Friday, December 30, 2011

A Technical Look at Gold and Silver at the End of 2011

 

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.

While gold and silver are in long-term secular bull markets, they have experienced price weakness in the last few months of 2011. The technical picture indicates that they are likely to remain pressured for a while longer before recovering in 2012.

GLD (the major ETF for gold)  fell below its 200-day simple moving average earlier in December and at the time, I pointed out in a previous article that this indicated lower prices in the future and it would next fall to the 325-day. After bouncing back up to the 200-day, gold did indeed fall to 148 on December 29th, which was the 325-day moving average. At the time that gold was breaking its 200-day, the DMI (directional moving indicator) also gave a sell signal on the daily charts. The RSI (relative strength index) fell below 50 and MACD (moving average convergence divergence) below the zero line -- both bearish. The sell signal on the DMI does not seem to be exhausted just yet.

The moving average picture overall still indicates that gold is in a short-term bull market. For this to turn negative, the 50-day would have to fall below the 200-day moving average and even then it shouldn't be considered as serious unless it was confirmed by a cross below the 325-day. The gives gold a lot of room to fall, even if the chart remains bullish. Even though a short rally in the beginning of 2012 is indeed possible, lower prices are likely to follow. A break of the 325-day moving average should be considered significant and would next bring GLD down to the 140 level. The 40-month simple moving average however is the most solid support below the 325-day. 



Silver shows greater weakness than gold on its charts with the selling much more advanced. Unlike gold, silver has hit new yearly lows and when this happens the first time, it is likely that a series of  new lows will then be made, although short rallies frequently take place first.  For SLV, the major silver ETF, the 50-day moving average already fell below the 200-day in October and the bearish pattern was confirmed when the 50-day then fell below the 325-day at the end of November.  On the daily charts, the DMI is on a sell signal and this seems to be only halfway done at this point. The other technical indicators are also bearish. SLV is currently being held up by support around 26. Much stronger support exists around 21 (really a band of support between 18 and 21).



The recent drops in gold and silver should be considered to be buying opportunities, although investors with a longer-term horizon should not be pushing the buy button just yet. The charts do not indicate a definitive bottom has been put in, nor that this is likely to happen in the next few weeks. Secular bull markets tend to last for around 20 years and this indicates the ultimate high for gold and silver will be around 2020. While there is always a higher high in the future during secular bulls that doesn't mean that there aren't major reversals along the way. The stock market secular bull between 1982 and 2000 had the 1987 crash, the 1989 and 1997 flash crashes, the 1990/91 bear market and the 1998 bear market. Smart investors used these declines as buying opportunities and made lots of money when they did. The same will be true for gold and silver for the rest of this decade. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Tuesday, December 20, 2011

Rumors of Housing's Rise From the Dead Are Greatly Exaggerated



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.

Housing starts for November were released today, December 20th, and the stock market rallied strongly on the supposedly "good" news. The statistical error rate in the housing report is so huge, that the numbers are meaningless -- and easily subject to manipulation by a government that is desperate to provide news of a recovering economy.

Housing starts peaked at 2,273,000 in January 2006. According to the Commerce Department, construction of new U.S. residences in November 2011 was 635,000. Almost five years later, housing activity is still less than 28% of what it was at the peak. Despite this almost three-quarters decline in housing activity, this is being spun as evidence of an economic recovery by the mainstream media. Would you consider it progress if your salary was only 28% of what is was five years ago?

As dismal as this statistic is, it is very possible the actual number is much worse. The housing starts report has the highest statistical margin of error of any government report. The error is so huge that is a waste of taxpayer money to produce this report. The error in the overall number can be greater than ten percent. The error on individual components can be as much as 33%. This is important because better housing start numbers in 2011 (November was not the first month when better numbers were reported, this took place earlier in the year as well), have been created by a supposed surge in apartment house construction. Apartment construction rose by 25.3% in November and this is what is making the overall number higher. Considering the huge statistical error rate, it is possible that it didn't rise at all.

Optimists who think it did rise by that much need to ponder the implications of why a lot of apartments are being built and very few single-family houses. The inescapable conclusion is that few Americans can afford to buy their own home anymore. I would hardly describe that as an indication of better economic conditions. Even more telling is that the number of completed housing units dropped by 5.6% in November even though housing starts rose earlier this year. If this is correct, a lot of housing that is begun is not being finished. While that makes no sense, nothing else about the report does either.  

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Thursday, December 15, 2011

Gold Breaks Down, Where to Look for a Bottom

 

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 fell and closed below its 200-day moving average yesterday, December 14th. This indicates a technical breakdown and the last time this happened was in August 2008. Gold bottomed approximately 30% off its high three months later in November.

Any analysis of an investment's technical state should begin with the big picture, so recent events can be put in context. Gold is in a secular (long-term) bull market which will last until approximately 2020. This means that the greater trend will move prices higher over time. No market moves straight up however. There are always reversals in a secular bull market and these are sometimes steep. The 1987 stock market crash which took the U.S. indices down 40% and some individual stocks down 70% or even 80% took place in a secular bull market that lasted between 1982 and 2000. Stock prices went to new highs after the crash despite many pundits claiming the crash meant a new depression was coming. Anyone who realized stocks were in a secular bull market could easily have predicted stocks would recover.

Even though gold has dropped below its 200-day (40-week) simple moving average, this does not indicate that it is even in a short-term bear market. At the very least the 50-day (10-week) moving average would have to fall below the 200-day to indicate that. Gold will have to trade below it's 200-day for approximately the next two weeks before that would happen. This did indeed occur in 2008, when it could be said that gold experienced a brief cyclical (short-term) bear market.  The 10-week moving average traded below the 40-week for about four months from September 2008 to January 2009. See a four-year weekly chart of the Gold ETF GLD below.



The bearish behavior of gold in latter 2008 was caused by the Credit Crisis. While you have probably heard ad nauseum that gold is a safe haven in a crisis, this does not include credit crises
(which are crises in the financial system when the banking system has difficulty functioning). We just saw that gold went down during the 2008 credit crisis and yet many gold "experts" somehow can't figure out that it should go down during the current 2011 credit crisis coming out of Europe. In our era, gold can drop during a credit crisis because central banks lease gold at low rates to the big banks and hedge funds. These entities are desperate to raise cash, so they sell the gold into the market (they can't sell many of the assets on their books). This depresses the price of gold -- temporarily. But at some point, they have to buy the gold back and return it to the central bank it was leased from. This makes the price of gold rise again. I explained the entire process in the second volume of my book "Inflation Investing", which covers gold, silver and other metals.

Gold has support at the 65-week simple moving average, but this is not the likely bottom in a full-blown credit crisis.  In order to find that, it is necessary to look at a monthly chart. It can be seen from this that the ultimate support would be at the 40-month simple moving average. Currently, this is around 120 for the gold ETF GLD. This possible buy point, which should be considered a worst-case scenario, was discussed in the October meeting of the New York Investing meetup. See the five-year monthly chart for GLD below.




It's important for investors to focus on the big picture and not get carried away with all the distractions of day to day price movements. Markets go up and down. No market goes in one direction. Every time gold drops, commentators come out of the woodwork saying it means the rally is over and deflation is taking place -- neither is true. It is the bigger price movements that have meaning and gold is in a long-term uptrend. In any secular bull market, a large drop is always a golden opportunity to buy. Just wait until there is some evidence that a bottom has been put in.  

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Wednesday, December 14, 2011

Gold and Silver Plummet as Dollar Rallies on EU Woes

 

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 euro fell to a yearly low on December 14th as Italian interest rates at auction hit new highs. Collateral damage to the EU crisis is showing up not only in stock prices, but in the precious metals markets as well. 

The euro fell below the psychologically important 1.30 level in European trade and is testing support from last January. If it breaks that support (and it is pretty certain that it will), the 125 level is the next stop and 1.20 after that. The euro can be tracked through the ETF FXE. At the same time the euro is breaking down, the trade-weighted dollar has broken out. The dollar has been stuck at key resistance at 80 since September. It tested  this level both in September and in November. It traded as high as 80.67 in early morning trade. There is still strong resistance just under 82. A break above that will cause the dollar will head toward 88. The dollar can be tracked through the ETF DXY.

As the dollar rises, gold and other commodities fall. Spot gold was as low as $1562 an ounce in early New York trade. Gold plummeted after the New York open and was down as much as $68 an ounce.
Gold can be tracked through the ETF GLD. Gold decisively broke its 200-day moving average (which is very bearish) and this was the first time it has traded below this level since early 2009. The next level of support is the 65-week moving average, which is currently in the high 1400s.

While gold in general should go up during a crisis, this did not happen in the fall of 2008 -- gold was down around 30% at the time. During credit crises -- and the situation in Europe is a second global credit crisis -- it is reasonable for gold to decline. Central banks lease gold cheaply to banks and large hedge funds and they sell it on the market to raise quick cash (I have explained how this is done is some detail in my book "Inflation Investing"). This time around, there is the added danger that the IMF will sell some of its large hoard of gold to raise money for a eurozone bailout.

Gold's companion metal silver is much more volatile than the yellow metal and is influenced by the economy as well as financial market events. Silver traded as low as $28.47down $2.37 after New York trading opened. This was more than a 7% drop. Silver can be tracked through the ETF SLV. It has strong support around $26. If it breaks that, expect it to head toward the $21 level.

The EU debt crisis is not over and is likely to continue for a while longer and possibly for many more months. EU leaders have come up with one "solution" to the crisis after that has failed shortly after it was announced. Look to the markets to see whether or not their future gambits will create some viable end to their problems. So far the markets have made it very clear that the situation in Europe is continuing to deteriorate and it is dangerous to be on the long side of almost any investment except the U.S. dollar. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Friday, December 9, 2011

New EU Plan is Much Ado About Nothing

 

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.

Once again the EU has come up with a too-little, too-late solution to deal with its very serious debt crises. Proposals for a tighter fiscal union and the small amount of funds committed will only delay the inevitable default.

Treaties only have meaning if their terms are actually followed. The eurozone already has a treaty that created it. That treaty has very clear fiscal benchmarks that all members must follow. The key benchmark concerning a maximum 3% debt to GDP ratio for an annual budget was almost universally ignored by all member states. Greece was only the most extreme example. It finally admitted to lying about its numbers (it was not "caught in the act" by the central EU head office even though the numbers it submitted were too good to be true). Greece originally reported a projected debt to GDP ratio of 2.0% for 2009. After many revisions, it turned out to be 15.4%. It was not punished for its duplicity or major violation of EU accords; instead it has been offered three bailout packages so far.

The new treaty provisions once again state that the eurozone countries need to have a balanced budget and should not violate the 3% debt to GDP limit. This wasn't enforced the first time and there is no reason to believe that it will be enforced the second time either. This time however the new treaty states that there will be automatic consequences, including possible sanctions. I'm sure they all had a good laugh about those possible sanctions. This is a complete and total joke and should be treated as such.

As for the current amount of money proposed to rescue the over indebted EU countries, it is much too inadequate to be more than a temporary stopgap measure (the only thing the Europeans seem capable of doing). The debt problem for the troubled EU countries -- Greece, Ireland, Italy, Portugal, and Spain -- runs into the trillions. How much is on the table now --  €200billion. The EU will loan this amount to the IMF, which will in turn use it to provide the same amount of aid back to the EU.  Not only is this is a paltry sum, it is disturbing they need to engage in a financial shell game as part of their bailout attempts. Even more absurd is that the ESM (European Stability Mechanism), set up to handle the debt crisis, will be capped at €500 billion. What will happen when they run out of this money and there is still a large amount of debt in danger of defaulting?

The problem with debt crises is that the amount needed to handle them is a moving target. It keeps rising and rising with time because interest rates keep rising and this makes borrowing costs continuously more expensive. Greek one-year bond yields are at 353% today. Even with three rescue packages, they continue to climb toward the stars. Immediately after the announcement of each rescue plan, yields dropped significantly for a short period of time, then they went much higher than they had been before. Expect to see this pattern with the other EU debt crisis countries. The EU is very good at getting its problems under control for a few weeks with its band aid measures.  Expect its current efforts to be another short-term success that turns into a long-term failure.


Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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

Wednesday, December 7, 2011

Volcker Says U.S. Mired in Recession and Inflation is Coming








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

In a talk given to a small audience at the American Museum of Finance on Wednesday evening, former Federal Reserve Chair Paul Volcker stated that there was an ongoing recession in the U.S. and that we will be seeing inflation in the future because of the actions of the Fed and Treasury during the 2008 Credit Crisis.

While most of Volcker's talk centered on the current crisis in Europe, he frequently made connections to what was going on in the EU to what has taken place in the United States. His remarks about the U.S. being mired in an ongoing recession were in response to a question on whether an infrastructure bank would be a good idea. As part of his answer he stated, "We're not going to end the recession in the next month or the next year. It's going to take several years before the recession is over." The U.S. government claims that the last recession ended in June 2009and has repeatedly said that the U.S. has not fallen back into recession even though unemployment and consumer confidence have continually remained at recession levels.

When discussing the bailouts during the Credit Crisis,  Volcker remarked "people said that there will be inflation... that's true over time." Volcker was critical of pro-inflation policies. He said that "the problem with inflation is that it looks so enticing, but the historical record doesn't verify that it is." He continued, "We would be very foolish if we deliberately went out and created inflation." The Federal Reserve under Ben Bernanke has kept Fed Funds rates around zero percent for three years now, which means real interest rates have been negative. Negative interest rates are highly inflationary as is money printing. The Fed has expanded its balance sheet one of the many ways it prints money by over $2 trillion dollars since September 2008.

Volcker described the 2008 Credit Crisis as a "regulatory failure", but added "the Fed is only one regulator". He went on to state that "the Federal Reserve took a lot of extraordinary measures" to handle events back then and "the Fed and the Treasury did not necessarily follow the letter of the law" in attempting to control the damage to the financial system. Volcker further laid part of the blame for the Credit Crisis to proprietary trading by banks and said he was "not in favor of banks being speculative entities being supported by the U.S. government".

Paul Volcker was Chairman of the Federal Reserve from August 1979 to August 1987 and is widely credited with bringing down the high inflation of the 1970s by raising interest rates. More recently he headed the President's Economic Recovery Advisory Board, which he left in February.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Friday, December 2, 2011

Why the U.S. Unemployment Numbers Can't Be Trusted

 

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

There is more fantasy in the U.S. employment numbers than in a Harry Potter novel. According to the BLS, the U.S. added 120,000 jobs in November 2011 and the unemployment rate fell by 0.4%. This is not possible.

The U.S. economy needs to create approximately 150,000 jobs a month to keep the unemployment rate steady based on new entrants into the labor force (the oft cited 200,000 figure is based on past conditions that are no longer applicable). According to official sources, the U.S. added 131,000 jobs a month in 2011. This is better than in previous years, but still not enough to reduce the unemployment rate. Yet, the BLS (Bureau of Labor Statistics) claims the unemployment rate is dropping and fell from 9.0% to 8.6% in November. How is this possible?

Well, first of all, it isn't. These numbers were created — and "created" is a very appropriate word in this case — by claiming that large numbers of workers left the U.S. labor force. At the same time, the U.S. government has stated that an economic recovery has takien place. A country's labor force does not shrink during recoveries, it grows. This has not happened during the current U.S. "recovery".

The U.S. labor force had approximately six million fewer workers in November 2011 than it did in November 2007. Four years ago, 146,793,000 people were employed in the U.S. In November 2011, only 140,987,000 had jobs. This makes no sense if a recovery has taken place. It does make sense however if there is an ongoing recession and government statisticians have decided to massage the numbers for political reasons.

On the flip side, there were 79,069,00 people not in the labor force in November 2007 and today that number is 86,757,000 — almost eight million greater. The labor force of the U.S. should not be shrinking because the number of students and immigrants looking for jobs exceeds the number of people retiring. People do leave the labor force though if they have determined that there simply are no jobs to be found. The recent Consumer Confidence survey from the Conference Board indicated that less than 6% of Americans thought jobs were currently plentiful. 

In November 2011 alone, the BLS claims that the U.S. labor force dropped by almost a net 600,000. This helped reduce the reported unemployment rate to 8.6%. This form of statistical manipulation is something that might be expected in a corrupt third-world backwater. Apparently, this is the standard that Washington is now adhearing to for its statistical reporting. 

 
Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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 securi

Friday, November 4, 2011

Is October's Unemployment Rate Really 12.7%?

 
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 BLS released its non-farm payroll figures for October today and they stated that 80,000 jobs were created and that the U.S. unemployment rate was 9.0%. There are reasons to believe that this number is actually as high as 12.7%.

Except for February and March of this year, the unemployment rate (the U-3 number) has been 9.0% or higher since May 2009. It hasn't risen well into the double digits because large numbers of workers have supposedly left the labor force and these people are not counted as unemployed. If we go back four years to just before the Great Recession began, we find that in October 2007 there were 145,937,000 employed Americans over 16 and 79,506,000 were not in the labor force. Now in October 2011, there are 140,302,000 employed people and 86,071,000 not in the labor force. You can see the figures here: http://www.bls.gov/webapps/legacy/cpsatab1.htm.

So in the last four years the American economy has had a net loss of 5,635,000 jobs. This huge loss hasn't shown up in an escalating unemployment rate because at the same time a net 6,565,000 people have supposedly left the labor force. The BLS conveniently does not count them as unemployed even though they do not have jobs. If we included them in the unemployment calculations, the unemployment rate for October would be 12.7%. This should not be confused with the underemployment rate (known as U-6) which includes people working part-time, but who want full-time jobs. This number was 16.2% last month.

A case could be made that the U.S. labor force should be shrinking because more people are retiring than there are graduating students. There are approximately 3.5 million people reaching age 65 (not all of whom retire and many of whom didn't work) and only about 3.2 million students graduating high school currently (eventually most of them enter the labor force). While retirees have the advantage, there are also approximately a net 1.3 million immigrants coming into the U.S. every year and a disproportionate number of them are younger adults of employment age. The labor force should at least be steady, if not growing slowly. Instead, BLS figures indicate a rapid shrinkage is taking place.

It would be highly unusual for the labor force to decline at all during a recovery. When the economy is strong, people on the margins go out looking for jobs. For the labor force to drop by millions indicates an extremely weak economy.  So, if the U.S. labor force has six and a half million fewer workers than it did four years ago, no significant recovery has taken place. If the labor force hasn't dropped by as much as the BLS claims, then the unemployment rate is in the double digits and this also indicates no significant recovery has taken place. While it seems more likely than the true unemployment rate is closer to 13% than 9%, either figure indicates that the U.S. economy is still recessionary.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Tuesday, November 1, 2011

EU Deal With Greece Falling Apart

 

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 lost its rose colored glasses today with Greece announcing a political referendum early in 2012 on the recent EU bailout deal. This could lead to the deal falling apart sooner rather than later.  Stocks sold off on the news in Europe and the U.S. while interest rates rose in Greece and other troubled EU countries.

The deal that the EU put together last week to handle its debt ridden members and to help prop up its banks was essentially smoke and mirrors surrounding a house of cards. It had no chance to work in the long run and the best it could accomplish was to buy more time before the inevitable day of reckoning. The 50% haircut on Greek debt, plus $130 billion euros did provide Greece with enough funds to keep going. It did not stabilize the situation enough however to ensure another debt crisis didn't occur within the next few years. Nor was there any reason to believe that Italy, Spain, Portugal and Ireland wouldn't need a similar bailout in the future. The plans for recapitalizing EU banks were likely to create a credit crunch and send the EU into a deep recession before further steps were taken. The centerpiece of all the bailout operations  the EFSF (European Financial Stability Facility) was based on essentially printed money that was going to be leveraged. This was how the problem of too much debt was going to be solved.

While stock markets worldwide had huge rallies based on the "good" news that came out of the EU last week (traders like hearing about governments printing more money), they were giving back those gains on Tuesday. Both the German DAX and French CAC-40 were down over 4% in late day trading. The euro, which has held up remarkably well during the entire crisis was down over 1%. Big EU banks were getting slammed hard. France's Société Générale (FR:GLE) was down  almost 17%, Credit Agricole (FR:ACA) fell almost 13% and BNP Paribas (FR:BNP) dropped almost 12% .  Deutsche Bank (DB) was down over 6% and Commerzbank (DE:CBK) down over 10%. The U.S. S&P 500 was lower by a comparatively mild 2% in early going.

Bonds reacted more strongly. The yield on the safe haven 10-year U.S. treasury fell over 6% and the yield was barely above 2% in the morning in New York. Yields on trouble country debt in the EU were moving in the opposite direction. Italian 10-year governments traded over 6.25% (above 6% is considered a critical point of potential breakdown). Only buying from the ECB, which also included Spanish government debt, kept yields from soaring much higher. Yields in Greece were even more telling of the market's true opinion of the EU debt deal and its aftermath. Before the deal, yields on one-year Greek governments reached 193%. They had only fallen to 154% (no solvent country pays anywhere close to this amount) before the announcement of the Greek referendum. This yield peaked at 200% today (November 1st).

Panic was caused by the proposed referendum in Greece because polls show that the terms reached with the EU and IMF are highly unpopular with the Greek people. Even though they have gotten an incredibly good deal, the average Greek is focused on the additionaly years of austerity that would be required on Greece's part.  Apparently, neither the Greeks, nor the markets like hearing that there is no free lunch.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Thursday, October 27, 2011

More Contradictions in Third Quarter GDP

 

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 Commerce Department reported today that third quarter GDP increased at a 2.5% annual rate. A supposedly much lower inflation rate created significant improvement over numbers from earlier in the year. There was also a surge in consumer and business spending reported, although other recent surveys contradict the claims in the GDP release.

Real personal consumption expenditures (consumer spending) increased by 2.4% compared to only 0.7% in the second quarter. Most of this was caused by a 4.1% increase in durable goods purchases. Nondurables were barely changed. Delayed auto and parts shipments from Japan because of disruption from the massive March earthquake can account for more sales being reported in the third quarter, but not likely to be repeated in the fourth. Despite claims of much higher consumer sales, businesses barely increased inventories in the third quarter — something they would do if they saw their sales climbing. Moreover, consumer confidence surveys indicate consumers were gloomy in the third quarter and readings have now fallen as low as they were around the bottom of the 2008/2009 Credit Crisis. Consumer confidence surveys are not controlled by the government and act as a check of the reliability on government statistics. 

While businesses didn't seem to notice any increase in customer spending, there was nevertheless a frenzy of equipment and software buying going on. This supposedly increased by 17.4% during the quarter. Apparently, I missed the all the news about major software upgrades and equipment innovations that took place this summer. Nonresidential structure spending was almost as buoyant increasing by 13.3%. Where this building boom is taking place isn't exactly clear. Coincidentally, the unemployment rate among U.S. construction workers is also 13.3% (See Household Data Table A-14 of the September Non-Farm Payrolls Report). As bad as this is, it is still a year over year improvement.

GDP figures are also boosted if the inflation rate is lower. It's a lot easier to report better inflation numbers — all it takes is some statistical adjustments — than it is to actually improve the economy. Inflation was supposedly 3.3% in the second quarter, but only 2.0% in the third quarter. Nominal GDP is reduced by the inflation rate to get the final figure. The change in inflation, whether or not it actually took place, added much of the improvement seen from the second to third quarter, not an increase in economic growth.

Mass media coverage about GPD was of course ebullient about what good shape the U.S. economy is in. Of course, we won't know the actual number for several more years. This report is only preliminary and there are two adjustments that will be made to it and then annual revisions every July. In the last several years, adjustments have been mostly down, sometimes by very significant amounts. Even then, that number is going to still be overstated because the U.S. consistently understates its inflation rate. To find an approximate level of the actual GDP, just subtract 3% from the reported number. This will give you a more accurate sense of what is going on in the economy. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

It's a 50% Default for Greece

 

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.

EU leaders have agreed to seek a 50% reduction in Greek debt from bondholders. This supersedes the 21% reduction decided on in July that was supposed to resolve Greece's financial problems. Apparently $30 billion will be given to the banks as an inducement for them going along with the plan. The EU and IMF will also give Greece an additional 100 billion euros in bailout aid.

While the announcement was delivered with a sense of finality, the first bailout of Greece in May 2010 was supposed to solve Greece's debt problems and so was the second bailout this July. It has only taken three months since the  "everything is really fixed now" July announcement before a much bigger bailout and debt writedown proved to be needed. Until fairly recently, EU officials have constantly denied that this would be necessary or that Greece would default. Not paying 50% of your bond debt is not only a default, but it's a major default.

EU officials still seemed mathematically confused about the situation in Greece. EU President Van Rompuy claimed that the current deal will reduce Greece's debt to GDP ratio to 120% by 2020. If so, Greece is still likely headed for more trouble. Since it is estimated that Greece's debt to GDP ratio is around 160%, it should fall to 80% if all bondholders took a 50% hit. Perhaps all bondholders will not be taking a reduction after all. Both the IMF and ECB hold large amounts of Greek government debt and have in the past been reluctant to accept any writedown of their investments.

The pre-dawn news for the EFSF (European Financial Stability Fund), which is supposed to receive 440 billion euros, is that it will be leveraged up to a trillion euros. The U.S. has been pressing for two trillion. This money can be spent to bail out all the EU banks hurt by the Greek default, but only if they can't raise additional capital in the open markets. So the debt problem will be solved by incurring additional debt and borrowing against it. If this isn't a financial system ticking time bomb, nothing is.

The unanswered question is what is going with happen to Portugal (the next most likely crisis), Ireland, Spain and Italy. EU officials tried to minimize the situation by saying Greece is a special case. It would have been more accurate to say that its problems were more extreme and urgent. They are not unique.  The other countries are already somewhere on the path to insolvency and this will have to be dealt with in the future. The only question is how soon that future will arrive. 

 Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Tuesday, October 25, 2011

October Consumer Confidence Well Into Recession Territory

 

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 October Consumer Confidence number fell to 39.8. It is once again approaching the all-time lows that occurred at the bottom of the Great Recession. The number has never reached the 90 level since 2009, which is the cutoff for a healthy economy. The continually poor levels of consumer confidence  bring into question whether the last recession ever really ended.

While U.S. consumers are gloomy about almost all aspects of the economy, they are most pessimistic about employment prospects. Only 3% of U.S. consumers think that jobs are plentiful. While it is true that this number could have been lower during the 1930s Depression when millions of ordinary Americans went hungry and were homeless, the lowest possible value is only zero. And the current reading could actually be zero since zero lies within the statistical margin of error for the survey. In contrast, those who say jobs are hard to get came in at 47% and that would definitely had been much higher during the 1930s.

The Present Situation Index — how consumers see the state of the economy currently was a very dismal 26.3 in October. This number has remained at fairly low levels for four years now. What has caused the overall consumer confidence  number to rise has been expectations for a future improvement in the economy. The government and mainstream media has continually told U.S. consumers the economy is getting better and will continue to get better. So, consumers have told the survey takers that don't see things as being in good shape now, but they were hopeful about the future. Consumers are starting to lose hope however. The future expectations number fell from 55.1 in September to 48.7. Apparently, you can only fool the public for so long.

The "don't believe what you see with your own eyes, but believe what the government tells you" efforts are still going strong however. Media reports cited better retail sales and a big stock market rally since early October as indications that the U.S. economic situation is improving. Retail sales may have indeed gone up since they are not adjusted for inflation and higher prices make them look better even if fewer units are being purchased. As for the wild behavior of the stock market, explosive rallies are common in bear markets and not in bull markets. They can also occur at any point because of liquidity injections into the financial system from central bankers in Europe, the UK, and the U.S. as would happen during a banking crisis like the one currently taking place in the EU. They don't last for long however.

No matter how you look at the consumer confidence, the numbers are ugly. They are not just indicating recession, they are shouting recession. Only 11% of Americans think that business conditions are good.  The Present Situations Index has dropped six months in a row. Some of the components are at rock bottom levels. Yet, the government and mainstream media keep reporting that the economy is on track for improved growth in the second half of 2011. How can such diametrically opposed views be reconciled? The simplest way to explain the discrepancy is that someone is lying. Any guesses as to who that might be?


Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Friday, October 21, 2011

Can the EU Solve Its Debt Crisis with More Debt?

 

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

European and U.S. stocks were rallying on Friday in what appears to be a liquidity frenzy supplied by the central banks. The market is once again hopeful now that EU leaders are beginning six days of meetings on how to save Greece and the euro. Based on their previous track record, which has led to the current crisis, there is little reason for long-term optimism.

Stock prices have not been the only thing rising lately.  Interest rates have been too in the credit- challenged Eurozone countries. While yields of Greek one-year governments have fallen back to only 180%, they were as high as 189% on October 19th. Greek two-years are at a more manageable 77%. Rates keep increasing in Greece despite the bailouts and this indicates the bailouts aren't nearly large enough and will have to continue and get bigger to keep the country out of default.  The political will for ongoing and ever-larger amounts of bailout money doesn't exist in the EU or does it?

While the EU voting public doesn't approve of spending more rescue money, the EU has created the EFSF (European Financial Stability Facility) a 440 billion euro fund to help bail out its member countries that have debt problems and to bail out the banks that lent them the money that allowed them to have those debt problems. Much remains to be decided on how the EFSF will actually function. There is disagreement of how to use it to bail out failing banks for instance (this is currently being referred to as recapitalization since bank bailouts are also unpopular with voters). There is also a proposal to leverage EFSF funds up to five times, so there will be more than two trillion euros available. This idea is apparently a "helpful" suggestion made by the U.S. monetary authorities.

While the stock market is showing almost as much enthusiasm for the leveraged bailout proposal as it did for the great innovation of triple A rated subprime mortgages in the mid-2000s, such financial trickery ended badly the first time and is likely to fall apart even faster this time. Mainstream media coverage, at least in the U.S.,  rarely looks at where the money is coming from for the EFSF. Technically, the money is being borrowed. So in order to deal with a debt crisis that is wreaking havoc on the financial system because of too much risk, more money will be borrowed and then that money will be leveraged (a form of borrowing in and of itself) to magnify the risk of the new borrowing. If this appears not to make any sense at all, that's because it doesn't. When the default comes — and there is 100% chance that it will —  the end will be much, much worse.

A case can be made however that the EFSF money isn't really borrowed, but a form of money printing instead. If governments borrow without the ability to actually pay back the money without inflating their currency, they are printing money. EU countries are already highly indebted just like the United States (Japan is in even worse shape). The fact that there is a debt crisis in a number of Eurozone countries is confirmation that the level of debt is beyond the point of no return. So a more accurate portrayal of what is going on with the EFSF is that money will be printed, this counterfeit money will be leveraged by borrowing against it and this will solve the problem of too much debt. 

The world has already lived through a debt binge in the early 2000s. The current crisis centered in Europe is simply a continuation of the unraveling of that debt. Governments handled the first implosion with trillions of dollars of bailouts, by running trillions of dollars in budget deficits, and by printing trillions of dollars of money. Debt problems keep resurfacing however. Could it be that engaging in additional reckless and irresponsible financial behavior isn't a solution for reckless and irresponsible financial behavior? EU leaders may wish to ponder this before going forward. 

Disclosure: None


Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Wednesday, October 19, 2011

Inflation Picking Up Globally Leading to Stagflation


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.

Britain shocked the markets on October 18th when it reported an inflation rate of 5.2% for September. This was up from 4.5% the previous month and well above government projections. Inflation isn't just rising there, but higher prices are a global phenomenon.

The world seems to be entering a new period of stagflation similar to the 1970s. Stagflation is high inflation and low GDP growth. This is very evident in the UK where GDP growth for the second quarter was only 0.2% — a full 5% lower than the current CPI (the difference between the UK Retail Price Index is even greater).  The only surprising thing about the UK inflation rate is that the official rate is so low given the amount of money printing done through quantitative easing in 2009 and 2010.

Despite the low growth and high inflation that has resulted from it, the Bank of England (BOE) has just started another round of QE. BOE Governor Mervyn King recently stated, "Without monetary stimulus  low interest rates and large asset purchases there is a risk that growth will stall and inflation fall below our symmetric 2 percent target." As of September, the UK inflation rate has been above the bank's target rate for 22 months in a row. This is happening even though unemployment is also at a 17-year high. Central bankers have consistently maintained the inflation can't be elevated if the economy is weak. They have apparently managed to do so because they don't let real world observations intrude on their thinking.

Inflation is also rising elsewhere as well. On the European continent, the official EU rate rose from 2.5% in August to 3.0% in September. GDP increased by 0.2% there in the second quarter. Inflation has already been elevated in China and India for some months. China's inflation rate in September was 6.1% with food prices increasing at 13.4%. The price of necessities is rising faster there than the price of other goods. This is a common pattern in a number of countries. The yearly inflation rate in India was 9.0% in August.

In the U.S., the CPI for September indicated a 3.9% year over year rise in consumer prices.  This rate severely underestimates actual inflation. According to the alternative numbers produced by Shadow Stats, the current U.S. inflation rate is approximately 11% (Shadow Stats calculates its numbers with the formulas utilized by the U.S. government in the 1970s and this is the only way to get valid comparisons of U.S. inflation numbers across time). Official U.S. GDP growth for the second quarter of 2011 was 1.3% — well below even the government's reported inflation rate.
Even though a clear picture of stagflation is emerging globally, expect this to be continually denied by mainstream news sources. Even yesterday in its reporting on U.S. producer prices, one of the major news services stated, "the strong rise in wholesale prices last month is unlikely to prompt a broad increase in inflation pressures given the weak economy." This is actually pure misinformation. There is a long, long history of high inflation throughout the world during periods of low economic growth or even severe decline. One of the most recent cases historically was in the 1970s when inflation skyrocketed in 1974 during the worst economic downturn since the 1930s depression. Both  Fed Chair Ben Bernanke and BOE Governor Mervyn King were around at that time, but apparently can't seem to recall it. Perhaps if central bankers had better memories, they wouldn't be repeating the mistakes of the past today.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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

Friday, October 14, 2011

2011 Budget Deficit Third One Over a Trillion Dollars






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. budget deficit figures released on Friday afternoon indicate that the deficit for fiscal year 2011 (ending on September 30th) came in at $1.3 trillion. This is slightly higher than the 2010 deficit and the third trillion dollar deficit in a row.

Total federal spending (on-budget items) came in at $3.6 trillion. Revenues were $1.3 trillion, over 4% higher than in fiscal year 2010. Revenue rose slightly to $2.3 trillion. As bad as the budget deficit appears (and a trillion dollar deficit is really extreme), the Congressional Budget Office estimated in January that the 2011 budget deficit would reach $1.5 trillion. The fight over raising the budget deficit ceiling postponed federal spending for a few months until a deal was reached in August however. It is likely that this spending will show up in the 2012 fiscal year.

While there is a special congressional committee looking for $1.5 trillion in savings, its actions are not going to reduce the total federal spending by enough to reduce the budget deficit to something manageable. The amount being cut is for a 10-year period and averages only $0.15 trillion per year. If this had been done last year, the 2011 budget deficit would have been $1.15 trillion — still an astronomical amount.

It is also safe to assume that the budget deficit in the next five years can easily grow much faster than the intended cuts. When they did their projections for future fiscal years, the Obama administration assumed that U.S. GDP would be growing by over 5% a year until 2016. While this figure was never plausible because it is much higher than the potential growth rate of the U.S. economy, now that the U.S. is facing a possible recession and negative GDP growth, it is even more absurd.

Investors should assume that a continual stream of major budget deficits awaits the U.S. in the future. At this point, the massive cutting that is necessary to get the budget under control will cause a hit to the economy resulting in lower tax revenues, which in turn will make the budget deficit worse, not better.  This is the downward spiral that Greece currently finds itself in. More cutting actually is leading to a higher debt to GDP ratio. The U.S. debt to GDP ratio is approaching 100%. Once this number is over 90%, a country's economy becomes permanently weakened. When it reaches 150%, and it will  for the U.S. if its budget deficits remain as large as they currently are, the probability of default becomes almost 100% certain.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

60% Cut for Greek Bondholders on the Table

 
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.
Bloomberg reported overnight that Greek bondholders were preparing to lose 60% on their investments. This is much bigger than the constructive default of 21% proposed with the second bailout in July. A big cut in the value of Greek bonds will cause major problems for German and French banks — and the ECB itself.

Rumors have been floating around the markets for days about a managed default of Greek debt at around the 50%, or greater, level and an occasional brief or cryptic comment has been made publically by EU officials. While this news was reported by the Helicopter Economics Investing Guide blog days ago, it is only just now filtering into the mainstream news services even though a large cut on Greek debt is an arithmetic inevitability. The only alternative would be a second bailout package several times larger than the proposed 109 billion euros (say 500 billion euros or more). Considering that populations of the EU countries are hostile to spending even the 109 billion euros, additional bailout funding is highly unlikely.

Bloomberg quoted a number of well-placed financial executives, including the CEO of Deutsche Bank, in its report indicating a general consensus was building that Greek bondholders would accept a deep reduction in their holdings. There ECB (European Central Bank) seems to be a major exception however. The ECB had amassed a considerable holding of Greek debt earlier on in an attempt to hold down interest rates there. Interest rates have since gone as high as 141% on Greek one-year governments. The ECB subsequently bought up debt from Portugal, Ireland, Spain and Italy to hold interest rates down in those countries. Investors should expect that ultimately these efforts will prove just as successful as they have in Greece.

Recapitalization (a euphemism for "bailout") will be necessary for EU banks if they have to take major losses on their Greek loans. Dexia, the largest bank in Belgium, folded almost overnight recently and its exposure to Greek debt was only a little over 1% of its loan portfolio — and this was before talk of a 60% haircut for Greek bonds. Imagine what would happen to banks with larger exposures? EU banks also hold substantial amounts of loans to Ireland, Italy, Portugal and Spain. The largest holders of Greek debt by far are of course Greek banks themselves. Proton Bank recently closed there, but officials made it clear that it was because of alleged criminal activity and not because of the debt crisis.

Sovereign credit and bank downgrades throughout the EU are becoming increasingly common.  S&P downgraded Spain's long-term credit rating from AA to AA- with a negative outlook (meaning more cuts are likely) today. The agency predicted Spain would miss its deficit cutting targets for 2011 and 2012. S&P downgraded the credit ratings of a number of Spanish banks three days ago including Santander (STD). Credit Suisse analysts just declared the Royal Bank of Scotland (RBS) to be the "most vulnerable" bank in Europe. RBS is 87% owned by the UK government. Credit rating agency Fitch threatened across the board downgrades of the banks yesterday. This potential downgrade would impact Barclays (BCS), BNP Paribas (FR: BNP), Credit Suisse (CS), Deutsche Bank (DB), Goldman Sachs (GS), Morgan Stanley (MS), and Société Générale (FR:GLE) among others.

Perhaps in the next few weeks there will be some temporary resolution to the Greek debt crisis. Unless the cut that bondholders are forced to take is big enough, it won't last however. Whatever happens with Greece won't solve the problems in Ireland, Italy, Portugal, Spain, and possibly in Belgium. To be effective, the recapitalization (bailouts) of EU banks will have to be substantial. This will by necessity involve using money printing to resolve a debt crisis.  That's actually already been done since 2008 and look at what great shape the global financial system is in now. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Tuesday, October 11, 2011

Wishful Thinking on Economy and Europe Driving Markets

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 a major rally on Columbus Day based on the French and German leaders' mystery plan to recapitalize EU banks and on raised forecasts for U.S. economic growth in the second half of 2011. While both news items seemed to contain nothing but wishful thinking, that's often enough for short-term traders.

The Dow Industrials closed up 3.0% and Nasdaq 3.5% on low trading volume. Big moves in the market are more likely when many traders are away and the people who want to move the market know this. Huge rallies under such circumstances are common in severe bear markets. Nasdaq  for instance went up 4.9% on Friday July 5th in 2002 when almost everyone was off on a four day weekend. The market then had an ugly selloff later in the month and an even bigger drop in September and October.

It shouldn't be surprising that "good" news on the economy appeared on Columbus Day. The timing had probably been carefully planned. Goldman Sachs and Macroeconomic Advisers raised their growth forecasts for third quarter U.S. growth to 2.5 percent from about 2 percent and this created the predictable cheerleading coverage from the mainstream media that the U.S. was avoiding a recession. While it is certainly possible that the government will report GDP growth of 2.5% in the 3rd quarter, this does not mean that the U.S. is avoiding a recession, or even that the U.S. isn't currently in a recession. The original GDP numbers at the beginning of the Great Recession weren't that bad either, but they have since been revised down.... again ... and again ... and again. This is how GDP reporting works in the United States. Good numbers are released when everyone is watching and the downward revisions, which can go on for years, are reported when no one is paying attention.

Adding juice to the rally was the news that the German and French had a plan to recapitalize the EU's crumbling banking system. No details of the plan were available however. The lack of information can mean only one of three things. The first possibility is that there is no plan at all or the details are so sketchy that releasing them would make it clear that nothing significant had occurred. Alternatively, there might be a plan that could work, but the chances of getting it approved by everyone involved are close to nil. Or there could be a plan that has a good chance of being approved, but wouldn't be very effective. Regardless, there was no good reason for a market rally from this "recapitalization you can believe in" piece of news.

The EU banking/debt crisis has no easy solutions and will have an ugly ending of some sort despite the mainstream media's constant stream of upbeat "things are getting better" articles. ECB president Trichet admitted today that the EU's debt crisis has become systemic and has moved from the smaller countries to the larger ones.  The rumors of a possible 60% haircut on Greek debt (reported by the Helicopter Economics Investing Guide on Monday and in the financial pages throughout the EU on Tuesday) may even be optimistic. When Luxembourg's Prime Minister Juncker was interviewed on Austrian TV late yesterday about the rumors of a 50% to 60% reduction in Greek debt having to be taken, he replied "we're talking about even more."

A credit crisis can have a devastating impact on the global economy as was made quite evident in 2008. While a case can be made that the monetary authorities have learned how to handle a credit crisis from their recent experience, they have less to work with than they did three years ago. Fed funds rates have already been close to zero for almost three years in the U.S. Quantitative easing has already been done twice in the U.S. and is on its second round in the UK, although it's already run into a glitch there. The BOE refused to buy gilts for the first time ever on Monday because they were too expensive. Maybe money printing isn't the panacea it's supposed to be after all. If not, the global financial system is in a lot of trouble.

Disclosure: None.

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.

Monday, October 10, 2011

Is Dexia Bank the Bear Stearns of the Current 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.

Over the weekend French President Sarkozy and German Chancellor Merkel said they had come to an agreement on recapitalizing EU banks. No details of their mystery plan were released. Plenty of details were forthcoming however on how Dexia bank was going to be bailed out and they indicate that it's time for EU leaders to stop talking and to start acting. 

Before its recent failure, Dexia bank was described as one of the strongest banks in Europe. It had no trouble passing the recent EU stress tests for banks (so much for the accuracy of those tests, which I have maintained for some time are nothing but a meaningless public relations gambit). Its Greek debt exposure was cited by the mainstream media as a primary reason for Dexia's demise. Dexia though had only 5.4 billion euros of Greek debt on its books out of an asset base of 518 billion euros according to Bloomberg. So, Greek debt was a little over 1% of Dexia's loans. Apparently this was enough for wholesale funding for the bank to dry up. Like most banks, consumer deposits were not enough to maintain Dexia's operations, it needed to continually borrow in the interbank market.

Dexia was a Franco-Belgium bank created 15 years ago by a merger of banks from the two countries. It also operates in Luxembourg and owns a 75% stake in Denzibank AS in Turkey, which it purchased in 2006. The Belgium government agreed to buy Dexia for 4 billion euros.  The French and Luxembourg units will be sold. Together, the three European governments will guarantee 90 billion euros of interbank and bond funding for 10 years. Belgium's share will be about 15% of its GDP. Guaranteeing bank debt has its risks and this is why Ireland required an EU bailout. Could Belgium be next?

If Dexia can fail, what EU bank is safe?  Moreover, the failure happened without a default by Greece, so it is clear many more bank failures are possible regardless of the outcome of the Greek debt crisis.
It can also be assumed that default will make the situation much worse. There are reports from German news agency DPA that Eurozone finance ministers are working on a plan involving a 60% reduction in Greek debt (previous reports indicated a 50% reduction).

The recent Dexia failure just like Bear Stearns failure in March 2008 happened because confidence from lenders in the interbank market disappeared. This can happen overnight. The monetary authorities patched things together temporarily after Bear Stearns demise, but the overall situation continued to deteriorate until Lehman Brothers failed six months later. A Greek default is likely to be the Lehman moment for the current credit crisis and Dexia's sudden collapse is similar to Bear Stearns. More bank failures in the EU will be a warning that the current crisis is escalating out of control.

Disclosure: None
Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

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

Friday, October 7, 2011

U.S. Employment Still at Recession Levels in September




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 non-farm payrolls report for September indicated the U.S. economy added 103,000 jobs last month. Mainstream media immediately jumped on the number as proof the U.S. is not in a recession. It indicates no such thing.

While it seems reasonable to assume that employment can't increase at the begging of a recession, this did not happen in December 2007 when the Great Recession began. Total U.S. non-farm payroll employment actually peaked in January 2008 at 137,996,000. It then declined until hitting a low point of 129,246,000 in February 2010, many months after the recession supposedly bottomed in June 2009. Total employment in September 2011 was only 131,334,000, not even remotely close to levels four years earlier. These figures can be viewed at: http://research.stlouisfed.org/fred2/data/PAYEMS.txt.

The internals of the employment situation for September were not encouraging either. In their press release, the BLS admitted right up front that the end of a strike by the Communication Workers union added 45,000 jobs to the 103,000 total. This leaves only 58,000 jobs being created during the month. More than that amount came from only two sources -- health care and construction. The largest increase in jobs was 41,000 and they were created in the "health care and social assistance" category. Like education, many of these jobs are funded by the government either directly or indirectly, yet they are counted as private sector jobs. The government promulgates this fantasy and the mainstream media mindlessly repeats it.

Another 26,000 jobs somehow came from construction. At least the BLS didn't claim they came from the struggling residential real estate market. Almost all of these new jobs came from the heavy and civil construction category. Perhaps the federal government is building another Hoover Dam and forgot to mention it to the public? This is sort of an eyebrow raising number to say the least.

So in September 2011, there were 6,649,000 less employed people in the U.S. than when the Great Recession began in 2007. This is after over two years of supposed recovery. Based on the recent net increases in the labor force, the U.S. needs to create approximately 150,000 new jobs a month for the employment situation to just hold steady. To reduce the official unemployment rate of 9.1% would require adding a much larger number of jobs every month. This is not happening. As for whether or not the U.S. is in a recession, an unemployment rate of 9.1% has always indicated a recession in the past. Is there any reason to think "things are different" this time around?

Disclosure: None.

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
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.