Currency Markets - California Dreaming is Greek to Me

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 trade-weighted U.S. dollar has been rallying since early December 2009. Except for a sell off after the beginning of this year, the rally continued because of trouble in the euro zone centered around Greece. The euro, representing more than 50% by weight of the basket of currencies that make up the trade-weighted dollar, hit a seven-month low and lost more than 7% of its value from its recent high. It takes a huge leap of logic to think that fiscal troubles in the euro zone are bigger those in the United States, but this is what the mainstream media has dished up as the explanation for what is going on. The invisible hand of the ECB (European Central Bank) manipulating the currency markets would offer a more rational explanation.

Greece represents 2% of the euro zone economy, compared to California which represent 13% of the U.S. economy. Both are in fiscal trouble. Neither can print their own money to get out of that trouble because they are both part of currency unions. While it is generally not recognized, U.S. states are de facto part of a currency union for the dollar, which was established in the 1800s. Their fiscal problems should be considered as analagous to european countries that are part of the euro zone. California is essentially in default and is only being kept afloat by constant cash infusions from a number of federal stimulus programs. It represents a much bigger drain on the U.S. dollar, than Greece does for the euro.

Selling the euro and buying the U.S. dollar because of the fiscal profligacy of countries like Greece is also absurd considering that the U.S federal government is just, if not more profligate, than the most fiscally irresponsible euro zone countries. It is considered outrageous that Greece had a budget deficit that represents 13% of its GDP. The 2011 U.S. federal budget submitted by president Obama on February 1st has a deficit of 11% of GDP (U.S. GDP figures are grossly overstated). For every dollar the U.S. intends to spend in 2011, 40 cents will have to be borrowed or printed.  Does that sound like a country that is protecting the value of its currency?

Greece has submitted a plan to the European Union (EU) for slashing its budget deficit to 3% by 2012 - the maximum allowed by the EU. While many people think that this is unlikely to happen, the U.S. has no intention whatsoever of slashing its budget deficit to that level in 2012 and will be fortunate if it is even lower than current levels. As for California, there seems to be no path to fixing the problem there without a massive federal government bailout - and it is only one of several U.S. states that have serious fiscal problems. Yet, the markets are selling the euro and buying the U.S. dollar because the U.S. is viewed as being in better fiscal shape that the euro zone? Perhaps I missed something when I took Logic 101.

Disclosure: None

NEXT: Withdrawal of Liquidity Threatens Second Global Meltdown

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.

Future U.S. Bailouts - FHA, FDIC, PBGC, U.S. States

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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There is no end in sight for U.S. bailouts stemming from the Credit Crisis. Once you've bailed out wealthy Wall Street bankers (and there are a handful of Federal Reserve programs for this in addition to $700 billion TARP program), it isn't politically tenable to say no to pensioners, savers, homeowners. and local governments. It should be kept in mind that the Credit Crisis didn't create the problems, but merely exposed the rot in the system that had been there for many years. As Warren Buffett most famously said, "you only know who's swimming naked when the tide goes out". Well, a lot of U.S. government operations have been swimming naked for years and the Credit Crisis caused the tide to go out.

The problems center around housing, banking, pensions, and government operations that don't have the money printing ability of the federal government. The government already nationalized massive housing loan entities Fannie Mae and Freddie Mac in 2008 and these have become bottomless pits for government aid. Fannie lost $18.9 billion in the third quarter of this year and requested an additional $15 billion in funding. Things would be even worse, if much of the loans that had previously been handled by Fannie and Freddie weren't now being insured by the FHA (Federal Housing Administration). The FHA is now backing loans that would have made a crooked subprime mortgage broker blush in the heyday of the housing bubble. When it comes to getting FHA insurance these days, bad credit, a spotty work history, and even a previous foreclosure aren't deal breakers. Not surprisingly, FHA finances are spiraling downhill fast and warnings about a need for a bailout are already becoming louder.

The FDIC has temporarily solved its need for a bailout, with temporarily being the operative word. On November 12th the FDIC mandated that banks pay three years of their insurance premiums up front. This will provide the FDIC's insolvent bank deposit insurance program with an immediate cash infusion of $45 billion. Unfortunately, the FDIC itself estimates that its funding needs will be $100 billion in the next four years. Assuming they only need that amount (which is possibly very optimistic), they will still have a serious short fall. There have been 123 U.S bank failures as of mid-November and the ones on November 13th cost the FDIC approximately a billion dollars. That's for just one week. At that rate, the FDIC would be out of money again in 45 weeks.

The PBGC (Pension Benefit Guaranty Corporation), a government chartered company that insures U.S. pensions is another operation which is heading toward a bailout. In its 35 years of operation, it has lost money in 29. Losses have even taken place when the U.S. economy was strong and the stock market rallied. In bad years, the PBGC loses even more money. So far in 2009, it has taken over 144 failed pension programs compared to 67 in 2008. It was $22 billion in the red this year. According to an inspector general's report, the PBGC's former director was alleged to have had improper contacts with Wall Street. When questioned by a congressional panel, he took the Fifth Amendment (refusing to answer because it might incriminate him). Fannie Mae and Freddie Mac executives also had serious ethical problems. Corruption and bailouts seem to go hand in hand.

While California's budget woes are well known, there are nine other U.S. states that are in serious financial trouble and an additional ten not far behind them. California has a $121 billion budget gap and is resorting to IOUs to make payments. According to the Pew Center, the nine other states in serious trouble are Arizona, Michigan, Nevada, Florida (states hit hardest by the housing downturn along with California), Rhode Island, Oregon, New Jersey, Illinois and Wisconsin. High unemployment and reduced business activity have caused tax receipts to plummet and are behind the current fiscal distress. There is little evidence the problem is getting better despite claims by the federal authorities and mainstream economists that the recession is over. The federal government has the same problem as the states, but it just prints money to make ends meet. While the feds can bail out the states, who's going to bail out the U.S. when money printing doesn't work anymore?

NEXT: The Art of 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.

Does Money Printing Cause Deflation or 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.

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There were $18 billion in U.S. Treasuries available for sale today and the Fed bought $7 billion of them. Increasing government debt is in and of itself inflationary. Buying that debt with freshly printed money is mega-inflationary. You would never know it from market trading today however. Oil prices dropped 4% after being down 3.5% last week. Gold was at a two week low and the trade-weighted U.S. dollar was up around 80.42 in recent trading (its break down level is 78.33). Commodity prices are supposedly trading on the bad economy and of course there is no need to worry about inflation - at least not for the next few minutes (after that, you had better worry).

The market was down most of the day, but a late day rally let the Dow close up 44 points. The S&P closed up 2, the Nasdaq down 9, and the Russell 2000 was down 3. The S&P 500 bounced off it's 200-day moving average and the Russell 2000 stayed just above its 200-day. The Nasdaq bounced off its 50-day moving average. The Dow traded well below both its 200-day and 50-day moving averages. The RSIs on the daily charts for all the indices are below 50, which is bearish. The other technical indicators don't look much better.

The media claims today's trading is because the economy is bad (so the Dow, the S&P 500 and the dollar go up - that makes a lot of sense). Vice President Biden apparently made some remarks on the weekend talk shows about how the administration didn't realize how weak the economy was. How this is news to anyone is beyond me. The Obama administration has a level of economic obliviousness that is truly astounding. This has been obvious from almost the very beginning when Obama announced the Treasury Secretary Geithner would be detailing a plan the next day to restore the financial system and Geithner then came up with no specifics at all in his press conference. The market tanked that day in case you've forgotten. Obama's plan to give the Federal Reserve more regulatory authority over the banks even though the Fed is only a quasi governmental entity that is partially owned by the banks was another real winning idea. The U.S. economy is basically being run by a bunch of 5-year olds. The only difference from the last administration is that the current 5-year olds are Democrats, while the previous 5-year olds were Republicans.

Oil is selling off for seasonal reasons and look for it to hold at one of the Fibonacci retracements, which are around $58, $53 and $48. It will be a bargain again possibly relatively soon. Oil, gold, silver and all commodities go up when there is inflation. The Fed is buying almost 40% of all treasuries for sale with money just out of the printing presses and there's not going to be inflation? Not on the planet earth. It is only a matter of time. Expect more stimulus and more bailouts from the government as far at the eye can see. Put California at the top of the list, its debt was downgraded to BBB by Fitch just a few minutes ago.

NEXT: First Four Trading Day Review

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.

The House of Cards Economy

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:

Housing continues to deteriorate. There are now 12 million homes in the U.S. with mortgages that exceed their value. This pool of houses which is particularly vulnerable to abandonment and foreclosure represents almost a quarter of all mortgaged residential properties . By the end of 2008, it is estimated that there will be a million bank owned properties for sale, which would represent a third of homes on the market. The situation is already much worse in trend leader California, where over 50% of existing home sales were foreclosed properties last month. Median prices there have dropped 34% from the high so far. The rest of the U.S. could follow California, although increased government efforts to prop up the housing market are trying to prevent further erosion.

Last quarter 766,000 U.S. home owners received at least one foreclosure notice. Only six states accounted for a majority of foreclosure activity - Arizona, California, Florida, Michigan, Nevada, and Ohio. The last four of these states are battlegrounds in the presidential election and Arizona would be too if McCain didn't represent it in the senate (nevertheless McCain's lead in the polls there is surprisingly small even though Arizona is one of the states most likely to support a Republican candidate for president). Foreclosures were worse in the beginning of the quarter and the rate even declined by 12% in September. While it looks like the number of foreclosure notices will be lower in the future, this won't be taking place because of improvements in the housing market.

The rate is being lowered by new laws have been enacted in a number of states to delay the repossession process and the FHA is attempting to renegotiate loan terms for a number of mortgage holders at risk. Foreclosure statistics are indeed very much affected by the ease of foreclosure which varies by state and should not be considered as an absolute indication of the strength of a state's housing market. New York for instance currently has a low foreclosure rate because it is necessary to go to court first and this means a foreclosure can take well over a year, longer if the judge doesn't wish to be cooperative. The FDIC is also trying to delay or prevent foreclosures. The first thing they did when they took over IndyMac was to stop all foreclosures and they are continuing to do so.

Delay does not mean preventing the inevitable however, it usually only means it only takes more time to get there. U.S. housing was in a bubble and prices became way extended on the upside. They are going to have to come down at least to the long-term mean - and we still have a long way to go to get there - before a sustainable recovery in real estate is possible. This will be an important precondition to a healthy economy as well. A look at the past suggests this linkage. Housing prices fell approximately 50% nationally in the U.S. between 1930 and 1940. The economy wasn't in such great shape then either.

NEXT: Black Friday Panic Grips World Markets

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.

Government Investment Pools Dry Up

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 the downgrades of the bond insurers threatened U.S. municipalities with higher future interest costs, it became obvious in November 2007 that there were far more immediate risks to public finances when there was a run on Florida's Local Government Investment Pool . The run began when word got out that the Investment Pool had exposure to $1.5 billion in defaulted and downgraded SIVs. Florida had to freeze withdrawals to prevent the fund from collapsing. The municipalities that got out early were lucky, all others had to find emergency funding to meet their payrolls for police, firemen, hospital workers, teachers, and other employees.

Local, State and Government investment pools existed in at least 20 states and were essentially special money market funds that bought short-term debt and were set up to get higher yields that would otherwise have been available. Little did they know that these slightly higher yields were being produced by taking on massively higher risk through exposure to subprime toxic waste that the big brokers (Lehman in Florida's case) were more than willing to sell to them. Problems were by no means isolated to Florida either. In the last days of November, Montana school districts, cities and counties withdrew 10% of the total $2.4 billion in its investment fund after the rating on one of the pool's holdings was lowered to default. The state of Maine had invested 3% of it money, apparently on Merrill Lynch's advice, into a fund only two weeks before its credit rating was lowered to junk status. Financial difficulties with government investment pools were also reported in Orange County, California and Seattle, Washington.

While the losses of the Government Investment Pools were certainly serious, were they isolated of were they likely to spread? If these ultra-sophisticated money-market funds got into trouble, wouldn't it be reasonable to assume that the money market funds open to the individual investor might suffer similar problems in the future? By the late fall of 2007, it had already been reported that Bank of America, SunTrust, Wachovia and Legg Mason had taking steps to prop up money market funds that contained securities of possibly questionable worth. And it looked like the formerly safest of investments were in some cases becoming among the riskiest.

Next: Subprime Freezes Over

Daryl Montgomery
Organizer, New York Investing meetup

For more about the New York Investing meetup, please go to our web site: http://investing.meetup.com/21

Housing Market Collapses, but the Statistics Hold Up

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.

The August housing sales figures released in September 2007 indicated that housing sales had fallen off a cliff in most of the areas of the U.S. that had been at the center of irresponsible mortgage lending. Los Angeles county California lead the way with a 50% decline in houses sales from the previous year. Orlando, Florida and Phoenix, Arizona were not far behind with a 40% drop. House sales in Las Vegas, Nevada were 37% lower than a year before. The collapse in the U.S. housing market would be led by these four housing bubble states: Arizona, California, Florida and Nevada plus two others: Michigan and Ohio, which were suffering economic hardship from declines in U.S. manufacturing.

One of the most fundamental tenants of economics is that price is determined by supply and demand. When demand drops or supply rises, prices should fall. When demand drops a lot, prices usually fall a lot. While there were anecdotal reports of housing prices falling 50% or more at bank auctions in various parts of the country, the overall statistics indicated only modest drops in housing prices in most communities, and even small increases in others. How was this possible, assuming there was no fraudulent manipulation of the numbers (something that should always be considered when two and two doesn't add up to four)? As with many of the U.S. government reports, statistical sleight of hand by the number crunchers was at work .

When housing prices were being compared year over year, there were in reality two different markets being measured. In other words, the comparison was being made between apples and oranges and was therefore effectively meaningless. When housing sales fall dramatically, they don't fall evenly across the economic spectrum. People who buy more expensive homes are more likely to be able to get a mortgage and the high-end of the housing market holds up. People at the lower end get shut out and sales for cheaper homes fall much more than those of expensive homes. The most recent housing market statistics will have a lot more high-priced homes in them proportionately than the previous years statistics and this skews the average and median prices up. It is in fact easy to come up with examples where every house price in a market falls by a significant amount and yet the average and median house price goes up! This was exactly what was happening in the summer and fall of 2007. While the plummeting housing sales numbers were accurate, the officially reported prices in no way reflected actual pricing trends in the market.

Next: Bubble, Bubble, Toil and Trouble

Daryl Montgomery,
Organizer, New York Investing meetup

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