Did Gold Peak on Octobler 18th?

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 as measured by the ETF GLD fell 3.2% in New York trading on Tuesday. Its chart looks very similar to December 2009 when it experienced an intermediate peak.

Early last December, gold had been rallying for three months. Sentiment was extremely bullish. GLD (and SGOL and IAU, the other ETFs which hold physical gold) was well above its simple 50-day moving average. The technical indicator RSI had become extremely overbought on the daily charts in late November, rising above 80. After a slight dip below 80, the RSI then rose to a merely overbought 80 as the price of gold hit a higher high. This negative divergence signaled the gold rally was done for the next few months. Gold then gapped down and had a sharp drop with the RSI quickly fallingl toward a neutral 50. 

More recently, gold has been rallying since late July. Sentiment has been extremely bullish for quite awhile. Gold has been trading well above its simple 50-day moving average. Gold became overbought by the last week of September and entered extremely overbought territory on the daily charts at the end of the month with the RSI rising above 80. By early October, the RSI was even higher. Then there was a quick dip below 80 and the RSI rose and hit 80 while the price of gold hitting new highs. The negative divergence once again signaled trouble. On Tuesday, gold gapped down and had a sharp drop. The RSI had even a bigger drop falling toward 50. The pattern is almost identical to December's, although gold was a bit more overbought and overbought for a longer period this time around. 

If gold follows last December's pattern, it will fall toward its simple 200-day moving average. For longer term holders, this is not a significant move. Shorter term position traders should be more concerned. Regardless of your investing time frame, this doesn't look like a good time to add to positions. In long-term bull markets, and gold has been in a long-term bull market since 2001, investors should add to positions when the price of an asset is around its 200-day moving average.  

Disclosure: No positions.

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

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

Foreclosure-Gate Scandal Widens

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.


After the Obama administration has failed to take action in the foreclosure crisis, up to forty state's attorney generals are now planning to launch a joint investigation into a massive number of robo-perjuries committed by big U.S. banks. So far, partially government owned GMAC, J.P. Morgan Chase, Bank of America, and Litton Loan Servicing, a division of Goldman Sachs, have been implicated in 150 pre-trial depositions in a Florida court case. In these depositions, bank employees admitted to having provided sworn court testimony about documents they didn't read and wouldn't have understood even if they had read them.

The Florida case involves 3,000 homeowners facing foreclosure. The "foreclosure experts" who signed notarized court documents that were key elements of perhaps hundreds of thousands of foreclosures had formerly been hair stylists, factory workers, and Walmart floor workers. They were provided with no formal training. It seems that many of these "foreclosure experts" knew little about mortgages. Some of them couldn't even define the most basic terms related to their job. One exasperated robo-signer stated, "I don't know the ins and outs of the loan, I just sign documents". The signing being discussed involved notarized documents subject to the perjury statutes and something that most courts in the United States would blindly accept because it was provided by a major financial company. Apparently, some institutions don't feel they need to follow the law and the courts let them get away with it.

There is more than enough reasons to think that the same corrupt practices are taking place in consumer credit card cases throughout the United States.

Up to now, the Obama administration has opposed a national halt to foreclosures even though the epicenter of the scandal seems to be partially government owned GMAC. Federal officials claim that a moratorium would hurt the housing market and using incredibly twisted logic have stated that it would distract lenders from 'helping' borrowers that face foreclosure. The program they are alluding to, HAMP (Home Affordable Mortgage Program), is generally acknowledged to have been a significant failure. It is beyond amazing that something which could turn out to be the biggest organized fraud in the history of the United States doesn't seem to bother Obama and his people. Apparently, the federal government is one of those institutions that doesn't think that it needs to pay attention to the law either.

Other than the obvious political implications, the recent revelations could mean a lot of lawsuits are launched at every level of the home loan process. The holders of bonds consisting of securitized home loans could potentially be at risk with the value of these loans plummeting once again as happened during the Credit Crisis. It will probably be much harder to do another bailout this time around however.

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.

New Foreclosure Crisis Has Much Broader Implications

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 international economist Hernando De Soto, one of the key differences between an undeveloped economy and a developed one is clarity of ownership of real estate. The recently emerging foreclosure crisis in the United States indicates a movement toward the the third world model.

There is still a large overhang of U.S. properties with severe mortgage delinquencies and this problem is likely to continue for several more years. As early as three years ago however, problems with implementing the foreclosure process became evident. During the housing bubble, banks became sloppy and didn't properly transfer ownership papers when loans were securitized into bonds. The current owners of those bonds frequently can't produce the appropriate documents in foreclosures cases in the 23 states that require court action for a foreclosure. This led to the 'show me the note' movement after a federal judge ruled in 2007 that Deutsche Bank lacked standing in 14 foreclosure cases because it could not produce the relevant documents. A number of similar judicial rulings followed.

The banks have gotten around this problem by producing notarized affidavits from 'expert' witnesses who claim they have thoroughly reviewed a packet of documents related to an individual foreclosure and that they are valid and complete. One such 'expert' was Jeffrey Stephan, who has admitted under oath to having signed off on the documents for 10,000 foreclosure cases per month for the last five years. Mr. Stephan not only did this for GMAC (its parent Ally Financial is 56% owned by the U.S. government), but also for J.P. Morgan Chase and numerous other banks. This process is now being called robo-signing. It should be referred to as robo-perjury. While I am not a lawyer, it would seem to me that a number of other possible crimes might also be involved here as well, such as racketeering and criminal conspiracy Whatever criminal activity took place, a majority government owned enterprise participated in it. 

Readers should ask themselves if there is any reason to think that the big banks are acting any differently in their other consumer credit cases, such as defaults on credit cards.

The revelations from GMAC loan officer Stephan have caused a foreclosure moratorium to be put into effect by a number of lenders. The lenders were apparently shocked to find out that one person couldn't actually read and thoroughly review 10,000 legally dense document packets per month. Apparently none of the 'brilliant' members of the U.S. judiciary caught on either. Yes, it would certainly have taken a legal genius of Clarence Darrow's caliber to figure out that something that was impossible just couldn't happen. GMAC was the first to stop foreclosures in the 23 judicial states (those that require court cases for foreclosure). J.P. Morgan Chase followed. On October 8th, Bank of America suspended foreclosure activity in all 50 states.

Interestingly, the current administration is opposed to a foreclosure freeze. According to the Center for Responsive Politics, employees of J.P. Morgan Chase, Citigroup and Goldman Sachs were three of the largest sources of funds for Obama's 2008 presidential bid. Only a cynic would think that this would have something to do with his administration's pro-bank view in the foreclosure crisis. Some might even claim that it looks like everything is being done to further the interests of a economic and political elite, just as happens in a corrupt third world country. If this were true, the banks won't be punished for flagrantly disregarding the rule of law, since it is only the little people that need to worry about such niceties.

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.

Let Them Eat Quantitative Easing

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.


Grain prices soared on the Chicago futures exchanges on Friday. A report from the USDA stating that there would be lower inventories was cited as the cause. Quantitative easing from the Fed was behind the extent of the move however. Commodities are priced in dollars and with more of them floating around; any piece of negative news can cause food prices to go through the roof.

Food prices were already rising during the summer because Russia had halted wheat exports due to a severe drought. On Friday, the USDA (United States Department of Agriculture) cuts its crop estimates for the U.S. for second month in a row. The corn crop is now expected to be 3.4% lower than last year. The soybean crop is still expected to be good, but will come in 2.2% less than last month's prediction. The USDA now says global wheat inventories will be 1.8% lower than they thought in September.

While these changes seem minor, as would be expected in a market with too much money floating around because of the Fed, the impact on prices was explosive. December corn futures rose 8.5%. Soybeans were up 3.9% on the day. Both are used as animal feeds and this raises prices for producers. Shares of some of the big meat companies fell sharply in response. Consumers should expect higher prices at the store.

Analysts are now concerned about another food crisis, like the one in 2007 and 2008. Food prices got out of control back then and a number of countries stopped grain exports to insure adequate supplies for their domestic markets. This is only one of the many potential downside risks of Ben Bernanke's new quantitative easing program. Bernanke continually insists there is no inflation however, just as he continually insisted that subprime loans wouldn't cause any problem with the economy. Like a modern day Marie Antoinette, if bread prices become too high he is likely to suggest the peasants eat cake. They are already eating his quantitative easing, whether they know it or not.

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.

September Jobs Report Indicates Economy Dead in the Water

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 was the 15th month with the U.S. unemployment rate was at or above 9.5%.  The underemployment rate, which includes forced part-time and some discouraged workers, rose to 17.1%. While the Great Recession supposedly ended in June 2009, well over a year later the employment figures have still failed to show any significant improvement.

Private sector hiring was tepid to say the least in September. While the BLS (Bureau of Labor Statistics) claims that there were 64,000 private sector jobs added last month, only two categories dominated hiring - 'leisure and hospitality' and 'health care and social services'. Leisure and hospitality, which includes drinking establishments, added 38,000 jobs. It is perfectly understandable why people would want to drink more considering the state of the economy.  Health care and social services (the mainstream media always leaves out the social services part), which is the only category that continually added jobs during the recession, added 32,000 jobs. Why social service jobs are counted as private sector jobs is a of course a mystery known only to the BLS. Education jobs are also counted as private sector, even though most of them are paid for with taxpayer money. Many health care jobs are of course also government funded.

Government jobs actually counted as government jobs dropped 159,000 in September. Almost half of this was accounted for by a loss of 77,000 Census positions. Considering the Census was supposedly finished months ago, this leads to the obvious question: What have these people been doing since then? Another 76,000 jobs were lost by local government. The Obama administration's February 2009 stimulus package provided a lot of funding for localities to pay for police, fireman and teachers. This funding seems to already be running out. What will happen in 2011, when the stimulus money has been completely spent?

The economic establishment has told us that the U.S. economy has had four quarters of recovery so far and we have already in the fifth. Employment hasn't shown any recovery however. Up to now, the claim have been that this is because employment is a lagging indicator (something that only showed up in the 1990s after a number of 'adjustments' had been made to how GDP and the inflation figures were calculated). The employment lag has already been several quarters and it now looks like it is heading for several years.

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.

Quantitative Easing Has Sent the Dollar Into Free Fall

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. dollar has been in free fall since the beginning of September. The Federal Reserve acting in concert with the ECB (European Central Bank) is behind the action. Most other countries are seeing rising currencies and this is going to hurt their economies and the American economy as well.

It's become a running joke globally that the U.S. follows a strong dollar policy because the evidence so blatantly contradicts this claim. Things have gotten even worse lately with the dollar-trashing activities of the Fed going into hyper drive in time for the November election.  The trade-weighted dollar (DXY) lost approximately 6% of its value in September alone. It is not coincidental that the Dow Jones Industrials went up more than 10% during the month or that gold hit one all-time high after another. Stock markets rise when a currency is being devalued. All commodities are priced in U.S. dollars, so all else being equal; a commodity's price has to go up when the dollar falls. Rising commodity prices under such circumstances do not indicate a robust economy, they indicate inflation.

A cheap currency is indeed a plus for a major exporter. Currently China is the prime example globally of a economy that benefits a great deal from a currency with a low value. The Chinese yuan (CYB) doesn't really float, it can only have a small change in value during any given time period, so it can remain underpriced. The EU has now joined the U.S. in demanding China let the yuan have a more realistic value. China denies it is manipulating its currency however. If this is the case, it should just let it float freely on world currency markets and the value would remain approximately the same. For some reason, China is reluctant to do this.

Unlike exporters, major importers like the U.S. do not benefit from declining currencies. For more than four decades, the U.S. has followed policies that have destroyed its industrial base. The private commercial sector is now 20% manufacturing and 80% services. A weaker dollar will give more business to the manufacturing 20%, while hurting the service sector's 80% with more inflation. It won't solve the U.S. unemployment problem. At the same time it will damage the economies of exporters by raising their costs for commodities and the prices of their goods. All in all, it's a lose/lose situation.

The Federal Reserve's new quantitative easing program, first announced in August, is what is undermining the dollar and wreaking havoc in global currency markets. The euro (FXE) has recovered to the 1.40 area, but this is also due to the almost $1 trillion Euro-TARP bailout of the EU currency. The Japanese yen keeps rising and hit another multi-year high today. The Japanese monetary authorities have intervened in the currency markets to stop the yen from climbing, but to no avail. The Swiss franc (FXF) broke above parity with the dollar in August. The Australian dollar (FXA) is about to follow the Swiss franc's lead. The Brazilian currency (BZF), one of the weakest on earth for much of the twentieth century, is beating the stuffing out of the U.S. dollar.    

The big drop in the dollar is not likely to continue much longer (although the charts indicate there could be another leg down). It is already causing destabilization in world markets and could lead to another global financial crisis if it does. If Fed Chair Bernanke continues with his enthusiasm for quantitative easing though, the dollar could hit an air pocket and wind up much lower overnight. While the Fed's interest in quantitative easing will probably cool suddenly after the election, it may continue to play its dangerous game of chicken with the dollar until then.

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.

Quantitative Easing Means Foreigners Will Dump Treasuries

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 and gold rallied strongly yesterday on the news that Japan is doing more quantitative easing and remarks from Fed Chair Ben Bernanke that more quantitative easing (also known as money printing) would be good for the U.S. economy. The major, and possibly disastrous, downside risks were not mentioned in mainstream media reports.

Quantitative easing has been tried many times before in Japan. It has failed to produce any lasting results, which is why it needs to be done again. The Fed has already engaged in quantitative easing during the Credit Crisis (frequently referred to as QE1) and is also doing it again because it didn't have any lasting results. Moreover, it isn't clear that any positive results took place at all because of QE1. The Fed claims it was a great success, but hasn't offered any proof to support its contention. There is certainly proof that it didn't work. Exhibit one is the much higher unemployment rate that we currently have. Just the need to do quantitative easing again is in and of itself proof that this was a failed policy.

While the advantages of quantitative easing are dubious, the risks can be horrendous. The biggest danger is for a country with a massive debt held outside that country (this describes the United States, but not Japan) Printing money is inflationary. It devalues the currency of the country doing it. The trade-weighted dollar did indeed have a big sell off on the news. Inflation-sensitive gold hit another all-time high. Quantitative easing will encourage large foreign holders to sell U.S. debt and to not make purchases in the future, except for TIPS (treasury inflation protected securities). Even TIPS will ultimately be shunned because they reflect the understated official U.S. government inflation rate. Without this source of foreign capital, the U.S. cannot fund its budget deficit or its trade deficit. This would send the economy into a severe contraction. The only way to avoid that would be to print even more money...and then more money ....and then more money. Without the money printing, the U.S. economy would enter a severe depression. With money printing, the risk is hyperinflation.

The biggest foreign holders of U.S. treasuries are China, Japan, the UK, the Oil Exporters, Brazil, the Caribbean Banking Centers (off-shore money havens used to hide the parties involved in financial transactions), Hong Kong, Russia, Taiwan, Switzerland and Canada. Why would these countries continue holding U.S. government bonds if they know they are going to be paid back in devalued currency? Why will these countries want to buy more bonds in the future? According to TIC (Treasury International Capital) data, China held $939.9 billion in U.S. treasuries in July 2009. In July 2010, it held only $846.7 billion. It is also known that China has been selling long-dated paper and moving into the short end of the yield curve. Other countries would want to do the same in response to quantitative easing. This may be why yields on the two-year note keep hitting all-time lows.

The impact of the first round of U.S. quantitative easing shows up even more clearly in the amount of treasuries held by the Fed. At the end of the first quarter, the Fed held $5.259 trillion in U.S. government bonds - more than five times the amount of China, the largest foreign holder. The nightmare scenario of the U.S. having to print money to buy its own government bonds because it can no longer borrow enough money from foreign sources to fund its government operations has clearly already taken place. That the Fed is now doing more quantitative easing indicates a self reinforcing inflationary cycle is underway. Investors should act accordingly.

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.

ZIRP Failed in Japan, So They're Doing It 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.


In what is being billed as a surprise move, the Bank of Japan lowered interest rates back to zero and is planning on more quantitative easing. Along with an unending number of stimulus programs in the last twenty years, Japan has done it all before. If these economic policies actually worked, it wouldn't have to be doing them again. U.S. policy makers are following Japan's lead.

On October 5th, the BOJ announced that it cut interest rates to 0.0% to 0.1%. Rates had been 0.1% since December 2008. Japan had previously maintained a zero interest rate policy (ZIRP) between 2001 and 2006. The U.S. Fed funds rate has been at 0.0% to 0.25% since December 2008. The Bank of Japan also announced a $60 billion quantitative easing program that will purchase government bonds, commercial paper and corporate bonds. Last month, the Japanese government announced a 915 billion yen stimulus package. The Japanese economy has been in the dumps for 20 years and stimulus programs, super low interest rates, and quantitative easing hasn't fixed it. Yet, despite encountering failure over and over and over and over again, the government still repeats these same actions with the belief that somehow they will work this time.

The Japanese government was the most important player in creating the country's massive stock market and real estate bubbles in the 1980s. The last twenty years has been the hangover from those bubbles. Incompetent government policy both led to the creating of the problem and then prevented it from being fixed. It took over 18 years for the stock market to hit a low (assuming it doesn't go lower in the future). Government policy delayed the inevitable, but didn't prevent it. Japan now has the highest government debt to GDP ratio (over 200%) among developed countries. Its debt is so high from its repeated stimulus programs that it makes teetering-on-default Greece look fiscally conservative. The inevitable outcome of Japan's actions will be collapse and not recovery.

In dealing with the Credit Crisis and its aftermath, the U.S. has followed Japan's lead. Just yesterday, Fed Chair Ben Bernanke said the U.S. central bank should engage in more quantitative purchases of treasury bonds because it would "ease financial conditions". Moreover, Bernanke claims the first round of quantitative easing (also known as money printing) was a major success. The figures certainly don't show that this is the case. U.S. unemployment was around 7% when quantitative easing began the first time and is now around 10%. The Fed doesn't actually claim that economic conditions became better, since the obvious facts make that impossible, but instead claims things would have been much worse without their policy actions. How do we know things wouldn't have been better?  How do we know that things didn't become better in the short-term, but will become much worse in the long-term? We do know what has happened in Japan because of the same policy actions that the Fed is following. But like the Japanese, the U.S. Fed apparently also believes in miracles.

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.

Why Quantitative Easing Will Raise Long-Term Rates

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The two-year treasury yield fell to another record low on Monday, touching 0.3987%. The 10-year treasury yield was up slightly however in September, rising for the first time since March. Federal Reserve money-printing is behind both falling shorter-term rates and rising longer-term rates.

A survey by Bloomberg of more than 60 mainstream economists indicates they expect 10-year treasury yields to keep rising in 2010 and through 2011. Perhaps someone has been passing around some notes on the approximately 500 hundred year old 'quantity theory of money', which states if the amount of currency is increased without an appropriate increase in economic growth, inflation will result (and consequently interest rates will have to rise, with the biggest increase taking place on long-term bonds).  For this not to happen, the laws of simple arithmetic have to be violated. The Federal Reserve has essentially been maintaining that that is what has taken place for the last two years. Bernanke of course does not directly state that we have entered a new economic age where two plus two no longer equals four because he would be laughed out of Washington and even the never questioning U.S. mainstream media wouldn't print such garbage.

Bloomberg also reports that a survey of primary dealers (the people who buy the paper that the Treasury issues) estimates that the Fed will buy $100 billion to $1 trillion in Treasuries by the end of the year. According to Deutsche Bank however, the market has reacted as if $315 billion to $670 billion of quantitative easing has taken place recently. The Fed announced on August 10th that it would be conducting further quantitative easing this year. The stock market then had its best September in seven decades. Money printing is an easy way to juice up stock prices. And since there is an important election on November 2nd, it would make sense to think all or almost all of what is scheduled for 2010 will take place before people vote. It looks like that is exactly what is happening.

While the Fed's actions can make the stock market look good in the short-term (investors need to watch out for what follows however) and can make shorter-term rates like the two-year go down because of all of the buying that it is doing,  longer-term rates will go up if the market sees this as inflationary. The 10-year treasury is the bench mark for everything from home mortgages, to credit cards, to corporate bonds. Higher yields on the 10-year are a drag on the economy. The Fed has supposedly reinstituted quantitative easing to stimulate the economy, although there is little evidence that the Fed has managed to stimulate the economy very much in the last three years. The stimulus has instead come from massive government budget deficits. The Fed seems oblivious to the existence of a liquidity trap, a condition where increased 'money' generated from the central bank just moves around the financial system and never gets into the real economy. Under such circumstances, doing more of the same won't make things any better, but can easily make them worse.

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.

More 'Good' Pre-Election Economic 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.


Consumer income had a nice rise in August thanks to extended unemployment benefits (not regular unemployment benefits). The final budget deficit figures for fiscal year 2010 have been leaked and the U.S. is supposedly only in the hole for a massive $1.3 trillion. The ISM manufacturing index came in at 54.4 and the the mainstream press is citing a strong manufacturing sector as the reason the U.S. stock market had its best September since 1939. Altogether, this news could be summed up as 'stupidity you can believe in'.

By almost every measure except the headline number, the ISM report was a disaster. The highest number inside the report was prices paid, an inflation measure, which came in over 70. Prices apparently went up a lot in August. This component had the biggest increase by far, which wasn't difficult because only one other component went up - inventories. Inventories usually pile up because sales are slowing down. The negative big gains were more than matched with negative big losses in the report. Order backlogs, supplier deliveries, employment, and the production components all had big drops. Well, that certainly should have led to a big stock market rally all right.

As for the supposed improved budget deficit figures, as of this August, $1.377 trillion dollars had already been borrowed to fund the federal government in fiscal year 2010. This number would have been $115 billion larger (for a total of $1.492 trillion) if there hadn't been 'financing by other means'. Financing by other means had a big increase in August and is projected to have another big increase in September. There are also substantial 'off budget outlays'. See http://www.fms.treas.gov/mts/mts0810.pdf for the August Treasury report on 2010 fiscal year spending. Makes you wonder if the U.S. government is using the Enron Accounting Manual to do its books.

Finally, some people might argue that an economy that is dependent on extended unemployment benefits for increased consumer spending could just perhaps be somewhat troubled. Few if any of these people write for the mainstream press of course, which generally treated the news of an increase in consumer income and a rise in the savings rate to 5.8% as just more rosy news. If this is such good news, obviously the U.S. should institute ultra super extended unemployment benefits. After all, look at what these policies have done for Europe – riots in the streets and turmoil in the bond markets. The euro has been rising though and obviously this must be due to improved manufacturing in the U.S., if you follow the logic of the mainstream press. If not, you might just conclude that there is a whole bunch of government manipulation of the markets going on.

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.