Friday, October 5, 2012

Lying with Statistics: the September Jobs Report

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.

One month before the presidential election, there was suddenly a major reversal in unemployment trends that have taken place during the entire administration of the Obama presidency. The figures indicate explosive growth is taking place in the U.S. economy and this has occurred overnight. The explanation of where this growth is coming from or how it has happened is illusive.

Unlike the previous four years, large numbers of jobs were supposedly created last month. Actually that's not exactly the case. The household survey reported 873,000 jobs were created, whereas the business survey reported 114,000 — a typical amount. In previous months, the household survey has actually indicated major job losses. The mainstream media has failed to report this. However, when a number suddenly appears that lacks credibility in the same survey, but that number is positive, it apparently is worth reporting. 

Where did these jobs come from?  It's not clear from the report. It was specifically stated that "manufacturing employment edged down in September". There was a loss of 16,000 jobs, so there is no evidence that U.S. manufacturing is on the upswing. Based on the following statement, 600,000 people were hired part-time last month: "The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) rose from 8.0 million in August to 8.6 million in September". This is a huge change. Where are these part-time workers employed and what were they hired to do? Will they be fired the day after the election?

Perhaps even more amazing is that the BLS reported that the U.S. labor force grew in September 2012 for the first time in years. From August 2007 to August 2012, the U.S. labor force shrank like it would during a depression with a total 9,602,000 people leaving it. It abruptly increased by 418,000 last month. What caused such a large number of people to suddenly influx into the labor force? GDP last quarter barely grew indicating a stagnant U.S. economy.

The number of unemployed persons, at 12.1 million, supposedly decreased by 456,000 in September. The BLS stated that the unemployment rate fell to 7.8%  the first time it has been below 8.0% since just after President Obama took office. The continual multi-year unemployment rate of over 8.0% has been a major issue in the presidential election.

The numbers in the September employment report are quite fantastic and there is no basis for believing them. Disreputable statisticians can easily produce highly unreliable numbers. If statistics are inconsistent with the past, with each other, have no traceable explanation or seem contradictory with real world observations, they are suspicious. In the case of the September employment report all four criteria have been met. The quality of U.S. economic numbers have been decaying for the last 30 years. They seem to currently be making the transition from manipulation to outright fantasy.

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, September 21, 2012

The Technical Picture for Gold and Silver


 

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 world is awash in central bank money printing, with Japan this week joining the US and the EU central banks in announcing new stimulus efforts. As long as these programs continue, investors should be bullish on gold, silver and their miners and look to accumulate on any pullback (the same can be said for other inflation-related assets as well).

While there are a number of options for buying gold, silver, and their mining stocks it is best to analyze them using the GLD for gold, SLV for silver, and GDX and GDXJ for miners. All are ETFs with GDX representing a portfolio of senior miners and GDXJ junior miners (companies doing exploration and those in pre-production). More aggressive investors can buy leveraged products such as DGL and UGLD for gold, AGQ and USLV for silver and NUGT for miners.

Technically speaking, the charts for gold, silver and the miners are strong and getting stronger. The 50-day SMA (simple moving average) of GLD crossed the 200-day SMA on Thursday. This is considered a major buy signal among technicians and ironically it's known as the golden cross.  SLV hasn't made this cross yet, but it is a mathematical certainty that it will do so. This will most likely happen by the end of next week. The miners GDX and GDXJ are somewhat behind SLV and it looks like the cross might not take place until the beginning of October. As long as the 50-day moves above the 200-day and stays above it, the bull move is confirmed.

The DMI technical indicators however already gave buy signals for GLD, SLV, GDX and GDXJ in late August. The positioning of the indicator was bullish and the trend line moved up sharply. The RSI and MACD were also properly situated to support a bullish interpretation for all the daily charts. In the last few days, the trend line has gotten too high and has moved sideways or slightly down for GLD and SLV. It is still moving up for GDX and GDXJ.

While the DMI is indicating some pullback should be coming soon, the RSI offers even more support for this view. The RSI on SLV became overbought in late August and really overbought in early September. It reached the overbought point for GLD twice in September and recently for GDX. It is high, but not overbought for GDXJ. This pattern is bullish in the intermediate term and indicates a multi-month rally is likely, but it is bearish in the short-term. Too much buying has taken place too quickly and some pressure needs to be taken off. A drop down to the 50-day SMA would be healthy at this point.

There is also a very distinctive chart pattern for GLD and SLV that should be noted by investors. So far, GLD has made a textbook perfect cup and SLV has almost as good a match (GDX and GDXJ need to build the right side of the cup more). Ordinarily, this would be followed by a handle and then a breakout from the handle and the ensuing rally should last for some time (seasonally gold tends to peak around March). A drop of say 3%-7% soon would complete the textbook pattern. 

Investors have every reason to be bullish on the monetary metals and their miners. Both the fundamental backdrop (money printing from here to eternity) and the technical picture look good. This doesn't mean that they will be going straight up without occasional drops. Just use the drops to increase your positions. Of course, like all rallies, this one too will eventually come to an end. Until then, I will be tweeting daily updates with the charts attached from my twitter account which is @nyinvesting.


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, September 13, 2012

Why You Must Invest for Inflation From Now On

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


The Fed made history today by announcing an open-ended money printing policy — a policy heretofore unseen outside of history's hyperinflation havens. The news conference that followed the announcement revealed a central bank acting out of extreme desperation.

While the Fed is doing another round of quantitative easing, QE3 is not the same as QE2. The previous QE involved the purchase of U.S. Treasuries. This time around, the Fed is buying MBSs (mortgage-backed securities). In QE1, various types of securities were bought. The previous QEs also had specific limits to the amount of money that was going to be printed whereas QE3 doesn't. QE3 is supposed to be ongoing until somewhat after the economy and employment situation have been improving for a while. How long that will be is anybody's guess.

Despite several questions in the press conference that followed the announcement, Bernanke made only vague statements about how the Fed would determine when enough money printing was enough. The purchase of mortgage-backed securities is likely to continue for some time because doing so is supposed to reduce unemployment. How that will work is not clear other than perhaps reducing unemployment in the construction industry. The Fed's actions should lower already historically low mortgage rates and Bernanke specifically stated more than once that getting the price of homes up was one of his major goals (he seems to have forgotten that the global financial collapse in 2008 was the result of the collapse of the housing bubble).

Anticipating the obvious objections, Bernanke tried to head off the major criticisms of the Fed's new plan at the beginning of his news conference. While he admitted that the Fed's action hurt savers and would make it difficult to prepare for retirement, he said that if you don't  have a job you wouldn't have any money to save anyway. So, apparently the large majority of people who have a job should risk having their retirement unfunded in order to pursue Bernanke's high risk policies that have been tried for the last five years, but haven't worked. I wouldn't have been surprised if a couple of retired people were brought up to the podium and Bernanke kicked them a few times to emphasize his point.

Bernanke also denied that the new round of money printing will cause inflation. The basis of his argument was that the members of the FOMC aren't prediction inflation in their projections, so obviously it's not going to happen (these are the same people that failed to foresee the subprime crisis coming). Also Bernanke claimed inflation has been around 2% for years, so there is no problem. Even a casual perusal of commodity prices since 2009 shows increases of 100%, 150%, 200% and sometimes more however. It is true the government isn't reporting inflation, but that isn't the same as it doesn't exist. The head of the Weimar German central bank also claimed inflation wasn't a problem as he printed more and more money. Eventually, inflation reached 300 million percent.

One of the real eye-openers of the Bernanke news conference was his admitting the impotency of the Fed and monetary policy. Over and over again Bernanke stated that the Fed's actions were, "not a panacea". He said that, "We [the Fed] can't solve the problems by ourselves". He also emphasized that the Fed's, "tools are not so powerful that they can solve the problem". If the chances of success are so limited, why is the Fed taking a course of action that could have serious negative consequences for the American people?

In addition to his desire to reinflate the housing bubble, Bernanke was also proud that when the Fed speaks, economic forecasters change their numbers and that, "markets respond to [the Fed's] guidance".  This was a blatant admission that the Fed purposely manipulates the stock and bond markets and financial news. Obviously, this destruction of free market mechanisms is not something that he considers shameful, even though this represents a major power grab on the part of the Fed.

Bernanke was much more coy however when the question of whether or not the Fed's money printing decision was base on political considerations. One reporter mentioned that Romney was not planning on reappointing Bernanke and asked if the policy shift was an attempt to help reelect President Obama. Bernanke denied this of course, his voice almost breaking when he stammered out, "our decisions are based entirely on the state of the economy." I must admit that I am personally surprised that the Fed did this before the election because this question is only going to be the beginning and the Fed has now made itself an ongoing issue in the presidential campaign. I didn't think Bernanke was so foolish to take this risk, but obviously I overestimated his political awareness.

Earlier this month, ECB head Mario Draghi promised unlimited bond buying. This is different from what the Fed is doing because those purchases are supposed to be sterilized (new liquidity put in is neutralized by liquidity being removed). Many people however believe that the ECB will have to engage in money printing despite its claims. Added to the Fed, this means inflation investments will have a bid under them for some time to come.  Investors should be looking at gold and silver, energy and agriculture. Ironically, shorting Treasury bonds also look like a good bet now as well, since the Fed is not buying them as part of its QE program (Operation Twist though will be going on to the end of 2012 however and this acts to lower interest rates around the 7 to 10-year maturity level so be careful). Keep buying as long as the Fed keeps printing.


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, September 7, 2012

U.S. Employment in Long-Term Downtrend




 

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

The August employment report released on September 7th was not particularly good by any measure. While the month to month changes seem lackluster, the longer term picture is truly dismal.

The headline numbers indicated that 96,000 jobs were created in August and that the unemployment rate declined from 8.3% to 8.1%. The previous two months were revised down by 41,000 however. Manufacturing employment was down 15,000 from July. "Food Services and Drinking Places" was the category with the biggest gains, adding 28,000 jobs last month.

Underneath the surface, the picture wasn't mediocre, it was negative. Looking at the total number of people listed as Employed in Table A indicated that 119,000 fewer Americans had jobs in August than in July. This comes from the Household survey and receives little attention from the mainstream media. This number was negative in the July release as well. Why isn't this reported?  Well perhaps the media doesn't trust people to know whether or not they actually have a job.

What happened to employment between July and August though was minor compared to the weakening jobs picture over the last five years. It was in August 2007 that the Fed cut the discount rate, which was the beginning of its attempts to stimulate the economy. By the end of 2008, the Fed's Fund rate was at zero and a number of special programs had been implemented to handle the Credit Crisis. The first quantitative easing program had begun and a second round took place after that. In respect to jobs, the figures indicate that the Fed's efforts have been an utter failure.

In August 2007, 145,794,000 people were employed in the U.S. Last month, five years later, 142,101,000 people had jobs. So after all of the Fed's efforts and all the stimulus programs implemented by the Obama administration, there were 3,693,000 less jobs in the United States.   In his Jackson Hole Speech in August, Fed Chair Ben Bernanke stated the Fed's efforts "increased private payroll employment by more than 2 million jobs". Oh really?  Why don't those jobs show up in the government's own statistics Mr. Bernanke?

What caused the unemployment rate to be reported as lower in August than in July was a decline in the labor force. It shrank by 368,000. This is only a continuation of a multi-year trend though. In August 2007 there were 79,319,000 people not in the U.S. labor force. By last month, 88,921,000 didn't have jobs. That's an increase of 9,602,000 in five years. Yet, at the same time the employable population has grown substantially.

What about during just the Obama administration? His employment record is a big issue in the current presidential election after all. The labor force population has increased from 234,552,000 to 243,555,000 or by 9,003,000 so far during Obama's term. The current participation rate of 63.5% (low for the last few decades) would indicate that approximately 5,717,000 jobs should have been created to keep employment at a steady state. When Obama took office in January 2009, 142,099,000 Americans were employed. As of August 2012, 142,101,000 Americans were employed. There was a net increase of only 2,000 jobs. This represents a huge relative loss since the U.S. needed 5.7 million jobs just to maintain the same level of employment. More jobs would have been needed to make things better.

At his Jackson Hole speech Bernanke stated how concerned he was at the unemployment problem in the United States and that the Fed was willing to do more. Considering how little impact the Fed's high risk money-printing policies have had and how little seems to have resulted from the numerous stimulus programs that have been implemented, there is no reason to believe either will be improving the economy in the future. They are good for juicing stock prices however — at least in the short term. In the long run the gains will prove to be illusory.

Sources for the above from Table A of the August 2007,  January 2009 and August 2012 Employment Situation report from the BLS. The URLs for the websites are:
http://www.bls.gov/news.release/history/empsit_09072007.txt
http://www.bls.gov/news.release/archives/empsit_02062009.htm
http://www.bls.gov/news.release/empsit.a.htm


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, September 5, 2012

Draghi's Sterilization Makes ECB Monetary Policy Impotent



 

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 response to concerns about the inflationary risk of more money printing, European Central Bank President Mario Draghi is going to propose "sterilizing" unlimited purchases of government debt for struggling Eurozone countries. A failed government bond auction in Germany this morning indicates why the plan won't work.

Draghi's newest strategy will focus only on government bonds of three year duration or less. These bonds from the peripheral countries have been snapped up by hedge funds in recent trading days driving their yields down considerably. Draghi will apparently also stress conditionality for the ECB's purchases. Governments must agree to ECB control to get aid and must meet the conditions they agree to in order to continue to have their bond markets supported (Greece has been notorious for violating its promises in this regard).

When central banks sterilize transactions, they pump money into one area of the financial system and remove it from another at the same time. Bloomberg reports that there is an estimated 800 billion of excess liquidity in the eurozone banking system. So, policy makers figure there will be no problem draining an unlimited amount out of the liquidity rich north and transferring it to the cash-strapped south. While this sounds good in theory, reality might be a major stumbling block for this idea to go forward.

While Draghi's plan will only be officially announced tomorrow morning, there was already a failed 10-year bond auction in Germany this morning (only the second time this has happened in recent several years). Germany attempted to sell €5 billion in bunds, but only managed to find buyers for €3.61 billion of its debt. The other more solvent credits of the Eurozone such as Finland, the Netherlands and Denmark are also likely to face this problem in the future. It is simply common sense that this will happen. If the size of the money pie isn't being made larger and some people are getting bigger pieces, someone else has to be getting smaller pieces. Lower interest rates in Spain and Italy are going to mean higher rates in the north.

The voters of the northern Eurozone countries may not be amused when they find out how they are paying for the escalating debt problems in Spain and Italy. Retail sales figure released this morning were lower month over month for the whole Eurozone and manufacturing is continuing its contraction. While Spain is in a full-blown recession, the economies of the northern countries are weakening. Higher interest rates there will not help the situation. It should be an interesting meeting of ECB officials tomorrow. 


Disclosure: Not a Central Banker

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, August 31, 2012

Bernanke Makes No New Promises at Jackson Hole



 

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

Stocks underwent wild gyrations on Friday morning. First the Dow was up over 100 points just after the open on hopes that Fed Chair Bernanke would promise more QE in his Jackson Hole speech. Then, as Bernanke gave his remarks almost the entire rally disappeared. Then a few minutes later the Dow was up 100 points again.

Did anything happen to justify these market movements? The answer is no for the first rally and no for the second rally. Only the selling made sense. There was no promise in the speech for any additional QE in the immediate future. Bernanke did say "the Federal Reserve will provide additional policy accommodation as needed" as he has already stated dozens of times. This is a meaningless platitude that he repeats as often as a mindless parrot. He basically can't take any other position.

Bernanke had to admit that the economy wasn't in really awful shape, but he did emphasize that getting the unemployment rate lower was an important consideration for the FOMC. He did not make any case, nor did he offer proof that doing more quantitative easing would be effective in accomplishing this goal.  He did admit however that, "estimates of the effects of nontraditional policies on economic activity and inflation are uncertain". In other words, the central bank is playing a potentially dangerous game that might have very negative unforeseen consequences in the future.

Bernanke did admit that doing QE could disrupt the Treasury market. He stated that, "if the Federal Reserve became too dominant a buyer in certain segments of these markets, trading among private agents could dry up, degrading liquidity and price discovery".  All of the Fed's actions degrade free markets. That's why they are supposed to be effective. History has shown that markets always dominate in the end however.

Bernanke made it obvious in his speech that he doesn't think any underlying changes have taken place in the economy or financial markets. The ever-insightful Fed Chair also thought in the spring of 2007 that a mountain of subprime mortgage debt posed no risk to the economy or markets. This time Bernanke said, "rather than attributing the slow recovery to longer-term structural factors, I see growth being held back currently by a number of headwinds". Consider the Fed has been taking action since August 2007 (yes, it's been five years) and the economy still is not in great shape, you would think it might occur to him that maybe his policies don't work particularly well (note to readers: many economists are not particularly good at reality-based thinking).

Within the last few days, it has become obvious that Bernanke wouldn't promise anything at Jackson Hole. The QE touts were already making media appearances and publishing articles admitting this, but claiming that the Fed would be taking action at its September meeting. The same people said the Fed would be announcing QE at its June meeting and when that didn't happen, they said it would occur at the July/August meeting. Then it was supposed to take place at Jackson Hole. Now it's going to happen in September. Don't hold your breath.

There is no way the Fed can do QE3 before the election (unless Europe has a major collapse). It would just be too much of a political hot potato. While there are those who state correctly that the Fed has acted prior to presidential elections in the past, that was before the "Audit the Fed" movement started and before the Republicans started criticizing Bernanke's money printing. Romney has already said that if elected, he is going to dump Bernanke. Doing QE again with only the flimsiest of justifications would be seen as a blatant act to help reelect Obama and save his own job. Like QE itself, this could have "uncertain" consequences and many of them could be unpleasant.

The text of Bernanke's speech at Jackson Hole can be found here: http://www.marketwatch.com/story/text-of-bernanke-speech-at-jackson-hole-2012-08-31?pagenumber=2


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, August 29, 2012

Case for QE3 Getting Harder to Make

 

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.

Second quarter GDP was revised up from 1.5% to 1.7% this morning and the Fed's Beige Book this afternoon stated that modest improvements in the economy were taking place. So how can Fed Chair Bernanke justify a third round of quantitative easing?  He can't.

Market participants who are expecting a full-out statement supporting QE3 this Friday at the economic confab being held at Jackson Hole are likely to be sorely disappointed. Bernanke made such a statement in 2010 before the second round of QE began at the end of that year. The Fed leaked the information to the stock market even before that. It got maximum mileage in terms of juicing up stock prices as a result. A recovered economy however didn't quite materialize. If a third round of QE is being taken seriously, it indicates the first two didn't exactly benefit the economy as much as was claimed.

Seeing how successful they were in manipulating stock prices in 2010, the members of the FOMC (Federal Open Market Committee) are merely attempting to use the same playbook in 2012. Stories were planted in the mainstream media in June about how the Fed was going to do more QE. When that didn't materialize, there was an immediate segue to "they didn't do it this time, but will at the next meeting". Before the late July, early August meeting a front page story appeared in the Wall Street Journal that the Fed was determined to do something at the next meeting and the members of the FOMC were discussing more QE. The meeting came and went and no policy change was announced. The "they didn't do it this time, but will at the next meeting" theme immediately reappeared.

Last week, the minutes from the July 31-August 1st meeting were released and they did contain a lot of discussion concerning more quantitative easing. The members of the FOMC knew that this would become publicly available information and would help move the markets up (at least for a while) even if they weren't intending to do anything. Even if they were, their hands are becoming increasingly tied.

The official economic numbers are mediocre, but QE isn't justified unless they are really poor. A GDP of 1.7% is not low enough to make the case for more quantitative easing. If it is, then the Fed will be printing money most of the time in the future. Retail numbers and the jobs report also supposedly showed some improvement after the last Fed meeting. The Fed Beige book, a broad survey of the U.S. economy, released this afternoon essentially said the economy was doing OK. The reasons for doing more QE are rapidly being undermined.

There are other problems that will prevent any casual QE from being done right now as well and they emanate from the presidential election. Republican candidate Romney has already stated more than once that he intends to replace Ben Bernanke as Fed Chair. Ben Bernanke doing QE before the election would be seen as a blatant attempt to help reelect President Obama and save his job. It would become a major political issue and bring scrutiny to the Fed's actions that it most certainly would like to avoid (the Fed constantly claims that it is politically independent).

There is one instance however where the Fed could justify doing QE before the election — if there is a breakdown in the eurozone. ECB head Mario Draghi and EU leaders are even better at promising and not following up with concrete action than is Ben Bernanke. Another round of major money printing on a global scale would be considered necessary as was the case during the Credit Crisis in 2008. Back then, it took six months of bombarding the financial system with liquidity before markets bottomed. Investors shouldn't be in any hurry to buy this time around either because stocks are likely to have a major drop once again if problems in Europe get out of hand. If it works at all, QE can take time to have an impact even on the stock market.


Disclosure: Not a central banker, nor do I play one on TV

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, August 22, 2012

Has the Rally Begun for Gold, Silver and the Miners?



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, silver and their mining stocks have been meandering sideways for months, but it looks like the early stage of a rally has begun. Confirmation of a sustainable uptrend hasn't taken place yet and that is the point when it's a good idea to be fully invested. There is enough reason to start accumulating a position however.

The technical picture for the monetary metals and their mining ETFs on the daily charts brightened considerably on Monday and Tuesday. While this was true for a number of indicators, investors should pay closest attention to the DMI (Directional Market Indicator). This flashed a buy signal for ETF GDX, which represents the senior gold and silver mining stocks. GDXJ, the junior mining stock ETF, and the silver ETF SLV were all on the verge of doing the same on Tuesday. The ETF GLD was positively positioned for a short-term rally, but will not be able to give this signal until rallying for several more days. In any move up or down in gold and silver, it would make sense for the mining stocks to move first.
















While the bullish picture isn't complete just yet on the daily charts, more work needs to be done on the weekly charts. A buy signal on these longer-term charts is the confirmation of a longer-term rally that investors would like to see. This could happen in a week or two and should be followed closely.

There is one other major missing piece for a completely bullish picture and that is the position of the moving averages. GLD, SLV, GDX and GDXJ are all in bearish patterns with the 50-day simple moving average being below the 200-day (or the 10-week is below the 40-week). The prices for all of these ETFs have moved above the 50-day and are heading for the 200-day. That resistance needs to be broken next, and then the 50-day average needs to move above the 200-day. This will take some time for the miners, but possibly very little time for GLD. Probably before this moving average cross takes place, prices will rise above the 65-week (or 325-day) moving averages. Moving and staying above this level should be interpreted as the rally is here to stay and that everything else will fall into place.

The major risk to an ongoing rally in the precious metal sector is the situation in Europe. A major drop in the euro could be bearish because this will cause the U.S. dollar to rise and gold and the dollar usually move in opposite directions. There are times however when they both move together. The risk to the global financial system caused by a euro breakdown could be one of them.

In the very long term, both gold and silver are in secular bull markets that began in 2001. This secular bull is likely to last around 20 years  and could be with us for up to 25. The biggest part of the move in secular bulls is usually in the last few years. We are still in the early stages of this rally.


Disclosure: Accumulating long positions in gold, silver and mining ETFs. 


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, August 17, 2012

If an EU Leader Says It, Don't Believe It





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.

German leader Angela Merkel revved up the markets on Thursday by saying once again that she and the other EU leaders would do everything possible to save the euro. If traders realized how reliable previous official statements concerning the Eurozone debt crisis have been, markets would have experienced a major selloff.

When the debt crisis first appeared in Greece, Merkel said there would be no bailout and the Greeks would have to solve their own financial problems. ECB President Trichet made it clear that Greece wouldn't receive any special treatment. It wasn't long before they both backtracked on their public statements. On April 11, 2010, a €30 billion bailout was agreed to and this was raised to €45 billion on April 16th. By May 2nd, a total package of  €110 billion had been arranged. This amount was meant to fix Greece's debt problems once and for all. The Washington Post reported that IMF director, Dominique Strauss Kahn, and EU Commissioner Olli Rehn stated, "the plan would lead to a more dynamic  economy that will deliver the growth, jobs, and prosperity that Greece needs in the future". If there were a worst-forecasting-prediction-of-all-time award, both Strauss-Kahn and Rehn could be potential winners.

Not only did the Greek economy not prosper, but it went into a tailspin. Other claims made by the EU proved to be equally absurd as well.  As reported by BBC News, the Greek debt to GDP ratio was supposed to rise from 115% at the time of the bailout to 149% in 2013, when it would then fall. Instead it rose to 165% in 2011. Greece's budget deficit was expected to be down to 3% of GDP (the EU target rate that all members states are obligated to meet). If Greece is lucky, it's deficit will only be 7.3% of GDP this year. It is expected to rise again in 2013 however to 8.4%. So much for that.

Even though Greece missed the EU and IMF's projected targets by a mile, this was only possible because a much bigger bailout took place in 2012. Greece received an additional €130 billion  and got to effectively write off almost 75% of its government debt held by private bondholders (the ECB and IMF were exempt from the write down). Certainly Greece must be better off after €240 billion in bailouts and writing off a big part of its debt, isn't it? Well, no it isn't. Before the first bailout in 2010, Greece had around €300 billion in government debt. Just released figures indicate in now has €303 billion in debt. While debt is no lower, GDP has collapsed, falling over 9% in 2011 alone and currently on target for an over 6% drop this year. Unemployment has skyrocketed with the someone under 25 being more likely not to have a job than to be working. By almost any criteria you wish to chose, the EU, IMF and ECB program has been a complete failure.

Now the EU and its partners are preparing to bailout Spain. Already a €100 billion loan has been committed for Spanish banks. This doesn't include any funds to bailout the government. How bad is the situation in Spain?  Well, Reuters has reported that one of Spain's regional mayor robbed a number of supermarkets last week and distributed the stolen food to the poor. As a member of  a regional parliament, he is immune from prosecution. Government stealing from those that have is of course nothing new, but apparently in Spain there's no attempt to hide it.

It looks like Spain will be asking for a full-fledged bailout soon. The EU will then directly take over its finances.  The total bailout could easily involve a trillion euros or more, unless some EU country stops it after realizing the damage this is going to cause the EU itself, let alone Spain. The long-term implications are likely to be quite ugly for both.

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, August 10, 2012

How Much Stimulus Will Be Done by China, the EU and UK?





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.

Much weaker than expected trade data out of China on Friday indicates more economic stimulus will be forthcoming there soon.  Even bigger stimulus is expected from the ECB as it revs up the printing presses to bail out Spain and Italy (unless Germany stops it of course). According to a recent released report, the recessionary economy in the UK may need massive doses of quantitative easing to recover.

Exports in China rose by only 1% year over year in July and this was well below forecasts of an increase of 8.6%. Imports were up 4.7%. For a country that has an export-based economy like China does, this is a serious problem. Like the U.S., Europe and Japan, China engaged in a massive amount of stimulus during the Credit Crisis in 2008/2009, spending $586 billion or 14 percent of its GDP in addition to cutting interest rates and lowering banking reserves.  This led to a big expansion of local government debt, a major housing bubble that has yet to burst and consumer inflation. Apparently, there are unfortunate side effects when governments apply a lot of economic stimulus (notice you rarely read about them in the mainstream media).
This time around, China has already cut interest rates twice and reserve requirement ratios for banks three times since November. Its economy has slowed for the last six quarters and probably by much more than official figures indicate (China's economic numbers should be taken with a grain of salt).
China is still in spectacular shape though compared to Japan, which had a massive trade deficit in the first half of 2012. Japan has been economically troubled for 22 years and despite zero percent interest rates and an unending number of stimulus measures its economy remains in the doldrums. While all the stimulus hasn't solved Japan's economic problems, it has led to a debt to GDP ratio of over 200% (worse than Greece's).
One reason China's exports are doing so poorly is the weakening economy in Europe. On Thursday, the ECB cut its growth forecasts and is now predicting the eurozone economy will contract by 0.3% in 2012.  They are still hopeful of slight growth in 2013 however. Maybe they think it will come from all the money they plan on printing to bail out Spain and Italy. The Eurozone is basically tapped out from all the bailouts it has already done in Greece, Portugal, and Ireland (Cyprus and banks in Spain are now on the list as well). Greece needs a third bailout and is struggling to make it through the month until it receives its next welfare payment in September. The situation there is potentially explosive. The IMF has stated Ireland will need another bailout by next spring.
When ECB President Draghi said on July 9th that the central bank will take any measures within its mandate to save the euro, the inevitable conclusion was that he was willing to engage in massive money printing. The amount of money needed for the huge bailouts that Spain and Italy would require simply doesn't exist so it has to be created out of thin air. The Draghi proposal is for the ECB to buy bonds, but the ECB has already tried buying bonds under the SMP program.  The moment the buying stopped, interest rates shot right back up. This approach is costly and only effective in the very short term — a typical government program. It won't prevent the Eurozone's failure, it will merely delay it and make it worse when it happens.
The UK is not part of the Eurozone, but its economy is also contracting. Citigroup economists have stated that the UK will need to print an additional £500 billion and lower interest rates to 0.25% to prevent continued stagnation. Apparently, they don't think there are serious risks if this approach is taken. Neither did the Weimar Germans in the early 1920s, the Zimbabweans in the 2000s, the Chinese in the 1940s, the Brazilians for most of the 20th century, the Yugoslavians in the 1990s or the Hungarians in 1946. In fact, countries that create hyperinflation always claim the risks of money printing are minimal before it takes place. And there are usually a large number of top economists that support this view.  

There are serious structural problems in the major economies today. The usual Keynesian quick fixes that have been applied since World War II no longer seem to work, nor will they. These have led to a world drowning in debt and all debtors eventually reach their borrowing limit. When this happens with countries, they then try to print their way to prosperity. History makes it quite clear that this doesn't work 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.

Friday, August 3, 2012

July Jobs Report Shows U.S. Economic Statistics Are a Joke



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

According to the Labor Department, the U.S. added 163,000 jobs in July. Also according to the Labor Department, the U.S. lost 195,000 jobs in July. So the U.S. economy is either doing OK or it's falling apart big time. Or maybe something between the two is happening. Confused? You should be.

Two separate surveys are used for the employment report. In one, they ask businesses about the amount of hiring they've done in the previous month and in the other the ask people whether or not they have a job. The amount of jobs created for the month is determined by the business survey and the unemployment rate from the survey of households. As more than one article on the July employment report pointed out today, "economists say the business survey is more reliable". So if you think you're unemployed, but an economist says you have a job, the economist is right.

The unemployment rate ticked up to 8.3% according to the household data.  The two surveys have frequently not seemed to match in the past with minimal job gains resulting in drops in the unemployment rate. The Labor Department explained that this occurred because millions of people have left the U.S. labor force since the "recovery" began in 2009 (150,000 more left in July). Even though these people are unemployed, they are not counted as unemployed and this makes the unemployment rate look better. Why millions of people would stop looking for work during a "recovery" has never been answered. Usually, this type of behavior takes place during depressions.

The Labor Department did not discuss the massive discrepancy between its two employment surveys in its press release. Instead it gave a rosy assessment of all the jobs created last month. This included 25,000 new jobs in manufacturing, even though the recent ISM Manufacturing report (a private survey) indicated U.S. manufacturing activity shrank last month.  So an industry that is losing business is hiring lots of new workers. That certainly makes a lot of sense all right.

One possible explanation for the discrepancy was that "inappropriate" statistical adjustments were made to the numbers in the business survey. While one should never rule out gross incompetence when discussing the output of the government statistical offices, a more cynical person might think that there was a purposeful effort to produce better numbers than actually exist because it's an election year. After all, those pesky downward revisions months later never get any notice from the press and the ugly truth can always be told later when no one is paying attention (and after they've voted).

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, August 2, 2012

Central Banks Sucker 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.

Three major central banks met on August 1st and 2nd and none of them took any decisive action. Markets in the U.S. and Europe have been rallying since late June on expected policy easing they've been promised by reports in the mainstream media. So far, empty talk is all the central banks have delivered.

Traders had high expectations for the Fed's monthly meeting on July 31st and August 1st. A week previously, news hit the wires (only a few moments before Apple's disastrous earnings were announced) that the Fed was definitely going to do some easing at this week's meeting. The source was the Wall Street Journal and they followed up with a front page article the next day. And what did the Fed do?  Nothing, zilch, nada. So much for the Wall Street Journal being a reliable source of investing information.

For the previous meeting in June, Goldman Sachs claimed the Fed was going to be doing quantitative easing (or maybe some other form of easing, but you would have to have read the entire coverage to find that out). What happened when QE wasn't forthcoming? The market hypsters came out of the woodwork with assurances that QE3 would be announced at the July/August meeting. Now that that hasn't happened either, we are hearing "just wait until September". You might as well wait for Godot. The only way the Fed will be doing QE before the election is if the financial crisis in the Europe gets out of hand. This will not stimulate the economy, but prevent a total collapse of the stock market (not a drop, but a total collapse).

The Bank of England and the ECB also met today. No rate changes from either of them (unlike the U.S. and Japan both have rates slightly above zero and they could lower them). The Bank of England is already doing QE2 and has been doing so since the fall of 2011. The UK is in a recession and QE has not stopped its economic decline.

Mario Draghi, the ECB chair and one of the biggest windbags to ever run a central bank, held a press conference after his meeting. He said that the ECB would undertake "outright" open market operations and would be using non-standard policy measures. Bonds rallied on the news. Unfortunately, only minutes later, Draghi was forced to backtrack on his boisterous pronouncements. He admitted that he was only providing "guidance" of what was going to occur in the future and details wouldn't be available for weeks. Draghi continued that even if the ECB was ready to act now, it would not have the grounds to do so. Someone should give that man a bagpipe.

How long the markets will continue to fall for promises of stimulus that never comes remains to be seen. Whatever happens, there is no reason be confident that things will be getting better. If the Fed could fix the U.S. economy, it would already have done so. If the ECB could solve Europe's debt crisis, it also would have already done so. Doing more of the same is not going to work, so it's not worth waiting for cental bank action as is. Eventually, the markets will figure this out.

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, July 27, 2012

Why Quantitative Easing Won't Happen Now



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.

Quantitative easing is off the table for the Fed at the moment because of Friday's GDP report. According to the Commerce Department U.S. second quarter GDP growth was 1.5%, which is mediocre, but not bad enough to justify another round of money printing stimulus.

The stock market has been juiced up on a number of occasions since June on rumors of impending QE3.  There is always connected to phrase like "the Fed will do more to help the economy." The mainstream press never raises the question of why does the Fed need to do more to help the economy. If its program worked, the economy should have recovered. If they don't, doing more of the same thing isn't likely to accomplish much. A need for a third round of QE certainly implies that the first two weren't effective — at least in creating economic growth.  Could it be that printing money out of thin air doesn't really create lasting wealth?

All the U.S. fans of quantitative easing should look across the pond at what is taking place in the UK. Its second round of QE was started last October. Yet, Britain has fallen into and remains in recession. It doesn't look like it will exit the recession by the end of the year either. So much for QE being a panacea for saving an economy.

The best case for the ineffectiveness of QE though comes from Japan. Japan has maintained a zero interest rate policy since 1999 (the U.S. had done so since 2008). After ten years of economic decline and malaise Japan began implementing quantitative easing in the early 2000s. The ten years that followed were also a period of economic decline and malaise. The Japanese stock market peaked in 1989 and over twenty years later it is still down more than 75% from its high (investors who fought the Bank of Japan are glad that they did). The various stimulus programs raised stock prices temporarily, but they eventually fell to lower lows.

The stimulus bag of tools that central banks use is meant to be effective when there is a cyclical downturn in the economy. However, they will not work if the problem is structural — and that is exactly what Japan has been dealing with since 1990 and Europe and America are dealing with today (and probably since 2000). We are at the end of the Keynesian era, where credit can no longer be extended to greater levels without creating a subsequent collapse and the economy can't grow without continual stimulus from the central banks and massive government deficits. This is sharply evident in the case of Greece and Spain at the moment, but it is just as true in the U.S., UK and Japan.

The Fed can't just cavalierly decide to engage in more QE as is. It will need to do so if there is a major financial incident in the EU and it can't waste its bullets. It is inevitable that there will be such a crisis, and the Fed knows it. Mario Draghi's assertion on Thursday that the ECB will do everything possible to save the euro was nothing but meaningless bravado. The crisis in Europe has been going on for over two years now and despite numerous bailouts and half a dozen support schemes it keeps getting worse. During the entire time, the powers that be in the EU have said that they will do everything to save the euro. Sometimes "everything" isn't enough. 

The Fed also has the problem of looking political if it acts before the election. While it is true that the Fed has acted before elections in the past, it actions weren't being closely scrutinized back then. Nor were its policies politically controversial. The House of Representatives just passed the Federal Reserve Transparency Act of 2012 by 327-98. This legislation would produce a full audit of the Fed. While it might not pass the Senate this time around, eventually it will.

While the Fed will almost certainly be doing quantitative easing again, but it won't happen until either  the problems in Europe become a full-fledge global credit crisis or the U.S. economy is in an obvious recession. In either case, it will not be something to cheer about. 

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, July 20, 2012

The EU May Have Reached Its Bailout Limit




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

Today, yields on Spanish 10-year sovereigns tested their yearly high yield of 7.28%, while Italian rates reached 6.16%. This was after funds for the Spanish bank bailout were approved by the EU, although the money won't be going directly to the banks. Earlier in the week, the IMF admitted that  the only solution to Europe's debt woes was to run the printing presses at full speed.

The situation in Spain is ugly and getting worse. Unemployment is almost 25% there and the country is in a recession. The Spanish economy is dependent on public spending and building empty houses that no one buys. The government has recently announced severe spending cuts and higher taxes, both of which will lower future growth. Yet, until today Spain was forecasting GDP growth of 0.2% for next year. It now thinks that GDP will decline by 0.5% in 2013. This is not just an optimistic scenario; it's a Harry Potter fantasy scenario. As is the case with Greece, Spanish economic and financial numbers cannot be trusted. Greece in the early stages of its bailout also produced optimistic projections of how easily and quickly everything would be fixed. Instead, its financial problems escalated out of control.  The same outcome should be expected in Spain.

Bailed-out Bankia is a good example of the how reliable the books are for Spanish banks. Bankia claimed to have earned a 300 million in profits in 2011, but in late May revised that to a €3 billion loss. Now Spain is in line for a €100 billion bailout from the EU, although it has claimed that it needs less. Based on how Bankia did its accounting, Spanish banks are likely to need more, maybe ten times more than that amount. This does not include money for bailing out the bankrupt Spanish government.  

Originally, the EU planned on providing the bank bailout money (structured as a long-term loan) directly  to Spain, who would in turn distribute it internally. When this caused Spain's sovereign debt rating to be downgraded, creating greater fiscal problems for the struggling government, the EU then decided to route the loan directly to the banks. Yesterday, the German parliament refused to go along. They were only willing to approve a loan directly to the Spain itself. It wasn't easy to get even that passed. Twenty-two members of Angela Merkel's coalition voted against it. The leader of the Free-Democrats described the bailout as "a bottomless pit". It doesn't look like German legislators have an appetite for any further bailouts and this is bad news for Spain and Italy as well.  

The IMF has an idea of what to do instead, but its solution could hardly be described as constructive. In a report issued on Wednesday, the organization essentially advised the EU to engage in every type of money printing possible, do a lot of it, and to start doing it immediately. The ECB has already expanded its balance sheet by more than the U.S. has and it hasn't solved the EU's problems so far. Massive money printing as suggested by the IMF would debase the euro significantly. So, in order to save the currency union, the currency it issues must be destroyed. Somehow, there seems to be a logic flaw in this line of reasoning (sort of like, a debt crisis can be solved by incurring more debt).

The bailout news today was disastrous for Spain and Italy. The Spanish IBEX index was down 5.79% dislocations  — a mini-crash and the worst drop in the two years. The Italian market was down 4.4%. The euro hit a new yearly low. The ETF FXE traded down to 120.78. This is below its bottom during the Credit Crisis, but still above the 2010 low made when the debt crisis first appeared. As the situation continues to unravel, more selling should be expected.


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, July 13, 2012

Europe Continues Its Slide Toward the Precipice




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 Finnish finance minister has said all eurozone countries are making contingency plans in case the currency union breaks up. With debt downgrades, bond market anomalies, troubled bailouts, and austerity packages with their associated riots becoming the new EU norm, their worries are obviously justified.

Last night, Moody's downgraded Italy's government bond rating two notches from A3 to Baa2. This is just above junk status. Moreover, the outlook is negative with further downgrades possible in the near future.  So what happened in the Italian government bond auction this morning?  Did buyers  demand higher interest rates to buy Italy's increasingly risky debt as basic economic principles would predict? No they didn't. Italy sold €3.5 billion of three-year bonds at an average yield of 4.65%, much less than the 5.3% it had to pay last month.  How is this possible? Apparently Italian banks couldn't resist an urge to grossly overpay for their governments newly issued debt. The ECB was most certainly backing them up behind the scenes. If this is how Italian banks do business, can we assume that they're solvent?

There is little need to pose that question for Spanish banks. Recent data indicate that they borrowed €365 billion in June from the ECB — a record amount. This compares to €325billion in May. These numbers indicate that Spanish banks have been closed out of the interbank lending market (a good indication of insolvency). The highly troubled Spanish banking sector, which has €3 trillion in debt on its books, will be receiving an immediate infusion of €30 billion in bailout funds from the EU and another €45 billion in November. This represents 2.5% of its total debt and that amount is supposed to fix the problem. The actual funds needed will be many times that. It is impossible to say exactly how much because the financial numbers for Spanish banks are not reliable.

Spain seems to be following Greece's descent into a self-reinforcing economic collapse. This week Prime Minister Rajoy announced further budget cuts of €65 billion over the next two years.  VAT was raised from 18% to 21%. Almost a quarter of the Spanish work force is unemployed, even worse than Greece's 22.5%. Spain though seems to be making a more serious effort at fiscal austerity than Greece. According to reports in the German daily Rheinische Post, the troika on its latest visit found that the Greek government failed to implement 210 of the 300 budget savings requirements it had agreed to in exchange for its bailout money.

While interest rates are pushing against unsustainable levels in Spain and Italy, they have gone to theoretically impossibly low levels in northern Europe. Negative interest rates first appeared in government debt in Denmark and the Netherlands last December. Then Germany paid negative rates on some of its short-term bonds starting in January. This week, France sold six-month Treasuries at a yield of -0.03% and two-year bonds at -0.001%. Below zero yields are a sign of severe market stress.

The euro this week has traded below 1.22 to the U.S. dollar, but is slightly higher today. Investors should watch the 1.20 level. If the euro breaks and stays below this area of support, it could drop to parity with the dollar. The major central banks would intervene to prevent this though, so the ride down wouldn't be smooth.

Stock markets reacted bullishly in late June and early July to the news of further bailouts in the EU. Most traders didn't ask where the money would come from, nor if the plans were even legally possible. They may not be. The German constitutional court will be ruling whether or not Angela Merkel's promises to participate in the ESM (European Stability Mechanism) can go forward.  Even if they rule favorably, there is little actual money committed to the ESM. More money printing (and the ECB has already done quite a bit) is the only option left to fund the various bailout schemes to save the euro. Of course, it's logically absurd that a fiat currency could be saved by producing excess amounts of it. The same is true for trying to solve a debt crisis by taking on more debt.  But hope reigns eternal in the land of euro make believe.

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, July 6, 2012

Central Bank Action Supports Credit Crisis View



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 was another confirmation of an emerging credit crisis yesterday as central banks in various parts of the globe took coordinated action to pump money into the financial system. The banks involved though claimed it was mere coincidence that they all acted at the same time.

Central banks are generally only interested in dealing with their own internal matters. On ocassion though, they act together as they did in October 2008 at the height of the Credit Crisis. Massive stimulus from lower interest rates and quantitative easing finally allowed the markets to put in a bottom six months later.

On Thursday, the People's Bank of China cut its key lending rate by 31 basis points (a basis point in one-hundredth of a percent) to 6%. This was a previous cut less than a month ago. Manufacturing has been declining for months now in China and there are some estimates that GDP will barely be above 7% this quarter. While this would be enviable for any North American or European economy, below 7% growth would feel recessionary in China. Lowering interest rates is not without risk for China since the country also has a massive real estate bubble and this will continue to feed it. 

At the same time that China was cutting rates, the ECB cut its refinancing rate to 0.75% from 1.00%. The banks' deposit rate however was lowered to zero (obviously not much room to maneuver left there). While the ECB has still not fully implemented ZIRP (zero interest rate policy), which Japan and the United States have now maintained for years, it is so close that the difference is irrelevant for all practical purposes.  The Bank of England did not lower its 0.50% benchmark rate, but instead raised the ceiling on its current round of quantitative easing by 50 billion pounds. They've obviously come to the conclusion that once rates have gotten close to zero, money printing is the only way to go.

Absent in any obvious way from yesterday's action was the U.S. Federal Reserve. It already had its monthly meeting at the end of June and announced an extension of Operation Twist (an attempt to drive 10-year yields lower even though they had already hit all-time lows on June 1st). The market bulls were claiming that the Fed would announce a third round of quantitative easing, but they didn't. The Fed is also going to have trouble engaging in more QE in the near future because the U.S. is once again near its debt limit. National debt is now over $15.8 trillion and the debt ceiling is $16.4 trillion. The two will come together at some point this fall. To implement quantitative easing, the Fed has to buy newly issued treasuries. When the debt ceiling is reached, there won't be any. It took months to raise the debt ceiling last time and it is likely to be just as contentious an issue this time as well.

The current global financial crisis is centered in Europe and nothing has been fixed there. The EU has been trying to keep 10-year bond yields below the critical 6% level in Spain and Italy since last summer. They have utterly failed in the case of Spain. Spanish 10-year governments were over 7% in June (higher than last fall, which was in turn higher than last summer). After being driven down close to 6% twice in the last two weeks, the yield was as high as 7.04% today. Italian 10-years traded at 6.08%. Rates continually above 6% mean that Spain and Italy will need bailouts, but the necessary money will have to be printed. Germany holds the keys to the printing press however and may not let them be used.

Stock markets worldwide have held up remarkably well considering there are serious problems in the financial system and the global economy is weak. Liquidity from central banks is responsible for this. However markets have a tendency to revert to realistic prices and if they aren't allowed to do that gradually, they will do so suddenly.

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.