that it exists and when it becomes so obvious that it can't be covered up anymore, they will then deny responsibility. Before this continues any further, you might want to pick up some hard assets and strong currencies.

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Consumer Confidence At Recession Levels 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.


September consumer confidence dropped to 48.5 from a lower revised 53.2 in August. The number was below analyst expectations. Stocks dipped sharply on the news.

The latest confidence numbers from the Conference Board show the disconnect between consumer perception of the U.S. economy and the spin being presented by officialdom is getting wider and wider. A confidence number of 90 or above indicates a positive view on the economy. The current number is lower than the lowest number from the 2001 recession. It is in fact barely above the lowest number recorded during any recessionary period since 1980, except for the recent Great Recession. Yet, government officials and the mainstream media keep telling us that the U.S. economy is in recovery. Based on their own experiences, American consumers aren't buying it.

The current conditions number for September came in at a close to a rock bottom 23.1. This view on the current state of the economy has yet to make any significant move up since the Credit Crisis in 2008. What caused the overall consumer confidence numbers to rise in the last year was the expectations component, which represents consumers' view of what the U.S. economy will be like in the future. After an onslaught of 'the economy is on the road to recovery' propaganda emanating from Washington, D.C. and dutifully repeated by the mainstream media, American consumers in 2009 started becoming increasingly confident that a better economy was waiting for them down the road. After not seeing this happen month after month after month after month after month after month, consumers are starting to have their doubts though. The expectations number fell from 72.0 in August to 65.4 in September. If it remains on its current trajectory, the overall confidence number will get back to where it was during the Credit Crisis.

Consumer spending accounts for 72% of GDP. Consumers without confidence don't spend. Consumers without jobs and credit don't spend either. Nevertheless, the government has consistently reported an increase in consumer spending taking place while total wages and salaries have fallen and available consumer credit has been reduced. The savings rate is higher than it used to be as well, which should lower consumer spending even more. But the rules of arithmetic and economics are different in Washington, D.C. than they are in the rest of the universe (the only other known exceptions are in government statistical offices in other world capitals). For some reason American consumers are choosing to view the world as they see it instead of accepting fanciful claims from the Washington con machine. If this continues, even stock traders might eventually catch on.

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Was Window Dressing and M&A Driving Friday's Market?

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 market had a spectacular rally on Friday with the S&P 500 up 2.1% on the day. It was unlikely the August durable goods report was responsible for the market's action, since durable goods fell 1.3%. End of the quarter window dressing from mutual fund managers was a more likely explanation with impending mergers and acquisitions news being another.

Window dressing is when funds buy winning stocks so they can show them on their books after the end of the quarter and imply they owned them all along. This has been a common Wall Street practice for decades. September has been an incredibly strong month for stocks. Although there are four trading days left in the month, so far September 2010 looks like the best September since the 1930s Great Depression. Which year during the depression depends on the index. As of Friday, the S&P 500 was up 9.7% on the month.

The U.S. markets were falling apart during the summer, but the tone changed dramatically after the Fed restarted quantitative easing (money printing). The Europeans have been pumping money at the same time through their Euro-TARP program. All asset classes - stocks, bonds, and commodities - have been rising on the liquidity flood.  Based on market performance, an observer would assume that the U.S. economy has not only turned around, but is zooming and problems in the eurozone have been fixed. Neither is the case. The mainstream press has done its best though to paint a rosy picture. It managed to put a positive spin on Friday's reported drop in August durable goods.

Not only was the S&P 500 up 2.1% on Friday, but the Dow rose 1.8%, the Nasdaq 2.3% and the small cap Russell 2000 was 3.3% higher. These are huge movements for one day. Trading volume was ho hum as usual. Despite press reports, economic news wasn't the cause of this action. Window dressing was likely the major driver, with mergers and acquisitions adding fuel to the fire. Too much cheap money is leading to a boom in this area. If companies don't see potential growth because the economy is weak, easy money lets them buy growth by acquiring another company.  The new combined company then lays off a lot of workers, which raises the unemployment rate and creates bigger economic problems down the line.

The big liquidity surge is well-timed for the U.S. election on November 2nd. The administration and its supporters are likely to be citing the good performance of the stock market as evidence that their programs are working. This has already happened in the past. The 2009 stimulus bill was also timed to have maximum spending in the second quarter of 2010 and not early on when the economy was in horrible shape. A huge 'Recovery Summer' PR campaign was planned as a lead in to the fall election, but lack of evidence of a recovery caused it to fall apart. The Fed then had to restart quantitative easing to paper over (quite literally) the problem and create some good news in the market. The good news should continue until November 2nd. It might even peak that day. We will just have to wait and see.

Disclosure: No positions.

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.

Time Saving Guide to Government Economic Reports

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.


With a major election on November 2nd that will determine the balance of power in the United States for the next two years and possibly for much longer, there is a certain pattern that investors are likely to see in government economic reports during the next several months. In order to save everyone time reading dozens of these reports when they could have a gripping fiction novel in their hands instead, I have summarized them in advance so we can all just get on with our lives.

Economic Reports Before the Election:

The Commerce Department, Labor Department, BEA, BLS [pick one] will announce higher than expected numbers for [insert report name]. Analysts will be surprised, not because the headline number beats their purposely low ball estimate that they had chosen to help make the economy look much better, but because the report contains numbers that are so obviously false and impossible that even a retarded monkey with a drug habit would notice something was amiss. No financial reporter from the mainstream press catches on however. President Obama will cite the report as evidence that his economic programs are suddenly working just in time for the election.  "Finally we're getting a little something, a very little something to be sure, from that $3 trillion in deficit spending" states the president. "Fortunately, I won't be around when we have to pay it back. I'm going to let the next guy figure that one out." Off camera, the president will be heard thanking a lowly-paid government statistician that did a lot of work on the report for a job well done and congratulating him on his recent purchase of a new Lamborghini and a 28-room house.

Economic Reports for Two or Three Months After the Election:

The Commerce Department, Labor Department, BEA, BLS [pick one] will announce that the numbers for the [insert report name] were revised sharply lower for September and October. This information will be found in a footnote on page 8 of the news release. While no mainstream financial reporter will notice, persistent bloggers will want to know how the government could have stated that construction employment tripled, while at the same time housing sales fell to their lowest level since caveman days. Bloggers will also question how the earlier manufacturing numbers could have been so rosy, when so many people were living on the street and eating out of garbage cans. A spokesperson for the department will admit that numbers had been inflated by the assumption that there had been a huge increase in garbage can manufacturing and cushions for sitting on the sidewalk and it turned out that this just wasn't the case. "Who would have thought those people were so poor?  Certainly no one inside the beltway, that's for sure", she will go on to state.

Economic Reports in the Summer of 2011:

The Commerce Department, Labor Department, BEA, BLS [pick one] will announce their annual revision for the [insert report name]. It will turn out the numbers for the summer and fall of 2011 were much worse than even revisions after the election indicated. The evidence that the economy entered a recession before the election becomes pretty overwhelming. Nevertheless, no mainstream financial reporter will write an article on this news because they will all be on vacation. The NBER, the body that determines when recessions begin and end, will still not be convinced though and will wait until 2025 to declare that a recession began in the summer of 2010. President Obama will not initially be available for comment because he will also be on vacation - his 23rd since the beginning of the year - in some banana republic backwater. When confronted with the news on his return, the president will state, "It's obviously George Bush's fault." The American people will react by hoping they get a new garbage can and sidewalk pillow for Christmas.

Disclosure: No positions

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

This posting is satire. There is no intention to endorse the purchase or sale of any security.

More Predictable Changes in Weekly Unemployment 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.


Weekly unemployment claims increased to 465,000 last week rising by 12,000. The number was above analyst expectations, although it shouldn't have been.

Weekly unemployment claims almost always have a significant drop around major holidays and then rise afterwards. This happened right on schedule for the Labor Day weekend. The last major drop was around the July 4th weekend. It was reported today that the four-week moving average is now the best since late July. Somehow, mainstream media reports failed to mention the reason for this was because both periods contained major holidays.  The major reason for the holiday drops is that the bureaucrats responsible for processing the claims and reporting the numbers seem to take longer vacations than anyone else. Nine states were missing data for the week before Labor Day, so the numbers had to be 'estimated'. For some reason, this very important piece of information didn't appear in press reports either.

What the press did report was that weekly unemployment claims were suddenly improving and this was evidence the economy wasn't falling into another recession. This was an amazing analysis considering a claims number under 400,000 would be needed to justify that statement and the best number around Labor Day wasn't even below 450,000. Furthermore even the most casual examination of the claims data shows that claims have been consistently in the 450,000 to 500,000 range all year. So instead of reporting "Not Much Changes in Employment Picture" or "Weekly Claims Improve As Usual Because of Holiday", the press fell all over itself to report a big improvement in the U.S. employment picture. The only thing they left out was cheerleaders in the background and audio that intermittently said 'rah, rah, rah'. Stocks rallied strongly on the surprising news that seemed to indicate a strengthening economy.

Maybe the mainstream media had already pre-written their articles about the 'recovery summer' that the administration had promised and didn't want to waste good copy. As for the recovery summer, there was essentially no change in weekly unemployment claims, or in the overall unemployment rate. Claims are somewhat better now though than they were a year ago when they came in at 538,000. It took around $1.5 trillion of on-the-books deficit spending to achieve the improvement to 465,000. Apparently a trillion dollars of borrowed money just doesn't go as far as it used to.

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

The Fed's Minimum Price Stability, Maximum Unemployment Policy

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 Fed says it's worried about deflation and high unemployment. So in order to tackle these two problems it's going to do more of the same things that lead to them.

In its post meeting statement yesterday, the FOMC said that inflation is 'somewhat below' levels consistent with its congressional mandate for stable prices.  Since the official inflation rate is positive, this indicates that under no circumstance should prices actually remain stable in the U.S. It also means that prices have to increase by more than the amount they are rising now. This of course leads to long-term dollar devaluation and indeed the dollar has lost 96% of its value since the Fed has been in business. They obviously can't wait to lop off the remaining 4%. Having a worthless currency is obviously a good thing as far as the Fed is concerned (you might disagree when you have to pay $5,000 for a loaf of bread). Inflation-sensitive gold hit its fifth record high in as many days on the news and was pushing $1300 an ounce this morning.

It order to tackle the non-existent deflation problem, the Fed intimated that more quantitative easing - also known as money printing - is on the way. There is no case in financial history when excess money printing hasn't eventually led to higher consumer inflation and it has frequently led to hyperinflation. The Fed has already done a lot of 'printing' and the ever increasing price of gold is showing the dollar losing value right in front of our eyes. However, the see no inflation, hear no inflation, and speak no inflation Fed ignores the gold market. Instead they are looking at ever dropping interest rates - the two-year treasury hit another record low after the meeting. Falling interest rates are being caused by all the new money they are manufacturing because bonds are being bought with some of it and this drives their price up and rates down. Using some form of inverted, twisted thinking, they view a market reaction caused by excess money printing as a sign of deflation.

The Fed first lowered its Funds rate to zero in 2008. With help from the U.S. treasury, they have engaged in an expansionary money creating policy since then as well. Unemployment is now much higher than when they started these moves and is stuck around the 10% range if you believe the official numbers (if not, it's much higher). After the worst recession since the 1930s, the economy is stuck in neutral, if you believe the official numbers (if not, we have already entered another recession). So the Fed's solution is to ratchet up the same policies that have failed over and over again and they claim somehow they will work now. It is far more likely the Fed's actions will nstead lead to minimum price stability and maximum unemployment.

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Is the Bond Market Setting Up for Another Credit Crisis?

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.


Spreads on high yield bonds and U.S. treasuries are narrowing. Junk bond issuance is at an all-time high because excess liquidity is lowering risk aversion. Who is buying all the bonds is not particularly clear however. But don't worry, just as they did before the last Credit Crisis, the economic elite is telling us there is nothing to worry about this time either.

When there is too much money sloshing around the global financial system, the distortion shows up clearly in the bond market because it's an insider's game. The average investor isn't exactly trading credit default swaps in his or her 401K. According to a recent Wall Street Journal report, less than $29 billion has gone into high yield bond funds in the last 20 months. Yet Dealogic data indicates that $172 billion of junk bonds have been issued in just 2010 alone. Spreads over 10-year treasuries are now around 6%, but have been somewhat lower during the summer. In 2007, spreads fell to around 2% and this indicated all common sense had abandoned the bond market. The inevitable collapse followed and at the height of the Credit Crisis, junk/treasury spreads were over 20%.

One of the major determinants of yields on junk bonds is the danger of default. The economy is in much worse shape now than it was in 2007, even though we were just told yesterday by the NBER that the recession ended 15 months ago (boy, that sure is a timely announcement). So we should not get as low as a 2% spread between junk and U.S. treasuries like we did last time. Less risk of failure because of government bailouts should not be assumed either. Few issuers of junk bonds would be considered too-big-to-fail and the government blank check for bailouts is either over or it soon will be.

There is also the mystery of why as more and more bonds are being issued, less and less trading activity is taking place. Bloomberg economist Michael McDonough recently reported U.S. treasury trading is down and so is junk bond trading. Trading in stocks on the NYSE is also down as the market has risen. So how can prices be going up when there is a greater supply of bonds, but apparently less demand?  This is not really possible, so there has to be missing information. Now who would have access to vast sums of money and the ability to hide their activities in the market?

A narrow spread between junk and treasuries is something to keep an eye on and to worry about. It is a good indicator of whether or not central banks have injected so much liquidity into the financial system that they have risked another credit crisis. It is not possible to say where the exact point is where the spread is too low, although it is now definitely somewhere well above 2%. If we haven't reached it yet, we are getting close.

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Is Too Much Liquidity Creating New Investment Bubbles?

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.


Near month silver futures closed at a 30-year high on Friday and December gold futures hit another all-time high. Traders are looking for a breakout on the S&P 500 today as stocks have continued to rally throughout September. Liquidity is the driving force behind the market's move and it is unlikely the Fed will saying anything in this week's meeting that will indicate a reduction in its current massive pumping operation.

Unfortunately, it's not just the Fed that has the money spigot open full-force; the operation is global in nature. This evidence of this is that a number of government bonds of various maturities hit all-time high prices this summer. In a free market, this would normally be interpreted as an indication of an extreme economic weakness and deflation. While there is indeed significant evidence of slowing economies in a number of countries, particularly in the United States, purchases of government bonds can be influenced by central banks and treasury departments and can even be done by them as well. This can create significant distortions in the market. What is going on is that a lot of the excess liquidity is being used to buy bonds that then pay for day to day government operations.

Inflation sensitive gold is a much better arbiter of whether or not there is inflation or deflation. The gold market is not completely free of attempts at government influence of course, although there is far less of it than in the government bond markets. Gold is not only saying there is inflation, but that inflation is escalating. The U.S. Federal Reserve says otherwise. Of course, Fed officials also said that sub-prime loans wouldn't cause any serious problems in the financial markets. Yeah, you can really trust what the Fed says.

Outside the U.S, the European Financial Stability Facility, also known as Euro-TARP, is adding significantly  to financial market liquidity. The facility is currently valued at 440 billion euros. All three major rating agencies just gave it a triple A credit rating. Yes, these are the same rating agencies that gave securitized sub-prime loans triple A credit ratings. Certainly there was no reason to think that loans to people without jobs, without income, without assets and histories of defaulting on their debts were unlikely to be paid back. The same level of intelligence and insight was probably applied to the recent Euro-TARP rating.

The cause of the global real estate bubble was too much liquidity. We all know the ugly collapse that followed. Government officials have tried to reinflate the bubble, but reinflating a just collapsed bubble is not possible. This became quite apparent this summer when housing sales in the United States fell off a cliff. Creating new bubbles in bonds, commodities and stocks is possible however. Excess liquidity could cause all three. The collapse that would follow would be much worse that the recent Credit Crisis. Why are central bankers taking this risk?  Quite frankly, it's because they are just not as smart as the people who work for the rating agencies.

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Will Stocks Continue to Rally After Quadruple Witch?

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.


Today is one of four days during the year when index futures, index options, stock options and stock futures all expire. The market has rallied throughout September into the quadruple witch, but will it continue to do so?

As has been the case with every rally since the bottom in 2009, volume this September has been below average on the Dow Industrials. Low volume is an indicator of lack of enthusiasm for a trend and indicates the trend is likely to reverse soon. Nevertheless, stocks have managed to defy the lack of buying support and hold up for almost a year and a half now. This is theoretically impossible in a free market. It is very possible in a manipulated market however where one or a few large players control the game. In such circumstances, some tip sheet on Federal Reserve liquidity pumping would be the best guide to be used for trading stocks.

The mainstream media has been giving the rally as much support as possible as well. Weekly unemployment claims which invariably fall around holiday weeks, not surprisingly went down the week before and after Labor Day. Instead of reporting this as business as usual, the cheerleading media claimed it was new evidence of an improving economy. Retail sales supposedly had a minor jump in August, although the report was not credible. The smoking gun was the auto component which barely declined over August 2009 when Cash for Clunkers was giving auto sales a huge boost. Independent industry sources showed a huge drop in sales year over year, but somehow government statisticians know nothing about it. Both reports were replete with missing data, so some component numbers were merely wishful thinking estimates. The mainstream media didn't manage to report this key information. A consumer confidence survey today indicated confidence dropped to its lowest level since August 2009. The cause for the drop was consumers getting really gloomy about the future prospects for the economy. Apparently they are increasingly tuning out the information they are getting from the government/media complex and believing what they see with their own eyes instead.

So even though the economy is continuing to deteriorate, government statisticians are doing their best to hide this from the public. The mainstream media is doing its best to help them out by not questioning any number they produce no matter how unreliable or unbelievable it is. The Fed and other central banks and treasuries (think the one trillion dollar euro-TARP program) are doing their best to keep the world financial system afloat in a sea of liquidity. The most obvious evidence for this is a range of assets - stocks, bonds, and commodities - are all rising at once. This happens if there is more money in the system, otherwise traders would need to sell one asset in order to get funds to buy another. When they can bid up every asset, there has to be more available money and less risk aversion, which makes no sense given all the problems that currently exist.

Given the current environment, stocks can certainly continue to go up. Investors should assume the Fed will do everything possible until at least the election on November 2nd to make the market look good. There is no free lunch however. While liquidity driven markets can go higher and last longer than anyone thinks possible, they can also drop faster and much further than anyone would imagine. And this can take place suddenly. Constantly keeping the liquidity trough full also risks massive and sudden inflation. Don't expect to hear about this from the mainstream media though because they will be too busy telling you not to worry because everyone knows that liquidity fattened pigs can fly - or at least that's what the latest government report said.

Disclosure: No positions

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Gold Hits Another High as Producer Prices Rise

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. producer prices were up 0.4% in August after rising 0.2% in July. The core rate, which excludes the items where most inflation occurs, was up only slightly. Inflation sensitive gold hit a new high on the news.

The main driver of the increase in the August PPI was energy costs. Gasoline rose 7.5% and even home heating oil was up 7.0% during the month. Both have had some price reversal since then. Food prices supposedly dropped 0.3% because of lower vegetable costs. I personally haven't noticed this, but then again I don't get to shop in the Fantasy Land supermarket like most government statisticians.

The inflation linked precious metals were both higher on the news. Spot gold rose to $1278.30 in morning trade and silver reached $20.78. Gold is likely to have another gain in 2010 and if it does, that would make it ten consecutive years of price rises for the yellow metal. Gold and silver are seasonally strong between August and March. 

The price of gold is strongly linked to the loss of value in paper currencies. While many economists refuse to admit it, this is the definition of inflation. Gold has continually risen during the last decade (in dollar terms) as the U.S. government has consistently reported low and then ultra-low inflation rates. Either gold or the government is mistaken about inflation. Gold has a 5,000 year record of accuracy. How many governments have been around that long?

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Are Gold and Silver Breaking Out?

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 hit an all-time high yesterday. Silver is trying to challenge its high from March 2008. Both are inflation indicators and new highs indicate paper money is losing its value.

Spot gold came within a whisker of $1275 an ounce yesterday and was up 2% at its high. Spot silver traded around $20.54 at its peak and has so far been a bit higher today. Unlike the U.S. stock indices, both gold and silver are in secular (long-term) and cyclical (short-term) bull markets. Their recent rise was based on reports that the Federal Reserve would likely engage in more quantitative easing. The trade-weighted dollar (ETF: DXY) dropped significantly on the news and fell below its 200-day simple moving average. The dollar has been in a secular bear market for many years and usually moves in the opposite direction of the precious metals.

The technical indicators for gold (ETF: GLD) are somewhat overbought and look like they are losing strength. Silver (ETF: SLV), is more clearly overbought than gold, but the technicals look better overall. In strong bull markets, rallies can continue on weakening technicals however. News, as is always the case, can override all other considerations - although it will have to be news about liquidity and central bank money pumping and money printing.

As I have stated many times, there is already a lot of liquidity flowing into U.S. stocks and other investment markets in the last few months. Prices for almost all assets are rising because of this. Stocks continually went up on bad economic news during the summer and while some incorrectly interpret this to mean that the market is forecasting a better economy, this is wishful thinking. Look inside a number of economic reports and you will notice that rising prices are an important reason they don't look worse. The mainstream media does not report this however because the Federal Reserve keeps telling them that 'there is no inflation'. Apparently though, the Fed forgot to inform the gold and silver markets. Perhaps they should get a memo out right away and put 'rush delivery' on it.

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

August Retail Sales: Debunking Mainstream Media Coverage

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 August retail sales numbers were out this morning and media reports stated they were up 0.4%. Stock futures immediately rose because this was ahead of a 0.3% expected gain - or was it?  Buried in the middle of the government's press release was this statement, "The Census Bureau [the issuer of the report] does not have sufficient statistical evidence to conclude that the actual change is different than zero."

September 14th is primary election day in a number of U.S. states. It is amazing that political polls are reported more accurately by the press than government economic numbers. Like all political polls, most of the economic numbers are derived from surveys. All surveys have sampling bias, as well as other biases, that introduce errors. It is standard procedure for the U.S. media to report the sampling bias (such as plus or minus 3.4%) when reporting on any political poll. The mainstream media almost never does this with government economic reports even though their sampling error rates can be far more significant. While the mainstream media will report a political race as too close to call because of the margin of error in the polls, it will almost never say that that the numbers from a government report are meaningless gibberish because of statistical error.

The more accurate reporting of August 2010 retail sales is +0.4% (plus or minus 0.5%), so the number could actually have been minus 0.1% and the headline could have stated, 'No Conclusive Evidence Retail Sales Grew in August'. This is just the error from statistical sampling however. Unlike political polls, government economic reports have other serious problems. Incomplete data is one of them. As I mentioned in a previous article, the weekly unemployment claims for the first week of September was missing data from 9 out of 50 states, so the numbers for those 9 states were simply made up (and when the government makes up numbers for some reason it seems to err on the side that makes things look better).  Is there any missing data in today's August retail sales report?  The following items were not available:

Appl., TV and cameras
Computer and software stores
Building mat. and supply dealers
Beer, wine and liquor stores
Pharmacies and drug stores
Men's clothing stores
Women's clothing stores
Shoe stores
Department stores (incl. L.D.)
Other general merchandise stores
Warehouse clubs and supercenters
Electronic shopping and mail order houses
GAFO (firms that specialize in department store type merchandise)

The lack of data should be a reason to lack confidence in the final number in this report. Lack of consistency with other reported data is an even bigger concern. According to today's retail sales release, auto sales and parts were only 1.5% lower in August 2010 than they were in August 2009. Industry source Autodata found that the drop in auto sales between these dates was 21%. This problem could be reconciled if the government reported the change in auto sales as -1.5% (plus or minus 100%). It would also be a good idea if the government used the plus or minus 100% for all of its numbers. That would give the public a clear indication of how accurate they are, although it is highly unlikely the mainstream media would report it.
The government's press release on August retail sales can be found at: http://www.census.gov/retail/marts/www/marts_current.html

Disclosure: No positions.

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.

Weekly Claims and Trade Deficit Not as Good as Reported

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.


Stocks reacted enthusiastically to the weekly unemployment claims for the week ending September 3rd and to the improvement in the U.S. trade deficit during July. As usual, the mainstream media hyped up the headline number, but 'forgot' to report some important details.

Weekly claims falling the week before or during a major holiday is a hardly unusual and has nothing to do with an improving employment picture. The 451,000 number reported for the week before Labor Day was the lowest number since the week that contained the July 4th holiday. The problem is not that unemployment offices are closed, but the bureaucrats that tabulate the statistics can't work faster to produce the numbers in a timely fashion. In this report, apparently 9 states didn't have their numbers ready, so two of them estimated their numbers and the BLS estimated the numbers for the other seven. This information doesn't appear to have been included in the intitial press release from the BLS. Some bloggers caught on to it though and Bank of America sent out a note later about what had happened.  Stocks in both the U.S. and overseas rallied on the BLS release showing an improving jobs situation based on incomplete data.

The market was also excited about the trade deficit decreasing in July. While no trade deficit is definitely a good thing (something that hasn't occurred in the U.S. since the 1970s), this is not necessarily true for a lower trade deficit. If the trade deficit is decreasing because of surging exports, that is indeed a positive. If it is decreasing because of a big decline in imports, this can indicate business and consumers are spending less because of poor economic conditions. Falling imports accounted for most of the July decrease. Of the increase in exports, capital goods accounted for 82%. This is surprising considering the July durable goods report showed a significant decline in production of capital goods in the U.S. If exports are surging for capital goods, why is production falling?  There seems to be some contradiction here.

The stock market shouldn't have been happy with either of these government reports. Without the positive spin the mainstream media gave them, it probably wouldn't have been. The truth is that weekly unemployment claims have been continually at recession levels for over two years now and there is no evidence yet of their improvement (even a one week drop below the 400,000 recession level, quite possible before the election on November 2nd, wouldn't mean employment is on an upswing). As for the trade deficit, it was cut in half during the Credit Crisis because the economy was collapsing. An improving trade deficit can actually be sending a negative message. Investors need to know the details and the historical context of any given economic report before they can react appropriately to it. Lots of luck in getting that from the mainstream media.


Disclosure: No positions.

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.

August Beige Book Admits Economy Heading Down

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 Fed just released its Beige Book summarizing U.S. economic conditions up to the end of August and the takeaway was "widespread signs of a deceleration compared with preceding periods". In general though the report was a mastery of double-speak and attempted obfuscation.

The Beige Book is a compilation of anecdotal reports on various sectors of the economy from the Fed's twelve regional districts (Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco). The Fed uses it as an additional source of information when determining economic policy. If they trust the numbers produced by the U.S. government statistical agencies, it's not clear however why it's necessary to produce this monthly study.

The Beige Book for August seemed particularly strained in its attempt to put some rosy spin on its findings. This was most evident in the section on Consumer Spending and Tourism. The opening sentence was positive and gave the picture of a slow growth economy (the story the Fed is trying to sell to the voting public):

"Reports on consumer spending were mixed but suggested a slight increase on balance. Most Districts reported that non-automotive retail sales rose compared with the previous reporting period or were above their levels from 12 months earlier."

The details that followed however indicated that consumers throughout the country were acting as they do during a recession:

"Atlanta reported a decline in the level of sales, and Richmond noted that sales "sputtered" in August, while New York and Dallas reported that growth in retail sales slowed. Several Districts noted an emphasis on necessities and lower-priced goods. Boston reported that back-to-school purchases were focused on immediate needs; in Cleveland, consumers focused on "value-priced seasonal items;" and in St. Louis, Kansas City, and San Francisco, sales were relatively stronger for lower-priced items."

Interestingly, the report goes on with a positive view of auto sales, even though they fell by 21% year over year in August and 5% on a monthly basis according to industry source Autodata:

"Most Districts also reported that sales of new automobiles and light trucks were largely stable or up slightly during the reporting period."

The Beige Book's authors would have provided a more accurate description of the state of the U.S. economy in August 2010 if they simply stated the following:

"Consumer spending was reported to be slow in most Districts, with purchasing concentrated on necessary items and retrenchment in discretionary spending. Districts reporting on auto sales described them as falling or steady at low levels."

This would have made their work much easier as well, since this is a statement from the Beige Book for August 2008.  That report was issued just before the U.S. economy fell off a cliff.

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Traders Should Watch the Gap

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.


Anyone who rides a commuter rail in the United States is probably used to hearing a message to 'watch the gap'. The advice also holds for stock trading.

A gap is a price level on a chart where no trading took place from one time unit to the next time unit. This happens on daily charts when the opening price is above or below the previous closing price and the market continues to trade in the direction of the gap. Gaps in the stock market on the daily charts invariably show up on Nasdaq because all stocks open at a price determined by market conditions. Specialists try to balance the buys and sells on the NYSE and this can delay the opening of stocks there and smooth out the price. Since most Dow Industrial stocks trade on the NYSE and its stocks frequently open gradually over several minutes, gaps on the opening are rarely seen on the Dow. This also mutes the gaps on the S&P 500, which contains a significant number of NYSE stocks.

Markets move to fill gaps, or in other words trade at the price points that were missed when the gap was created. Most of the time, this happens anywhere from the next day to a few weeks later. It sometimes takes months or even years however to fill a gap. Short-term traders should be aware of all the gaps within the last few weeks on the indices, stocks, and even the ETFs they trade (even commodity ETFs fill their gaps on the U.S. charts even though these gaps are artificial because trading took place at the appropriate price points overnight). Traders with a longer term view should keep in mind gaps from the last couple of years that have remained unfilled.

Trading of U.S. stocks in the last six weeks can be viewed as an attempt to fill gaps. Nasdaq gapped up on August 1st and that gap was filled on August 6th. Nasdaq gapped down on August 12th and that gap still remains unfilled. Nasdaq gapped down again on August 24th and that gap was finally filled when Nasdaq gapped up on September 1st. The September 1st move however created a new gap. Nasdaq gapped up again on Friday, September 3rd and attempted to fill that gap in yesterday's trading, but didn't quite fall low enough to succeed. So Nasdaq has unfilled gaps both above and below where it is currently trading.

A market that gaps up and a down a lot is usually directionless, volatile, potentially unstable, and possibly manipulated. It can be a boon to short-term traders. It is not something however that a position trader or long-term investor should find attractive. Those with a longer view may wish to consider that Nasdaq has a large gap around 1800 that occurred in July 2009 and still remains unfilled.

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Stock Rally in Beginning of Month Ignored Economic Reality

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. stocks had an impressive rally the first four days of the month and this is generally a bullish indicator.  The rally took place with a backdrop of really ugly economic news however and that is not bullish. Weakness has a way of coming back to haunt the market as European bank news is demonstrating today.

U.S. economic reports for the last few months have been generally bad to awful. Nothing changed last week. While the ISM manufacturing index went up, this supposedly occurred because of a big increase in manufacturing jobs (the inflation component of the report was the actually the biggest gain, but the mainstream media somehow didn't report this negative news). This gain was not corroborated by the government's August employment report, which showed a drop in manufacturing jobs, nor by anecdotal evidence or anything else taking place on the planet earth. The stock market of course rallied strongly on the news.

The ISM non-manufacturing index, which measures the almost four times bigger service sector, didn't get nearly as much media coverage. It barely remained in positive territory. The inflation component, also the highest number in this report, was chiefly responsible for the number not going negative and indicating contraction.  Two components of the report were clearly in contraction however - exports and employment. The service sector losing jobs is a big negative for the overall U.S. economy.

Also lost in the stock buying frenzy was August car sales. They were down 21% year over year. This followed the 27% monthly drop in existing home sales in July and the 33% drop in new home sales in May. Last August was the peak of the Cash for Clunkers program. The numbers for car sales and home sales both demonstrate what happens when government incentives are no longer available in a market. While new homes sales fell to the lowest level ever recorded, August car sales were only at a 28-year low. For those who don't recall, 1982 was when the previous double-dip recession took place.

Government stimulus programs didn't fix the housing and car markets, but merely made them look better. This works for a while, but reality eventually rears its ugly head. A report from Europe today said that "the continent's major banks have more potentially risky government debt on their books than was disclosed during stress tests earlier this year." This wasn't exactly a piece of information that required the skills of Sherlock Holmes to uncover. At the time of their release, the stress tests were roundly criticized as being a phony PR gambit that set the bar so low that any bank not declaring insolvency in the next week would pass. Stocks of course went up on the news back then and today they are going back down.

Economic reality will eventually be reflected in the stock market. As I have said many times however, it's not the economy that drives the stock market in the short term, but liquidity. The Fed obviously kept pushing the 'flood the financial system with liquidity' button in early September. What happens when they stop doing this? See the homes sales and car sales numbers for a hint of how stimulus withdrawal impacts a market.

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

BLS Press Release MisReports August Jobs Data

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.


According to the August jobs report, the U.S. lost another 54,000 jobs last month and the unemployment rate rose to 9.6%. The government claimed that the private sector added 67,000 jobs, although most of these jobs came from the Health Care and Social Assistance category and from Education, both of which are filled with jobs supported by the government. The numbers in the BLS (Bureau of Labor Statistics) press release did not agree with the Data Tables and of course made things look better than they actually were.
      
The data in the non-farm payrolls report indicated that there were 40,200 jobs created in the Health Care and Social Assistance category (the mainstream media almost always leaves off the Social Assistance part, perhaps because these are so obviously government and not private sector jobs). Interestingly the BLS (Bureau of Labor Statistics) press release only admitted to 28,000 jobs and this incorrect number was picked up in every mainstream media article. The BLS press release, which can be found at: http://www.bls.gov/news.release/pdf/empsit.pdf, stated "Employment in health care increased by 28,000 in August, with the largest gains occurring in ambulatory health care services (+17,000) and hospitals (+9,000)".  The Establishment Data Seasonally Adjusted (Table B in the report), which can be found at: http://www.bls.gov/news.release/empsit.b.htm, stated that the number of jobs in Health Care and Social Assistance increased by 40,200.

The Goods Producing Sector, which actually does include mostly private sector jobs (nationalized companies like General Motors being the exception), was dead in the water in August. The total number of jobs added was ZERO. Goods producing industries include Manufacturing, Mining and Logging, and Construction. Manufacturing lost 27,000 jobs and this contradicts the rosy picture painted by the ISM manufacturing report from two days ago that indicated U.S. manufacturing employment was skyrocketing. Construction kept the Goods Producing Sector from being negative by adding 19,000 jobs. This occurred even though new home sales recently fell to the lowest number ever recorded. Perhaps these workers are busy building castles (or more appropriately, McMansions) in the sky, so of course their work isn't immediately visible to ordinary mortals such as ourselves.

There is no evidence in the August payroll numbers of any significant non-government related hiring taking place. The first job loss number was reported three years ago in August 2007 and after over $3 trillion in deficit spending since then, the U.S. employment situation has managed to only reach a state of controlled bleeding. There were an estimated 6.6 million students graduating from school this year and eventually most of them will need a job. That implies the U.S. needs 550,000 new jobs a month to absorb former students into the labor force. People are of course always leaving the labor force as well because of retirement and for other reasons such as giving up looking for a job because none are available. It has been generally accepted for a long time that the U.S. must add at least 200,000 jobs a month to just accommodate new people looking for work.  Even after getting to that level, and we are still losing jobs not gaining them, there is then an additional 8 million jobs that have to be created to replace those lost during the Credit Crisis. So far, it's just not happening.

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Sorting Out Contradictory Jobs Information

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.


Four jobs related reports were released in the first two days of September and they seem to indicate a contradictory view of the U.S. employment situation.

The weekly unemployment claims number was 472,000 for the last week of August, almost exactly the same as the 470,000 figure for the first week of January. Payroll processing firm ADP predicted yesterday that the U.S. private sector lost jobs in August because of a big employment drop in the 'goods producing sector'. At almost the same time, the ISM manufacturing index was released and indicated substantial hiring took place in U.S. manufacturing companies in August. Adding more confusion to the mix, outplacement firm Challenger, Grey, and Christmas said there was a sharp drop in planned layoffs in August.

The rule of thumb for recession is a weekly claims level over 400,000. This has existed continuously in the data for over two years now. Eight months into 2010, the only difference from the beginning of the year is that the four-week moving average is now 20,000 higher at 485,500. At no point during the 'recovery' did weekly claims fall to a level indicating the Great Recession actually ended. Weekly claims however should automatically fall during a protracted recession because big companies can only cut so many jobs until they get to a bare bones staff. This doesn't mean the economy is getting better, it means there is no one left to lay off. The Challenger, Grey and Christmas report on planned layoffs supports this view. Weekly claims will remain high under such circumstances if a lot of companies are going out of business because of ongoing recessionary conditions.

While there is no inconsistency with the weekly claims and the Challenger, Grey and Christmas data, the ADP and ISM employment data directly contradict each other. ADP's numbers are based on payroll processing while ISM's numbers are based on a survey of purchasing managers (the government's employment report is also based on surveys). The ADP report stated there was a significant drop in manufacturing hiring in August and the ISM report claimed there was a significant gain. The ISM report also showed a decline in the new orders component (Why would there be a substantial increase in hiring when there is less work to do?). Perhaps we will get some clarification in the government's August employment report tomorrow. 

There will be no sustainable economic recovery until private sector hiring picks up. This hasn't happened yet. While the mainstream media has reported otherwise, government numbers on private sector hiring include education jobs (almost all of which are government) and health care jobs (many of which are paid for indirectly by government programs). The private sector temporary jobs category in the employment report also has a footnote stating jobs from other categories are included. Could those other categories be government jobs? Looks like it, since once the Census stopped hiring, new temporary employment seems to have dried up. At the moment, it looks like any real recovery in private sector employment is a long way off.

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Inflation Makes Economy Look Better; Stocks Soar on the News

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.


Despite a number of economic reports at the beginning of the month indicating continued problems, stocks rallied strongly on September 1st. The Nikkei was up over 1% and the major European markets were up between 1% and 2%. The U.S. markets were up over 2% in morning trade.

U.S. stock futures were up strongly in the pre-market and not even an incredibly weak ADP employment report indicating a loss of private sector jobs in August could derail the rally. In a rare moment of candor, even news service coverage found the rally odd. One article stated, "The sharp jump in U.S. stock futures is surprising given the domestic economic reports due out later in the morning. Often investors don't make big bets ... heading into key economic reports, particularly in recent weeks as data has consistently showed growth is slowing." And this was before the ADP report indicated that job losses in the U.S. are accelerating again after three challenging years and despite trillions of dollars of government stimulus spending.

What supposedly started the global stock rise was 'good' news on China's manufacturing index (PMI). The official government number was 51.7 in August versus 51.2 in July. While that may seem OK, albeit rather mediocre, the details indicate big trouble on the horizon. One component of the report was disproportionately responsible for the index not falling below 50 and indicating contraction. That component was the Input Price Index, which rose from 50.4 in July to 60.5 in August. Isn't that an inflation indicator? Doesn't that mean that input prices went up around 20% in only one month? Couldn't this possibly indicate that China is on the verge of experiencing major inflation and this is masking a big drop in manufacturing activity there? Then the U.S. PMI was released at 10:30AM and it unexpectedly rose.  Of all its components, the highest number was Prices, also an inflation indicator.

In the U.S., the market was also pleased that home prices were rising.  This news however was more laughable than ominous. According to Case-Shiller, U.S. houses prices in select cities were up 4.4% in the second quarter. The entire time period included the $8,000 home-buyer tax credit. According to other sources, an increase of $8,000 in the median average U.S. home price would be about 4.4%. So what happened was the government gave homebuyers $8,000 and they then spent an average of $8,000 more to buy the same home they would have without the tax credit. This obviously didn't make real estate any more affordable, all it did was create the illusion that this was the case. It wasn't just naive and gullible homebuyers that fell for this scam either. One prominent mainstream economist commented on the data, "Even with concerns about near term developments, we recognize that the housing market is in better shape than this time last year." Home sellers of course got an extra $8,000 courtesy of the U.S. taxpayer (if you check your bank account and notice $8,000 missing, this is where the money went).

So how is it possible that stocks are having a massive rally on the above news items?  The state of the economy is not the short-term reason stocks rally or sell off. Stocks rally on liquidity. And it is obvious that central banks are injecting huge amounts of liquidity into the global financial system at the moment. The liquidity free lunch doesn't last for a long time however. It has to be paid for periodically with withdrawals of liquidity to prevent a huge inflation spike. This causes lots of volatility with stocks experiencing big price rises followed by sharp drops. We saw a lot of this in the second half of 2008 when the market went up and down like a yo-yo on crack cocaine. While this resulted in an eventual market collapse two-years ago, this is not likely to deter the Fed from continuing to play the same dangerous game again until the November 2nd election. Investors should brace themselves for a rocky market during the next two months.


Disclosure: No positions.

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.