More Debt Problems in Europe

 

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

While stocks weakened in the U.S. on Thursday because of disappointing economic data, they were down in Europe on the resurfacing of the debt crisis issues.

The head of sovereign ratings at S&P, Moritz Kraemer, speaking at an event at the London School of Economics said that another restructuring of Greek debt is likely, with the bailout partners such as the IMF having to take a hit the next time around. Speaking at the same event, the IMF mission chief to Greece acknowledged it would take at least a decade to fix Greece's finances. His prediction may be optimistic considering the situation in Greece is volatile and its economy is in free fall. 

Greece is of course not the only problem child in the eurozone. Portugal, Ireland, Spain and Italy also need some sort of fix. The Eurozone has attempted to put together a firewall to prevent these countries from collapsing into the same debt crisis that engulfed Greece. There are now plans to extend the ceiling of the rescue aid package to 940 billion euros ($1.25 trillion). This money is used to buy up bonds from the debt-challenged countries in order to keep their interest rates down.

The funds do not solve the underlying problem however — all of these countries are living beyond their means and until they drastically cut their expenses they will require a continual stream of rescue money. German central banker, Jens Weidmann, recognized as such when he stated, “Just like the ‘Tower of Babel,’ the ‘Wall of Money’ will never reach heaven. If we continue to make it higher and higher, we will, in fact, run into more worldly constraints".

The program has been effective in the short term however. Portuguese 10-year bond yields were at 17.39% on January 30th, but were trading at 11.52% on March 29th (still too high for Portugal to remain afloat in the long term). Italian 10-year bonds had a yearly high yield of 7.46%, but traded at 5.29% today and Spanish 10-years were as high as 6.72%, but recently went for 5.47%. The eurozone's goal is to keep these rates below 6% — the level at which Greece got into trouble.

The rescue funds should run out by 2013 and more money will have to be added to the mix. Whether or not this will be the point when additional money is not forthcoming remains to be seen, but there will be such a point. The amount of assistance Ben Bernanke is willing to provide may impact the timing. As reported by Zero Hedge, the  U.S. Fed already holds some European sovereign debt. It could easily buy more. Once again, the end will be the same unless you believe that a debt crisis can be solved by taking on more debt or by printing more and more money. At least some of the more responsible authorities are beginning to admit that this isn't possible.

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.

John Paulson Says Double-Digit Inflation is Coming

 

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

As average U.S. gas prices head toward $4.00 a gallon, billionaire hedge fund operator John Paulson recently told a standing room only crowd at New York’s University Club that double-digit inflation is about to rear its ugly head. Paulson assumes that the Fed will continue to engage in its inflation-creating behavior.

John Paulson is famous for making a killing on shorting subprime bonds before their collapse. Most of Wall Street was bullish at the time and Fed Chair Ben Bernanke famously declared that he didn't see subprime mortgages causing any problem. The market completely fell apart weeks after Bernanke spoke.

The Paulson Bernanke dynamic is now back in play with predictions of inflation. Bernanke doesn't see it now and doesn't anticipate it. In an interview with ABC News done around the same time that Paulson gave his talk, Bernanke stated "We haven't quite yet got to the point where we can be completely confident that we're on a track to full recovery," and he continued that the central bank would take no options off the table to further stimulate the economy.  The interviewer didn't ask Bernanke the obvious question of whether or not the need for further Fed stimulus after four years indicates that the previous efforts have been a failure.

Paulson's presumption that the Fed will continue to feed inflation forces is completely supported by Bernanke's actions and statements. The Fed Chair further blamed rising oil and U.S. gasoline prices on geopolitical tensions. Prior to the mid-2000s though, geopolitical tensions only raised the price of oil to $40 a barrel. This time it's well over $100 a barrel. Money printing accounts for the price difference, but you'll never hear that from the Fed's money-printer-in-chief. And this is to expected. No government in inflation's 2000 year history has ever taken full responsibility for causing it.

Governments also have a history of finagling with the inflation numbers as well. This seems to be a universal practice once some form of indexation takes place (adjusting prices for inflation). The U.S. introduced indexation for social security and tax brackets in the 1970s. Starting it the 1980s, a number of statistical "improvements" were introduced in how the inflation rate was calculated. Interestingly, all of these "improvements" lowered the reported rate.

When it comes to inflation predictions, investors have a choice between John Paulson, who has made billions from his knowledge of how markets works, and Ben Bernanke, who has repeatedly shown he is oblivious to their dangers (remember how he let Lehman Brothers go under and this almost led to the complete collapse of the global financial system?). If you are betting on Bernanke, you are betting against history repeating itself. Money-printing has always led to massive inflation in the past. Apparently, John Paulson knows this.


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.

March Consumer Confidence and the Housing Market

 

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

The Conference Board's March Consumer Confidence number came in at 70.2 this morning. As has been the case for the last four years, hope for a better tomorrow is holding the number up. It certainly wasn't the real estate market, which has been shown to be weak once again.

A healthy consumer confidence number is 90 or above. This number has not been this high at any point since the "recovery" began in mid-2009. It has instead ranged between a deep recession level in the 40's and a milder recession level in the 70s. What has caused repeated rises and falls in the number are changes in the Expectations sub-component. How people view current conditions has remained dismally low.

This is how it works. Consumers are bombarded with stories from the news media about how the economy is heading up and then they are asked if they think the economy will be better in six months. Not surprisingly, many answer yes and this causes overall consumer confidence to rise. As the months go on and they don't see any real improvement they become more pessimistic and they don't  think things will be better in six months and then the number falls. This scenario has played out multiple times in the last three years.

Expectations for a better future zoomed to 88.4 in February, but fell back somewhat to 83.0 in March.
The Present Situation Index, however, was a very poor 46.4 in February, but rose to 51.0 in March. While these numbers are not good, they are much better than some Present Situation numbers during the "recovery" year of 2011. Those were at depression levels. The worst number last year however wasn't the Present Situation one, but the Jobs Are Plentiful reading. This was statistically indistinguishable from zero at one point. Since negative numbers are not possible in the report, the reading has not gotten worse.

There have been two running news stories since the beginning of 2012 that have buoyed the consumer confidence numbers — an improving employment situation and a recovering housing market. Both of these may prove to be illusory. The hype about the real estate recovery is already starting to unravel. 

U.S. home prices dropped for the fifth month in a row in January according to the S&P/Case-Shiller home price index. They are now down 34.4% from their highs in July 2006. The National Association of Realtors has reported that existing home sales slipped 0.9 percent in February to an annual rate of 4.59 million units. As for pending contracts, a whopping 33% were canceled last month. While many have pointed out that home sales were much better in February 2012 than they were in February 2011, they usually neglect to mention that most of the U.S. was snowed in last February and this February was one of the warmest on record. The real recovery seems to have been one in the weather.

The sharp differences in weather from year to year can impact any economic statistic that is seasonally adjusted. The employment numbers are in this category. They may have been juiced up by a warmer winter as well. If so, U.S. consumers will start to become less hopeful about the future as they have before and the confidence numbers will start drifting down later this year.

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.

Stocks Rally on Bernanke's Admission That the Fed Has Been Ineffective

 

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 rallied Monday based on comments that Fed Chair Ben Bernanke made at the National Association for Business Economics spring conference. Long-term interest rates however went up.

The Dow Industrials rose 100 points not too long after the market's open, apparently on the hopes that more quantitative easing might be coming. Bernanke made no such promise in his talk and it would be a stretch to have made that interpretation, but as usual mainstream media reports put a positive spin on Bernanke's remarks.

The takeaway that got buried was that the Fed Chair admitted that the economy remained weak and there has been no significant recovery yet. In relation to job gains, Bernanke specifically stated, "we have not seen that in a persuasive way yet." He followed up by saying that without much stronger GDP growth, the unemployment rate was unlikely to fall much further.

Essentially, Bernanke's remarks are an admission that the Fed's policy of zero percent interest rates for almost three and a half years now and two rounds of quantitative easing (combined with trillion plus dollar budget deficits for four years in a row) have been a big dud. The average American however wouldn't know this based on what they read in the papers and hear on TV. There have been three years of reports from the mass media informing the public about the "recovery" that is taking place.

Every time Bernanke has made comments, whether specific or indirect, about more stimulus from the Fed, stocks have rallied strongly — one of the few things that easy money has accomplished. The Fed has also been successful in driving interest rates down, although this seems to be changing. Long-term rates rose on Bernanke's remarks even though the Fed's Operation Twist program is still ongoing. Mortgage rates, after being at all-time lows, rose above 4% last week.

Stock traders make their decisions on very short-term time horizons. Liquidity drives stock prices up, regardless of what else is going on in the background. Bernanke has delivered on greater liquidity on a massive scale since the Credit Crisis in 2008. Not surprisingly, the stock market has had a nice rally during that time. Liquidity was also behind the previous real estate market rally in the first years of the 2000s that led to the Credit Crisis and before that the late 1990s tech stock bubble that was followed by an 80% crash in the Nasdaq. There will be serious consequences again this time around, but that type of long-term thinking isn't an important consideration for most traders.

Investors should ask themselves,: If the Fed's ZIRP (zero interest rate policy) and money-printing quantitative easing are such good ideas, why haven't they been done before and why don't we just always do them? While ZIRP is historically unusual, money-printing is nothing new. It's been done hundreds of times (if not thousands) and has always been followed by major inflation and frequently hyperinflation. The risks of these policies are extreme and this is why they have been avoided by responsible governments throughout time.

Ben Bernanke is not worried about inflation though. He claims he hasn't seen it yet (obviously he doesn't go food shopping or buy gas for his car). Of course, U.S. government statistics are manipulated so it is difficult for them to show inflation except when it is really elevated. Inflation is also one of those things that once it shows up, it is difficult to stop — sort of like a tsunami.

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.

Interest Rates Spike on News From Banks

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

While the big Tuesday rally in stocks got all the media attention, the big selloff in U.S. Treasuries that accompanied it went largely unnoticed. Good news for banks apparently means much higher interest rates and bad news for consumers.

Yields on U.S. treasuries were not that far above historical lows before the boondoggle accompanying the Federal Reserve's stress test announcements. When JP Morgan jumped the gun and other banks followed on March 13th, stocks mounted a spectacular rally in the last hour of trade. No one asked however where the money to fund all of that stock buying was coming from. Even a casual analysis shows that it came from the selling of U.S. Treasuries (which continued into the next day). 

The two-day rise in yields from the bond selloff was sizeable to say the least, with the longer-end of the curve having the biggest gains in absolute terms. Yields were up 26 basis points on the 30-year, 25 basis points on the 10-year, and 26 basis points on the 7-year (a basis point is one hundredth of a percent). Even the 5-year yield rose 21 basis points. Essentially, interest rates rose a quarter of a percent on treasuries with maturities of 5 years or more — and it all happened literally overnight. 

Since interest rates were at such low levels, the spike in yields represented a big increase on a percentage basis. This was most pronounced at the middle part of the curve. Yields on the 7-year went from 1.43% to 1.69%, for a gain of 18%. Yields of the 5-year went from 0.92% to 1.13%, and this represented a 23% increase. An even bigger jump took place in the 3-year, with yields up 28%when rates rose from 0.47% to 0.60%. The two-year though was up only 18% after going from  0.33% to 0.40%. The percentage increase in the 10-year, where yields went from 2.04% to  2.29%, and the 30-year, where yields went from 3.17% to 3.43%, were modest in comparison.

Treasury bills were less affected with yields on the 3-month and 6-month unchanged. The one-year rate rose from 0.18% to 0.21%. The one-month yield (which went negative in late 2008 and late 2009) went from 0.05% to 0.08%.  Yield information for treasuries can be found at: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield.

The Fed's Operation Twist, a plan to sell $400 billion of shorter-dated Teasuries and buy an equivalent amount of longer-dated paper is still ongoing. By the end of March, a switch of $268 billion will have taken place. The purpose of this operation is to keep rates for the 10-year yield low in order to stimulate the economy. Apparently, it wasn't working so well this week. The Fed publishes the schedule for its Operation Twist sales and purchases and these can be found at: http://www.newyorkfed.org/markets/tot_operation_schedule.html.

The rise in interest rates is not just important to investors, but to consumers. as well. Consumer loans are frequently based on some formula using the 10-year Treasury yield. If this goes up a quarter of a percent, so will the rates on consumer debt. This will be a drag on the economy. While rates have been kept artificially low by the central bank for the last three years (they have gone down during the "recovery", when they should have been going up), the sudden rise in yields this week indicates the Fed may be losing its ability to hold them down.

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.

Market Rallies on Bungled Stress Test News Release

 

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 Federal Reserve released its stress test results of 19 banks two days early yesterday. JP Morgan Chase forced its hand by making a public announcement that it had passed the test. Although the news was not particularly good, nor the results completely believable, U.S. stocks had their best day all year.

The Fed said on Tuesday that 15 of the 19 banks tested would have enough capital, even if they suffered a financial shock.  Citigroup (C), Ally Financial, SunTrust (STI) and MetLife (MET) failed the test. It should be considered shocking that any bank would fail a stress test after all the lavish government bailout and support programs that have funneled considerable amounts of money to them.  The U.S.  government had to semi-nationalize Citigroup and owned 27% of its stock by the time the Credit Crisis was over. Citi received approximately $45 billion in TARP funds alone and when it started paying them back, it got a $38 billion federal tax credit. And it still can't pass a stress test?

Of course, if Citi did pass a stress test, it might bring too much attention to the test's credibility. The Fed claims it set tough conditions and major banks complained that the tests were made too rigorous by considering a scenario where unemployment reached 13% and housing prices dropped 21% (presumably the Fed meant the official unemployment rate being 13% and not the actual rate). While these conditions sound tough, they aren't comprehensive, nor where the attention should be focused.

What prevented hundreds of U.S. banks from failing in 2008 and 2009 was a government willing to provide an effectively unlimited amount of money to keep them afloat.  The feds also propped up the housing market with minimal interest rates and mortgage relief programs and kept the unemployment rate (at least officially) out of double digits by running trillion dollar deficits. It should be expected that these policies will continue, so how could there be any risk to the U.S. banking system?

The policies themselves are creating the risk. Easy money is inflationary and always has been (and no, things will not be different this time). Inflation devalues financial assets and destabilizes banks.  The Fed however denies that inflation exists and that it will exist, so it is not politically tenable for it to do ever include any realistic inflation scenario in its bank stress tests.

Stress tests do not exactly have an unblemished record as is. The ECB tests in Europe passed Dexia bank with flying colors. Only three months later, it was in serious trouble and then it collapsed. Major Irish banks also passed the test, although Ireland itself had to be bailed out shortly thereafter to prevent its financial system from collapsing. Central bank stress tests are essentially public relations gambits meant to tell the public how good things are regardless of the actual state of affairs.

The release of the U.S. stress test also inadvertently revealed the true relationship between the Federal Reserve and the banking system that it supposedly regulates.  Even though the Fed was scheduled to release the stress test results after the market closed on Thursday, Jamie Diamond  announced that JP Morgan Chase (JPM) has passed the stress tests while the market was still open on Tuesday. He also stated that his bank would be raising its dividend and doing a stock buyback. Shortly thereafter, U.S. Bancorp (USB) and American Express (AXP) raised their dividends and announced stock buybacks. Wells Fargo (WFC) and BB&T (BBT) announced that they would be raising their dividend. 

Diamond's announcement forced the Fed's hand and it had to take emergency measures to move its own announcement up. The imbroglio was described by the mainstream media as a "miscommunication" between the Fed and Jamie Diamond. Oh really?  This is quite difficult to accept considering Jamie Diamond sits on the Board of Directors of the New York Fed. A more plausible scenario is that the big banks do what they want and the Fed follows their lead.  This nicely explains how the Credit Crisis came about in 2008 and why the banks will get into trouble once again.

The market rallied strongly on the news starting around 3:00PM with the Dow Jones industrials closing up more than 200 points. Anyone who knew that the accidental "miscommunication" was going to take place made a lot of money.


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.

How Good are February Retail Sales Figures if You Consider Inflation?

 

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.

Unadjusted for inflation, U.S. retail sales rose 1.1% in February. There may have been little or no gain if price increases are accurately taken into account.

Retail sales going up in the beginning months of the year should surprise no one because this is when companies typically raise prices. Anyone who goes to Starbucks is aware of this practice. It pervades a number of industries across the spectrum. Clothing prices are being hit particularly hard this year with jumps in prices estimated to be around 10% for the spring season (already underway in February). Mainstream media reports on February retail sales did glowingly mention that sales at clothing stores were higher while neglecting to report that higher prices were the reason.

This is not the only source of price increases in early 2012 however. Year over year, gasoline had the second  greatest percentage increase (10.3%) in the retail sales report. This can be considered a measure of energy inflation and not an indication that more product is being sold. A rough approximation of food inflation can be garnered from the Food and Beverages category. Year over year this increased by 3.7%, while the U.S. population is estimated to have grown only 0.7%. If inflation is the actual driver of higher retail sales, it would be reasonable to assume that the one area with chronically lower prices — electronics — would see a decline in sales. Year over year, sales in the Electronics and Appliance category did indeed fall by 1.4%.

Interestingly, the biggest increase in any retail sales category was in Building Materials and Garden Supplies. This was up 13.8% year over year. It is quite possible that the unusually warm winter weather pushed garden supplies purchases into February, instead of March (the numbers are seasonally adjusted and much higher garden supply sales in February would be magnified because of this). Prices for many building materials are rising sharply as well however. Lumber has been the one major exception, but even lumber prices rose this February.

Retail sales account for approximately 70% of the U.S. GDP, so how they behave gives a good indication of how the economy is performing.  Higher inflation is not an indication of a better economy though, it indicates just the opposite. The U.S. retail sales numbers are not adjusted for inflation, nor are the CPI numbers an adequate indication (they underestimate the actual inflation rate significantly). Analysis of the February report indicates that inflation is allowing the government to report better numbers. Investors need to keep this in mind. 


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.

Greece Interrupted — Bond Swap is Not the End

 

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.

Greece is set to swap its privately-held government bonds today for new ones that will represent a three-quarters loss of the original investment. The deal will allow the country to receive 130 billion euros in funds from its second bailout. Like the money from the first bailout, those funds will eventually run out however.   

The Greek bond swap is the biggest debt writedown in history. Over 85% of  private investors (essentially banks, the deal does not include bonds held by the IMF or ECB) holding 117 billion euros ($234 billion) agreed to the "voluntary" exchange. The CEO of one major European bank described the transaction as about as voluntary as a confession during the Spanish Inquisition. The loss to bondholders is twofold consisting of a reduction in face value of 53.5% and then lower interest payments stretched over a longer period of time. All in all, private bondholders are taking an approximately 74% hit (assuming of course there isn't another writedown or Greece doesn't renounce its debt completely in the future).

Credit rating agency Moody's decided to call a spade a spade and declared Greece to be in default. Moody's line of reasoning in stating the obvious is that it considers a loss greater than 70% to be a "distressed exchange" (that's putting it mildly) and is therefore indicative of a default.  The matter is not merely academic, since there is a significant amount of credit default swaps (bond insurance) outstanding on Greek debt. On Friday, a committee of the International Swaps and Derivatives Association —  the regulatory authority on credit default swaps — ruled that the Greek debt restructuring was a credit event, and this will trigger payouts. How much CDS holders will receive remains to be seen.

Commentary from the EU political leadership on the swap deal was more mixed than after the first Greek bailout (statements back then were upbeat and generally confident that the problem had been solved and Greece was on its way to recovery). French president Sarkozy stated, "Today the problem is solved. A page in the financial crisis is turning." Christine Lagarde, head of the IMF said, "The real risk of a crisis, of an acute crisis, has been, for the moment, removed." German officials were far more cautious however. The French may be correct as long as their words are taken literally. The problem is indeed solved for today. That doesn't mean it is solved for tomorrow.

It is actually highly unlikely that the situation in Greece will be turning around any time soon because of the massive reduction in its debt load from the bond swap. If Greece had a functioning economy, there would be hope. However Greece's economy is heavily dependent on government spending and in exchange for bailout money the IMF and ECB have demanded severe cuts in Greece's budget deficits. Greece is now entering its fifth year of recession, after GDP contracted by 7.5% in 2011. Investment fell by 21% last year after sliding 15% in 2010.  For Greece to continue to operate at all, continued bailout money will be needed. Greece has effectively gone from a welfare state to a state on welfare.

Not surprisingly, some analysts are sounding a note of caution. Predictions are that the financial bleeding in Greece will show up once again later this year. Problems may arise even sooner depending on when the next election takes place (now supposedly in May) and how much power the fringe parties gain. The bond market doesn't seem hopeful either. One year Greek government bond yields were last at 1143%.  Such yields represent collapse, not solvency.

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.

Behind the Market Drop and Why it Could Get Much Worse

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

After a sharp rise since last October, the market looks like it is set up for one of its usual spring downturns. Without continued liquidity injections from the major central banks, it won't be able to break through the wall of resistance it's currently facing, nor will there be much support to hold it up.

As has been the case for months, trouble in Greece is currently roiling international markets. The bond swap deal reached as part of the latest bailout settlement isn't going well. With a March 8th deadline looming, Bloomberg is reporting that private investors holding around 20% of Greek government debt have so far agreed to participate. The Greek government has set a threshold of 75% for the deal to go through. While the mainstream media has consistently cheer leaded the success of every bailout deal, the market has never been convinced. Yields on one-year Greek government bonds have been on a strong upward trajectory since last summer and were over 1000% today.

The eurozone debt crisis has resulted in a great deal of liquidity being poured into the market by the Europeans. The  ECB pumped approximately half a trillion euros via LTROs (long-term refinancing operations) last fall. The rise in global stock markets can be traced from this event. At the same time, the Bank of England was on its second round of quantitative easing and examination of the U.S. Federal Reserve balance sheet shows what looks like the beginning of QE3. The monetary base in the United States was also moving straight up the chart last fall and earlier this year. No matter where you looked, liquidity was flowing into the system. Since stock markets respond immediately to extra liquidity, a powerful global rise in markets took place.

The problem with liquidity-driven markets is that if the liquidity dries up, they can wither like a plant that has been denied water. The constant supply of liquidity always has to slow down because eventually the liquidity will flow into the mainstream economy and turn into ugly inflation. The big liquidity pump that started last fall seems to be falling to slow trickle lately and markets are quite vulnerable once this happens. A failure of the Greek bailout deal (and government bond yields indicate that the market expects this to happen), would cause a massive negative liquidity event that would be on the scale of the Lehman default in 2008. It might even be worse.

At the same time liquidity issues are impacting the market, stock prices are stuck at resistance and the technical indicators are deteriorating. The S&P 500 is at its high that it reached earlier in 2011. The Dow Industrials are also at last year's resistance. Only the Nasdaq has managed to break through because of a small number of stocks like Apple Computer (AAPL) -- which is clearly exhibiting bubble-like action.


Recent news indicates deteriorating economies outside the United States. The economy within the U.S. is only being held up by massive government spending with budget deficits of $1.3 trillion last years and projected to be $1.3 trillion again for 2012. This is all borrowed or newly printed money. How big would the U.S. GDP be without these continual massive injections of government pseudo-cash?  Inflation is also clearly showing up in the ISM Manufacturing and Non-Manufacturing (Services) reports. The Prices component is the highest one for both. Prices for services (80% of the U.S. economy) have been rising for 31 months in a row and are listed as accelerating in February.


Stocks usually have a selloff in March or April. This year they are especially vulnerable. There will almost certainly be some type of drop. How big remains to be seen. The possibility for major selling should be kept in mind by investors.

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.