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.

Is the Bond Market Setting Up for Another Credit Crisis?

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.


Spreads on high yield bonds and U.S. treasuries are narrowing. Junk bond issuance is at an all-time high because excess liquidity is lowering risk aversion. Who is buying all the bonds is not particularly clear however. But don't worry, just as they did before the last Credit Crisis, the economic elite is telling us there is nothing to worry about this time either.

When there is too much money sloshing around the global financial system, the distortion shows up clearly in the bond market because it's an insider's game. The average investor isn't exactly trading credit default swaps in his or her 401K. According to a recent Wall Street Journal report, less than $29 billion has gone into high yield bond funds in the last 20 months. Yet Dealogic data indicates that $172 billion of junk bonds have been issued in just 2010 alone. Spreads over 10-year treasuries are now around 6%, but have been somewhat lower during the summer. In 2007, spreads fell to around 2% and this indicated all common sense had abandoned the bond market. The inevitable collapse followed and at the height of the Credit Crisis, junk/treasury spreads were over 20%.

One of the major determinants of yields on junk bonds is the danger of default. The economy is in much worse shape now than it was in 2007, even though we were just told yesterday by the NBER that the recession ended 15 months ago (boy, that sure is a timely announcement). So we should not get as low as a 2% spread between junk and U.S. treasuries like we did last time. Less risk of failure because of government bailouts should not be assumed either. Few issuers of junk bonds would be considered too-big-to-fail and the government blank check for bailouts is either over or it soon will be.

There is also the mystery of why as more and more bonds are being issued, less and less trading activity is taking place. Bloomberg economist Michael McDonough recently reported U.S. treasury trading is down and so is junk bond trading. Trading in stocks on the NYSE is also down as the market has risen. So how can prices be going up when there is a greater supply of bonds, but apparently less demand?  This is not really possible, so there has to be missing information. Now who would have access to vast sums of money and the ability to hide their activities in the market?

A narrow spread between junk and treasuries is something to keep an eye on and to worry about. It is a good indicator of whether or not central banks have injected so much liquidity into the financial system that they have risked another credit crisis. It is not possible to say where the exact point is where the spread is too low, although it is now definitely somewhere well above 2%. If we haven't reached it yet, we are getting close.

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.

Durable Damaged Goods

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

Our Video Related to this Blog:

The June Durable Goods Report was released this morning and the number fell 2.5%. The Bloomberg headline for the report was "U.S. Durable Goods Orders, Excluding Cars and Planes, Unexpectedly Advance". There you have it, once you remove the bad components of some report, it's actually bullish! Unfortunately, things are only bullish in Never Never Land and not in Reality Land where those of us who don't work in government agencies or for the mainstream media have to live. Attempts to mute the stock market reaction to the report obviously came directly from the Federal Reserve. Media articles stated that an unnamed top official (now who could that be) said the U.S. economy is likely to see moderate growth in the second half of 2009, as signs grow that the recent severe contraction is waning. If this happens, it will be one of the Fed's first accurate predictions in over two years.

Too much attention shouldn't be paid to one Durable Goods Report, the numbers are highly volatile and the government has little idea what they really are as is. A fall of 12.8% in transportation damaged the numbers. Surprisingly, car sales were down very little (you should be suspicious of that number). The star component was orders for primary metals, which rose 8.9%. The most important number was shipments, which fell 0.2% for a record eleventh straight monthly decline. Yeah, that certainly looks bullish.

There are still some shoes to drop for the economy with commercial real estate being at the top of the list. Fed Governor Janet Yellen admitted to this in a talk yesterday. She also said, "Concern that the massive federal budget deficit will cause inflation is misplaced, deficits don't cause inflation". But she did admit that they can cause higher interest rates, with the implication that this is somehow not related to higher inflation (it was not reported if the audience was doubled over with laughter by that point). Of course, the U.S. is printing money to pay for the deficits and this unquestionably causes inflation. Yellen didn't discuss that rather unpleasant topic and may have even denied that that was the case as well. She did mention she thought core inflation would under 2% for years to come. Yellen is quite possibly the dullest member of the Fed (the competition is strong, so this would be some honor).

News that just crossed the wires indicates that the Fed bought 2.99 billion in treasuries so far this morning. This is with printed money. By the end of the week, the amount is likely to be a lot higher. But, don't worry, this is not going to cause inflation - in Never Never Land that is, in Reality Land there's going to be a lot of problems.

NEXT: Oil Update - EIA, CFTC, and USD

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.

Building a BRIC House; Nat Gas and Market Update

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

Our Video Related to this Blog:

The BRIC (Brazil, Russia, India, China) countries had their first ever summit yesterday. Much of the discussion centered around how they can diversify their assets out of the U.S. dollar - BRIC countries hold nearly one-third of overseas U.S. debt - without creating too much disruption. It would be more appropriate to state this as they are trying to find a way to dump their dollar holdings without causing the dollar to drop too much while they are doing so. They are considering buying each others debt. Whatever happens, they will be certainly be buying less U.S. debt in the future and you should assume they are slowly selling off their current holdings.

The implications for the U.S are dire. For the last three decades we have been dependent on borrowing money from foreign countries to fund out twin trade and budget deficits. While the trade deficit has improved somewhat with the recent collapse in oil prices (it's still very large), our budget deficit in 2009 is going to come in more than four times the previous record. Foreign sources were probably already tapped out before the Credit Crisis caused U.S. borrowing needs to balloon and now they are diminishing their lending instead. This will only force the U.S. to print more and more new money to cover its spending needs. This is the path Weimar Germany followed and it is what lead to their hyperinflation.

The trade-weighted dollar was at 80.23 this morning, still holding above its 78.33 break down level. Light sweet crude was as high as 71.73, but then fell back to around the 71 level. The Natural Gas storage report came out this morning and gas in storage increased by 114 bcfs, while expectations were for an increase of only 110 bcfs. UNG sold off 40 cents in the two minutes following the release of the data. I am not interested in buying though until it can get to around the 15 level. As of yesterday, the Dow has closed below its 200-day moving average three days in a row. So far today, it hit this line from below and bounced down. The S&P 500 and Russell 2000 have held above theirs. A break and close below for the S&P and Russell would be significant.

For some commentary from a Bloomberg reporter about the U.S. treasury bond smuggling case out of Italy and that was reported in this blog on Monday, please click below (if the URL doesn't work, try putting it into a browser):
http://www.bloomberg.com/apps/news?pid=20601039&sid=a62_boqkurbI
Whatever the truth is behind this caper, it is worthy of a James Bond novel.

NEXT: Quadruple Witching Today; Fraud Update

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.