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.

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.

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

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

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

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

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

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

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

Disclosure: None

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

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

Bernanke in a Hole in Jackson as Wall Street Evacuates

 

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

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

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

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

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


Disclosure: None

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

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

Ben Bernanke's 'It's Not My Fault' Inflation Speech

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.

Americans shouldn’t expect to hear the truth about inflation from Fed Chief Ben Bernanke and he didn't disappoint in a speech he gave to the International Monetary Conference in Atlanta, Georgia on Monday. The money-printer-in-chief of the Federal Reserve denied that the Fed’s easy money policies are responsible for the inflation that is currently showing up in commodity prices. The public shouldn’t have expected anything else from the dissembling Fed Chair, nor should they believe anything he says.

Bernanke claims that rapidly rising commodity prices are the result of rising demand and not enough supply. While in isolation this is always the case in economics, it doesn’t explain why demand is rising in leaps and bounds and why this has occurred at the same time the Fed has been on a money printing binge. Bernanke did not make comparisons in his speech between demand and prices in 2008, when the Fed turned up the printing presses to max and conditions right now. Let’s look at a few of them:  U.S. gasoline prices went from approximately $1.60 a gallon to almost $4.00. Oil prices have tripled from a low around $33 a barrel. Copper prices almost tripled during the same period. Cotton prices have gone through the roof and took out a high established around 150 years ago. Silver prices went from a low of $8.88 to almost $50.  And that’s just the beginning.

Did global demand for oil, copper, and silver increase by three or more times in two and a half years?  It most certainly did not. If anything economic demand has only increased by a few percent at most. There is something that did increase by a lot more however – the Fed’s balance sheet, which grows when it prints money. That has gone through the roof just like commodity prices. Money printing of course increases demand for any number of items because it makes a lot more funds available in the financial system. For some reason, Bernanke didn’t quite connect the dots between the two in his speech.

The recognition that increasing the available money in the economy leads to rising prices has been known for 500 years and was first proposed by well-known astronomer Copernicus. The idea is based on grade-school arithmetic. If you have an economy of a certain size and a given amount of money and you increase that amount of money, then each unit of money is worth less. It’s not rocket science, and yet Fed officials with PhDs from top schools can’t seem to be able to grasp this simple concept. Or perhaps they don’t want to do so.

Bernanke’s speech also didn’t explain why the price of gold has doubled since its Credit Crisis low. While gold does have some industrial uses, its price is a good gage of inflation expectations on the part of the investing public. Bernanke claimed these were under control, so we don’t have to worry about inflation. Gold is telling a very different story – and gold is not known to lie.

Bernanke also fell back on the 'employment is high and there is slack in the economy, so inflation can’t happen' argument. Historical analysis indicates that hyperinflation takes place under just such conditions. The most recent example happened in Zimbabwe in the 2000s (perhaps Ben didn’t read the papers during those years). As the economy collapsed and unemployment headed toward close to 100%, prices skyrocketed. It wasn’t the first time something like this has happened, it’s the same story over and over and over again throughout history – yet Ben keeps telling us it can’t happen. Well, I guess if you don’t let little things like reality intrude in your worldview, it can’t.

As an author of a book which includes a lot of material on inflation history, I found no case in the past where the authorities admitted their guilt in causing inflation. In every instance, the government printed a lot money or cut the coinage (if it was before paper money existed). Without exception in modern times, speculators and foreign influences are blamed for inflation. For some reason the government money-printers behind the inflation that ruins their countries just never seem to admit that they’re at fault. Bernanke’s recent speech is just another example of history repeating itself.   

Disclosure: None

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

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

ZIRP Failed in Japan, So They're Doing It Again

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 what is being billed as a surprise move, the Bank of Japan lowered interest rates back to zero and is planning on more quantitative easing. Along with an unending number of stimulus programs in the last twenty years, Japan has done it all before. If these economic policies actually worked, it wouldn't have to be doing them again. U.S. policy makers are following Japan's lead.

On October 5th, the BOJ announced that it cut interest rates to 0.0% to 0.1%. Rates had been 0.1% since December 2008. Japan had previously maintained a zero interest rate policy (ZIRP) between 2001 and 2006. The U.S. Fed funds rate has been at 0.0% to 0.25% since December 2008. The Bank of Japan also announced a $60 billion quantitative easing program that will purchase government bonds, commercial paper and corporate bonds. Last month, the Japanese government announced a 915 billion yen stimulus package. The Japanese economy has been in the dumps for 20 years and stimulus programs, super low interest rates, and quantitative easing hasn't fixed it. Yet, despite encountering failure over and over and over and over again, the government still repeats these same actions with the belief that somehow they will work this time.

The Japanese government was the most important player in creating the country's massive stock market and real estate bubbles in the 1980s. The last twenty years has been the hangover from those bubbles. Incompetent government policy both led to the creating of the problem and then prevented it from being fixed. It took over 18 years for the stock market to hit a low (assuming it doesn't go lower in the future). Government policy delayed the inevitable, but didn't prevent it. Japan now has the highest government debt to GDP ratio (over 200%) among developed countries. Its debt is so high from its repeated stimulus programs that it makes teetering-on-default Greece look fiscally conservative. The inevitable outcome of Japan's actions will be collapse and not recovery.

In dealing with the Credit Crisis and its aftermath, the U.S. has followed Japan's lead. Just yesterday, Fed Chair Ben Bernanke said the U.S. central bank should engage in more quantitative purchases of treasury bonds because it would "ease financial conditions". Moreover, Bernanke claims the first round of quantitative easing (also known as money printing) was a major success. The figures certainly don't show that this is the case. U.S. unemployment was around 7% when quantitative easing began the first time and is now around 10%. The Fed doesn't actually claim that economic conditions became better, since the obvious facts make that impossible, but instead claims things would have been much worse without their policy actions. How do we know things wouldn't have been better?  How do we know that things didn't become better in the short-term, but will become much worse in the long-term? We do know what has happened in Japan because of the same policy actions that the Fed is following. But like the Japanese, the U.S. Fed apparently also believes in miracles.

Disclosure: No positions.

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

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

Japan and U.S. Offer More 'Stimulus You Can Believe In'

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 mainstream media on Monday was hyping a Japanese expansion of a low-interest loan program to financial institutions after talking up Fed Chair Ben Bernanke's statement on Friday that the Fed "will do all that it can" to support the economy. Japanese stocks and U.S. stocks respectively rallied strongly on these essentially negative news items.

The Japanese have been trying to fix their economy for twenty years. They have engaged in one stimulus program after another after another after another after another and it's still dead in the water. Despite the repeated failure of the approach they have taken, this doesn't deter them from engaging in the same behavior again. There is no reason to believe things will be any different this time. Nevertheless, the mainstream media cues the cheerleaders and dutifully reports this as good news, instead of pointing out that the need for a new stimulus program indicates all the previous ones have not worked. That sounds like bad news to me.

The U.S. monetary and fiscal authorities seem to be doing their best to imitate the Japanese. The Fed though has only had three years to follow them on their road to perpetual economic failure. Bernanke's statement on Friday was made from the Fed's annual meeting at Jackson Hole, Wyoming, which the media described as a 'confab' (confab is short for confabulation, which in psychiatry means 'the replacement of a gap in a person's memory by a falsification that he or she believes to be true' - unquestionably an important concept when dealing with establishment economists). What exactly was Bernanke implying when he said that the Fed would be doing all that it can to support the economy? Does this mean that it wasn't doing all that it could have done previously? In at least one sense the answer to that question is yes. The Fed could have opened the floodgates of uncontrolled money-printing and Bernanke was intimating that this is what is going to be happening in the future.

While the Fed and its cohorts in the economic community continue to maintain that there will be no double-dip recession, Intel threw some more cold water on this assumption on Friday. The tech bellwether sharply lowered its third quarter earnings expectations after raising them only a month earlier. PC sales have been running below previous forecasts. This is a strong blow to the U.S. economy since computer and software sales were up 24.9% in the second quarter GDP report. A drop to a negative number for this category could turn the entire third quarter GDP negative. But don't worry, Ben Bernanke will be handling the situation and we all know what an excellent job he's done previously in fixing the economy. Wait, isn't that a confabulation?

Disclosure: No positions

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

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

Will Fed Meeting Be a Turning Point for Stocks?

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 has its August meeting today and stocks sold off in the morning despite media attempts to put a positive spin on the outcome. The latest phase of the rally that started in early July took place after Ben Bernanke admitted to congress that the U.S. economy was troubled. Stocks shouldn't have rallied on this news, but they did.

The stock market is supposed to be a leading indicator of the economy and should react to changes approximately six months in advance. This only works in a free market however. The more the authorities are fiddling with the financial system behind the scenes, the less stock prices will act as an early warning system. The bull market peaked in October 2007 for instance, but a recession began only two months later.

This time, U.S. stocks peaked on April 26th. May and June were bad months for the market. While stocks have not gotten back to their highs, they have been rallying since the beginning of July, when problems in the eurozone calmed down (thanks to a commitment of an almost trillion dollar bailout for the currency). The rally entered a second phase after Ben Bernanke testified before congress about the bleak prospects for the U.S. economy. The market sold off that day, but then mounted a rally on the bad news, which was supported by numerous economic reports showing the economy was turning down.

Why would anyone buy stocks when the economy was facing a possible recession? While this behavior doesn't make sense, a better question is: Who was buying stocks after this news came out? Based on the trading volume, not many market participants were entusiastic. With the exception of a few days of selling, the entire rally since early July has taken place on below average volume - a technical negative.

The 50-day moving average for volume has also been declining as well since early July. This is part of a greater trend that started in March 2009, when the bigger rally began. Volume peaked on the Dow Industrials when the market hit bottom and back then there were days when over 600 million shares were traded. More than a year later, a day when over 200 million shares traded would be considered good volume.

The market seems to be rallying on the hopes of Fed easing. With fed funds rates at zero, the traditional forms of easing are obviously no longer available. The Fed would have to engage in quantitative easing (a form of money printing), which would involve the purchase of treasury bonds and this would lower their interest rates. According to mainstream media reports, consumers and businesses would supposedly borrow and spend more money as a result. This is wishful thinking at best.

Even though the Fed has lowered interest rates to nothing and has effectively provided the big banks with free money, this has not been passed on to the consumer. Interest rates on credit cards were 14.55% in 2005 and in May 2010 they were 14.48% (see: http://www.federalreserve.gov/releases/g19/Current). Banks have not lowered their interest rates in response to the Fed's recent actions, but have pocketed the difference. This has been the major reason that they have been reporting such huge profits. It is naive to think that they are going to change their behavior.

Disconnects between markets and the underlying economy have happened many times. They don't last forever however. The two eventually have to meet. Either the economy improves to justify market pricing or market prices decline to meet the economy. The tech bubble at the end of the 1990s and the more recent real estate bubble were good excellent examples of this. Pricing that is too high will come back down to earth and the correction can last for years. Government attempts to try to hold up the market, as has happened with real estate prices, don't prevent the inevitable, they merely delay it. The current disconnect with stock prices and the economy will also self-correct and may do so suddenly. The only question is when it will occur.


Disclosure: No Positions.

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

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

Bernanke Testimony Indicates Fed Still in Denial

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


Fed Chair Ben Bernanke testified on Capitol Hill today and didn't disappoint. As usual, his lack of insight into the true state of the U.S. economy boggles the mind.

The key takeaway from Bernanke's remarks is that the U.S. economy is strong enough to withstand the fiscal tightening ahead. Bernanke then promptly undermined this claim by admitting that the housing market has "firmed only a little" since mid-2009 and that it will take a long time before 8.5 million jobs lost during the Credit Crisis will be restored. What Bernanke left out was that even though the federal government has spent trillions on bailouts and efforts to directly and indirectly prop up the U.S. housing market, it has managed to get only slightly better. As for the jobs lost, what will that number be after the 1.2 million temporary Census workers are let go in the next few months? A 10 million lost job figure is probably more realistic.

It is of course not surprising the U.S. economy has gotten better after the government has pumped trillions of dollars in extra spending into it and given banks credit at zero percent interest. What is surprising is how little improvement there has been given these extraordinary and unsustainable measures. There is little evidence of private sector hiring in the job market and moreover the weekly unemployment claims are stuck over the 400,000 number that indicates layoffs are taking place at a recessionary level. The U.S. economy is also dependent on consumer spending. This accounted for 72% of GDP before the Credit Crisis. Consumers not only have job problems, but they are also losing access to credit. While credit card debt is dropping rapidly, there was a minuscule increase of $1.0 billion increase in overall consumer credit in April. Loans held by the federal government increased by $1.7 billion.

Nevertheless, Bernanke is confident that "gains in final demand will sustain the recovery in economic activity" even though "support to economic growth from fiscal policy is likely to diminish in the coming year". Bernanke went on to state the federal budget deficit is was estimated to decrease by $500 billion in fiscal year 2011. It was not clear where in the private sector the 'final demand' would be coming from to make up the reduced spending from the federal government. It certainly doesn't look like it will be coming from the over leveraged American consumer. As for the reduction in the budget deficit, prior to the last year of the Bush administration, the record budget deficit in total was less than $500 billion. A reduction by that amount now indicates the federal government will be spending $1.1 trillion more than it is taking in during 2011. That is still an enormous amount of deficit spending and hardly indicates an economy that can function on its own without constant ongoing government stimulus.

What led to the tragedy of the Great Depression in the 1930s were major missteps from the Federal Reserve and the federal government. The Fed put the interests of the banking community over those of the American public and this is what turned a bad recession into a bad depression. This was combined with an ongoing campaign of denial of the problem on Washington's part. Herbert Hoover gave a press conference in June 1930 announcing the Depression was over (it was only just beginning). The similarities to all the talk coming out of Washington today about economic recovery should give investors pause.

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.

Market Sells Off Even Though Bernanke Is Bullish

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


Fed Chair Ben Bernanke stated last night that he is 'hopeful' the U.S. economy will not fall into a double dip recession. After a tremendous drubbing on Friday, stocks somehow managed to sell down to even lower levels yesterday. They are down again this morning following Bernanke's comments - a fitting response to his forecasting acumen.

Few people in the United States seem to be as oblivious to the condition of the American economy as is the guy who is in charge of the Federal Reserve. Bernanke notoriously stated that subprime borrowing wouldn't cause any problems only weeks before it blew up into the biggest financial crisis the world has ever seen. Following this, the Fed released a number of statements in the spring of 2008 about how it was hopeful that its policies would prevent the U.S. economy from falling into a recession. Unfortunately, the economy had already fallen into recession months before, but the Fed was blissfully unaware of this even though it has more access to economic data than anyone else. The buffoonish Bernanke has been beating the drum of economic recovery for a long time now, even though analysis of U.S. statistics indicates the private sector is still struggling. The only recovery that seems to have taken place is in increased government spending.

At the moment, the markets don't seem to share Bernanke's rosy view of the future. The Dow dropped 115 points (1.2%) yesterday and most of the selling took place around the close, as is typical in bear markets. The Dow's ending price of 9816 was well below the key 10,000 level. The S&P 500 fell 14 points (1.4%) and closed at a new low for 2010, as did the Dow. Selling was even more pronounced in the tech heavy Nasdaq and the small cap Russell 2000. The Nasdaq lost 45 points (2.0%) and the Russell 15 points (2.4%). As of today, the Dow and S&P 500 have spent 13 trading days below their simple 200-day moving averages, a bearish pattern. Selling was also widespread with market breadth close to three to one negative on the NYSE.

The only areas of the market that did well yesterday were utilities, gold/ gold miners, and treasuries - safe havens. Financials were hit hard with Goldman Sachs (GS) falling 2.5% and Bank of America (BAC) losing 3.4%. U.S. bank failures have reached 81 so far this year and look like they are going to handily exceed 2009's very high figure. Credit card debt has fallen for 19 months in a row and May's employment report indicated private sector hiring has disappeared. Once the 1.2 million temporary Census workers are dismissed, the U.S. unemployment rate should go above 10%. These are not signs of economic recovery and yet the Fed chair keeps spouting one cheerleading remark after another about how recovery is taking place. Herbert Hoover did the same thing in the early 1930s as the Great Depression was developing. Consequently, he is now treated as a historical laughingstock. History may take the same view of Ben Bernanke. 

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.

Fed Will Leave Rates at Zero Until Inflation Shows Up

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 left the fed funds rate in the zero to 0.25% range at its April meeting. This is the 16th month that the Fed has maintained rates at an all-time low. While the Fed was a bit more upbeat about the economy than it has been at recent meetings, it still pledged to keep rates near zero "for an extended period of time".

When it comes to the Fed and other government representatives, investors would be best off by paying attention to what they do and not to what they say. The Fed was certainly more upbeat in its statement from the April meeting than it was in previous meetings. It noted that "economic activity has continued to strengthen and that the labor market is beginning to improve","growth in household spending has picked up recently" and  "business spending on equipment and software has risen significantly". You would think happy days were here again and short-term rates will be 5% before you know it. Well maybe not, it turns out.

While strong economic growth leads to inflation, apparantly there is no risk of that (inflation that is) as far as the Fed is concerned. The Fed went on to say that "with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time". So the Fed seems to be talking out of both sides of its mouth. Either growth is not sustainable in the long-run and it thinks this will keep inflation subdued or the Fed has pumped so much money into the financial system that this is creating economic expansion (at least for the moment) and inflation will follow.

The first scenario was seen in Japan during the last two decades, especially after its two-year recession in the early 1990s. The economy was supposedly recovering nicely without inflation for a few years. Instead, it gradually fell into the abyss and a deflationary spiral. In the second case, uncontrollable inflation is possible - and this can take place with a great deal of resource slack. Rapidly declining and eventual collapse of resource utilization is the marker of hyperinflation. Fed chair Bernanke should tell Zimbabwe that it couldn't have possibly had the second highest inflation rate in world history, sextillion percent, because it had an unemployment rate of 94%. Weimar Germany, with a mere 100 trillion percent inflation rate, had unemployment that reached almost 25%.

The Fed statement also had two telling comments that provide significant insight in the Fed's thinking. These were, "financial market conditions remain supportive of economic growth" and "bank lending continues to contract". Taken together these indicate that the financial conditions that are supportive are the Fed's low interest rates and the high prices of stocks - the paper economy. While the paper economy is going great, as indeed it was before the Credit Crisis and during every other bubble in history, the real economy is struggling. It can't function well without adequate credit from banks. In other words, the Fed's positive view of the economy is based on economic make believe.

If the Fed really believed the economy was improving, it would be raising rates or at least getting ready to do so and not say it was maintaining its ZIRP (zero interest rate policy) for a long time. As I have documented in previous articles, there is usually a two to three year lag from the end of a recession until the Fed starts raising rates. If we assume optimistically that the recession ended in July 2009, that would take us until at least July 2011 before rates went up. Any rate rise before that date would indicate significant inflation risk and a rate rise after July 2012 would indicate a serious deflation problem.  In either case, the Fed's response will be too little, too late.

Disclosure: None Relevant

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.

China Worries About Inflation, The EU Needs to Worry About Growth

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 Chinese just announced a second increase in reserve levels for their banks. The first increase took place less than a month ago. That announcement was the earliest of three major withdrawals of liquidity from global markets. The other two were the U.S. Fed closing down five of its Credit Crisis liquidity injection programs on February 1st and the Bank of England temporarily halting its quantitative easing (read money printing) program shortly thereafter. Stocks and commodities started selling down with the first Chinese announcement and continued selling off with the others. Global markets got hit again with the second announcement and adding to their worries was a poor GDP report coming out of the euro zone.

China has been leading the world out of the global recession. This hasn't occurred by magic. It has engaged in a huge amount of stimulus to reeve up its economy. While doing so it also froze the value of its currency, the yuan, and this has kept it tremendously under valued compared to a free market price (some estimates are that the yuan should be 40% higher, even a greater amount is possible). Economic stimulus and undervalued currencies are both in and of themselves inflationary. The combination of the two in large amounts can be explosive. So China is understandably trying to lower liquidity in its economy by reigning in bank lending. While these efforts are minimal so far, traders are anticipating more serious efforts down the road. Food inflation is a particular danger for the Chinese and too much of it can risk political destabilization. Food prices are already rising in many parts of the world and reached over 19% in next-door India at one point in December.

While the Chinese have probably engaged in the most significant stimulus measures globally for any sizable economy, the euro zone has not been as nearly aggressive. While the U.S. lowered its funds rate to zero, and the UK to 0.5%, the interest rates in the euro zone were only dropped to 1.0%. Less stimulus in the euro zone means less inflation in the future, but also means less economic recovery now. Fourth quarter GDP figures came in at 0.1%, indicating overall growth is flat. Leading economy Germany had a zero percent quarter over quarter growth rate. Much troubled Greece's economy sank 0.8% from the previous quarter. Italy was down 0.2%. For all of 2009, the size of the 16-nation euro zone economy fell 4%. Growth in the 27 member EU (a number of countries in the EU don't use the euro) was also only 0.1% last quarter. No matter how you look at it, Europe is economically weak.

In mainstream media reporting of Europe's predicament, one major news service stated, "the recovery in the third quarter now appears likely to have been due to temporary factors like government spending boosts, a build-up in inventory levels and car scrappage schemes that pay people to trade in old cars". The exact same factors have boosted GDP in the U.S., although that wasn't mentioned. The U.S. reported 1.4% quarterly GDP growth for the last quarter of 2009 and this was triumphed in news coverage. Investors can expect that number to be revised downward as was the case with the original third quarter figure. Greater stimulus in the U.S. has been one reason that American GDP numbers have been better than in Europe. Another reason is that the U.S. is willing to engage in more blatant manipulation of its economic statistics.It's a lot easy to 'fix' the economic numbers after all than it is to actually fix the economy.

A slow down in the Chinese economy will have a strong impact on the Western industrialized nations. Much of the improvement that has taken place since the depths of the Credit Crisis in the fall of 2008 has been because of increased demand from China.  The economies in the U.S., UK, Japan and Europe are still very weak. Based on recent actions, the powers that be in the US and UK seem oblvious to this. European leaders seem to be no sharper. Proposed austerity programs in the troubled euro zone economies - Greece, Ireland, Italy, Portugal and Spain will only cause further economic contraction. The fix for the Greece's debt problems - details are still forthcoming - is likely to be a win/lose situation.

Investors should expect that industrialized countries will be on inflation watch for a while longer. At some point even the incredibly oblivious U.S. Fed Chair Ben Bernanke will realize that there are still economic problems that have yet to be solved. More stimulus will follow. Stimulus is what has been behind the global market rallies that began in March 2009. Reduction of stimulus is what is behind the sell off that started in January. Investors should watch for signs that stimulus is returning. Until then, stock and commodity prices are likely to be pressured.

Disclosure: No positions.

NEXT: China is Selling Its U.S. Bond Holdings

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.

World Economic Leaders Need IQ Bailout

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 are few things investors can count on during our current era of financial turmoil. One of them is the unerring obliviousness and incompetence of the world's elected leaders and central banks. Somehow they both manage to find the highest cost, least effective solution for every Credit Crisis problem they try to solve. Moreover they usually don't bother to act until every dog in the street has been aware of the problem for some time. There was more than enough support for this view on both sides of the Atlantic today.

There was a summit meeting in the EU today, where the leaders of the 16-nation block struck a deal, at least in principle, on assisting Greece with its debt problems. No details of the rescue package were forthcoming, but there were suggestions of some form of loan program. This is enough to open up the Pandora's box of 'moral hazard', but probably won't be enough to fix the problem - at least not with the initial measures. The final cost for any help to Greece will be much more than early expectations and this will pale in comparison to the cost of future bailouts for other member states such as Spain and Italy.

The whole scenario currently taking place in the EU should seem vaguely familiar to Americans. The much maligned TARP bailout program was initially only supposed to be loans, so it wasn't really costing the taxpayers anything. A number of other bailout programs mushroomed around it and by some estimates reached $11 trillion in promised money (compared to $700 billion for TARP).  While it has been claimed that some TARP money was returned, it is not clear how much actually was. When Citibank announced it was paying back $20 billion (of the $45 billion it received), the U.S. government agreed to give it a $38 billion tax break. It's not clear how many similar deals were worked out to shift the burden from a loan program to a direct cost for the American taxpayer, who after all would have to pay extra taxes to make up for the federal government tax breaks given to the big banks.

While the EU leaders were busy sowing the seeds of future financial disaster for their currency union, the ever out of touch U.S. Fed chair Ben Bernanke was testifying on Capitol Hill about a proposed exit strategy from his easy money policy. As a reminder, Bernanke didn't realize that subprime loans would cause a problem, didn't realize the U.S. was in a recession months after it had begun, and didn't realize that not bailing out Lehman would lead to a possible collapse of the world financial system. Now he doesn't realize the recession and economic problems caused by the Credit Crisis are still not over.  At least he's consistent.

Those who think the U.S. economy is healthy only have to look at the state of the housing market. Almost one in three borrowers have mortgages that are for more than the value of their property. As of November 2009, 5.3% of U.S. home mortgages are three or more months behind in their payments. A year earlier in 2008, it was only 2.1%. In 2009, 2.8 million mortgage holders received a foreclosure notice. Current estimates are this number will rise as high as 3.5 million in 2010. Fannie Mae and Freddie Mac, both nationalized by the U.S. government, have just announced that they will buy back troubled loans contained in securities they have sold to investors (this is a major bailout for the big money players, although the mainstream media did not report it as such). Last year, the Obama administration pledged to cover unlimited losses for both companies through 2012. Draining liquidity from an economy with these conditions in the housing market would send the U.S. into a major depression.

The U.S. experience in the Credit Crisis shows that once you start bailouts, there is potentially no end in sight for how many there will be, nor any limit to the final cost. The disaster precipitated by not bailing out Lehman Brothers also indicates that you must bail out everyone once you start the process. Of course, bailing out no one is the other option. Half and half measures don't work and produce the worst results at the greatest costs. The EU seems not to be aware of this lesson. Maybe they're getting their advice from Ben Bernanke?

Disclosure: No positions

NEXT: China Worries About Inflation, The EU Needs to Worry About Growth

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 State of the Union for Investors

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.


We live in extraordinary times. The U.S. economy is at risk of veering toward a multi-year depressionary state or experiencing a massive bout of inflation. Based on president Obama's State of the Union address last night, investors should still be worrying about both possibilities.

The impact of the global Credit Crisis that began in 2007 has been deep and prolonged so far. It was met with extraordinary government action in terms of spending and in pumping liquidity into the financial system - both of which are inflationary in the long-term. Despite these efforts, economic recovery in the U.S. has been tepid and elusive so far. This has not stopped our leadership from taking credit for 'saving us from another depression' despite the lack of evidence to support this view. On a number of economic fronts, the situation has continued to deteriorate, but Washington continues to congratulate itself on its great performance. The State of the Union address with its almost uninterrupted applause for a long litany of meaningless political platitudes provides the perfect picture of just how out of touch Washington is and how oblivious they are to their record of failure.

In his speech last night, president Obama emphasized that jobs creation would be the focus of his administration this year. For those with short memories, this was also stated as the prime focus of the White House in January 2009. The U.S. unemployment rate was 7.2% at that time and the claim was that if congress didn't pass the proposed $845 billion stimulus package, unemployment would reach double digits by the end of the year. Democrats said they emphasized government spending over tax relief in the bill because that was the best and fastest way to create jobs. Well, congress passed Obama's package, really a massive giveaway to a number of special interests, and the unemployment rate was 10.0% at the end of the year.  Based on their own criteria, the White House's 2009 attempt at job creation was a complete failure and a big waste of taxpayer dollars. For some reason this wasn't mentioned in the president's upbeat speech.

By this point, I don't think anyone should expect an honest appraisal from the White House on any aspect of the administration's performance. Obama made a number of negative references in his speech to the much derided Wall Street bailout program, TARP. He stated that it was "about as popular as a root canal" and it was something which "I hated". What was left unstated was that while he was a presidential candidate Obama made phone calls to round up Democratic support for the bill and this was instrumental in passing it and one of the first acts of his administration in 2009 was to get congress to release the second $350 billion allocated in the bill so it could be spent. Imagine what he would have done if he had liked TARP.

Deficit reduction was another item highlighted in the State of the Union speech. Perhaps this was meant as the comic relief - I don't know. Apparently this will start in the 2011 budget. Obama stated that he had already found $20 billion in inefficient programs in next year's budget and would pore over it "line by line" to find even more. The 2011 budget hasn't been released yet, but the budget deficit for the 2010 budget (starting on October 1, 2009) is now estimated to be $1.35 trillion. A savings of $20 billion would reduce the current deficit by less than 1.5% and lower it to only $1.33 trillion. Doesn't exactly look like a big dent in profligate government spending does it?  While this is completely meaningless, Obama also claimed that if his health care program was passed it would result in a trillion dollar reduction in the budget deficit (over a many year period, but that wasn't emphasized). A big spending government program leading to deficit reduction?  Yeah, that can happen. Any investor who believes this should stop investing immediately because you are probably buying stock in the Brooklyn Bridge.

Despite the claims coming from Washington, the recession is not over. The White House, congress, and even the Federal Reserve seem incapable of recognizing this because it would be an admission of failure on their part. At some point it will be recognized however because the American public will insist on it (the message from the surprise upset in the Massachusetts senate race seems to have eluded the White House so far). Modern democracies will always eventually err on the side of more government spending. As we have seen in the last year, this doesn't necessarily solve the problem of a bad economy and thus it is still possible for an intractable depression to take hold. Too much government spending does eventually lead to the problem of excessive government debt though and at some point the debt becomes so high that it is impossible to pay off. That's when intractable inflation shows up. Historically, the worst economic disasters take place when government is most oblivious to these unfolding problems. In that case, Americans have a lot to worry about. President Obama stated more than once in his speech last night "I don't quit". Based on his first year in office, he should have said, "I don't listen".

Disclosure: Not applicable.

NEXT: The Twilight of Ben Bernanke

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.

When the Invisible Hand is the Government

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.

Our Video Related to this Blog:

Adam Smith in his Wealth of Nations pictured an invisible hand that operated behind the scenes to make capitalist markets operate efficiently. When that invisible hand becomes the government, you no longer have capitalism, nor do you have efficiency. The self-correcting mechanisms of capitalism are also done away with and the market loses the ability to fix itself. Three pieces of news out recently - China trying to reign in bank lending, the U.S. 3rd Quarter GDP report, and the Bank of England admitting to secret loans to big banks during the Credit Crisis - are representative of how important government's hand in the global economy has become.

China is the growth success story of the world. It's economy is indeed humming along. The tune it seems to be singing however is bubbles are here to stay. Along with freezing the exchange rate of the yuan at artificially low levels in 2008, the government has pumped incredible amounts of money into the financial system in the last year in order to maintain a high growth rate. Anecdotal stories out of China indicate that a lot of the money is is being used to build empty office buildings, unused infrastructure and even empty cities. The government's warning to banks to control lending seems a bit hypocritical to say the least. Markets around the globe sold off on the news however, which tells you just how important Chinese growth is viewed as a cornerstone for recovery from the Credit Crisis.

The U.S. could learn a thing or two from China on how to goose up a flagging economy (as for government hypocrisy, the U.S. is way ahead). Revisions to the third quarter GDP indicate that growth was only 2.8% instead of the originally reported 3.5%. Cited for lowering the numbers were a bigger trade gap, lower commercial construction, consumers didn't spend as much and business inventories fell more than expected. None of these are surprising and they are all probably still considerably overstated. Without Cash for Clunkers program and the federal housing purchasing subsidies, there would have been no economic growth and U.S. government officials wouldn't have been able to shout from the rooftops that the recession is over. This reminds me of the press conference that Herbert Hoover gave in June 1930 announcing the depression was over (there were three more grueling years ahead before the U.S. economy even hit bottom). If he had today's government statisticians, he could have produced the numbers to prove it.

The Bank of England today admitted that it secretly lent over $1 billion dollars to two major banks - the Royal Bank of Scotland (RBS) and HBOS PLC - to keep them afloat during the height of the Credit Crisis in late 2008. HBOS was later merged with Llyods Banking Group (and you can probably guess which invisible hand brought them together). Both banks have since been nationalized with the UK government owning 84% of RBS and 43% of the Lloyds/HBOS combined firm. Lloyds in now in the process of raising a massive amount of new capital. One would have to be pretty naive to believe these were the only secret government dealings during the Credit Crisis. What could have happened in the U.S. boggles the mind. The Federal Reserve is an unaudited entity and operates in secrecy as is. Fed chair Ben Bernanke has refused to provide information requested by congress about the bailouts. If there's nothing to hide, why is he hiding it?

Disclosure: No positions.

NEXT: Why You Can't Trust U.S. Weekly Jobless Claims

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.Inflation Reports - Contradictions and Absurdity

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.

Our Video Related to this Blog:

The PPI (producer price index) was out Tuesday and the CPI (consumer price index) was out today. Both were up 0.3% for October, but for exactly the opposite reasons. Food prices were up in the PPI with fresh vegetable prices skyrocketing 24%. Fruit and vegetable prices declined for the 4th straight month in the CPI report and helped keep inflation down. New and used motor vehicles were up so much in price that they were responsible for 90% of the increase in core inflation in the CPI report. In the PPI, car and truck prices were down so much that they caused the core to fall 0.6% (an unusually large change for core PPI). So much for consistency in U.S. government reporting of inflation.

Even if they painted a consistent picture, the official U.S. inflation figures can't be trusted as is because of statistical adjustments that were made to the calculations in the 1980s and 1990s. All of these adjustments acted to lower the reported inflation rate and make it nearly impossible for high inflation numbers to appear. Substitution effects and hedonics are just two examples of 'improvements' made to the inflation calculations. Substitution is assumed to take place when the price of something rises a lot. People supposedly buy less of it and buy some cheaper item instead (less steak, more gruel for instance). The higher price item gets less weight in the data and the lower priced item more weight. Consumers are of course getting less pleasure from their purchases. Hedonics is exactly the opposite. Improvements in manufactured items like cars and electronic goods are assumed to lower the price because consumers get more pleasure from them. Sound contradictory? Well, that's because it is. Both make it difficult though for reported inflation numbers to rise too much and that's why they are both used.

There is really no reason to pay attention to the U.S. government's official inflation numbers. All you have to do is watch the currency and gold markets. A falling U.S. dollar means there is more inflation for Americans. Gold prices however are even a better gauge and can give a global read on inflation. While gold has been hitting a series of all time highs in U.S. dollars in the last six weeks, it is also recently started hitting all time highs in a number of other currencies, including the euro, the British pound, the Swiss franc, the Canadian dollar and the Yen. The market is clearly indicating global inflation is taking place and fiat currencies around the world are losing value.

Gold hit another all time high in morning trading in New York today, with spot gold reaching $1153.90. Silver was even stronger reaching $18.86 at one point. The trade-weighted dollar traded as low as 74.90, it's third break of the 75 level. The dollar rallied strongly yesterday on Bernanke's comments that the Fed was watching the level of the dollar. He said the same thing in June 2008 and probably other times as well. Based on the dollar's performance, all the Fed has done is watch it go down. The Fed also constantly says that there is no inflation in the U.S. The markets disagree. You decide which one you want to believe.

Disclosure: Long gold and silver.

NEXT: The Real Story About Gold Supply and Demand

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.

Central Banks Support the Dollar

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.

Our Video Related to this Blog:

The U.S trade-weighted dollar had an explosive rally on Monday. The rally was by no means even during the day, but consisted of a few sharp rises that lasted only minutes. Not much happened in between. Only central banks have enough capital to account for this type of trading pattern. Not all currencies moved equally against the dollar either lending further credence to central bank intervention having taken place. Only the euro and Canadian dollar had significant moves down with the Australian dollar having a lesser drop. The Yen hardly budged. The British pound actually rose slightly on the day. Care to guess which central banks might have been involved?

Gold and silver had sharp sell offs in reaction. However this was not the only reason that accounted for their movement down. There is an options and futures contract expiration tomorrow. The same expiration affects natural gas, which also had a sharp sell off, but this was only tangentially related to movements in the U.S. dollar. The dollar intervention was clearly timed to get maximum bang for the buck (so to speak) and drive down the price of gold as much as possible. There was no technical damage on the gold and silver metals charts though. Silver partially filled a gap from the breakout earlier in the month and probably needs to trade to the bottom of the gap before it can resume its movement upward.

A number of gold and silver miners also filled their equivalent gaps from the same day in early October. GDX, the precious metal mining ETF did so and traded down to its 50-day moving average. Technical problems are showing up on a number of miner's chart however, so this sell off is probably not over. Novagold (NG) has serious problems on its 15-minute chart which indicate a lower low is quite possible in eight to ten days. A rally in the middle is likely. You might want to consider a tight stop. Buying on the dip is another option. Silver stocks like Hecla (HL) and Coeur d'Alene (CDE) are interesting possibilities. Hecla still has an unfilled gap lower down (as do a few other mining stocks). Look for the gaps and keep an eye on them before deciding to buy.

While currency intervention is keeping the U.S. dollar from collapsing, it will have a high cost over time. Everything sold off yesterday and that includes U.S. treasury bonds. When bonds go down, interest rates go up. There was a minor breakout in the 10 and 30 year bond interest rate charts Monday. The stock market is exceedingly vulnerable in here as well. The rally has been based on liquidity and the movement of that liquidy out of stocks into the dollar could damage stock prices considerably. This is the choice the monetary authorities are facing - save the U.S. dollar or save the stock market and keep interest rates low. Knowing how competent Ben Bernanke is, it will probably be none of the above.

NEXT: Markets Enter Danger Zone

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.

Inflation News Sends Gold Soaring

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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The ISM Services Index was released this morning and it came in at 48.4, which indicates only a slight contraction. While the mainstream media put the usual bullish spin on the news, it was actually nothing short of disastrous. One component was overwhelmingly responsible for the improvement from last month - Prices Paid. Prices Paid is a measure of inflation. It came in at an eye popping 63.1 in August versus 41.3 in July. The biggest increase in the Manufacturing Index yesterday was also Prices Paid (new orders was a very close second though, there were no close second in today's Service report). In the manufacturing report, prices paid was 65.0 in August versus 55.0 in July. None of the ISM reports are adjusted for inflation, just like most of the government's economic reports. In both cases, higher inflation as opposed to better economic activity can make the numbers look better. Financial media usually fails to mention this.

Spot gold reached $987 this morning. It is approaching once again the key $1000 breakout level. Spot silver almost reached $15.80, just below important resistance at $16. Gold has traded just over $1000 twice. The first time was in March 2008 and the second time in February 2009. This key level was reached at the end of gold's bullish seasonal period which ranges from August to February. This time the $1000 level will be reached at the beginning of the strong seasonal period. Expect silver to follow gold up. Once it breaks above $16, it will head toward $21.

While you would think that the U.S. dollar would nosedive on this news, it was down only slightly from yesterday's close of 78.38. After dipping just below the 78.33 breakdown level, it started rallying and is now up. This illogical trading of the dollar has been common since the Credit Crisis began. Why would traders rush to buy it, when the currency is constantly being debased by the central bank? They wouldn't, at least not voluntarily. Nations, including the United States, have a long history of trying to maintain the value of their weakening currencies by manipulating the market. The manipulation always fails in the end however.

Fed chair Ben Bernanke has said over and over again that there can't be inflation because there is spare capacity and slack in economic production. While he may be an expert in the U.S Depression, he apparently never studied hyperinflation where just such a scenario is common.
Bernanke has also been repeatedly wrong in everything he has said and done. For those who would like a video review of Bernanke's appalling record, click on the link below:
http://www.youtube.com/watch?v=HQ79Pt2GNJo

NEXT: No Recovery in Jobs

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.