How Good are February Retail Sales Figures if You Consider Inflation?

 

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.

Unadjusted for inflation, U.S. retail sales rose 1.1% in February. There may have been little or no gain if price increases are accurately taken into account.

Retail sales going up in the beginning months of the year should surprise no one because this is when companies typically raise prices. Anyone who goes to Starbucks is aware of this practice. It pervades a number of industries across the spectrum. Clothing prices are being hit particularly hard this year with jumps in prices estimated to be around 10% for the spring season (already underway in February). Mainstream media reports on February retail sales did glowingly mention that sales at clothing stores were higher while neglecting to report that higher prices were the reason.

This is not the only source of price increases in early 2012 however. Year over year, gasoline had the second  greatest percentage increase (10.3%) in the retail sales report. This can be considered a measure of energy inflation and not an indication that more product is being sold. A rough approximation of food inflation can be garnered from the Food and Beverages category. Year over year this increased by 3.7%, while the U.S. population is estimated to have grown only 0.7%. If inflation is the actual driver of higher retail sales, it would be reasonable to assume that the one area with chronically lower prices — electronics — would see a decline in sales. Year over year, sales in the Electronics and Appliance category did indeed fall by 1.4%.

Interestingly, the biggest increase in any retail sales category was in Building Materials and Garden Supplies. This was up 13.8% year over year. It is quite possible that the unusually warm winter weather pushed garden supplies purchases into February, instead of March (the numbers are seasonally adjusted and much higher garden supply sales in February would be magnified because of this). Prices for many building materials are rising sharply as well however. Lumber has been the one major exception, but even lumber prices rose this February.

Retail sales account for approximately 70% of the U.S. GDP, so how they behave gives a good indication of how the economy is performing.  Higher inflation is not an indication of a better economy though, it indicates just the opposite. The U.S. retail sales numbers are not adjusted for inflation, nor are the CPI numbers an adequate indication (they underestimate the actual inflation rate significantly). Analysis of the February report indicates that inflation is allowing the government to report better numbers. Investors need to keep this in mind. 


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.

Economic Reports Indicate U.S.Economy Heading Down

 

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.

Default notices on U.S. home mortgages rose 33% in July. Retail sales and food services rose only 0.0% -- adjusted for inflation they were negative. The CPI inflation measure for August came in at 0.4%, almost as high as it was in July.  Weekly jobless claims rose again this week, coming in at 428,000.  All are pointing to an economy in trouble.

The Great Recession began in the housing market after subprime loans started to default in large numbers in 2007. The U.S. economy will continue to have difficulties until all the excesses are ringed out of house prices. Government policy has instead been geared toward stabilizing the market with temporary fixes. The Federal Reserve instituted a number of programs to funnel money into the mortgage markets to protect the banks that had too much exposure to real estate loans and the Obama administration has created programs like HAMP (Home Affordable Mortgage Program) to lower the foreclosure rate. Banks themselves have avoided or delayed foreclosures as long as possible because they don't want the properties on their books. All the government's efforts have certainly slowed down the rate of foreclosures and that may ultimately be all that they accomplish. A 33% increase of foreclosure notices in July indicates a new wave of foreclosures is likely next year.

Meanwhile, U.S. retail sales are declining if you take inflation into account. Retail sales increased strongly with rising home prices in the first years of the 2000s, but after the housing market turned south they have yet to recover. They have been held up by trillion dollar plus annual federal budget deficits, Federal Reserve money printing, and government stimulus programs including the 'Cash for Clunkers' gift to the auto industry. Despite all of these efforts, retail sales and food services were up 0.0% in July (the same 0.0% for jobs created in August). The mainstream media reported 0.1%, but this is only the retail sales component of the report. The report is not adjusted for inflation, so even if retail sales rose 10% a year, but inflation was also 10%, there would be no actual growth (although that is not the story you would get from mainstream news sources).

Retail sales are crucial for the U.S. economy because they make up approximately 70% of GDP. If they don't grow in real terms (after being adjusted for inflation), it is difficult for the economy to grow. To get a quick read on how the retail sales numbers are being impacted by rising prices all that is necessary is to look at the gasoline sales subcomponent. There is no reason to think Americans are using a lot more gasoline from year to year, if anything less is being used. Yet, year over year gasoline sales are up 20.8%. This is caused by inflation. Retail sales and food services overall were up 7.2% year over year. Adjusted for a realistic inflation rate, this number would be somewhat negative. 

That is not to say that the government is reporting an inflation rate that high. The just released CPI for August was 0.4% or 4.8% on an annualized basis. It was 0.5% in July or 6.0% on an annualized basis. Alternative inflation measures from ShadowStats.com indicate actual U.S. inflation is several percentage points higher than the official numbers indicate. ShadowStats.com calculates its inflation numbers the same way the U.S. government did in the 1970s. Since there have been many changes in how U.S. inflation is determined since then, it is not meaningful to compare current numbers to the past ones since doing so is like comparing apples to oranges. The ShadowStats numbers indicate that inflation is much higher now or if you don’t accept that, then you are left with the absurd conclusion that high inflation didn’t exist in the 1970s (you will find that this is the case if you use current methods to recalculate the 1970s inflation numbers).

The other major drag on the U.S. economy -- lack of jobs -- also seems to be getting worse. Weekly claims rose again this week to 428,000. Over 400,000 is considered a recessionary level. With the exception of a few weeks, these have been continually over 400,000 for almost three years now, indicating an ongoing recession (despite all the claims to the contrary of a recovery). The trend is actually worse than it appears however. These numbers should strongly regress toward the mean (move back to the long-term average), but haven't as of yet. As a recession goes on and on eventually everyone that is going to be laid off eventually has been and that should cause this number to decline for statistical reasons even if the economy isn't improving. That it has managed to stay at such high levels for almost three years is truly amazing.

The overall picture provided by U.S. economic reports indicates a flat or declining economy with rising inflation. Little progress seems to have been made in the last three years. The new credit crisis arising in Europe is only going to make matters worse. The U.S. economy was merely weak before Lehman Brothers defaulted, but it fell off a cliff after that.

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.

New Homes Reveal Old Problems With Government Statistics

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. New Home Sales report released on December 23rd indicated a drop of 11.3% in November. Analysts had expected a gain. According to the previous Commerce Department reports, new homes sales had risen every month since April. They were expected to rise again in November because a government tax credit for new home buyers was originally scheduled to end in the beginning of the month (it was extended to June 2010), so analysts had assumed that there would be a rush of last minute buyers. There may have been and without them the drop might have been much greater than 11%.

New Home Sales is almost certainly the most inaccurate of the economic reports issued by the U.S. government. I can say this with some certainty because it would be almost impossible to produce something more error ridden. One of the major news services stated in their coverage of the November report, "Government statisticians have low confidence in the monthly report, which is subject to large revisions and large sampling and other statistical errors. In most months the government isn't sure whether sales rose or fell." Read that last sentence again and then consider that if the U.S. government is willing to issue an official report on housing that is about as accurate as picking numbers randomly out of a hat, how much can you trust the GDP, CPI, PPI (the two major inflation reports) and Non-Farms Payroll reports. Also note that the mainstream financial media seems to be well aware of the lack of reliability, but doesn't mention it except on very rare occasions when the news is particularly bad.

If the New Homes Sales report is so prone to inaccuracy why not just fix the problem? This is indeed a good question. The statistical tools to make this report better have been known for decades and yet the U.S. Commerce department doesn't seem to be able to apply them. It can be assumed that this isn't done because they don't want to do it. Statistically sloppy work is extremely prone to manipulation after all, solidly done work is not.

When confronted with this problem, you will get a more accurate picture of what is taking place by looking at many months of data in aggregate and comparing it to the previous year (the errors will cancel out at least to some extent). In the first 11 months of 2009, new home sales are down 24% from the first 11 months in 2008. Inventories have been falling throughout 2009 and are now at 38 year lows. The number of homes under construction or planned for construction have fallen to a record low. If new home sales were rising between April to October as the Commerce Department reported, why are home builders building fewer and fewer homes? That doesn't look like an industry in recovery as the public has been repeatedly told. For some reason, we seem to have gotten a glimpse of the true state of the housing market in the November New Home Sales report. Perhaps the guy in charge of producing cheerful statistics was on vacation? Somehow, I'm sure he'll be back soon.

Disclosure: Not relevant.

NEXT: Investing Themes for the Next Decade

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.Inflation Reports - Contradictions and Absurdity

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

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

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

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

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

Disclosure: Long gold and silver.

NEXT: The Real Story About Gold Supply and Demand

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


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

The Long and the Short of It

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:

In the short term the market can trade on fantasy, it the long term it always trades on reality. So we can state that at some point in the future, the current U.S. stock rally based on economic 'recovery' will eventually fade. It probably will not happen all at once, but in succession with small cap stocks turning down first and big caps last. The Russell 2000 chart looks awful, while the Dow Jones chart looks OK. There seems to be little if anything left to push stock prices higher. Short-term interest rates are already around zero and have been at that level since last December. The Feds only option to push stocks higher after a drop is to buy government bills, notes and bonds in the market with newly printed money. The Fed is supposed to stop its quantitative easing program for treasuries today however (this decision can be reversed in a heartbeat). The employment report next Friday is the next big test for stocks.

The stock market rally yesterday didn't evenly undo the damage from Wednesday. The Russell 2000 was up 2.5%, less than its 3.5% drop the day before, while the Dow was up 2.1%, more than its previous 1.2% drop. Nasdaq was the laggard, rising only 1.8%, also less than its 2.7% drop on Wednesday. The S&P did better, going up 2.3% after falling 2.0%. Spot gold rose as high as $1049.10 (there is resistance at $1050) after bouncing off support at $1025 the day before. Silver rose to $16.69. The dollar fell and closed at 75.94, below the key 76.00 level. Bonds had a significant sell off, with the 10-year treasury interest rate rising to 3.50% and the 30-year rising to 4.35%. For people who want to short long-term treasuries (the same as going long on interest rates), there is a leveraged 200% ETF, TBT and a leveraged 300% ETF, TMV. These are very aggressive trades.

News was out overnight on inflation and employment in the Eurozone. Year over year CPI is down 0.1%. While there is much hand wringing about deflation and this being caused by a weak economy, this is not what is actually keeping prices flat. Just as falling currencies are inflationary, rising currencies are deflationary. The euro has rallied from the 1.25 to the U.S. dollar range in early March to a high of 1.5020 on Oct 23rd. Since all commodities are priced in U.S. dollars, this has kept their costs from rising as much in Eurozone countries as they have in the U.S. This factor was even mentioned in news coverage in relationship to oil prices. When inflation is defined as a currency losing its value, everything else falls into falls into place. Mainstream economists rarely use this definition however - and their economic predictions are almost always wrong.

The current party line in the mainstream media on inflation is that it is going to happen, but not for three or four years, basically at some distant time in the future (so no one should be worrying about it). Admitting that inflation is going to be a problem at any point is actually a big switch in the tone of coverage. Deflation was the key theme in the news for most of the last two years. Inflation is going to start picking up by the CPI report for December. Why? Because oil prices are the key swing factor. Oil fell as low as $33 last December and gasoline was below $2 a gallon in the U.S. Oil closed yesterday at $79.87 and gasoline prices are closer to $3 a gallon. Oil's price this December is going to a lot higher than last year's and that is going raise the CPI number. While this is totally predictable, the mainstream financial media seems incapable of seeing what is coming. Even though they can't see the obvious that will take place 3-months ahead, they will quote predictions for 3-years from now. My impression is that most financial reporters haven't the slightest idea what is going on in the markets, but then again I don't like getting my investing advice from English majors. Anyone who gets their financial information from the mainstream media is doing just that.

NEXT: Bank Banruptcy Bonanza

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. Dollar Down, Everything Else 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.

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The trade-weighted dollar hit a new yearly low overnight falling to 75.10 at one point. It only decisively broke important support at 76.00 six trading days ago (there were short breaks before that signaling what was coming). While there is minor support at 74.00, this is not likely to hold very long. A test of the all time low of 71.50 is almost inevitable at this point. It may take a couple of months before this happens. Expect a bounce when it does. How long the U.S. dollar will be able to hold at that level remains to be seen. Eventually, new all time lows will be reached.

The decline in the dollar is causing almost everything else to rise. This includes gold, silver, the stock market, food commodities and now oil. All of these price movements can be traced to the huge money printing operations of the U.S. central bank. Markets move first, then consumer prices second. Expect noticeably rising CPI starting with the report for December. The current rise in oil, which hit $80.05 a barrel for light sweet crude early this morning, has insured the inflation numbers are going to start perking up soon. The rally in grains currently taking place is also going to start impacting food prices sometime next year.

Oil's performance is impressive considering it is taking place against seasonal headwinds and the interference with energy trading that the CFTC conducted this summer. While the CFTC drove 200% long oil ETF DXO out of business, it left the 200% short oil ETF DTO alone. It seems that only leveraged long positions cause excess volatility in energy trading, but leveraged short positions don't. U.S. investors are left with non-leveraged ETFs such as OIL and USO as their only means to invest in oil at the moment. How long the oil rally lasts is still an open question. Higher priced oil definitely upsets the authorities and now that their summer attempt at price controls has failed, you should assume that plan B will appear at some point in the future. Also watch natural gas prices, just as silver usually moves after gold, natural gas can follow oil. Their price ratios are still incredibly out of whack (in theory oil should be 6 times the price of natural gas, it was priced well over 20 times during the summer).

Oil is still far away from its all time high of $147 a barrel (although it will be getting back to that level), while gold keeps hitting new highs. The close of spot gold at the end of the afternoon session of Globex yesterday was $1064.50. To hit another all time high, $1070.40 has to be taken out. Spot silver closed at $17.86 yesterday and needs to break and close above important resistance at 18.00. It has been above $18.00 briefly twice so far (the inverse pattern of the U.S. dollar breaking 76 twice briefly before a major break took place). Once it breaks this level, silver will test its 2008 high around $21. It is only a matter of time.

NEXT: What Earnings Are Telling Us

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.

A Recovery Reminscent of 1990s Japan

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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Economists are predicting that the U.S. recession is over or will be soon. A Wall Street Journal survey found that 57% of economists think the recession is already over. Another 23% think it will end this month or next. Their predictions for GDP growth in the third quarter are currently around 3% and range as high as 6%. Nevertheless economists are not predicting that the employment picture will be improving anytime soon or that incomes will rise. They make it clear that the recovery means "things are less bad than they were previously" and "this is definitely a recovery that only a statistician can love". Statistics are indeed one of the few things that will be manufactured while the blossoming 'recovery' takes place.

The big areas of the economy are still not doing well, even in the statistics. Retail sales surprised economists yesterday when they fell 0.1% in July. Economists had predicted they would rise 0.7%. The key to the 'improvement' was the government's cash for clunkers program which is revving up the auto industry (you should ask yourself, what is going to happen to the auto industry when this program stops?). Indeed it did, but not enough to turn retail sales positive. Excluding autos, retail sales were down 0.6%. General merchandise sales were down 0.8% and department store sales down 1.6%. Yeah, consumers are spending again all right. Consumer spending is 70% of the U.S. economy.

CPI was out this morning and prices were supposedly down 2.1% year over year. Responsible for most, if not all of the drop, were energy prices which were down more than 28%. Oil peaked last July at $147 a barrel, then dropped sharply until hitting $33 a barrel in December. Going forward the current oil price compared to last years is going to turn from a huge drop into possibly a big gain. Expect CPI figures to start rising in the fall as a result.

The industrial production figures are out later this morning and after dropping 17 months in a row are expected to be up. While this is hardly surprising, expect the press to claim it indicates recovery. This is like saying a stock that dropped 17 days in a row and then goes up on the 18th day is rallying.

New numbers were released this morning on the real estate market. At the end of the second quarter, 32.2% of all U.S. mortgaged properties were under water. This unbelievable huge number was actually down slightly from the 32.5% at the end of the first quarter. The real estate industry declared that this was "great news". While all of these mortgages are potential future foreclosures, it is currently predicted that the U.S. foreclosure rate will peak at only 4%. If the U.S. government pays off the mortgages for the other 28%, and I wouldn't put it past them, this could happen.

Essentially any good GDP numbers will be the result of government injections into the economy. This is like a company that borrows a million dollars including the million dollars as part of its earnings. Government boosting of GDP on borrowed or printed money should not be included in the figures (don't assume that reform is ever going to be made). In these circumstances, when the programs that boosted the economy end, GDP falls right back down. This is exactly what happened in Japan in the 1990s and early 2000s. The economy stayed in the doldrums for two decades.

NEXT: Japan Climbs Out of Recession ... Again

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.

So Much for No Inflation

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

Our Video Related to this Blog:

The monthly PPI and CPI came out yesterday. Even the government's highly manipulated figures indicate that inflation has suddenly resurfaced (you can assume that inflation is actually a lot worse, see http://www.shadowstats.com/ for a more accurate set of numbers). But don't worry, the mainstream media assures us that "inflation is not expected to be a problem any time soon given a severe recession which is keeping a lid on wage pressures". Of course, they also said the same thing last month before inflation zoomed this month. They will probably also still be saying the same thing when you are paying $50 for a loaf of bread.

The PPI yesterday was the real shocker, rising 1.8% month over month (expectations were for it be up by 0.9%). While the media blamed this on a rise in energy prices, the core rate, which excludes food and energy prices, was up a substantial 0.5%. Media reports assured us that this was nothing to worry about though because PPI was down 4.6% year over year. The core PPI however was UP 3.3% year over year. This huge discrepancy indicates that the PPI went down because of falling energy prices. According to the media, a drop in inflation caused by falling energy prices is important, but a rise in inflation because of energy prices increasing is irrelevant. Those of you who are capable of basic logical thought may not think this makes any sense.

The CPI report had consumer prices up 0.7% last month. The core rate was up 0.2%. As with the PPI, the media said it's nothing to worry about because its all because of energy prices going up. However, the price of food, clothing and medical care all went up as well. While the price of almost every necessity went up, some luxury items like airline travel went down in price and this helped moderate the reported inflation rate. CPI was down 1.4% year over year, while the core was up 1.7%. Once again falling energy prices accounted for the drop.

What is causing inflation is that the U.S. government is printing a huge amount of additional currency. Since commodities are priced in dollars, in the long term it is going to take a lot more dollars to buy a given amount of oil, food or any other commodity. Prices have to go up. And it doesn't matter if there is a recession, or excess capacity in the system. This was the case in the U.S. in 1974 and prices zoomed. It has also been the case in every incident of hyperinflation throughout history.

NEXT: CIT DOA; Liquidity Injections Rally Market?

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 Simple Arithmetic of Hyperinflation

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 U.S. government inflation figures were out last week. According to official statistics, about as reliable as a pronouncement from Pinocchio, CPI fell 1.3% year over year. This was the biggest drop in 59 years. Core CPI was up 1.8% year over year, so no drop there. Core doesn't include energy and food prices, so the fall in oil prices from last year doesn't fully show up in it. The PPI figures had an even bigger annual drop. Mainstream news articles were filled with remarks about how great it is that the Federal Reserve has lowered interest rates to zero and flooded the economy with money to save us from deflation. I have no doubt that they will be very successful in this endeavor.

While there are still a lot of deflationists out there, I think even they could all agree that if a government has so much debt that its tax receipts could only cover interest payments on that debt, massive inflation would necessarily follow. This would happen because the government would need to constantly print a lot of new money to cover its regular expenses. Few outside sources would be willing to lend to that government. While this is an obvious worst case scenario, the inevitably of hyperinflation takes place somewhat before this situation is reached. Finding that exact inflection point depends on a lot of complicated mathematics involving a large number of factors and is subject to significant interpretation. For that reason, it is not possible to say that the U.S. has already reached it.

Examining the national budget figures for 2009, there is now $3.9 trillion in projected spending. Government receipts (mostly taxes) look like they will come in at $2.1 trillion. Only 53% of expenditures are covered. It is the decreasing coverage of government expenditures by tax receipts that led to the hyperinflation in Weimar Germany. The government had to print more and more money to keep itself running. Five years before their hyperinflation peaked, only 69% of the national budget was covered by taxes (yes, 16% more than is currently the case in the U.S.). Falling below 50% coverage seemed to have been the point of no return for the Weimar government.

What about interest payments on the national debt? In 2008, they were only $412 billion. This was during a time of multi-decade low interest rates that were close to zero for short term bills. Interest rates can't go any lower, but have a lot of room to go up. Everything else being equal, if we went back to the interest rates at the end of the 1970s, interest payments on the current debt would use up all tax receipts. Everything else will not be equal however. Every year the national debt is going to increase substantially and the interest rate needed to use up all tax receipts becomes lower and lower with time. Tax receipts need to rise enough to compensate for that. However, this would indicate a rapidly growing economy, that could easily raise interest rates more than enough to overwhelm the benefits of more taxes.

How can the U.S. government deal with this situation other than cutting the budget drastically (don't hold your breath for that one)? Since it is increasing the supply of government debt rapidly, it needs to increase demand even faster for its bonds. But foreign lenders are backing off. So the only solution is to print even more money, so it can buy even more of its own debt. Now that's going to help keep inflation under control!

NEXT: Stock Market Turns Ugly

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 Deflation Boogieman, Oil and Intel

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 PPI report yesterday and CPI report this morning both indicated deflation - at least in the headline numbers. PPI was down 1.2% and CPI down 0.1%. The core rates were flat and up 0.2% respectively. Falling energy prices, and falling food prices as well this month, are responsible for the "deflation" that is being reported by the government. NYMEX oil prices meanwhile closed yesterday in New York at $49.41, but were once again above $50 again in European trading this morning (the weekly storage report is out today at 10:30AM New York time). Oil is well off the $33 low being reflected in recent inflation statistics. Tech bellweather Intel released earnings last night and there was actually some good news in the numbers. The CEO also blatantly stated the PC market had bottomed. Apparently traders don't believe him though since the stock had a big drop in the aftermarket.

We have covered many times in this blog how the U.S. government manipulates the inflation statistics to lower the reported inflation rate, so you should always add a few percent to whatever numbers it releases. We have also demonstrated several times how falling oil prices are almost solely responsible for the recent drop in U.S. inflation rates (falling oil along with drops in other commodity prices were the key components of the deflation that took place in Japan in the late 1990s and early 2000s as well, but you will never see this mentioned in media reports). The U.S. government reported this morning that year over year headline CPI is down 0.4% - the first annual decline since 1955 - but the core rate is up 1.8%. Yesterday, the headline PPI was reported down 3.5% since last year, the largest decline since 1950. Gasoline and food prices were down over 13% and even food prices supposedly dropped (something I haven't noticed in the real world).

Considering the light sweet crude oil is already around 50% above its February low, the days of the current "deflation" may be numbered (and of course the U.S. is printing new money at an outstanding rate to make sure they are). During the entire time that oil prices have rallied, the mainstream media has continually stated that the price can't go up until the economy recovers and demand for oil increases (neither has occurred, yet prices have risen) . A quote from an article this morning, "Demand will have to come back before you see the oil price move up from $50 in a sustained way." You can find very similar statements when oil was at $40 and yet the price rose to $50. My guess is you will see similar statements at $60 and probably $70 as well. Interestingly, the people being quoted in the articles today are different from the people that have been quoted, and who have been continually wrong, during the last few months. Is the mainstream financial press actually starting to realize that their credibility is damaged when they continue to quote a source that has been wrong a few dozen times in a row? Perhaps, although you should note that the quotes themselves that contain the inaccurate information are not changing, just the people they are attributed to.

Finally, Intel earnings last night were significant. While they don't exactly indicate that the global economy is running on all cylinders, they do indicate that tech spending is not collapsing. It is also unusual for a CEO of a major company to state so blatantly an opinion of overall market conditions. So why isn't the market giving his bullish comments any credibility? My feeling is that it is because tech spending in the U.S. may not have bottomed. However, the U.S. is not the center of world when it comes to technology spending (and many American traders have yet to realize this). The market for computers in East Asia became twice as big as the market in North America long ago. If demand for tech is picking up in Asia, the market could have indeed be turning around.

NEXT: Economic Statistics are Yesterday, Stock Prices are Tomorrow

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.

What happened to Deflation?

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 CPI for February was out this morning and it was up 0.4%. Producer prices were up yesterday as well. Both were up in January too. Where did the deflation go that the mainstream media was warning us about over and over and over again at the end of last year and the beginning of this year? It seems to have been chased back to whatever part of Fantasy Land it came from by rising oil prices. The CPI report this morning did indeed indicate that two-thirds of the price increase was caused by more expensive gasoline.

While the official government inflation figures (not actual inflation, never confuse the two) were hoovering around zero levels at the end of last year, this blog pointed out that it was due to falling oil prices. Core inflation, which excludes food and energy, never got anywhere near zero. It was also clear to us that oil prices couldn't fall much further because they were too close to production costs and the next move would have to be up. While light sweet crude double bottomed in December and February, gasoline prices bottomed in December and have been going up since then. U.S. gasoline demand actually went up at least three weeks in a row recently. This is happening even though there is a severe recession (really depression) and demand is supposed to be dropping sharply or at least the media constantly tells us this. Since it isn't, this indicates prices have become too depressed and need to go up.

Oil has indeed moved up nicely since it February 18th low in the high 33's. The NYMEX contract closed at $49.16 yesterday. There is resistance just above $50.00, so prices should get stuck at that level before they can break higher. Surmounting this level will confirm that oil put in a double bottom at 33. Our oil tracking stock DXO had a significant breakout by closing at 2.71, 20 cents above its 50-day moving average. DXO actually traded above its 50-day five out of the six previous trading days, but couldn't close above it. Finally, the bulls gathered enough muscle to push it over. You should expect this line to be tested in the future.

Oil is in its seasonally strong period and should be bullish until at least June and possibly into the summer. The move is not going to be straight up however. Expect lots of volatility along the way. The weekly storage reports from Cushing, Oklahoma (one is due out today) can always cause sudden moves up and down.

NEXT: Invest Now for the Coming Inflation

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

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

Market Doesn't Believe Retail Sales Report

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 we have reported in this blog many times, the U.S. government has been blatantly manipulating its economic reports for years now. Nevertheless, the market generally believes them despite their internal inconsistency or the existence of other information that is strongly contradictory. This willingness to believe seems to have broken down today with the release of the Retail Sales Report for January. The numbers were good and way above expectations. Instead of rallying as it should have, the stock market tanked.

According to the government statisticians, retail sales rose 1% in January. The forecast among economists (who can't be trusted either) was for a drop of 0.8%. Perhaps this discrepancy was just too great for the market to buy it. The report furthermore had a big gain in apparel purchases, even though same store sales data for clothing chains showed a big decline. A number of retail industry watchers commented on this discrepancy and other anecdotal evidence that seemed to contradict the government's view. There seemed to be a consensus that the numbers would just be revised downward next month.

Looking inside the report, this is indeed what happened for December's numbers. Originally reported down 2.6% (not 2.7% as most media stories stated), the drop for December is now an even more horrendous 3.0%. The January rise of 1.0% would be from this lower number, or only up 0.6% above the number first reported. The news media always fails to point this out and this leaves a gaping loophole for creating good news where none exists. The real numbers, which are much worse, only come out a month or two later and the media pays little attention to them. There have been cases in other government reports where the revisions downward were so significant that even though there was a 'rise' in the numbers for the current month, the total was actually lower than the first number reported the month before. So even though the numbers are actually declining, they were reported as going up. This does not appear to be the case for the January Retail Report however. The good numbers seem to rely more on the falsification of the figures.

There was one another oddity in this Retail Sales Report as well and that is how it was covered by the news services. Articles were unusually short and details limited - this immediately made me suspicious of course. I had to search to find more extensive coverage (filled with negative commentary from everyone interviewed) and this has not happened before. It will be interesting to see if the new scepticism on the market's part spreads to the even more absurd inflation, jobs, and GDP reports. If it does, when the economic news actually does become better, no one will believe it.

NEXT: Deepening Global Recession Means More Inflation

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 Real Deflation is Taking Place in Bank Stocks

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:

PPI came out this morning and the U.S. government is now claiming that there has been wholesale price deflation in 2008. At least this is what the headline number indicates. Core inflation wasn't as benign, rising the most since 1988. The media is of course now hyping the headline number, which it downplays when it indicates inflation and ignoring the core number which gets a lot of attention when it's the better number (the advantage of having two numbers, one is likely to look better). The prices that are really dropping are assets, not those that are consumer related, with bank stocks yesterday taking a real hit.

According to the BLS wholesale prices in the U.S. fell by 1.9 percent in December. The yearly drop of 0.9% compares with a rise of 6.2% in 2007. As has been pointed out repeatedly in this blog, recent drops in the PPI are due almost exclusively to declining energy prices. These led the price declines last month, with energy prices overall going down 9.3% and gasoline dropping by a record 25.7%. For a change, food prices also fell, or at least the reports indicates a 1. 5% drop for the month (there was no drop for 2008, nor have U.S. food prices fallen year over year in the last four decades). Core inflation told a very different story however. It was up 0.2% in December and 4.3% in 2008. The last time it was higher was 20 years ago.

Mainstream media reporting on the PPI, as has been the case recently, has indicated the risks of consumer price deflation because of the headline numbers. The media usually reassures the public that economists (almost all of whom missed the Credit Crisis, the recession and are usually wrong in almost all of their predictions) have "confidence that the Federal Reserve (which has totally and completely mishandled the Credit Crisis since its inception) has the tools needed to keep deflation from becoming a problem". The media usually follows this up with 'isn't it great that the Fed had the foresight to cut interest rates to zero'. Certainly, you can not argue that what the Fed is doing will keep the threat of deflation away. Central Bank monetary policies that have given rise to hyperinflation in the past are usually very effective in preventing prices from falling.

While there is no actual deflation going on in consumer prices as the mass media would have you believe, assets prices are indeed deflating (the two are not interchangeable) because of the collapsing financial system. That collapse is by no means done. Bank America actually hit a new yearly low in aftermarket trading yesterday. Citigroup fell over 20% into the 4's (its yearly low is just above 3, a price that large cap financial stocks trade at only if they are on the verge of oblivion). Wells Fargo was also down quite a bit. The charts for JP Morgan, Goldman Sachs and Morgan Stanley are not looking particularly healthy either. Even after the U.S. government has pumped almost an unlimited amount of money into these companies, they are faltering again. As we have said in the New York Investing meetup over and over, "there is no such thing as a single bailout for an insolvent financial institution". We'll just have to see what the government does next.

NEXT: Bank(rupt) of America Gets Government Bailout

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 Truth About Deflation - A Crude Analysis

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:

In a carefully orchestrated media campaign to justify its money printing spree, the U.S. government has been trumpeting the need to counteract the threat of deflation. While there has been disinflation (lesser inflation) since this July when a concerted global central bank intervention began to drive up the value of the U.S. dollar, even the highly under reported inflation rates that the U.S. government publishes are still positive. A look inside the figures indicates quite clearly that there is only one major source for dropping prices - oil and its derivative products. If this reverses (and it will), watch out.

The PPI for November fell 2.2% after a record drop of 2.8% in October. The core which excludes food and energy was up 0.1%. Energy prices fell 11.2% after a 12.8% drop in October. Gasoline prices had a second record monthly decline. Home heating fuel fell by a whopping 23.3% (you should note that prices are down the most just as demand it rising substantially, which doesn't make sense if supply is not changing). Food prices were unchanged on the month. For the year, PPI is up 0.4%, but the core is up 4.2%. Overall PPI could indeed be reported as negative for the year when the December figures are released.

The seasonally adjusted CPI fell by 1.7% last month - the biggest drop since 1947 when seasonal adjustments were created. Core prices were unchanged however. Food itself was up. The cost of home ownership was up. The cost of health care was up. Energy prices however were down 17% . Gasoline prices fell an eye-popping 29.5% (gas prices went down at least 75 consecutive days in a row this fall, something which has never happened before). For the year, CPI was up 1.1% and the core is up 2.0%.

This morning the NYMEX light sweet crude contract hit $38.16 even though OPEC just said it would cut daily production 2.2. million barrels (the market is sceptical that this will actually happen). This is approximately a 75% drop from the early July high. This amount of drop is too much too fast. While I do not have exact figures, oil appears to be getting close to its cost of production. Could that level be as low as $35 or even $30? Yes it could. Whatever the bottom price is, the threat of deflation will likely disappear once it is reached .. and that should be soon.

NEXT:

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

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

PPI and CPI - Don't Get Excited Just Yet

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

Our Video Related to this Blog:

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

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

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

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

NEXT: Market Must Hold In Here

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

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

The Inflation Versus Deflation Argument - Part 4

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

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

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

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

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

NEXT: The Inflation Versus the Deflation Argument - Part 5

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

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

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

The Inflation Versus Deflation Argument - Part 2

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.

Inflation can only get out of control if the monetary authorities act irresponsibly by failing to stop rising prices and respond with denial and duplicity instead. In general, the worse the denial the greater the final inflation rate. In no case was this more clearly demonstrated than during the German hyperinflation when prices rose a 100 trillion percent between 1914 and 1923. Toward the end, consumer prices more than doubled every two days.

Eminent financiers, economists, politicians and Wiemar government officials all denied that inflation even existed in Germany, at least right up to the time of its final hyper phase and some of them continued with their denials even in the midst of those explosive price increases. Minister of Finance, Helfferich, assured the public that there was no inflation in Germany because the 'value' of currency in circulation was covered by a greater amount of gold reserves than it had been before prices began rising. Eminent professors, Elser and Wolf, echoed his argument. President of the Reichsbank, Havenstein, categorically denied that the German central bank was creating inflation and was convinced he was following a restrictive monetary policy. The Statistical Bureau of the German Government concluded in a study that there was a shortage of currency in Germany, but a great deal of inflation abroad!

How did these government officials and eminent economic authorities justify their continued assertions that there was no inflation despite rapidly rising consumer prices? They used one of the oldest tricks in the book, simply redefining inflation to be something else. By saying X really isn't X, but X is really Y and Y has certain attributes so X must have those attributes, you could of course prove almost anything. And the Wiemar German experts did just that by defining inflation as an in increase in the real value of currency in circulation (instead of the nominal value, which would essentially be the current definition of money supply) plus credit . While the total face value of currency in Germany was increasing dramatically, the total actual value was declining and this was interpreted as 'proof' that deflation was taking place. The accurate interpretation would have been extreme consumer price increases can take place when real money supply and credit are decreasing.

If instead of defining inflation as a function of real money supply and credit, Wiemar economists had defined it as the change in the value of a nations currency, they would have arrived at the correct conclusions about consumer price inflation. The exchange rate of the German mark essentially went to zero as price increases in Germany approached infinity. Since that time, globalization has only made the importance of currency as the key determinant of inflation even more important.

While the mistakes of the Wiemar German officials and financial experts seem laughable today, almost the exact same arguments about inflation began circulating in the U.S. in 2008. If such absurdities only surface prior to a massive outbreak of inflation, serious trouble was obviously ahead for the U.S. financial system.

NEXT: The Inflation Versus Deflation Argument - Part 3

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

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

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

The Inflation Versus Deflation Argument - Part 1

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.

One of the Federal Reserves two major purposes is to provide price stability for the American economy, a goal they chose to abandon in September 2007. While the Fed's interest rate policies after that time were highly inflationary, Fed officials excused their actions by denying that inflation was a problem, making rosy predictions that it would subside, and by assuring the public that they were capable of handling it and taking care of it in case it became a problem. None of this was true of course and the Fed's position increasingly lost credibility as gasoline and food prices skyrocketed in the U.S.

The Fed's biggest cover for its actions was the official inflation figures produced by the U.S. government statistical agency, the BLS (Bureau of Labor Statistics). The method of calculating the CPI (Consumer Price Index) was modified several times during the 1980s and the 1990s, with each modification producing a lower reported inflation number. Essentially these modifications involved reducing the importance in the CPI calculations of anything that was experiencing significant prices rises, thereby automatically lowering the final reported inflation numbers. It was hard for significant inflation to show up in the official government figures given this approach. By May of 2008, year over year CPI was only 4.2% in the U.S. despite rapidly rising energy and food prices during that period.

Recalculating CPI using the 1970s methodology indicated U.S. inflation was more likely around 12% (for more info: http://www.shadowstats.com/), almost as bad as it had been at its height in 1980. It became increasingly hard to convince the public otherwise, when the average U.S.consumer saw regular price increases at the gas pump and in the supermarket. Nevertheless, U.S. media continued to dutifully report the unrealistic official inflation figures as if they were true, helping the Federal Reserve perpetuate the fantasy on which it based its irresponsible monetary policy.

While the Federal government altered inflation calculations to produce the desired numbers in order to fool the general public about current inflation, lying about future inflation could not be done so easily. The augurs of where inflation was going, the money supply, are generally only looked at by the financially sophisticated. To solve this problem, the Federal Reserve simply stopped publishing the broad M3 money supply figures, the most telling number series of all, in 2006. Since many people realize that when a government hides information, its almost always information that would be particularly damaging if known, attempts to reconstruct M3 by private parties began immediately. By the spring of 2008, the reconstructed figures indicated that M3 was growing at approximately 20% (MZM, zero money, or cash and its equivalents was growing at an over 30% rate). The money supply figures indicated that U.S. consumer inflation was likely to peak at a minimum of 20% to 30% sometime around 2011. Depending on future readings, much higher inflation levels were possible.

The U.S. government's long-term misinformation campaign about inflation rates and its secrecy concerning money supply figures apparently didn't provide enough cover for the Federal Reserve. One group of apologists for the Fed (and the Fed had a legion of apologists who were feeding off the easy money gravy train that it was providing them at the expense of the American public) began publishing arguments about the risks of deflation in the U.S and how this justified an even easier money policy. Claiming that deflation actually existed in a period when inflation was getting out of control was by no means a new idea. It was in fact a prelude to some of the worse inflationary episodes in history.

NEXT: The Inflation Versus Deflation Argument - Part 2

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

Daryl Montgomery,
Organizer, New York Investing meetup

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