Consumer Confidence Plunges to Deep Recession Levels

 

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 Conference Board released its August 2011 consumer confidence numbers on Tuesday and they came in at 44.5, down a whopping 15 points from August. A reading over 90 indicates a healthy economy. The last time consumer confidence was that high was in December 2007.

The Consumer Confidence Index wasn't the only measure taken by the Conference Board that was down in their last survey -- the CEO Confidence Index, the Employment Trends Index, and Help Wanted Online Index were also lower. CEO confidence was down 12 points in the second quarter (before the budget ceiling negotiations became a heated issue).

Consumer confidence levels indicate that the U.S. has been in a continual recession since the beginning of 2008. The economic "recovery" that has supposedly taken place according to government reports  has not been corroborated  by this independent measure. After falling to 25.3 -- an all-time record low -- in February 2009, the index has so far peaked at 72.0 in February 2011. It was over 140.0 in 2000. The current August reading of 44.5 is lower than the worst readings from the 1980, 1981-82, 1990-91 and the 2001 recessions. So conditions are not seen as being as good during the current "recovery" as they were at the bottom of the last four recessions. 

What has been moving the confidence numbers up and down since the Great Recession began is the Expectations Index -- how consumers see the economy in the future. This is influenced by news flow and after a continuing barrage of media propaganda pumping up the prospects of the economy, this number rises. Every now and then though another crisis rears its ugly head and the Expectations Index plunges back to where it should be. It fell to 51.9 in August from 74.9 in July. The fight over the budget ceiling and the stock market drop in early August likely brought it back down to realistic levels.

What has hardly budged since the depths of the Credit Crisis is the Present Situation Index - how consumers see things right now. This was at 27.5 in February 2009 when consumer confidence was the lowest ever recorded. It was at 33.3 this August, two and a half years later. If the economy had truly recovered, this number should be over 90.  Instead, it's at rock bottom levels. Apparently, consumers can be fooled into thinking the economy will be better in the future, but not about their current experiences.

As soon as the dismal consumer confidence numbers were released, the media economic spin machine went into action to try to explain why they weren't so bad after all even though they looked really horrible. They dredged up numbers showing 47% of consumers plan on taking a vacation (or put another way --a majority of consumers can't afford to take a vacation)  and that more consumers plan on buying cars and appliances in the future. Not necessarily in the immediate future of course. This is probably going to happen after all the improvements in the economy take place -- the ones they keep reading about in the papers and seeing on the nightly news.

 Disclosure: None

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.

A Twisted Tale of Gold Stolen Almost 80 Years Ago

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.

Apparently the government can keep property stolen from you, but you can't keep property stolen from the government. A recent Bloomberg Businessweek article entitled "Gold Coins: The Mystery of the Double Eagle" details how the Secret Service has spent almost 80 years trying to track down 1933 Double Eagle $20 gold coins missing from the Philadelphia Mint.  It is well-known however who stole millions of dollars of gold from the American public in the same year - and since it was the U.S. government, lot's of luck in getting compensation.

The 1933 Double Eagle never went into circulation. All coins were ordered to be melted down because U.S. citizens were banned from owning gold in the same year. Moreover, the Roosevelt Administration confiscated all gold and paid gold holders $20.67 per ounce. Those who failed to turn their gold in were subject to a 10 year jail sentence - more time than some violent criminals got - and a $10,000 fine. Once the government had the citizenry's gold, it raised the price to $35.00 an ounce or 41% higher. The price difference represents the value of personal property stolen by the government.

Sensibly, some people sued the federal government claiming the gold seizure was unconstitutional. After all, the U.S. Constitution clearly protects property rights of Americans - if it is enforced that is. Moreover, the Roosevelt Administration claimed it was given authority to seize everyone's gold through a World War I law that gave the government sweeping powers to seize personal property to protect the Republic during wartime. There was of course, no war in 1933.

Nevertheless, the Supreme Court, in one of its most absurd rulings of all time, ruled the gold seizure perfectly legal. Even today, the mainstream press continues to soft peddle this trashing of the U.S. Constitution. The Bloomberg Businessweek article states that Roosevelt's Executive Order 6102,  "prohibited the hoarding of gold", rather than the owning of gold. While the gold was taken long ago, the same propaganda from the 1930s seems to still be with us.  

Apparently also in 1933 at least one employee at the Philadelphia Mint smuggled out some Double Gold Eagles. The government was unaware of this however. Around 1937, a Philadelphia coin dealer offered some Double Gold Eagles for sale. One of them, after being purchased by another coin dealer, was sold to King Farouk of Egypt. Unbeknownst to the Secret Service, the Secretary of the Treasury's office issued an export license for this coin on Feb. 29, 1944.

This was only one of many things that took place at Treasury that the Secret Service knew nothing about. Not stated in the Bloomberg Businessweek article was that the Under-Secretary of the Treasury at the time, Harry Dexter White, was the most highly placed Soviet agent in the U.S. government. This inconvenient, but well-documented truth has been covered up or minimized by left-wing historians and reporters for decades. White began working for the Roosevelt Administration in 1934 and concentrated on the relationship of gold and silver to currency management. The U.S. federal government confiscated American's private silver holdings in 1934.

The Secret Service arranged an elaborate sting operation in 1996 to eventually get the Farouk gold coin back. Thank goodness they didn't waste their time investigating Bernie Madoff while he was in the process of ripping off the public in his record breaking $65 billion Ponzi scheme. Eventually, after being seized from a British subject who had bought it, this coin was sold at auction and the proceeds were split between him and the U.S. government. Recently more coins have surfaced in the United States and the government has simply confiscated them -- something it is very good at doing when it comes to gold.

That the U.S. government claims rights through perpetuity and across national borders for its property, but unconstitutionally denies them to its own citizens is the major issue in the Bloomberg Businessweek article (one they seem to have missed entirely), but not the only one. Other than the dangerous precedent of property rights for the average person being trashed, the article brings up the point that the federal government is unaware that gold is stolen from its storehouses and the government wastes its time on pursuing trivial matters on its behalf while ignoring major economic crimes involving billions or even trillions of dollars. Fort Knox hasn't been audited  since 1954. How much of the gold is still there?  What other major Ponzi schemes and frauds are taking place while government agents spend their time tracking down gold coins from 1933?

Disclosure: Do not own any 1933 gold coins.

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.

July Consumer Spending - Reports of Its Health 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.

The U.S. stock market reacted jubilantly to July's consumer spending numbers. Apparently, it didn't see the bad news the BLS report contained. Some of this was understandable since the AP (Associated Press) article -- carried by hundreds of news outlets -- seems to have reported more favorable numbers than the ones the government released.

The important take-away from the report was that disposable personal income adjusted for inflation (or more accurately adjusted to reflect some of the inflation that actually exists) was down 0.1%. So if there was any increase in consumer spending, it was taking place on money being borrowed by already tapped out consumers. U.S. consumer debt, including mortgages, is already more than the $15 trillion GDP. Federal government debt is approaching that amount.

Both the BLS and AP reported that consumer spending increased by 0.8% in June. This number is unadjusted for the official inflation rate. The rise was concentrated in the durable goods component of the report. The BLS reported this as being up 2.0% and AP had it up 1.9%. Apparently, U.S. consumers ran out and bought more automobiles and automobile parts in July. According to the government, they then spent less on non-durable goods (items that last less than a year). According to AP, they spent more.

The BLS report had non-durable goods spending down 0.3% in July. AP reported it up 0.7%. Both reports had spending on services being up, the government by 0.5% and AP by 0.7%.  The story reported by AP was far more favorable that the one told by the U.S. government, which was in turn much more favorable than would be the case if some realistic inflation rate was used. The discrepancy for the non-durable and services numbers in the two versions is probably a consequence of AP using numbers not adjusted for inflation. These numbers will always make things look as favorable as possible. This is not news; it's public relations that favors Wall Street and makes the government look like it's doing a better job with the economy than is actually the case. Traditionally, this would be referred to as propaganda.

While the spending on durable goods was concentrated in transportation, increases for services took place because Americans were using more electricity to run their air conditioners during the record hot weather in July. This does not indicate the economy is getting better, nor that it is even flat. It indicates that it was hot in July. Yet, the AP couldn't wait to quote economists that claimed the consumer income and spending numbers that it reported indicated a U.S. economy with rosy prospects. Perhaps they should try including comments on the actual numbers next time.

The BLS report can be found at: http://www.bea.gov/newsreleases/national/pi/2011/pi0711.htm

One of the hundreds of places the AP report can be found is:
http://finance.yahoo.com/news/Consumers-spending-rebounds-apf-1701587266.html?x=0&sec=topStories&pos=4&asset=&ccode=

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.

Bernanke in a Hole in Jackson as Wall Street Evacuates

 

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.

Fed Chair Ben Bernanke gave his much awaited speech at Jackson Hole friday morning saying little of substance and less of note. Hours later, but only after the market had a chance to rally, New York City Mayor Bloomberg ordered a mandatory evacuation on the low-lying areas of New York City including Wall Street itself.

The mainstream press couldn't wait to trump up Bernanke's empty clichés and pump up the stock market. Before Bernanke started his speech the market started dropping and the Dow Industrials were down 220 points while he was speaking. Within two hours, the Dow had rallied almost 400 points from its bottom. Such huge market moves in a short period of time indicate an unhealthy market. When stocks bend too much, they eventually break.

What was the great revelation from the Fed Chairs speech? It was "the U.S. is headed for long-term economic growth". Another brilliant insight from the man that said subprime mortgages wouldn't cause any significant problem up to one month before they began torpedoing the stock market and the economy. Bernanke also failed to stop the worst bear market and recession since the Great Depression in the 1930s and let the world financial system fall off a cliff because he failed to understand what would happen if Lehman Brothers failed. But like the dim-witted son of a third world dictator, the press still slavishly talks him up after each ill-fated move.

Just as a barely subdued economic panic impacts America's main sreet communities, New York is on edge because of Hurricane Irene. Food stores and the transportation hubs are mobbed. People in low lying areas have been ordered to evacuate just before the authorities are closing down the subway system and commuter railroads -- the only way out for many New York residents. Another example of government action at its best. That Wall Street itself is in danger of being flooded just after more wisdom from Chairman Ben is an irony that should not go unappreciated.   


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.

Guide to Interpreting U.S. GDP Figures

 

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.

An update for second quarter GDP figures were released today and growth was revised downward to 1.0% from the initial reading of 1.3%. There will be another revision next month and then further revisions each year in late July or early August. Expect the numbers to get worse as time goes on.

Media attention is not equally distributed to all the versions of the same GDP report. The most attention goes to the first release called the Advance Report. These have tended to be highly optimistic since the Credit Crisis began. The Second and Third Reports that follow (also known as the Preliminary and Final Reports) get slightly less attention, although these are almost always within the same ballpark. The big revisions come in the yearly updates in July and while these can be devastatingly bad, little attention is paid to them by the mainstream media. Nor is the information provided in them used by the mainstream media to interpret current data. The primary reason for this is that the mainstream media rarely interprets government statistics at all no matter how absurd and ridiculous they are. Instead, they mindlessly repeat them in a parrot-like fashion. The public then thinks it's getting real news when it isn't.

On July 29, 2011, the BEA (Bureau of Economic Analysis) revised the GDP figures back to 2006 and stated that GDP growth in Q1 2011 had only been 0.4% instead of 1.9%. There was some comment attached to this report about how seasonal adjustments had inaccurately overstated the numbers. It would be logical to think that such overstatements would be happening in Q2 as well and that these will not be corrected by the BEA until the revision in July 2012. Looking at changes made to the GDP numbers in the last few years certainly provides more than enough reason to believe that the BEA provides the best news possible when the media pays the most attention and the worst news when no one is looking.

The history of the GDP for Q4 2008, the quarter when the Credit Crisis was at its worse, provides a good example of how the government reports GDP. The first report out was a reading of -4.0% -- a bad enough reading, but much better than what was really taking place. After many revisions downward, the BEA this July said the GDP had actually changed by -8.9%. This is an absolute error of almost 5.0%. If the BEA states quarterly growth is +3.0%, you may wish to ponder if it was really
-2.0% instead, but you won't be hearing about the difference until years later. One is normal healthy growth and the other indicates a recession.

The year over year GDP figures can have even bigger errors. The difference from Q4 2007 and Q4 2008 originally indicated 3.3% GDP growth (during the worst recession since the Great Depression, this pigs-can-fly number went unquestioned by the media), but by the July 2011 revision a GDP decline of 3.3% was admitted. This is more than a 6.0% absolute difference. You might want to consider subtracting 6% from any year over year GDP number that the government provides.

The GDP figures produced by the BEA can be highly unreliable and yet the mainstream media doesn't discuss this, nor does it warn investors about it in its reporting. When hearing the news about GDP growth being a passable 2% to 3%, you should assume it might barely be positive or even somewhat negative. For reports like the recent ones that indicate growth of 1% or less, you should assume the economy is noticeably contracting. The BEA will not admit these discrepancies until well into the future however.  You can also assume other statistical manipulations being used to overstate GDP won't be admitted at all.
 
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. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

German Flash Crash Shows Vulnerability of the Market

 

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

Between 3:30 and 4:00PM Central European time the DAX, the major German market index, lost around 250 points. This is roughly equivalent to a 500 point drop in the Dow Industrials in half an hour. Prior to that, the DAX had been slowly drifting lower. Then suddenly it dropped like a rock.

The pundits were quick to come up with possible explanations. A fat finger error was cited as a possibility (this is when a clerk accidentally puts an extra zero or two or three after the number of shares when entering a sell order). This was pure speculation on the part of the media however. While it is certainly possible that this was the cause of the drop, there is as of yet no evidence supporting this claim.

New problems with the evolving and unending Greek debt crisis were also thought to have led to the floor falling out of the market. Greece's central bank activated the Emergency Liquidity Assistance (ELA) program to help its struggling banks stay afloat. ELA is only for emergencies, so its use indicates that Greece is teetering toward default. So what else is new?  At this point, anyone who isn't in a coma should realize a Greek default is inevitable.  

The Bank of England also announced that it was extending a swap line to the ECB. The swap line allows the ECB to borrow British pounds at low interest rates in order to maintain liquidity in the Eurozone's banking system. Investors should ask themselves what exactly is going on that the ECB needs help maintaining liquidity. This is of course is always a problem during a credit crisis.

There were apparently also rumors about Germany banning short selling. Not so farfetched considering that France, Italy, Spain and Belgium extended their short-selling ban on financial stocks, which would have ended this week. Traders dislike restrictions and their initial reaction is to get out of the market when they appear. Authorities also don't make these bans unless there is good reason that traders want to engage in heavy short selling. They are an admission that something is rotten in Denmark or in this case, Greece, Portugal, Ireland, Spain and Italy. This news was out around the time the DAX had its precipitous fall.

If today's drop was an isolated incidence it wouldn't necessarily be anything to worry about. However, there has been at least one serious market problem each week for several weeks now. The Nasdaq and Russell 2000 in the U.S. have had three mini-crashes. The DAX has had a few itself. The U.S. Dow is moving up and down in multi-hundred point increments. The situation is not stable yet and the market is making that abundantly clear. 

 Disclosure: None

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. Investing is risky. If you don't feel that you are capable of doing it yourself, seek professional advice.

Economists Don't See The Recession That Has Already Started

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

A just released survey of 43 mainstream economists polled this month by the AP pegs the chances of the U.S. falling into recession in the next year at only 26% (one in four). As a group, the economists predict the economy will expand by over 2% in the second half of the year. Other news that appeared with the survey results included an article about how food stamp use in the U.S. is skyrocketing - a highly unlikely occurrence during an economic recovery.

When deciding how much credence should be given to the current recession view of the economics profession, investors should consider how accurately they predicted the Great Recession - the worst one since the 1930s. The recession began in December 2007. That same month a survey of 54 mainstream economist was published by Business Week under the title, "A Slower But Steady Economy" (AP could have used the same title for its current survey). How many of these highly-paid top economists realized that the U.S. was in recession?  None, zero, nada, zilch. How many thought that the U.S. was about to experience the worst recession in almost 80 years? None, zero, nada, zilch.
Unless you have reason to believe that establishment economists have been regularly taking handfuls of smart pills in the last three years, it's unlikely that their views are any more accurate today.

Instead of listening to the miss-opinion of mainstream economists constantly being shoveled out by the mainstream media, investors would be wise to look at the hard evidence of what is actually taking place in the economy.  Approximately 46 million Americans (15% of the population) are on food stamps. The number has increased by 74% since 2007. One wonders how big the increase would have been without the economic "recovery" that has supposedly taken place. Many of the people who receive food stamps are employed part-time and sometimes full-time in low paying jobs. If so, they are not part of the unemployment statistics and are considered successful examples of the U.S. pulling itself out of recession.  

Of course having a large part of the country on food-aid is an expensive proposition. How exactly has the U.S. paid for this?  Well, one way is through the approximately $2 trillion in money that the Federal Reserve has printed since 2007. Two trillion dollars of phony money can really juice up an economy. Without it, the GDP would still be in a deep hole from its 2007 levels and the illusion of  economic recovery wouldn't exist. If it turns there's no free lunch after all, the U.S. is going to be hit with a very big inflation bill in the future. Don't expect Fed Chair Ben Bernanke to see this coming though. After all, the Fed remained oblivious to the Great Recession long after it had started. Even in the spring of 2008, their meeting notes indicate that they were still hopeful about avoiding the recession that had begun months before.  

Investors should expect an ongoing stream of articles in the next several weeks or even months about how the U.S. is not going to experience another recession. The stock market is sending a very different message though and even the fluffed up economic statistics the government produces are likely to  look a bit anemic this fall. But don't worry, establishment economists are optimistic as they always are when a recession begins.

Disclosure: None

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. Investing is risky and if you don't think you are capable of doing it yourself, seek professional advice.

Three Crashes and a Second 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.

The tech heavy Nasdaq and small cap Russell 2000 crashed again yesterday, August 18th. Nasdaq was down 131 points or 5.22% and the Russell 2000 was down 42 points or 5.90%. This is the third crash for both of them since the beginning of the month. Repeating crashes (drops of 5% or more in one day) were  common during the Credit Crisis in the fall of 2008 and indicate severe stress in the global financial system.

As in the fall of 2008, bank stocks are leading the way down. The only difference now is that bank stocks in Europe are getting hit the hardest, whereas it was U.S. and UK banks three years ago. So far, U.S. markets are holding up better than those in the EU. The Dow and S&P 500 have had only one mini-crash so far. The German DAX has had several. While continental European markets have been hit the hardest, Asian markets have continued to suffer the least from the current turmoil. The Hong Kong markets are being more impacted than those in Japan.

While U.S. banks Morgan Stanley and Wells Fargo were down somewhat more than 4.5% yesterday and Bank of America and Citigroup 6.0%.  This was much better than the 10% drop in Germany's Commerzbank, the 11.5% drop in the Britain's Barclays and the 12% drop in France's 

Société Générale. As of August 18th, the EURO STOXX Financials index was down 38% from earlier this year.

Just last week, French banks were supposedly in trouble, but this was denied by them and one major French news outlet retracted a story that claimed this was the case. Yesterday, the ECB (European Central Bank) said one bank, which it didn't identify, had paid above-market rates to borrow $500 million a day for seven days. Today, it was reported that the U.S. Fed supplied $200 million of liquidity to the Swiss National Bank in the form of forex swaps. These are two separate issues. Switzerland is suffering from a skyrocketing currency (which is going to cause massive loan defaults in Eastern Europe if it continues since many loans there are denominated in Swiss francs), whereas the ECB is trying to keep banks afloat despite the fallout from the Greek debt crisis.

The chances of a full Greek default  (a selective default with bondholders taking a 21% haircut was already part of the second bailout deal reached in July) intensified on Thursday. Finland insisted that Greece provide a cash deposit equivalent to its share of the second bailout guarantees. Four other countries then made similar demands. This of course undermines the bailout by taking away money with one hand that the bailout is providing with the other.

Financial crisis behavior was also evident in the U.S. treasury markets. The yield on the 10-year fell as low as 1.9872 on Thursday, taking out the low from 2008. The two-year treasury has been hitting a series of new lows and has been significantly below its Credit Crisis bottom for some time now. One thing that is different from the 2008 Credit Crisis is that gold is rallying strongly and is in a blowoff. The December gold futures contract hit another all-time high  at $1881.40 this morning before U.S. stocks opened.  Gold has always been a safe haven throughout history and despite claims to the contrary, it will remain so.
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.

Today's Stock Market Action Looks A Lot Like August 1998

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.

Something is seriously bothering the stock market and the news that's out there isn't enough to justify what is going on. Such was the case in August 1998 as well. What caused the sudden bear market to appear out of nowhere in 1998 became fully evident only after the fact. The same could be the case in August 2011.

Perhaps the flash crash in October 1997 was a warning of things to come, just as the flash crash in May 2010 may have been a prelude to today's stock market drop. In the second half of July of 1998, stocks began to nosedive suddenly, just as they did in 2011. Some stabilization took place in the market toward the middle of August in 1998 and then a new deeper plunge began. Today, the Dow Jones industrials were suddenly down over 500 points this morning on what could only be considered minor bad news.

There were actually two problems causing the market debacle in 1998. Everyone knew about one of them - the Russian debt default and devaluation of the rubble, which took place on August 17th (less than half of the eventual market decline took place before this date).  Only Wall Street insiders knew about the second one - problems at Long-Term Capital Management (LTCM) - that almost brought down the financial system. 

Trouble in Russia was evident as early as October 1997 and it resulted from the fallout from the Asian financial crisis, which in turn started as a currency crisis in Thailand in July of that year. Today, Europe is undergoing a crisis with the euro that began in Greece in 2010. By August 1998, the Russian central bank had spent a great deal of its dollar reserves defending the ruble and decided to give up. The default had a number of ripple effects, but the most important one on LTCM wouldn't be known by the public until late September, only days before the market finally hit bottom.

After the Russian debt default, stocks plunged until the beginning of September. The market was close to its ultimate low at that point, but only because of the subsequent successful rescue of LTCM.  Stocks then rallied for approximately three weeks. A bailout of LTCM was arranged by the Federal Reserve on September 23rd. The market then sold off until early October hitting a new low and then the decline  was over.

In the rally that followed the stock market experienced huge gains led by a bubble in tech stocks. This was a consequence of the Fed lowering interest rates and pumping too much money into the financial system. The Fed had a lot of leeway to do both in 1998 and still there were serious negative results between 2000 and 2002 when the tech bubble collapsed. Inflation wasn't a concern back then because commodity prices had been declining for almost two decades and were around their lows. It should be assumed that a failure to have successfully rescued LTCM would have caused a much bigger drop in stocks (as happened when the Fed didn't bail out Lehman Brothers in September 2008).

The Fed has a lot less ability to maneuver in August 2011. Fed funds rates have been at zero since December 2008. The Fed has already expanded its balance sheet by approximately $2 trillion since the Credit Crisis began. Commodities are closer to their all-time highs now, not their lows. Another bailout like the one in 1998 (which was minor compared to what occurred during the Credit Crisis) could send inflation assets into a bubble. Gold is already trading over $1800 today and seems to be leading the way.  

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.

Credit Crisis Déjà Vu

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 September 2008, the markets were in sharp decline because of a bank-centered financial crisis. The authorities took action with bailouts and by buying bonds to prop up the market. Short selling of financial stocks was banned in order to stabilize the markets. Things are certainly different in 2011.  It's not that all of these events aren't happening again, they certainly are. This big difference is that now they are happening in August instead of September.

The geographic epicenter of the crisis has shifted as well. Europe is now dragging down the global financial system, whereas it was the United States that was doing the heavy lifting in 2008. Yet stocks have been down by similar amounts in continental Europe and in the U.S. this month. Whereas the U.S. was dealing with the failure of Lehman Brothers in September 2008, the EU is dealing with a selective default of Greek debt and trying to prevent new crises from arising in Spain and Italy (problems in Ireland and Portugal are on the back burner for now). Greece received its first bailout in May 2010 and then another bailout this July. The original terms of the new bailout require bondholders to take a 21% loss on their holdings. If the bondholders were just in Greece, this would not have major implications. However, French and German banks were major lenders to Greece. The Greek bailout is really a bailout for them.

Rumors have been rife that a number of French banks are in trouble and that S&P was going to downgrade them and France's AAA credit rating. Rumors also dogged Bear Stearns before its failure in March 2008. The company vehemently denied them, especially in the week before it collapsed. The SEC threatened to investigate and find the culprits spreading false rumors about Bear Stearns being in trouble. The SEC's case fell apart though after the company closed its doors. 

Any company, especially any bank, in trouble is going to publically deny it. So French banks denying that they are financially troubled, which they have done, is in and of itself meaningless. In this case, more credence can be given to S&P's statements on the matter. S&P denies it is about to downgrade the credit ratings for France or of the French banks rumored to be in trouble. It would look pretty foolish if it turned around and lowered them in the near future. S&P of course is still smarting from the reaction from its downgrade of U.S. debt from AAA to AA+. Even though the U.S. can't pay its everyday bills without borrowing money and this is as good a definition of insolvency as any, there was incredible outrage that S&P lowered its credit rating. After all, they had given the top rating to securitized mortgage bonds containing subprime loans and some of those borrowers had no income, no assets and no prospect for paying off their debts.

Another government reaction that took place in 2008 that is repeating itself in 2011 is a short selling ban. France, Spain, Italy and Belgium have just banned short selling of select financial stocks. On September 19, 2008, the U.S. banned short-selling on 799 financial stocks. Britain banned short selling on similar stocks the day before. Did it work back then?  No, it didn't. A large number of banks failed and many that didn't remained functioning only because of massive bailouts or because they were nationalized. 

Direct government takeovers were more common in the UK than the U.S. in 2008 and 2009, but just as the land of the free banned short selling, the supposedly capitalistic U.S. took over Fannie Mae, Freddie Mac and eventually GM (it had been lumped in with financial stocks as part of the short selling ban). It's not clear that the bailouts have yet to end either. In August 2011, Fannie Mae paid $500 million to buy servicing rights for 400,000 of Bank of America's worst-performing loans, loans with an unpaid balance of $73 billion. or these instead of Bank of America. Who exactly benefitted from this arrangement? Fannie Mae and Freddie Mac back $5 trillion in loans and many of them are not likely to be paid off. This debt is not counted as part of the $14 trillion plus U.S. national debt, but at least some of it should be.   

In 2011, the ECB (European Central Bank) has established a Securities Market Program to buy government bonds of its troubled members in order to keep interest rates lower than the free market rate. Its first buys were Spanish and Italian bonds on August 8th. The U.S. Fed was a heavy buyer of bonds in September 2008, although it didn't announce its first quantitative easing program until late November of that year. It also denied at the time that it was engaging in quantitative easing. Most of QE 1 had already taken place by the time the Fed announced it. This highly relevant fact remained unmentioned.

So here we are in 2011 and we find events are very similar to what was taking place in 2008. Some of the players are different, the locations are different and the order things are happening may be a little different. But all in all, it looks like the more things change; the more they remain the same.  

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21
Author: "Inflation Investing - A Guide for the 2010s"


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

Buy When There's Blood on the Street - Just Make Sure It's Not Your Own

 

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.

Monday August 8th, the first trading day after S&P downgraded U.S. debt, was a crash day in the American stock market.  Asia held up much better and so did much of Europe, except for Germany.

The Dow Industrials were down 635 points (5.55%), the S&P 500 was down 80 points (6.66%), Nasdaq was down 175 points (6.90%) and the Russell 2000 64 points (8.89%). The DAX in Germany was down slightly more than 5%, whereas the Nikkei in Japan and the Hang Seng in Hong Kong were down a little more than 2%.  A crash is traditionally defined as a drop of 5% or more in a day. The Nasdaq and Russell 2000 already had a crash day last week. U.S. stocks had numerous crashes during the Credit Crisis in 2008.

Stocks looked like they were about to enter freefall - a severe uninterrupted drop - around 3:00PM.  President Obama delivered a statement on the S&P downgrade and caused a temporary short-term move up instead. The market would have washed out otherwise and been ready for its first rally.

As is, the market is at the end of its first stage of selling, we may just have to wait a little longer.  The technical indicators on the daily charts have either hit their lowest points or are very close to them. Some short covering and opportunistic buying should lead to a quick sharp rally for a few days. This rally is for traders only. The weekly technicals have yet to bottom out and nothing longer term should be expected.  

Technical bottoms and price bottoms are not the same. The technicals will have to gather some strength before stocks can enter a new rally phase. The ultimate price bottom is probably as much as two months out, which would put it somewhere in October. Until then, choppy action that brings the indices intermittently lower should be expected. While the indices may not go a lot lower, individual stocks, especially small cap, high-beta stocks (those known for their volatility) can indeed go much lower. This also includes high flyers that have yet to have had a big drop. In major selloffs, almost everything goes down.

Once a bottom is established, the volatile stocks you wanted to avoid in the selloff are the ones you want to own. This is where you will make the most money. Small, emerging, and leveraged are the keys. Smaller cap stocks will go down the most and then back up the most (just make sure the drop was market related and not because the business of the company is threatened). Emerging markets, both the BRICs (Brazil, Russia, India, and China) as well as smaller ones will have the same up and down behavior. Russia was down 12% on August 8th for instance. You will do better still if you use leverage on your buys. There are ETFs that provide 200% and 300% exposure. For the emerging markets, these include LBJ (300% Latin America), YINN (300% China), RUSL (300% Russia), EDC (300% Emerging Markets), INDL (200% India) and UBR (200% Brazil). For small cap stocks, TNA (300% long the Russell 2000 index) is the most leveraged play.

Traders should be able to make good use of these ETFs to move in and out of the market. Investors with a longer-term perspective will want to wait until a market bottom has had time to fully develop.  

Disclosure: Waiting to buy.

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

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

U.S Credit Rating Downgrade - A Humpty Dumpty Moment

 

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.

As everyone knows by now, S&P downgraded the U.S. sovereign debt rating from AAA to AA+ on Friday. While the extent of the downgrade is minor, the implications are major. As the recent debt ceiling negotiations revealed, the U.S. cannot run its day-to-day operations without borrowing money. It lives on credit (as do most countries in the world today) and anything that impacts its ability to borrow money has serious consequences.

It takes a lot for a credit rating agency to lower the credit rating of a top corporation or country. This is usually only done long after the actual credit worthiness has experienced a significant decline.  The last major Friday afternoon credit downgrade from the credit rating agencies was when they lowered Bear Stearns rating on March 14, 2008. The company didn't open its doors again the following Monday.  The rating agencies were also tardy with lowering the credit ratings of accounting fraud poster child Enron, although they all did finally lower its rating to junk status four days before it declared bankruptcy. Perhaps the best analogy to the current U.S. situation though is the AAA ratings given to a number of securitized bonds that held subprime mortgages. These turned out not to be worthy of a top credit rating after all.

The farcical nature of how the credit agencies determine the rating of U.S. government debt was made clear during the debt ceiling negotiations. Numerous articles in the press reported that failure to come to an agreement, which would allow the U.S. to continue to spend money it didn't have because it could borrow more, would be viewed as fiscally irresponsible! A more rational response would have been, it's quite obvious that the U.S. can't function without borrowing an increasing amount of money and it is therefore insolvent. Under such circumstances its credit rating should be at the junk level - a BB or less - not an AA+. Eventually, this might happen, but as was the case with Enron, this would mean the U.S. would likely be going under a few days later.

The difference between the AA+ credit rating and the BB or lower one is caused by the fantasy factor. The AA+ rating is based on the glorious financial past of the U.S. and ignores the current downward trajectory it is on. Before the debt ceiling problems temporarily curtailed spending for a while, the U.S. was on course for as much as a $1.65 trillion budget deficit. This represents 11% of the current GDP number of $15 trillion (there are many reasons to think GDP is substantially overstated). It is true, that the U.S. is not borrowing money to pay for most of this deficit however - it's printing it. Quantitative Easing 2, a form of money printing, conducted by the Fed covered 70% of the deficit in the first half of the year. A country doing this certainly does not deserve an AAA credit rating, nor does it deserve an AA+ credit rating unless you can make a case that a company engaged in the business of counterfeiting money also deserves a close to top credit rating.

The Obama administration complained that S&P overestimated future U.S. deficits by $2 trillion. What this means is that S&P refused to accept the pie-in-the sky budgets numbers that the government generates. If you look at these, you will see that they assume GDP growth of over 5% a year, each and every year, until 2016. One year of GDP growth over 5% would be good and continual annual GDP growth of over 5% for the U.S. economy just isn't possible. The budget scenario also assumes very low inflation, which would certainly not be the case if the high growth it assumes takes place.  A combined deficit of $20 trillion in the next decade instead of the administration's $7.7 trillion would be more plausible. S&P assuming $2 more is still ridiculously low.

The immediate impact of the U.S. credit downgrade will be to cap the credit rating of companies at AA+. The government of the country has to have the highest credit rating in that country because in theory it has no default risk. Economists say that governments can use their ability to tax to pay off their debts. Although as finances deteriorate it is much more likely governments will print money to pay off their debts. No fiscally solvent government ever engages in excess money printing however. The U.S. Fed had increased its balance sheet (a measure of money printing) by $2 trillion since 2007. It doesn't appear that the credit agencies are taking this into account.

The longer-term implications for the lowered credit rating are far more serious.  More downgrades are likely. Interest rates will go up. Money will leave the United States. The U.S. dollar will lose its reserve currency status and this will lower its value substantially. Higher interest rates and a falling currency will both be inflationary. 

The financial world operates very much on image and reputation. Once that's shattered, it can take years to repair it, if it can be done at all.  When Bear Stearns was downgraded in March 2008, the damage to its ability to operate in the financial markets was terminal. The company imploded like an overinflated balloon that had a pin stuck in it. Fortunately, this is not likely to happen to the U.S. - at least not yet.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21
Author: Inflation Investing - A Guide for the 2010s

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.