October Consumer Confidence Well Into Recession Territory

 

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

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

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

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

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

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


Disclosure: None

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

EU and UK: Raise Taxes and Cut Stimulus

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.


Europeans seem bent on acting like lemmings to the sea and jumping off an economic cliff. Not only are the eurozone and UK raising taxes and cutting spending, they want the rest of the world to follow their lead and will try to get this to happen at the next G-20 meeting in late June.

Why anyone would want to follow European countries on economic matters is a real puzzle. The EU's recent handling of the Greek debt crisis will be recorded by history as one of the major episodes of government ineptness of our time (and there is really stiff competition in that category).  Instead of dealing with the problem immediately and decisively by instituting dollarization and removing Greece from the currency union, EU leadership let the matter fester until it blew up. They then tackled the problem with an approximately one trillion-dollar bailout. The EU approach to economic problems seems to be: Why institute a simple cheap solution when an expensive difficult one is available? It's enough to make one ponder if EU policy meetings resemble a multi-lingual idiot's convention.

Over the weekend German Chancellor Angela Merkel stated that she was going to push for a swift exit from fiscal stimulus programs and a focus on debt reduction at the next G-20 meeting. It was German foot dragging on the Greek debt crisis that caused the euro to lose 20% of its value in six months. With a record of success like that, of course the rest of the world should be eager to copy Germany's economic policy ideas. Earlier in June, Merkel's cabinet unveiled substantial budget cuts and tax hikes. France did the same thing recently as have other eurozone countries. Merkel is also spearheading the drive for an international financial transaction tax with the money being used for future bailouts. The possibility that there shouldn't be government bailouts of financial institutions or that the financial institutions that might be bailed out should pay the tax themselves and not their customers seems to have eluded Merkel. Of course, financial centers like London and New York would shoulder a disproportionate amount of the burden, so it is the ultimate socialist solution - get the other guy to pay. Perhaps Merkel isn't as economically challenged as seems to be the case.

Conditions don't appear to be much better in the UK, although we won't find out until Tuesday, June 21st when an emergency budget will be announced by the Conservative-Liberal coalition government. The UK is part of the EU, but not part of the eurozone so it is not obliged to follow the 3% budget deficit to GDP limit imposed there (not that the eurozone countries themselves follow this rule). Like their fellow EU members, suddenly the Brits woke up and realized they had massive deficits (they should have been reading the papers, it's been reported there on a regular basis). Large spending cuts and tax increases are on the table. Even then, the UK's budget deficit could reach 10.5% of GDP in the 2010-11 fiscal year (still less the U.S. number for 2010). It is thought the VAT (value added tax) will be raised from 17.5% to 20.0%. There have been rumors that the capital gains tax rate will be raised from 18% to 40%. If this occurs, money will flow out of British markets at a prodigious rate.

If what's going on in Europe sounds familiar to Americans, it should. These were essentially the economic policies of the failed Carter administration in the late 1970s. During that era, the U.S. economy was chronically weak and the stock market went nowhere. This economic program instituted today could have far worse consequences. The global economy was severely damaged by the Credit Crisis and is still in a very fragile state. It is likely to go into a tailspin.  The predictable follow up will be a return to spending. This scenario happened during the Great Depression after Franklin Roosevelt tried to balance the budget after the 1936 election and the U.S. economy and stock market tanked. If elected officials today are determined to repeat the mistakes of the past, investors should take note and act accordingly.  
 
Disclosure: None

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

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

U.S. Consumer Spending: Not Indicating Economic Recovery

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


The Commerce Department released figures for February consumer spending on March 29th. The report indicated that consumer spending was up 0.3% in February, but personal incomes were flat. The savings rate was lower though, dropping to 3.1% from 3.4% in January. Spending increases were highest for necessities, such as food and clothing. Spending on non-durables actually fell. Nevertheless, somehow the mainstream media looked at these figures and concluded, "Both the spending and income figures in Monday's report point to a modest economic recovery".

Now for a dose of reality.

If income is not going up, but consumer spending is going up, there are only three possible explanations. Consumers have either gotten increased credit and are borrowing more, they are spending savings, or they are selling assets.  If they are spending savings or selling assets to support their spending, the economy is in very bad shape, somewhat similar to the way it was during the Great Depression in the 1930s. Since the savings rate was still a positive number, consumers were not taking more money out of their savings accounts than they were putting into them. So consumers were still saving, but at a lower rate. The 'Personal Incomes and Outlays' report (that's its official name) doesn't analyze buying and selling of assets, but does have a figure on 'Personal Income Receipts on Assets' that includes interest and dividend income. This number decreased by $16.5 billion in both February and January and that may indicate that the public is quite possibly a net seller of assets. Consumer credit is also not handled in the report, but the latest figures from the Federal Reserve indicate that revolving (read credit card) consumer credit declined at a 2.5% annualized rate in January.

While the sources for the supposed increases in U.S. consumer spending are murky at best, the amount of consumer spending in and of itself is not a determinant of whether or not economic recovery is taking place. The increased spending needs to come from economic growth and not government spending. If it comes from more government spending, better numbers are just a shell game and are actually an indicator of just how troubled the economy really is.  U.S. consumer spending rose $34.7 billion in February. Of that amount, $16.6 billion came from an increase in federal government transfer payments. That is only the one-month change in federal spending being funneled directly into consumer's pocket. Government support for the U.S. economy has increased substantially and in myriad ways since the beginning of the recession in December 2007.

While consumer credit has declined significantly since the Credit Crisis began, government borrowing has increased to make up the slack. This is why the U.S. is facing a $1.6 trillion budget deficit in fiscal year 2010.  The record levels of government borrowing are propping up the entire U.S. economy, including consumer spending. Governments don't spend more when economies recover; they spend less. Only when U.S. government spending begins to decline sharply and reports come out that consumer spending is increasing should investors consider believing that economic recovery is really taking place.

Disclosure: None

NEXT: Market Says U.S. Treasuries Riskier Than Corporate Debt

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

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

Economy is Bad, but GDP Report OK

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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For those who missed it, the cover of the latest issue of Newsweek has a blaring headline, "The Recession is Over". This 'just wishing makes its so' approach to economic forecasting is being pushed by the Fed and some of its compatriots. I have yet to read though of even one industry that is showing growth in the alleged economic rebound that is taking place. Nevertheless, there was a lot of fanfare for the release of today's GDP Report and how it would show things are getting better. I had no doubt that it would considering the GDP figures are probably the most manipulated and unreliable ones that the U.S. government produces.

Yesterday I checked the 2007 and 2008 GDP figures. If you look at the BEA (Bureau of Economic Analysis) website, you will see that during 2008 the U.S. GDP increased over $450 billion. This a rather eyebrow raising figure considering that the U.S. was in the worst recession since the 1930s during all of 2008 and the classic definition of a recession is declining GDP. If only our current batch of government statisticians had been around in the 1930s they could have made the GDP numbers go up and shown conclusively that there was no Depression! Then they could have used the good GDP numbers to show people that they weren't really hungry and unemployed.

The headline number in today's GDP Report was a decline of 1.0%. For the past year the economy has declined 3.9% (or at least that's the not as bad as the real story official number). It also seems that first quarter GDP was revised downward from minus 5.5% to an even worse minus 6.4%. Looking inside the report, there is little that is positive other than the current declines are less than the previous declines. The big improvement in last quarter GDP did not come from either the consumer or business sectors, but from government spending and trade.

Consumer spending which accounts for 70% of GDP can be summarized as: spending on durable goods fell 4.0%, spending on nondurable goods decreased 7.1%, and spending on services was down 2.5%. Business investments fell at an 8.9% annualized rate during the second quarter and Inventories declined by $141.1 billion. Investments in structures dropped 8.9%, and investments in equipment and software fell at a 9.0% pace. Investments in housing went down for the 14th consecutive quarter, dropping at a 29.3% annual rate. While the actual economy itself was devastated, good news came from the government sector of GDP. Federal spending rose 10.9%! Imagine how good the GDP Report could be if the federal government printed and spent even more money?

Interestingly, the GDP deflator (the inflation rate used to calculate GDP) was 2.2%. I was amazed the government admitted to so high a number. Last year for the second quarter report it was 1.2% even though this was when oil and food prices were skyrocketing. The government claimed that there was almost no inflation at that time despite the obvious. According to classic economics, inflation can't exist during a recession. Also according to classic economics money printing causes inflation. It's quite obvious which one is winning in this case.


NEXT: Critical Juncture for Dollar and Stocks

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


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

CIT DOA; Liquidity Injections Rally Market?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The market had a great rally yesterday with almost all asset classes going up. This started a few days ago with the Goldman Sachs (aka Government Sachs) rally. Morgan Stanley beat expectations this morning. The Goldman rally took place BEFORE the good news was released and if yesterday was at least partially a Morgan Stanley rally, it happened before the news came out also. Don't worry though, the government announced many times last week that it was going to crack down on illicit speculation in the markets. If you had trouble not laughing when reading that last sentence, it's not surprising. There is no need to write parody, when you have the mainstream media reporting news like that.

The lack of memory on the markets part seems to be truly amazing. The no longer in existence Bear Stearns was about to announce good earnings in March 2008. The only thing that prevented it from doing so was the company went under before it could tell the world how much money it was making. This would seem to indicate to anyone with even the most minimal thinking ability that the earnings of these big Wall Street firms are meaningless. But hey, this happened last year. Traders, like government officials, don't let themselves get bogged down with the past. After all, it's not like history repeats itself.

It would not be unreasonable to assume that the market is rallying so much in the last few days because a lot of money is being pumped into the financial system. That the U.S. dollar is going down, while everything else is going up (a common pattern in market rallies since the beginning of June) supports this view. Now what could possibly be behind that? Probably the imminent failure of CIT, a lender to one-million small to medium size businesses. After giving CIT $2.3 billion in TARP funds, the U.S. government has decided to pull the plug. CIT is apparently not too big to fail (meaning that it doesn't have a lot of former alumni in highly placed positions in Washington, D.C.). Treasury Secretary Tim Geithner, part of the tweedledum and tweedledumber team of Geithner and Bernanke, is personally handling the situation.

If there is any historical analogy to CIT's failure it is the Bank of United States, actually a local New York City bank despite the name, failure in December 1930. This bank lent to lots of small and medium size business, but only in the New York metro area, whereas CIT lends nationally. The Fed refused to bail out the Bank of the United States and thought the repercussions would be minimal. Instead, the demise of the Bank of the United States set off the first of three major waves of bank failures that lasted more than two years and which wiped out a large part of the U.S banking system. But that was back in the 1930s when U.S. financial officials didn't have the slightest idea what they were doing. Instead today we have ever on the ball Fed Chair Ben Bernanke who in March 2007 said, "the problems in the subprime market would only reduce somewhat the effective demand for housing” and then followed that up in May 2007 with “given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited”. Bernanke saw no potential ill effects on the broader economy right up until June 2007. A few weeks later everything fell apart.

NEXT: Bank Profits Soar Even Though Business is Bad

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


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

Deepening Global Recession Means More Inflation

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The economic news out this morning corroborates a deepening global recession. GDP in the eurozone fell 1.5% during Q4 2008. This is the third drop in the row and the steepest. Predictions are that Japan's Q4 GDP will fall somewhere around a 10% annual rate. Media coveraged emphasized how the U.S. economy was doing better than those overseas, rather than questioning the absurdity of the U.S. GDP figures. Dire warnings of DEFLATION were mixed in with the reporting.

While it is true that declining economic growth leads to falling demand (an economic argument that discusses only demand and not supply is meaningless) and the current declines are rivaling the Great Depression in the 1930s, this doesn't mean there will be deflation this time around. During the Depression, the U.S. monetary authorities contracted the money supply in the beginning, which is a major reason the Depression lasted so long and became so steep. Currently, the monetary authorities are inflating the money supply at a rate worthy of Weimar Germany in the early 1920's or Brazil in its inflationary heyday. Simple common sense indicates the outcome will be different now than it was in the 1930s.

The truth will be found in the markets. While they can be manipulated in the short term, in the long term they have to move to accurate price levels (unless the government bans trading, which has indeed happened many times in the past). Even though constant efforts are made to suppress the price of inflation-indicator gold, it is nevertheless still rising and could easily hit a new all time high sometime within the next several weeks. It reached 950.00 in futures trading yesterday, just a smidge below the 1000 level. Silver has also been rallying strongly in the last two months. Oil is trying to find a bottom at current levels and expect it to put in a good rally once it does.

Anyone who reads this blog knows the alledged deflation that is taking place is accounted for almost completely by falling oil prices. While the manipulations in the gold market are well documented, oil is probably even more manipulated but in different ways. Right now Light Sweet Crude is in extreme contango (prices for futures months are much higher than the current price). While the current oil contract was trading at $34.45 this morning, April was trading at $42.14 and June was trading at $47.62. Also the price of Brent (an inferior grade of oil) is way above Light Sweet Crude, with Brent trading at $45.90. This is the reverse of the usual price relationship and is somewhat analogous to table wine costing more than a good champagne. Light Sweet Crude may have put in a double bottom yesterday (only time will tell), falling to $33.98, close to the low of $33.16 reached last December 19th. Press coverage on oil seems to have changed this morning, with some talk about how supply is going to be reduced at current prices and how this can support prices even though demand is falling (did someone recently give the reporters a basic lesson in economics?).

Ignore all the talk about deflation coming from the press and well-known deflationists like Noriel Roubini (who is predicting a big decline in consumer prices). Yes, global economies are sinking, but monetary and fiscal stimulation (both of which are inflationary) are being applied at historically high levels. It's only a matter of time before they work their (black) magic. Just remember though that it takes many years before the full impact of inflation shows up.

NEXT:

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

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

The Market Backdrop for 2009 - the Big Picture

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Let's recap what took place in took place in the market in 2008. It was a year of huge price variation. Below the price ranges of the major indices and commodity ETFs:


DJIA ----------- 7392.77 low---13338.23 high
SP500 -----------741.02 low --- 1471.77 high
Nasdaq ---------1295.48 low--- 2661.50 high
Russel 2000 ------371.30 low ----768.46 high
Oil (the ETF) -----19.38 low ------88.15 high
GLD --------------66.00 low-----100.44 high
SLV----------------8.45 low------20.73 high

The end of the year is always a good time to look at the big picture for the indices as well. As we have mentioned in this blog several times, the 200 month simple moving average is a key support level that it rarely violated. The last two times this has happened was in the mid 1970s, when it occurred for around 6 months and in the first half of the 1930s, when it lasted for a few years. At the end of 2008, all the major indices violated their 200-month moving averages in the last 3 months of the year. The Dow Jones and Russell 2000 have not closed below it on a monthly basis however, while the S&P 500 and Nasdaq have had 3 closes below this line. For the market to indicate that it is becoming healthy again, the indices need to move above the 200-month moving average and stay above it as happened in the 1970s (even then it still took many years before a major bull market began again).

The monthly charts also indicate that at the very least some sideways consolidation is necessary for awhile before any longer lasting move up is likely to take place. There can be tradeable rallies in this sideways pattern, which lasted around 8 months in 2002/2003. The indices also have a tendency to double or triple bottom and this is particularly true for the S&P 500. If you look at a longer term chart, you will see a double S&P bottom so far in 2002 and 2008 (and a double top in 2000 and 2007). The S&P making a triple bottom (and even a triple top in the future) is something that should be considered.

Best of luck with your trading in 2009.

NEXT: What We Learned from the First Trading Day of 2009

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

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

Herbert Hoover Policy - Working Just as Well Today as in the 1930s

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Congressional Republicans got in touch with their Herbert Hoover roots last night when they defeated the proposed $14 billion auto bailout. Republicans wanted wage concessions from union workers, even though they failed to be as specific in reigning in multi-million dollar banker and broker salaries when the $700 billion Wall Street welfare bill (TARP) was passed. Fiscal conservative when it is convenient, Republican Senator Grassley, stated "I think it would appear that the people who voted against this are carrying out the will of the voters as expressed through the phone calls to our offices". While calls against TARP to congressional offices ran up to 100 to 1 against the bill, a large number of Senate Republicans saw no need to carry out the will of the people in that case. Senator Grassley was among that group.

While I am generally opposed to bailouts, I am 100% opposed to hypocrisy and governmental stupidity. You can make a case for bailing out no one and you can make a case for bailing out everyone, but bailing out some companies and industries and not others produces the worst results at the highest taxpayer cost. Ultimately the U.S auto companies will be bailed out, either immediately through funds released from TARP by President Bush (the White House released a statement this morning saying it was thinking about it) or when the new congress meets in January. The justification for putting Wall Street on the dole for $700 billion and refusing $14 billion dollars for the car makers is simply not going to fly.

Ironically, the most negative reaction to the failed auto bailout bill took place in Asia overnight. Both the Nikkei in Japan and the Hang Seng in Hong Kong had crash level drops of 5.6% and 5.4% respectively. Japanese and Korean auto stocks were the most pummelled, falling around 10%. The Yen rallied strongly against the dollar reaching 88 to 1 range at one point. Oil (light sweet crude) fell to the $46 range, still well above its low of $40.50 reached several days ago. European indices was spared the full carnage because an announcement of a new $267 billion economic stimulus plan for the 27 country eurozone was released in the morning their time. While U.S. stock futures were way down before the opening, the selling was muted (not accidentally I might point out) by the White House's conveniently timed statement on the possible use of TARP funds to bail out the auto makers.

While the Herbert Hoover administration actually implemented a number of programs to deal with the collapsing U.S. economy in the early 1930s, these programs were spotty and inconsistent. Hoover himself frequently chose denial over reality in dealing with the unfolding depression, even going so far as to give a press conference in June 1930 announcing that the depression was over (it was actually just beginning). The U.S. congress seems determined to follow in his footsteps.

NEXT: Indecent Exposure - Madoff Caught Swimming Naked

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

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

Unemployment - Truth Worse than Even Government Reports

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Today's weekly jobless claims came in at 573,000, well above the cut off of 400,000 level which is usually considered recessionary. The four-week moving average, which is considered more important because it is assumed that the errors in each weekly report will cancel each other out, came in at 540,500. Continuing claims, all the people who are collecting unemployment, reached 4.43 million. Both numbers are the highest level since the deep recession of 1982 when official unemployment reached double digits. The increase in people on the unemployment rolls was the biggest since 1974, another year of major recession and a major bear market.

While no one could argue that these numbers aren't bad news, the truth is actually much worse. Somewhat less than half of the American labor force is eligible for unemployment. This part of the population never shows up in the official numbers cited above. This does not mean however that you can just double all the government figures to get at the true numbers. You would have to assume that the half of the U.S. labor force not eligible for unemployment is equally likely to be unemployed as the half that is and this is certianly not true. On the other hand, it is also certainly true that the ignored half or the labor force does not have an unemployment rate of zero.

The monthly unemployment figures published by the BLS also underestimate unemployment, but do so in a different way. People who are "no longer looking for work" also known as discouraged workers are not counted. The underemployed or people who have worked even a minimal amount part-time are counted as employed. The Labor Department does publish an alternate measure of unemployment, which counts part-time workers who want full-time work, as well as anyone who has looked for work in the last year. This number which still cuts out a number of people indicates that the current U.S. unemployment rate is closer to 13%, not the 6.7% officially reported in last months employment report (almost double, but not quite).

In times of great economic calamity for developed economies, unemployment can reach a quarter of the labor force. It was estimated to be 25% at the bottom of the U.S. Great Depression in the 1930s and almost that same number during the hyperinflationary collapse in Germany in the early 1920s. If the alternative unemployment figures reach 20% or more this time around, it can safely be said that the current economic crisis has gone beyond recession and has become a depression.

NEXT: Herbert Hoover Policy - Working Just as Well Today as in the 1930s

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

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

PPI and CPI - Don't Get Excited Just Yet

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Yesterday the PPI (producer price index) indicated that wholesale prices dropped 2.8% in October, the biggest one-month decline in the 60 years that this data series has been in existence. Today the CPI (consumer price index) report had consumer prices falling 1.0% last month, the biggest monthly drop in its 61 year history. One item alone, energy prices, made a disproportionate contribution to falling prices. Oil has dropped over 60% from its high in July and gasoline prices in the U.S. are down around 50% from their top the same month, having dropped an unprecedented 60 days in a row (with sharp decreases just before the election). This entire drop is still not fully reflected in PPI and CPI and is likely not yet over either, so expect further drops in both in the next couple of months.

Core inflation (inflation minus food and energy) painted a very different picture from the headline numbers however. PPI core rose 0.4% on the month. CPI core fell only 0.1%. There is also no year over year deflation either. Prices for finished producer goods have risen 5.2% in the last year and consumer prices are up 3.7%. At least these are the official numbers. The New York Investing meetup has demonstrated several times in its meetings how consumer price inflation is significantly understated by the U.S. government. Falling prices based on drops in commodity prices also have their limitations. While there is no maximum to commodity prices, there is a minimum which is determined by the cost of production. As this is approached, less efficient wells and mines are closed down. New projects are postponed. Supply falls so that profitable prices are maintained.

How does this compare to the deflation that took place in the early 1930s during the Great Depression? Estimates are that U.S. consumer prices fell approximately 3% in 1930, 9% in 1931 and 11% in 1932 (the bottom year). Production output was also falling by similar amounts during this period. Similar drops in prices and production took place in a number of countries. The one common denominator among these countries was a fixed-exchange rate gold standard and not the inherently inflationary fiat currency standards that now prevails throughout the world. Big increases in money supply, which are inflationary, are not sustainable under a gold standard, but can now take place in seconds by hitting the enter key on a computer keyboard. While the U.S. monetary authorities actually supported deflation by constricting the money supply at the beginning of the Depression, today they are doing everything possible to expand the money supply and create inflation.

Nevertheless, there are a large number of people who maintain that deflation is taking hold in the U.S and will only get worse over time. The crux of their argument is usually that bank credit is in collapse and the amount of bank credit available determines inflation or deflation (not rising or falling consumer prices, which is everyone else's definition) . They also frequently claim that inflation is led by rising wages and can't take hold otherwise. This was indeed true in the U.S during the 1970s, but apparently unbeknownst to these people, history began before that decade. Large inflations have existed since at least the Roman Empire and have taken many forms. As for Wiemar Germany, the one case of hyperinflation so far in an advanced industrial economy, there doesn't seem to have been any major increase in bank credit, which would be required in the deflationists world view. The government simply spent money it didn't have and had to keep printing more and more currency to keep up. For something like this to happen in the here and now, the U.S would have to be running larger and larger budget deficits and the national debt would have to be skyrocketing. Or in other words, exactly what is taking place.

NEXT: Market Must Hold In Here

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

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

Meltdown Microcosm - U.S Future Can be Seen in Iceland Today

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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What happens when you create an economy based on the shaky foundation of foreign debt? While this sounds like a question about the U.S. economy, it is actually something that has been asked recently about Iceland. While the U.S economy has been built on foreign borrowing for about 25 years, Iceland only pursued this course of action after the mid-1990s and it is already experiencing a financial meltdown. Things are so bad that the country itself risks bankruptcy. In response to the crisis, draconian emergency powers, which would be the envy of any totalitarian state, have been granted to the authorities. The currency no longer floats, some stock trading has been suspended and banks are closed. Want to get access to your money or get it out of the country? Lot's of luck.

The rot in Iceland's financial system that has built up over the years was hardly a secret. The top four banks in Iceland have liabilities greater than $100 billion, while the entire GDP is only $14 billion. However, unlike much of the rest of Europe and the United States, Iceland banks do not own toxic mortgage securities. The problem instead is simply one of too much leverage (the U.S. also has this problem). Heavily exposed banks are collapsing under the weight of debts incurred during the 2000's lending boom, which artificially increased the average citizens wealth 45% in only five years. While all highly leveraged enterprises will inevitably fail, the Icelandic government still refuses to admit this is the cause of the country's problems. The prime minister has claimed that the "banks were victims of external circumstances". Governments throughout history have of course always blamed external (and frequently internal) forces for economic calamities and never their own policy failures and mistakes. Iceland is no different, nor is the U.S.

While the financial bubble developed over many years in Iceland, the final decline has been sudden. The surprise nationalization of Glitnir, the nation's third largest bank, a week ago precipitated a large drop in stocks prices and a plummeting currency. It order to stabilize the krona, the government stopped its convertibility and fixed the exchange rate to 175 per dollar. Stock trading was also suspended. To avoid capital flight, banks were closed down. Emergency powers were given to the government that allows it to take over any company, limit the authority of boards of directors, and to call shareholder meetings at will. If this sounds like communism, that's because it is. And all this is happening in a country with a democratic history going back to 930 when the national parliament, the Althing, was established.

Any American that thinks that similar things can't happen in the United States is being naive. In desperate times, governments take desperate actions. The U.S. government after all confiscated gold and closed down all the banks in the 1930s to help stabilize the economy. This time around, AIG Fannie Mae, and Freddie Mac have already been nationalized by the formerly capitalist U.S. government. Treasury Secretary Paulson stated only yesterday that partial nationalization of banks was an option under the Wall Street bailout bill. Just like in Iceland, governments shut banks, stock trading is suspended, and currency is frozen during a financial crisis. Democratic states can become totalitarian and capitalism can transform overnight to socialism. If you haven't prepared for these developments beforehand, it will be too late to do so once they actually occur.

NEXT: Will Double Digit Crashes Follow Triple Digit Losses?

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

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

The Inflation Versus Deflation Argument - Part 4

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

While it is true that the U.S. experienced consumer price deflation in the 1930s and Japan did so in the 1990s and both experienced sharp drops in bank credit, there are few if any other similarities to the current situation in the United States in 2008. The situation in the 1930s U.S. and 1990s Japan is also a bit more nuanced that the deflationists would have you believe. In the late 1920s, the U.S. did see a big rise in money supply and credit, just as occurred in the U.S. in the early 2000s. According to the deflationists, this should have resulted in rising U.S. consumer prices at some point. It did not. Prices actually fell between 1926 and 1929. A similar thing happened in Japan in 1986. While consumer price deflation did appear in Japan after its banking system literally fell apart, it didn't show up consistently until 1999, nine years after the Japanese asset bubble began to burst. Based on these observations, the relationship between consumer prices and money supply and credit seem to be rather tenuous at best.

The deflations in the 1930s U.S. and 1990s Japan did have an important element in common that does not exist today - dropping commodity prices. As early as the spring of 1929, farm commodities in the U.S. experienced a sharp drop. All commodities declined in the crash month of October and then they crashed themselves in the spring of 1930 . While commodity prices didn't crash in the 1990s, they were weak throughout the decade. Oil reached its price low of just over $10 a barrel in 1998. Ten years later it would be almost 15 times higher. Not only were commodities not declining in the 2000s, but they were experiencing major price increases resulting in significant inflation in the U.S. and most of the world. The commodity picture in the 2000s was just the opposite of the early 1930s U.S. and 1990s Japan.

The import/export and deficit picture has no similarity to the contemporary U.S. either. In the late 1920s, the U.S. had a massive trade surplus and was the biggest creditor nation in the world. Its boom had been built on exports as was the case for Japan in the later twentieth century. Drops in exports damaged both economies. On the other hand, the U.S. in the 2000s was the biggest debtor nation in the world having both a massive trade deficit and government debt, which required heavy borrowing and had inflationary implications. Japan in the 1980s was similar to the U.S. in the 1920s and both were very dissimilar to the U.S. in the 2000s.

Currency also plays a different role in all three scenarios. The U.S. was on the gold standard until 1933 and even after that the currency didn't float. The Japanese yen traded relatively flat during the 1990s. In neither case, did currency have a significant deflationary or inflationary effect, in contrast to the U.S. in 2008 where currency played an inflationary role. The U.S. dollar dropped to all time lows in late 2007 because of the Federal Reserves easy money policy. Since the U.S. imported much more than it exported, this raised import prices and had a bigger inflationary impact than it would have had otherwise.

NEXT: The Inflation Versus the Deflation Argument - Part 5

For notes related to this talk, please see, 'Inflation vs Deflation Argument' at:
http://investing.meetup.com/21/Files

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

For more about us, please see our web site: http://investing.meetup.com/21