Why You Must Invest for Inflation From Now On

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


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

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

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

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

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

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

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

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

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


Disclosure: None


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

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

Bernanke Makes No New Promises at Jackson Hole

 

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

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

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

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

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

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

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

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

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


Disclosure: None

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

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

The Twisted Logic of the Fed's New Policy Move

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.

At the end of its September two-day meeting, the Federal Reserve announced it latest attempt to revive  the U.S. economy -- Operation Twist. This Fed launched its first program to stimulate the economy four years ago at its September 2007 meeting and the economy is still in the doldrums. While the Fed hasn't yet begun QE III, the Bank of England looks like it is about to return to this form of money printing.

The Operation Twist announcement didn't come as a surprise to the markets. It was obviously leaked to the press days ago and articles about it were common in mainstream news outlets earlier this week.  The name comes from a dance popularized by Chubby Checker in the early 1960s -- the last time the Fed engaged in a similar policy move. The rotund Mr. Checker is an appropriate symbol for the bloated U.S. national debt,  the bloated U.S. budget deficit and the bloated Federal Reserve balance sheet, which has been swollen by huge amounts of money printing. The Twist itself involves expending lots of energy going back and forth, but getting nowhere -- the very picture of the 2011 Fed.

In the current Operation Twist, the Fed is planning on selling $400 billion of short-term debt and buying treasuries with 6 to 30 year maturities. The idea is to drive down longer-term interest rates in order to stimulate the economy. Many mortgage and credit card interest rates are set based on the yield of the 10-year U.S. government bond. The 10-year interest rate is already at a record low after falling below the low of 1.95% established 70 years ago in 1941. Real U.S. interest rates (those adjusted for inflation) have been negative for some time. Thirty-year and 15-year fixed mortgage  were already at their lowest historical rates earlier this month. There is no evidence that interest rates are holding back consumers from making purchases. Lack of jobs and income are the problem and the Fed's latest move isn't likely to improve either.

Across the pond, the Bank of England looks like it will start another round of QE (quantitative easing) later this fall. The BOE already printed 200 billion British pounds in 2009 and 2010 for its initial program. This is small compared to the $2 trillion increase in the U.S. Fed balance sheet.  It is universally acknowledged that the UK economy is weakening and the BOE is willing to take this risky inflationary approach even though British consumer prices have increased by 4.5% in the last year. Real interest rates are negative there as well.

The Fed is probably anxious to start its next round of QE as well, but political pressure is holding it back.  Republican leaders in congress sent a letter to Ben Bernanke to "resist further extraordinary interventions in the U.S. economy". Apparently, they are worried that money printing and negative real interest rates will lead to serious inflation -- just as they always have throughout history. The anemic Operation Twist certainly isn't in the category of extraordinary. If anything, it's sub-ordinary. Apparently the stock market thought so with the Dow Industrials falling 284 points or 2.5%, the S&P 500 down 35 points or 2.9% and Nasdaq closing 52 points or 2.0% lower.


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.

8 More Reasons Why a Double-Dip 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 earnings season continues and one company after another beats expectations, the economic numbers are continuing to come in below estimates. The data and indicators are increasingly painting a picture of an economy that is falling apart. Here are a few of the reasons why another recession is imminent:

1. U.S. orders for durable goods fell 1.0% in June. Economists expected them to rise 1.0%.  Excluding the volatile transportation sector, orders fell 0.6% and shipments were down 1.3%. Inventories rose for the sixth month in a row, indicating goods are being produced, but they're not moving out the door.

2. Industrial output in China fell 2.8% in June. A "potential weakening of the global economy" was cited as the cause.

3. The ECRI (Economic Cycle Research Institute) weekly leading indicators index has fallen as low as minus 10.5. There has never been a case when it has gotten this low and there hasn't been a recession.

4. The Consumer Metrics Institute's Growth Index has been negative since January and is now around minus 3.0 (it fell to around minus 6.0 in August 2008). It leads U.S. GDP by approximately two quarters.

5. The U.S. trade deficit widened in May and was the largest in 18 months. This happened even though oil imports fell over 9%. Rising oil imports are usually the factor that makes the trade deficit go up. The trade deficit subtracts from GDP.

6. After a sharp drop in June, U.S. consumer confidence fell even more in July. The Conference Board's latest reading was 50.4. As usual, economist's estimates were on the high side. A reading of 90 or above indicates a robust economy. Before the most recent recession, consumer spending was 72% of GDP.

7. U.S. weekly unemployment claims refuse to drop below 400,000, the approximate dividing line between recession and non-recession. At no point during the current 'recovery' have they gotten that low. The unadjusted number of claims for the week of July 17th was 498,000. Even though companies are reporting huge earnings increases and raising estimates for next quarter, more and more workers continue to lose their jobs.

8. The economic cheerleader-in-chief, Fed Chair Ben Bernanke, gave a gloomy report on the U.S. economy last week in his bi-annual testimony before congress. Bernanke didn't see the subprime crisis coming, nor did he realize the U.S. was in a recession in the spring of 2008, months after the recession had begun. So if even he admits the economy is weak, it must really be in bad shape. Bank of England Governor Mervyn King, has also recently stated, "Britain can't be confident that a sustained recovery is under way".

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 Admits Major Policy Failures; Stocks Soar

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.


What's wrong with this picture? In his bi-annual testimony before congress yesterday, Fed Chair Ben Bernanke admitted that after more than a year and a half of zero interest rates and $3 trillion in federal deficit spending since 2008, the best case scenario for the U.S. economy is slow growth and high unemployment. The S&P 500 is up 2.5% so far this morning on this 'good' news.

Bernanke's congressional testimony included the following statements (emphasis added by me):

"Most [FOMC] participants viewed uncertainty about the outlook for growth and unemployment as greater than normal, and the majority saw [at the June Fed meeting] the risks to growth as weighted to the downside."

"financial conditions--though much improved since the depth of the financial crisis--have become less supportive of economic growth in recent months."

"many banks continue to have a large volume of troubled loans on their books, and bank lending standards remain tight. With credit demand weak and with banks writing down problem credits, bank loans outstanding have continued to contract."

"After two years of job losses, private payrolls expanded at an average of about 100,000 per month during the first half of this year, a pace insufficient to reduce the unemployment rate materially. In all likelihood, a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009."

The market dropped as Bernanke delivered his testimony yesterday afternoon - and he was blamed for bringing it down. The Dow closed more than 109 points lower. The Dow was then up more than 117 points right after the open today and the Nasdaq gapped up over 26 points. The mainstream media reported bullish news out of Europe and good corporate earnings instantly turned market psychology around. One major news service stated, "earnings Thursday showed that if the economy is slowing, many companies are not being affected too much by the downturn". In other words corporate profits have decoupled from the state of the economy. While this may sound completely idiotic, it may not be as absurd as it initially appears to be.

If the federal government has spent $3 trillion of borrowed and printed money in the last two years, that money has to have gone somewhere. Either direct or indirect government purchases could be responsible for the current batch of good corporate earnings, although sales to the economically strong economies in East and South Asian are behind better performance for many U.S. companies that do most of their business overseas. So the private sector of the U.S. economy can be dead in the water, but corporate earnings can be good because the government has become such a large component of the economy (as is the case in socialist states).

While corporate earnings are up and cash levels are at record highs, the money doesn't seem to be flowing into the general economy. Despite the supposedly great state of corporate America, there are few announcements of major business expansions, nor is hiring picking up. The usual evidence of a robust corporate sector is simply not there. Weekly jobless claims in fact rose 37,000 to 464,000 this week. While 'seasonal adjustments' were cited behind the big increase, weekly claims have been at recessionary (if not depressionary) levels for two years now. Apparently there are negative seasonal factors in winter, spring, summer, and fall.

The alternative explanation for today's big stock market rally, despite major gloomy news, is the not so invisible hand of government manipulation. Bernanke made it clear early on that he was more than willing to interfere in the markets. When the Fed began its rate lowering campaign in August 2007, it did so one hour before monthly futures expired and this created a huge rally that wiped out the profits of the shorts (and gave a huge gift to the parties that were on the other side of the trade - the big Wall Street banks perhaps?). More recently, the Fed created a huge global liquidity facility on May 9th, after the Flash Crash, and markets soared - at least for awhile. Since there are major elections in the fall, investors should assume that powers that be will not want a crashing stock market and the announcement of a new recession. It will be interesting to see how they try to cover this up.

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.

Fed Statement Not so Bullish This Month

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


The U.S. Fed ended its two-day meeting today and left its zero interest rate policy in place. While this was unsurprising, the statement the Fed issued provides investors with some insight into its current thinking on the economy. It was much less bullish today than in April, but still contained a lot of spin and denial. 

In past articles on March 17th and April 29th, I have discussed how the Fed has waited two to three years after the end of a post war era recession before raising rates and that this would be happening again.  That would mean the earliest Fed rate rise would take place around July 2011. Nevertheless, at that time many economists at the biggest U.S. bond dealers were predicting that a rate rise was likely at the Fed meeting this June. Since then, an article by the Federal Reserve Bank of San Francisco has appeared that suggested that the Fed should possibly wait until 2012 before raising rates (a three year period after the end of the recession). After reading that, the highly paid economists at the too big to fail institutions changed their tune and now almost all of them are predicting that the Fed won't raise rates until next year or even 2012. Your taxes were used for government bailout money to pay the salaries of many of these 'can't think for themselves' economists.

Almost all of these same economists are also parroting the Federal Reserve mantra that there can't be inflation while resource slack exists in the economy. One chief economist for a major bank recently stated, "inflation will hardly be a threat in an economy where massive labor-market slack is suppressing wages". Was he discussing the U.S. where unemployment is around 10% or Zimbabwe where it reached 94%? Of course, everyone would say it must be the U.S. because Zimbabwe had the second worse hyperinflation in world history. Truly massive resource slack always accompanies hyperinflation, but don't expect to get facts like that from the typical mainstream economist. They're paid to provide views that help their institutions make money, not to give the public the facts.

In its April meeting, buffoonish Ben and his stalwart crew of fed governors broke out the cigars to congratulate themselves on the great state of the U.S. economy.  The Fed statement released after the meeting was filled with glowing statements about the economy such as: "economic activity has continued to strengthen and the labor market is beginning to improve", "growth in household spending has picked up recently", "business spending on equipment and software has risen significantly", and "financial market conditions remain supportive of economic growth". There was one fly in the ointment however, " bank lending continues to contract". The Fed didn't seem too concerned. After all that only impacts the real economy, small and medium size businesses, and the guy on Main Street. Lack of lending can also cause recessions however. The Fed has apparently woken up to this unpleasant annoyance recently and behind the scenes reports indicate that it has been studying what to do in case the U.S. economy takes a second nosedive.

The Fed statement from the June meeting wasn't quite as optimistic after a number of recent economic releases indicated a weakening U.S. economy. Before the meeting ended today, it was revealed that new homes sales plunged 33% to record low level in May. The May employment report was unimpressive and indicated most new jobs were temporary and coming from the Census. Despite the obvious economic deterioration taking place, the Fed said in today's statement, "Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually".

The Fed continued to maintain that household spending was increasing, but admitted that it was constrained by high unemployment, lower housing wealth and tight credit (that certainly sounds like something that's going to be taking off in the near future). The Fed also stated that investment in commercial real estate continues to be weak and that "employers remain reluctant to hire". It acknowledged that "housing starts remain at a depressed level" (it would be hard to argue that something that was at the lowest point ever was anything but). The Fed further stated that financial conditions had become less supportive of economic growth and then blamed the Europeans. Moreover it reiterated once again that "bank lending has continued to contract in recent months". The Fed then ended its statement still upbeat about the future.  Maybe they just don't think recession is such a bad thing after all.

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.

The Case Against Reappointing Ben Bernanke

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.


Economics is one of the few professions where incompetence is regularly rewarded. The attempt to keep Ben Bernanke as head of the Federal Reserve for a second term is one of the most glaring examples of this practice - and one that will have serious negative repercussions for the United States going forward.

When president Obama announced that he was reappointing Bernanke last August, the reason he gave was that 'Bernanke prevented another depression'. This sound bite has been mindlessly repeated by politicians - senate leader Harry Reid most recently - and economically challenged media commentators ever since. Until the U.S. economy returns to its pre-Credit Crisis state, we will not know whether or not that we have been saved from another depression. There is more than enough evidence to indicate that we haven't been - double digit unemployment, bank loan portfolios that continue to deteriorate, rising bankruptcies and bank failures, lack of lending by the banks, and a housing market that only functions because of numerous government programs that prop it up are just a few reasons why this claim is wrong. Obama would not be the first U.S. president to prematurely call the end to a depression, Herbert Hoover did so in June 1930 when he told the press that the Great Depression was over - it was almost three years before the bottom and at least another decade before that was indeed the case.

One thing that will be pointed to as evidence of recovery will be good GDP numbers later this week - estimates are as high as 6% annualized growth for the fourth quarter of 2009.  If GDP numbers were calculated in a way that measured actual economic growth this would indeed be encouraging. Unfortunately, they are not. U.S. GDP figures for 2008 were positive even though it is universally recognized that the U.S. was in a severe recession the entire year - this is a theoretical impossibility, yet no one talks about it. The lesson of Japan in the 1990s and 2000s warns against using GDP figures as evidence that an economic crisis is over. Japan had quarters of over 10% annualized GDP growth. They were 'saved' from a depression as many as seven times (depends on how you count) in the last two decades. Their economy has nevertheless continued a long, slow leak since 1990 and bigger problems are likely in the next decade, which will be the third one after their crisis began. In reality, Japan extended its depression over a very long period of time; none of its government's actions prevented it.

The defect in the 'saving from depression' argument is an implicit assumption that the economy has two states like a light switch, on and off, instead of an infinite number of possible outcomes. Many of those outcomes involve inflation and hyperinflation. There is no discussion of the negative consequences of Bernanke's actions among his supporters - and all economic policy actions have side effects, many of which can be extremely undesirable. Bernanke himself wrote his PhD thesis on Fed policy errors during the 1930s and demonstrated that restrictive Fed monetary policy led to the debacle. He also came to the conclusion that doing the opposite would fix the problem. If the economy was as simple as a light switch it would. In a complex system, this is not the case. Doing the opposite may simply lead to a different disastrous outcome.

Bernanke also didn't show understanding of the impending problems within the financial system, nor did he react quickly. As late as June 2007, Bernanke was assuring people that there would be no problem with subprime loans. In July the problem blew up. As late as the spring of 2008, the Fed was releasing statements that they were hopeful they would still be able to prevent a recession. The recession had already begun in December 2007, but the Fed was unaware of it. In September 2008, Lehman was allowed to fail with the subsequent excuse being given that no one was interested in buying it. Only days later AIG was nationalized when no one would buy it. The Lehman failure set off a general global financial collapse. Bernanke is now claiming credit from 'saving' the system from this collapse with his quick action. As one commentator astutely observed, this is like an arsonist wanting credit for putting out a fire that he had started.

Bernanke was originally appointed by George Bush and is one of the key economic actors along with the current Treasury secretary Tim Geithner from the Bush administration. While on one hand president Obama constantly criticizes Bush economic policies and how much damage they have caused, on the other he has gone out of his way to keep the Bush economic team mostly in place. This is reminiscent of Obama's newfound criticism of irresponsible giveaways to the big banks. For those who don't recall, the TARP bill originally failed in its first congressional vote. Presidential candidate Obama was instrumental in rounding up enough Democratic votes to get it passed on a second try. Now, Bush deserves the blame.

Bernanke's appointment runs out on January 31st. The slow-moving senate has yet to get around to voting on it. While Bernanke has had his detractors in congress, they became energized after the surprise upset in the Massachusetts special senate election last week that indicated quite clearly that American voters are angry about how the economy has been handled. Senators up for reelection in November (only one-third of the total) particularly began to have second thoughts, as indeed they should. Support for Bernanke may come back to haunt them in the future even more than support for the ill-fated health care bill. Bernanke is almost guaranteed to win the vote to reappoint him however. The White House is leaning heavily on Democratic senators to support him and hoping that the public isn't paying too much attention. Voters tend to notice though when they don't have a job.

Disclosure: None

NEXT: Consumers Lack Confidence, They Also Lack Credit

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 Three Big Economic Lies of 2009

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.

Investors have trouble making money in the markets because the information they receive from the government is not a reliable accounting of what is actually going on. The mainstream media then repeats this information, no matter how absurd it is, without critical commentary or analysis. While financial media reporting has been filled with misinformation this year, there are three major ongoing themes in 2009 that investors especially need to realize don't hold up under scrutiny. These are: The economy is in recovery; Unemployment is a lagging indicator; and Inflation is not a problem. Let's examine why each one of them is not true.

1. The U.S. economy is in recovery.

This is based on the U.S. GDP going up in the third quarter (by 2.8%) and the contention that a reported increase in GDP indicates the end of a recession. This would be the case if the numbers were reliable - they are not - and they didn't turn positive as the result of government stimulus programs - which they did.

There have been a number of changes in how U.S. GDP has been calculated in the last three decades. These changes have caused better numbers to be reported. Consequently, it is now almost impossible for U.S. GDP to be negative. The original numbers published for 2008, indicated an economy doing well, not one that was in the worst recession since the 1930s. After an extensive revision of GDP numbers in mid-2009, the much reduced GPD number for 2008 was still positive - a theoretical impossibility - and absolute proof that the U.S. GDP numbers are unreliable and should not be believed.

Even with the extensive manipulation of the GDP figures, if you removed the impact of government stimulus programs for autos and housing and other forms of government spending, there still wouldn't have been a positive number in the third quarter. This game has been played before in Japan. Government spending brought the country out of recession in 1993, 1997,1998,1999, 2001, 2004 and 2009. Did they have a septuple dip recession? No, they have had one long two-decade recession masked by government stimulus programs - the modern version of a depression when Keynesian economic policies are pursued. The Japanese learned that an economy that does well solely due to government stimulus is not an economy in recovery. The U.S. should pay attention to this lesson. So far, it hasn't.

For a fuller discussion of the recent U.S. GDP numbers, please see my blog post: Mark to Model GDP at http://nyinvestingmeetup.blogspot.com/2009/10/mark-to-model-gdp.html.

2. Employment is a lagging indicator.

It would actually be more correct to state that GDP is a leading indicator of economic recovery (if things go right that is). The lag of employment to GPD only became very noticeable during the minor recessions in the early 1990s and 2000s and was a result of statistical 'adjustments' that made GDP look better so that it gave premature readings of economic improvement. In the major recessions in 1973-1975 and the double dip recession in 1981-1982, unemployment bottomed the quarter that GDP turned positive. It did not do so in the third quarter of this year. If unemployment was a lagging indicator, the lag should be much greater after major recessions than it is after less serious recessions. This is not the case and is a major contradiction to this viewpoint. What has actually happened is that statistical 'adjustments' made by the U.S. government to improve unemployment calculations have lagged the 'adjustments' made to improve the GDP numbers.

For my blog post on the latest U.S. unemployment figures please see: http://nyinvestingmeetup.blogspot.com/2009/12/us-employment-figures-dont-add-up.html.

3. Inflation is not a problem:

This oft repeated mantra from the Federal Reserve will prove in the future to be the biggest lie of all. Their argument that low capacity utilization prevents inflation is not true based on historical analysis. Nor are there any cases in the past when governments have 'printed' large excess quantities of money as the Fed is doing now and inflation didn't follow. The Fed's own figures also indicate that massive future inflation is possible. The Adjusted Monetary Base, a measure of future inflation potential, has gone up more in the last year than it has in the entire preceding 50 years. The rise of the Adjusted Monetary Base in the 1970s, when U.S. inflation reached 15% on a monthly basis at it height, is a mere blip compared to the current vertical rise.

The Fed has hinted that it will be able to take care of any potential inflation problem. This is the same Fed that didn't realize sub-prime loans were a problem almost up to the moment they started to bring down the financial system and the same Fed that was claiming in the spring of 2008 that it thought it could prevent the U.S. from sinking into a recession. Unfortunately, the recession had begun months before. The Fed was unaware of it however. The Fed will also be unaware that inflation is a problem right up to the point where every dog in the street knows about it.

For a thorough debunking of the inflation news, please see my blog post:
http://nyinvestingmeetup.blogspot.com/2009/12/why-inflation-is-and-will-be-problem.html.

Lack of honest government statements to the public about the economy is nothing new. Governments almost always try to hide the bad news. More than once in history, manipulation of the economic numbers has evolved into outright fabrication. It is also common for the mainstream economic community to support the government's view with fanciful obfuscations. When things have gotten to this point, the situation is already very bad and likely to get much worse. As usual, things will not be different this time. They never are.

NEXT: Why Interest Rates Will Rise in 2010

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.

Why Inflation Is and Will Be a Problem

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 December 2008, I predicted at the New York Investing meetup that inflation would reappear in the U.S. by the end of this year. The just released PPI report for November had wholesale prices up 1.8% (a 21.6% rate annualized). Year over year PPI was up 2.4%, the first positive reading in a number of months. The CPI report for November had prices up 0.4%. Year over year was up 1.8%. I made last year's prediction that inflation would be turning just about now based on another prediction that oil prices would be much higher today than they were in late 2008. Both government reports cited higher energy prices as the main driver of the uptick in inflation.

As would be expected, many mainstream economists (who as group significantly underestimated the PPI number) and Fed Chair Bernanke quickly told the public not to worry. They argue that this has to be just a temporary blip because inflation can't have a sustained rise unless the economy is expanding strongly. They point out that the most recent U.S. capacity utilization rate is 71.3% and claim that inflation can only become a problem if this number is over 80%. The capacity utilization argument might have some validity if the U.S. was a self-sustained economy that didn't engage in trade (something I refer to as a non real-world condition). The U.S. not only engages in trade though, but imports much more than it exports. The country has run a trade deficit with the rest of the world continually since the 1970s. One thing that we import a lot of is oil. Like almost all commodities (natural gas is the exception), the price of oil is set globally. The U.S. capacity utilization rate has only an indirect and minor impact on oil and other commodity prices. The error that many mainstream economists have made in their thinking is that the U.S. inflation rate is controlled by conditions that exist solely within the U.S. In actuality, markets outside the U.S. are the key determinant of the how much inflation American consumers experience.

The capacity utilization argument can also be debunked through historical analysis. Not only have there been cases of major inflation in countries with low capacity utilization, but this condition invariably accompanies hyperinflation. The most extreme example of this took place in the last few years in Zimbabwe. The unemployment rate there rose to 94%. With almost the entire nation not working, presumably capacity utilization was as low as it possibly could get under any circumstance. According to many mainstream economists and the U.S. Fed, Zimbabwe couldn't possibly have had inflation. Instead, it had sextillion percent inflation, the second highest rate ever recorded.

While capacity utilization is a red herring when analyzing inflation, currency policy is not.Commodity prices are affected by the strength of the U.S. dollar since all commodities are priced in dollars. A weaker dollar means higher commodity prices and higher inflation in the U.S. This is merely a specific example of a declining currency being the actual correct definition of inflation. Central bank easy money policy with excessive government borrowing backed up by money-printing is what causes a currency to decline.

Many economists refuse to accept that the declining value of a currency is the root cause of inflation though. When not using the capacity utilization argument, inflation-denying economists and other Fed apologists resort to defining inflation as a rise in credit and deflation as a drop in credit. Like capacity utilization, this viewpoint doesn't stand up to real world analysis either. For this to be true, there would have to be ever increasing amounts of credit in real terms in hyperinflationary environments. Not only does this not happen, but credit availability tends to implode during hyperinflation - the exact opposite of what would be predicted. The one thing that all hyperinflations do have in common though is excess money-printing.

Inflation is not a new phenomenon. There have been hundreds of inflationary episodes over time. The one thing they all have in common is that there is too much money (currency actually) for the size of the economy. Central banks in most major economies are currently engaging in excess money creation with abandon. At the same time, they are telling the public not to worry because things will be different this time. They also said that last time and the time before by the way.

Disclosure: Long gold.

NEXT: U.S. Plays Shell Game with Bailout Money

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. Employment Figures Don't Add 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.

Our Video Related to this Blog:

Fed chair Ben Bernanke is up for reappointment and is experiencing some difficult times with his congressional critics. Good news has suddenly and conveniently appeared to bolster his case however, including Bank of America planning on repaying the TARP money it received from the U.S. government and then a big improvement on the non-farms payroll number released on December 3rd. According to the Bureau of Labor Statistics, there were only 11,000 jobs lost in November 2009 and the losses for the previous couple of months weren't nearly as bad as they had reported (the last time there were actual job gains in the U.S. was in December 2007). Independent private surveys don't corroborate the government's numbers.

The U.S. government figures were not completely rosy by any means. They indicate that there were major job losses in Manufacturing and Construction, a significant drop in Information and in Leisure and Hospitality jobs, and amazingly a drop in Retail jobs during the height of the holiday season. U.S. Manufacturing employment fell by 41,000 in November and has declined by an eye-popping 2.1 million since the recession began in December 2007. Construction jobs fell by 27,000. There was also a loss of 17,000 jobs in the Information industries (half of that in telecommunications). Leisure and Hospitality lost 11,000 jobs. Jobs in retail declined by 15,000. You would not know this from reading the BLS press release however, unless you looked at the data attached to the bottom of it. The copy did not mention that there was a job loss in retail, but instead stated "there was little change in wholesale and retail employment".

So where did the job gains come from? Three categories had increases in employment -Professional and Business Services, Education and Health Services and Government. Professional and Business Services was the big gainer adding 86,000 jobs. However, 52,000 of those jobs were part-time. Education and Health Services added 40,000 jobs with 21,000 of these jobs coming from Health Care and presumably 19,000 from Education (which is not known for hiring people in November). Government added 7,000 jobs. The two consistent job producers since the recession began two years ago have been the Government and Health Care categories, with Education also frequently adding jobs (many health care and education jobs are government related).

The BLS claimed that unemployment fell from 10.2% to 10.0% in November. How can the unemployment rate fall when there are job losses? People have to leave the labor force. Barring a sudden population decrease of working age individuals, workers have to get so discouraged form the bad employment situation that they just give up looking. According to the BLS, 2.3 million people are marginally attached to the labor force and are not counted as unemployed because they did not look for a job in the previous four weeks. Another 9.2 million are working part-time even though they want full-time employment. The alternative unemployment rate which includes discouraged workers and involuntary part-time workers was reported by the BLS as 17.2%.

A check on U.S. government employment figures can be gotten from the ISM (Institute of Supply Management) Services and Manufacturing Indices, both of which survey employment as well as a number of other factors which indicate economic growth or lack thereof. The Services Index was released just yesterday and employment came in at 41.6 (under 50 means contraction). Employment in the services sector has been in decline for the last 19 months and dropped from October to November according to the ISM. All the job gains in the government employment report supposedly came from the service sector. There is a major contradiction here.

The November non-farms payroll figures are another government release indicating the U.S. economy is getting better. This one doesn't add up either. Healthy economies don't have major job losses in manufacturing and construction. Nor are jobs lost in retail during the holiday season (they are during depressions, but certainly not if the economy is improving). The big job gains were part-time, not permanent. The unemployment rate is improving because workers are so discouraged that they are leaving the labor force, not because jobs are being added. This doesn't happen if the economy is getting better either. Furthermore private surveys don't support the governments numbers. Investors should be wary. While markets can be fooled in the short-term, in the long-term they trade on reality.

Disclosure: None.

NEXT: Gold in Technical Correction as Dollar Rallies

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.

Bank Bankruptcy Bonanza

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:

CIT filed for bankruptcy in New York on Sunday. This is the fourth biggest bankruptcy in U.S. history, just behind number three General Motors (Lehman Brothers was number one). The CIT bankruptcy filing followed nine bank failures on Friday, which coincidentally involved the 4th largest bank failure this year. The FDIC Insurance fund which pays off depositors of failed banks is itself bankrupt. CIT itself is a bank holding company and became one last year in order to TARP funds. It will not be countered as a failed bank since it is expected to come out of bankruptcy.

The amount of money the government put into CIT was a small $2.3 billion (compared to $45 billion put directly into Citibank). CIT was not deemed too big to fail. It has actually been on the verge of collapse for several months now and almost went under in July. Lots of parties have been holding it up, including Goldman Sachs, with temporary measures since then - and for good reason. CIT is the largest loan provider for small and medium sized business in the U.S and 300,000 retail outlets are at least partially dependent on it for their merchandise. Imagine the impact on the holiday shopping season (goods are already at the stores by this point) if CIT had failed in the summer? The U.S. economy would have taken a major hit since retailing is its largest industry.

The federal government's indifference to CIT puts the lie to Bernanke, Paulson and Geithner's claims that the TARP government bailout money was to restore lending and support the economy. The biggest U.S. lender to small and medium size businesses has been allowed to fail. Before the failure, its was drastically cutting its loans to try and stay afloat. CIT lent $11.3 billion in the first half of 2008, but only $4.4 billion in the first half of 2009. While this was taking place the large banks, who got copious amounts of TARP money to increase lending, were cutting consumer credit sharply. So the U.S. has moved toward an economy where only big businesses and the rich are supplied with adequate credit (a third-world model). There is no way an actual economic recovery can take place given this situation.

Of course the government will probably come up with a plan for the CIT post-bankruptcy. I imagine a Cash Loans for Clunker Businesses program where huge amounts of money are lent to insolvent subprime businesses that don't have a chance of every making any money (businesses with Washington connections will be at the top of the list and get 99% of the funding). Bernanke is probably starting up the printing presses right now to pay for it. Just as a reminder, Bernanke claims he and the other central bankers 'saved' the financial system last year and he has been heralded by Obama for preventing another depression. With 115 bank failures this year and counting, a major financial company bankruptcy, and an insolvent FDIC bank insurance fund, the financial system isn't looking so 'saved' lately. Well, at least we've got the stock market, which just had its best seven month performance since 1933 . Hey, wasn't that during the Great Depression?

NEXT: Markets Roller Coaster Ride Powered by Media Hype

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.

Bank Earnings Reveal True State of Economy

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:

Consumer spending represented 72% of the U.S. economy before the Credit Crisis hit. During the 2000s, that spending was fueled by easy credit and free money thanks to Federal Reserve and legislative policy. The borrowing binge hid a deteriorating economy for years and alternative economic statistics indicate that the U.S. has really been in a recession almost the entire last nine years. The bill has now come due and it is going to take many years to pay it off. The economy can not have a sustainable recovery under such circumstances no matter how many times Ben Bernanke and mainstream economists say this is happening. Wishing just doesn't make it so.

Bernanke has repeatedly told the world how he and the other central bankers saved the financial system from disaster (modesty along with good reality perception are not his strong points). It would be more accurate to state that they postponed disaster with their actions. It addition to an almost unlimited amount of money pumped into the global financial system (much of it freshly off the proverbial printing press), the U.S. changed its accounting rules on the toxic debt held by the big banks so massive losses could suddenly disappear into thin air. Big bank earnings rose spectacularly last quarter as a result. This blog pointed out at that time that losses for the lending operations - the reason banks are in business - were deteriorating however. This deterioration was being hidden by big 'gains' in bank's trading operations (thanks to the change in accounting rules). Those losses have continued to grow this quarter and for many banks are now outpacing the phantom gains from accounting tricks.

The two biggest U.S. banks at the beginning of the Credit Crisis were Citigroup and Bank of America. Last quarter Citi lost 27 cents per share versus a 61 cents loss in Q3 in 2008. Citi had $8 billion in net credit losses and increased its net loan loss reserves by $802 million between July and September. Bank of America lost 26 cents in Q3 versus a gain of 39 cents a year ago. Bank of America's credit losses last quarter were almost $10 billion ( a billion higher than in Q2) and it added a whopping $2.1 billion to its loan loss reserves. Credit card losses for Bank of America were $1.04 billion last quarter versus only $167 million a year earlier.Supposed 'gains' from trading operations kept the top line numbers from being much worse.

Does this look like a banking system that has been saved? Does this look like what would happen in a recovering economy? If the government took back the $45 billion in TARP funds from Citigroup would it be in business the next day? If not, it is insolvent. Ditto for Bank of America. As long as these banks (and others) are in the too big to fail category, money printing is going to be necessary to pay for the continued bailouts that they'll need. Government largess is the reason the stocks of these banks have not collapsed back to last years levels. The same can be said for the stock market overall.

NEXT: Big Bust on Wall Street

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 Dollar, the Fed, Housing and the Economy

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. dollar was in free-fall last night in Asia. The trade-weighted basket fell as low as 75.21 (another new yearly low), well below the significant support level of 76.00 and approaching the next weak support level of 74.00. Some form of intervention took place after European markets opened and the dollar was saved from oblivion (at least for now) and shot straight up. Gold, and silver to an even greater extent, declined sharply on the dollar reversal. The pattern of gold and silver being strong in Asian trading and weakest in the U.S., which has been going on for several days now, continues. Oil remains strong this morning because unlike gold and silver it is difficult to manipulate on a daily basis.

The high price of oil has inflationary implications that will soon be manifested. Expect CPI figures to start jumping up significantly starting at the end of the year. Oil fell as low as $33 last December and it is going to be way above that level this year. Energy prices are the most important swing factor in the inflation numbers. Long-term bond prices are likely to rise on the news. The Fed will still keep short-term rates at zero however and Ben Bernanke will have an increasingly pained look on his face. The Fed released the minutes of its September meeting yesterday and little noticed was a statement that it was reserving the option of continuing any of its current programs. The most important one of those for bond investors is the money printing being used to buy U.S. treasuries. This is supposed to expire on October 31st. It's not likely to happen, at least not for long. The Fed has concentrated these purchases in the 7 to 10 year range of the yield curve, which keeps interest rates for mortgages and other loans down. Foreign governments have moved their buying to even shorter durations. The long end of the curve between 20 and 30 years is being left unsupported. Double short long bond ETF TBT should benefit from this situation.

How can we be so sure that the Fed's money printing extravaganza will continue? Housing, the ground zero of the Credit Crisis, remains troubled for one. Almost one million U.S. properties were involved at some stage of the foreclosure process in the third quarter (the summer). This number has been reached even though there are a number of federal programs to prevent foreclosure (and there have been a number of state programs that have put a moratorium on foreclosures). Anecdotal reports indicate that there are mortgages that haven't been paid for 18 months or more that still haven't entered even the first stage of foreclosure, let alone repossession. Banks don't want these properties on their books and the federal programs (plus a lot of bailout money) lets the banks avoid taking them back. A new wave of mortgage resets to higher interest rates is also just beginning and will last through next year. It will only add to the problem.

The second motivation for more Fed money printing will be the consumer economy. Constant stimulus is needed to keep it going. Retail sales figures were down 1.5% in September and revised down to 2.2% from 2.7% in August. The Cash for Clunkers program caused the August spike, but once it was over retail sales went negative again. Retail sales figures are not adjusted for inflation and this accounts for much of any 'growth' outside of stimulus programs that is being seen in this area. While almost every mainstream U.S. economists thinks the recession is over, they will all admit that unemployment is likely to get worse for at least another 6 months if not a year or longer. Consumer credit is also dropping sharply. So how is the consumer going to spend? More stimulus from the government will be the answer. Don't expect the printing press to be mothballed any time in the near future.

NEXT: Bank Earnings Reveal True State of Economy

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 Hits Dollar Panic Button

RThe '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 very first headline I saw this morning was "Bernanke Boosts Dollar, Commodities Down" (stock futures were also down, but this wasn't emphasized). As pointed out in this blog yesterday, the invisible hand of the Treasury looked like it was active in supporting the dollar in market trading after the opening and there were rumors that smaller central banks in Asia were buying dollars to try to push down their own currencies (new reports today confirm that South Korea, Hong Kong, Taiwan, Thailand, the Philippines have indeed done this and Indonesia probably has as well). Russia bought dollars overnight and has been doing so all week. The U.S trade-weighted dollar actually fell through critical support at 76.00 first thing in the morning on Thursday and closed just below that level in the afternoon. It fell to a new intraday yearly low of 75.77 and yearly closing low of 75.97.

PR support from the Fed to try to jawbone the dollar up was inevitable. You can expect a lot more of this in the future as well. Bernanke's remarks were essentially meaningless, but the mainstream media gave this non-news item major coverage (you should ask yourself why). Specifically, Bernanke said that the Fed will tighten monetary policy "when the economic outlook improves sufficiently," "the time will come when we have to tighten", "at some point" and "we will look at the broad outlook to decide". There is certainly a lot of new information in those statements ... at least for people who thought the Fed would not raise rates during an economic expansion on until the year 3000. What would investors do if we didn't have the media to keep us informed?

In the statement from its most recent meeting a couple of weeks ago, the Fed said that its accommodative policies will likely be warranted for an extended period. This was a blatant admission that they don't really believe the economy is recovering. The Fed has also continually assured the public that there is no danger of inflation. In his remarks though Bernanke admitted that the Fed can't keep monetary policy accommodative indefinitely for fear of triggering an inflationary surge. The gold breakout this week has already made the market's opinion on this matter quite clear - it's already too late.

So far this morning the trade-weighted dollar is at 76.33, having gapped up to 76.25 on the open from the below 76.00 close yesterday. The monetary authorities are clearly worried about the dollar falling and staying below 76.00. A test of the old low at 71.50 is almost inevitable if this happens... and they know it. Gold, which was began selling off last night, before the Fed news appeared, is trading at $1052 as I write this. $1050 is a minor resistance level for gold and it is trading just above and below this level so far today. Expect the gold dollar struggle to continue for some time.

NEXT: Subprime Crisis #2 Coming Soon

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.

Recovery? Don't Bank on It

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:

As of Friday, 98 U.S. banks have failed this year and the FDIC Deposit Insurance fund is on the brink of insolvency. The fund now covers only 0.22% of U.S. bank deposits, whereas a 1.15% minimum is mandated by law. At the end of second quarter 416 banks were on the FDIC's troubled list (this number should be updated in about another month), so the steady drip of money leaking out of the fund could turn into a torrent. Commercial loan defaults are the current crisis hitting the system and this problem has just begun. While you may be surprised that this could be happening after Fed Chair Ben Bernanke has repeatedly told us that the banking system was saved last year, a government report released today indicated that the public had been lied to about just this very subject.

A special inspector general investigating the handling of the bank rescue program TARP in the fall of 2008 found that then Treasury Secretary Paulson and other officials falsely claimed that the first 9 institutions getting funds were sound. Paulson specifically stated, "These are healthy institutions ...". At the time, Merrill Lynch was actually collapsing. Citibank and Bank of America subsequently required significant additional funds to stay afloat. The report was criticized by Assistant Treasury Secretary Herbert Allison Jr., who now heads the bailout program for the government. Allison maintains that any critique of the announcements made a year ago should take into consideration the unprecedented circumstances facing financial regulators at the time. In other words, the government feels that it is justified in blatantly lying to the public if a crisis is taking place. Let me repeat that: the government feels that it is justified in blatantly lying to the public if a crisis is taking place. Let me follow that up by pointing out that there is both a credit and economic crisis still taking place.

The FDIC itself has given us more than enough reason to think the U.S. banking system has not actually been rescued. Other than the domino like collapse of smaller and midsized banks that is now occuring, the FDIC's figures state that in aggregate U.S banks lost $3.7 billion in the second quarter, even though almost every large U.S. bank reported major profits. Of course the major banks have received massive injections of government aid, while the smaller banks have not. This is a move afoot to try to inject TARP funds into smaller banks to prevent defaults on a mass scale.

At the risk of sounding like a broken record, what is taking place in the U.S. now is very similar to what took place in Japan in the 1990s. Japan had a banking system dominated by a small number of large institutions. The first 9 recipients of TARP funds controlled 75% of the assets in the U.S. banking system. In both cases, banks were allowed to become so large that a failure of even one of them endangered the entire financial system. Japan has propped up its banking system for two decades now and the cost has been an economy unable to grow unless there is government stimulus. Personally, I am waiting to see what the U.S. government is going to do to rev up the economy next quarter now that the Cash for Clunkers program has expired.

NEXT: Gold! Record High Knocking on Heaven's Door

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 Reappointed, Court Order and FDIC

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:

Federal Reserve Chair Ben Bernanke is going to be reappointed for another 4 year term. Obama decided to reappoint Bernanke because he wanted to keep together the team that had weathered the Credit Crisis, an administration official said. This is of course like reappointing the team that did such a 'good job' handling Hurricane Katrina. Just as Bush praised those incompetents, 'change you can believe in' Obama praised Bernanke for preventing another depression. Bernanke was first appointed by Bush and didn't foresee the Credit Crisis coming, nor did he respond appropriately once it did. There is of course also no evidence that another depression has been prevented . So far, it is just some fantasy that politicians inside the Beltway keep repeating to each other.

In other Fed related news, a federal court in New York has ordered the Fed make available information from 11 of its Credit Crisis programs to the public. The court ruled that the Fed improperly withheld records under the Freedom of Information law. Bloomberg News sued (kudos to them) and is trying to find out how much money was given to which banks. In its defense of the case, the Fed (which I would like to remind you is only a quasi-governmental entity - the big banks own stock in it and have their representatives sit on the Fed's regional board of directors) essentially maintained that it was above the law. Undermining our democratic system - just another example of the 'good job' that Ben Bernanke has been doing.

The FDIC is also in the news again. For some reason, even though the Credit Crisis is supposedly over and the economy is recovering U.S. bank failures are skyrocketing. The agency needs new bidders for failed banks because existing banks are now avoiding purchasing them. The FDIC's deposit insurance funds are also getting depleted. The FDIC is proposing a rule change that will allow private equity firms to buy failed banks and maintain capital ratios of 10% instead of 15%. This will of course make the failed banks likely to fail again - and I bet the private equity firms will scream for a government bailout when this happens. Indy Mac and Bank United were already sold to private equity firms earlier this year. Based on this news, we can presume that the FDIC is not using the Bernanke approach of threatening to fire any bank president that doesn't agree to the government's proposed takeover demands, as happened with Bank America. Since these banks are NOT too big to fail, they are not being directly nationalized as was AIG or indirectly nationalized as was the case with most of the big U.S. commercial banks and brokers. Undermining our capitalist system - just another example of the 'good job' that Ben Bernanke has done.

The biggest danger in any crisis is leadership that is oblivious and is in denial. The crisis only gets worse under such circumstances. Bernanke has been a disaster as a federal reserve chair by any criteria that you wish to measure his tenure by. Obama is not only totally ignorant of basic economics and devoid of any ideas for handling our current situation, but is even oblivious to what the current situation is. His actions remind me of Herbert Hoover's famous June 1930 press conference stating the Depression was over. Hoover was more than a decade early.

NEXT: Consumer Confidence Game and Housing's False Bottom

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's Actions Speak Louder Than Words

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 old adage that 'actions speak louder than words' is something everyone learns as a young child because it is one of the most important things to know. In its press release from its meeting yesterday, the Fed's words were very upbeat and said the recession appears to be ending. However, they then followed this up with they would be keeping interest rates at zero for "an extended period." Zero interest rates are an extreme policy action only justified in the most dire economic circumstances and bear a high risk of causing massive inflation. So if the economy is doing much better why do they need to keep interest rates this low?

The stock market of course rallied on the Fed's positive outlook on the economy, even though the Fed's outlook has been completely wrong for the last two years. The Fed didn't see the Credit Crisis coming even one month before it blew up. Even in the spring of 2008, they were releasing statements that a recession could be prevented, even though a recession had already started in December 2007. This time the Fed has said that "economic activity is leveling out" and conditions in financial markets "have improved further." And what are the signs of the improving economy? They are increased factory activity, homes sales picking up and companies firing less workers. It should be immediately obvious that less firings are not a sign of a growing economy. As for factory activity, it is not adjusted for inflation, so rising prices can make it look better. If you check you will see that petroleum products are at the top of the list and not because there was a huge increase in their use, but because prices went up. Nevertheless, once again the Fed assured us in their statement that there will be no inflation.

As for the improving real estate market, in the last two days we have covered why that's not likely for years to come. News out today had foreclosures up 7% from June to July and 32% year over year. In the month of July, 360,000 U.S. households received a foreclosure notice raising the total for 2009 to 2.3 million. July was the third month out of the last five when foreclosures hit a new record high (that certainly looks like a recovering housing market doesn't it?). The huge rise in foreclosures is taking place even though there are a number of federal and state programs to prevent foreclosures including Obama's housing rescue plan (about as effective as the federal government's post hurricane Katrina rescue plan in New Orleans). Several states have even put moratoriums on foreclosures to temporarily stop them altogether. Foreclosures are still rising at a break neck clip however. Yet the Fed and the media are telling us that real estate is recovering.

The Fed also said it would gradually slow the pace of its program to buy $300 billion worth of Treasury securities and claims it will shut down this program at the end of October, a month later than previously scheduled. Mainstream media reports state that this program is aimed at lowering rates on mortgages and other consumer debt, but admit that some people think that it looks like the Fed is printing money to pay for the exploding federal budget deficit. Who are these people who insist on dealing with reality? Next they'll be claiming that this will be causing massive inflation like it has every other time in history when it's been done. Imagine believing history repeats itself instead of believing Ben Bernanke, who has apparently been wrong in every prediction he has ever made. Fortunately, we have the mainstream media to tell us that words speak louder than actions.

NEXT: A Recovery Reminscent of 1990s Japan

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.