The Gold is in Eastern Capitalism

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 head of China's State Administration of Foreign Exchange stated last night that China's gold reserves were 1054 metric tons, up substantially from previously reported levels. Purchasing gold, along with a whole host of commodities including oil and copper, seems to be China's strategy for getting rid of some of its almost $2 trillion worth of foreign reserve holdings (about half of which are in U.S. dollars). In separate news, a report by Deutsche Bank now predicts that China's GDP will be bigger than the U.S. GDP by the early 2020's. Based on recent reports of U.S. government chicanery in the manipulation of the financial system, capitalism seems to be disappearing in the U.S while it's on the increase in Communist China.

I have long predicted that the Chinese would be increasing their gold reserves, which are paltry compared to the current size of their economy. China also needs to diminish its foreign exchange holdings before the paper that its holding seriously devalues. These efforts have only just begun. Despite buying gold and stockpiling commodities, China's foreign reserves were up slightly to $1.954 trillion at the end of Q1 2009 from $1.946 trillion at the end of Q4 2008. In order to actually diminish its paper holdings, China is going to have to ramp up gold and commodity purchases substantially from recent levels. The implications are bullish for the commodity markets to say the least. China is not the only economy with small gold reserves and large foreign exchange holdings either, the Gulf Oil states fit this description as well. They also have good reason to be buying gold.

As China rises because it is becoming more capitalistic, the U.S. economy is heading down because of it is becoming less so. For anyone who doubts that the U.S. is turning into an authoritarian socialist state where the government calls the shots and no free is left in free enterprise, I suggest you read recent reports about the Bank of America and Merrill Lynch merger. It was arranged by Fed Chair Bernanke and Treasury Secretary Paulson (both Republicans and appointed by a supposedly conservative Republican president). When Bank of America CEO Ken Lewis tried to back out of the deal when he realized it could take his company down, Bernanke and Paulson told Lewis he and the board of Bank of America would be removed if he didn't go along with what the government wanted (recall that the CEO of General Motors was recently ousted and think about the implications for a moment). Lewis also claims Bernanke and Paulson directed him to lie to Bank of America shareholders, who remained uninformed about the actual state of things when they had to vote to approve the Merrill takeover. The government which is supposed to protect shareholders has obviously become one of their biggest enemies. We have pointed this out a number of times in this blog. Unlike the press, which is reporting this story now, the New York Investing meetup has been warning about this for over a year and a half.

Given the current state of affairs, no one should be surprised that China will over take the U.S. economically in as little as 10 years or so - at least based on official government figures. Keep in mind that the U.S. has overstated its GDP for many years and China may have been understating its GDP during its rapid growth phase. Investors needs to keep an eye to the East as economic power shifts there. The U.S. is now at a similar point historically that Great Britain was after World War I. Britain's world dominance was on the wane, while the more rough and tumble capitalistic U.S. was on the rise. Instead of facing this reality and making changes, the British engaged in denial and this assured their fall. The U.S is doing the same thing right now.

NEXT: Buy When There's Flu in the Streets

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.

Technicals Ugly, Risk of Domino Bank Collapses

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 Dow broke below the psychologically important 7,000 level this morning. This was after the S&P fell below it's November low on Friday. The Russell 2000 and Nasdaq have yet to break their November lows however. The Russell will have to fall to 371 (only 6 points lower than its price as this is written) and the Nasdaq will have to drop to 1295 (55 points below its current price) for this to happen. See if the market can hold when Nasdaq reaches its support level.

Actually the yearly low for the Dow was already given as 6952 on Friday evening instead of the 7033 actually reached on the day. How is this possible? The figures used for the yearly high and lows are for the theoretical Dow - this is the number that would be obtained if you averaged the high or low point of every Dow stock. Since all the Dow stocks don't peak or bottom at the same time during the day, this number is always better or worse than the actual figures. This is not the only quirk of the Dow either. It is also a price weighted average, which means higher priced stocks have a much bigger impact on what happens. Stocks like Citigroup, which fell to 1.40 on Friday, have limited impact on the average even if they drop 50%. This makes it increasingly harder for the Dow to continue to drop once a lot of its stocks are beaten down.

Pessimism ruled the market commentary over the weekend. I found one comment after another about how everyone knows this or that bad thing is going to happen. Well, if everyone knows all about those bad things, then everyone in all likelihood has already sold. When the selling is exhausted, markets have trouble going down (at least in the short term), no matter how bad the news is. This is one reason sudden, explosive rallies take place in bear markets. Too many people get on the short side of the trade. We are perhaps not quite ready for this just yet, but keep a watch out for this phenomenon, especially since there is a tendency for stocks to bottom in the March/April time frame.

More disturbing was media coverage of the banking situation in Europe. Ireland apparently isn't going to fall apart because things there aren't as bad as there were in Iceland. Britain isn't going to fall apart because things there aren't as bad as they were in Iceland. The problem with this line of reasoning is that things don't have to be as bad at they were in Iceland (an extreme example) for things to fall apart. Problems in Eastern Europe (Ukraine, Hungary, the Baltic States, and Romania) and Southern Europe (Greece, Portugal, and Spain) could cause banking collapses that spread throughout Europe and could push even major countries such as Britain over the edge (not to mention Italy). This tsunami of bank failures would then flood into the U.S. financial system.

The next meeting of the New York Investing meetup is this Tuesday at PS 41, 116 West 11th Street at 6:45PM

NEXT: Market Tumbles While Washington Fumbles

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.

Inauguration Day 2009 - Looking for a New Beginning

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:

President Obama hit all the right notes in his inauguration speech today. His spot on rhetoric needs to now be followed up with matching action ... and that won't be easy. The global financial system is in disarray. As far as economic policy is concerned, the concrete plans of the new administration look like more of the same, albeit with a different focus from the previous administration on who gets the bailout funds. There isn't yet any indication that the groundwork for a new economic structure, the only viable long term solution, is going to be put down. Until that happens, economic policy will essentially be an attempt to hold up a flawed model that is collapsing because it is permeated with rot.

We were reminded of the global aspects of the Credit Crisis yesterday with events coming out of Britain. The Royal Bank of Scotland was down 67% in Monday's trading as the British government upped its stake from 58% to 70% ownership. Some commentary in the press worried about full nationalization, as if 70% government ownership wasn't close enough. The bank lost $41 billion this year, the most ever for a British corporation. The British government announced a more comprehensive second round of bailouts for the banking system, following the first round which took place only a couple of months ago. Not only does it appear that there is no such thing as a single bailout for an insolvent financial company, but the same holds true for an insolvent financial system.

While average people poured into the nations capital and crowded the streets and Washington Mall, the well connected were having a different Inauguration experience. In an contrast worthy of the waning days of Versailles, images of the bejeweled and elegantly appointed rich and powerful partying in Washington's balls can be contrasted with the state of California delaying payments to the aged, blind and disabled because its coffers are bare. The state also has indefinitely delayed tax refunds to individuals and businesses that overpaid their 2008 taxes. In theory, the government can't just take your money in the U.S, but this might just prove to be in theory. California officials claim the state is facing insolvency within weeks.

All Americans should be happy that the U.S. is finally moving beyond race as a barrier to full participation in U.S. political system and should look forward to the day when an East or South Asian, Latino, non-Christian, or a Gay or Lesbian candidate can be a serious contender for the presidency. Successful systems only continue to be successful because the most talented rise to the top and getting rid of discrimination is the only way to insure that this happens. The talented at the top seems to have been a lacking in Wall Street for some time now and this is one reason things have gone so terribly wrong with our financial system.

NEXT: Banking Bloodbath Covers Wall Street in Red

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.