Today's Stock Market Action Looks A Lot Like August 1998

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.

Something is seriously bothering the stock market and the news that's out there isn't enough to justify what is going on. Such was the case in August 1998 as well. What caused the sudden bear market to appear out of nowhere in 1998 became fully evident only after the fact. The same could be the case in August 2011.

Perhaps the flash crash in October 1997 was a warning of things to come, just as the flash crash in May 2010 may have been a prelude to today's stock market drop. In the second half of July of 1998, stocks began to nosedive suddenly, just as they did in 2011. Some stabilization took place in the market toward the middle of August in 1998 and then a new deeper plunge began. Today, the Dow Jones industrials were suddenly down over 500 points this morning on what could only be considered minor bad news.

There were actually two problems causing the market debacle in 1998. Everyone knew about one of them - the Russian debt default and devaluation of the rubble, which took place on August 17th (less than half of the eventual market decline took place before this date).  Only Wall Street insiders knew about the second one - problems at Long-Term Capital Management (LTCM) - that almost brought down the financial system. 

Trouble in Russia was evident as early as October 1997 and it resulted from the fallout from the Asian financial crisis, which in turn started as a currency crisis in Thailand in July of that year. Today, Europe is undergoing a crisis with the euro that began in Greece in 2010. By August 1998, the Russian central bank had spent a great deal of its dollar reserves defending the ruble and decided to give up. The default had a number of ripple effects, but the most important one on LTCM wouldn't be known by the public until late September, only days before the market finally hit bottom.

After the Russian debt default, stocks plunged until the beginning of September. The market was close to its ultimate low at that point, but only because of the subsequent successful rescue of LTCM.  Stocks then rallied for approximately three weeks. A bailout of LTCM was arranged by the Federal Reserve on September 23rd. The market then sold off until early October hitting a new low and then the decline  was over.

In the rally that followed the stock market experienced huge gains led by a bubble in tech stocks. This was a consequence of the Fed lowering interest rates and pumping too much money into the financial system. The Fed had a lot of leeway to do both in 1998 and still there were serious negative results between 2000 and 2002 when the tech bubble collapsed. Inflation wasn't a concern back then because commodity prices had been declining for almost two decades and were around their lows. It should be assumed that a failure to have successfully rescued LTCM would have caused a much bigger drop in stocks (as happened when the Fed didn't bail out Lehman Brothers in September 2008).

The Fed has a lot less ability to maneuver in August 2011. Fed funds rates have been at zero since December 2008. The Fed has already expanded its balance sheet by approximately $2 trillion since the Credit Crisis began. Commodities are closer to their all-time highs now, not their lows. Another bailout like the one in 1998 (which was minor compared to what occurred during the Credit Crisis) could send inflation assets into a bubble. Gold is already trading over $1800 today and seems to be leading the way.  

Disclosure: None

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

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

Global Wheat Supply Threatened by Weather

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 worst drought in 130 years has destroyed at least a fifth of the current Russian wheat crop and threatens much bigger damage to the winter wheat crop if the weather doesn't change soon. Only a bumper crop in the U.S. has prevented wheat prices from really going through the roof.

Russia is generally the fourth largest wheat producer in the world. Along with the former USSR member states of the Ukraine and Kazakhstan, it would be a close second to top producer China. Unfortunately, the Ukraine and Kazakhstan are also affected by drought. Ironically, the world's second largest wheat exporter, Canada, had the opposite problem of excessive rains this year and the wheat crop there is expected to be 35% below normal.  

Investors shouldn't confuse production and exports for food commodities. China and India are usually the two largest producers of wheat, but because of their huge populations, they can also be importers as well. It is the United States, the third largest producer, that is the biggest exporter of wheat and it generally accounts for 20% to 30% of the global total. The U.S., Canada, Australia, the EU-27 and Russia-Ukraine-Kazakhstan together usually supply around 90% of the wheat to the export market. France is the major source of wheat from the EU, with Germany being a distant second. Expect major wheat importing regions- North Africa and the Middle East, East and South Asia, and South America - to feel any production shortfall.

The USDA had projected a billion bushel surplus from this year's U.S. wheat harvest. Without this, global supplies would be severely strained. Nevertheless, wheat is rallying strongly with prices at the Chicago Board of Trade up 42 percent in July, the biggest monthly rally in 50 years. Wheat prices broke above $7 a bushel there on Tuesday. At the Kansas City Board of Trade, hard red winter wheat prices were at a 13-month closing high of $6.85 a bushel. This is still a far cry from the all-time high of $13.84 a bushel in 2008 however.

ETFs/ETNs that can be used to invest in wheat on the long side are GRU (around 50% wheat), JJG (around 30% wheat) and DBA (25% wheat) in the United States and WEAT and LWEA (200% leveraged) in the UK. Investors may wish to wait until there is a pullback though since wheat looks extremely overbought at the moment.

Disclosure: No positions

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

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

Falling Supply and Rising Demand Cause Gold to Soar

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

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February gold futures broke $1200 for the first time a little after 4AM New York time. February 2010 is now the major front month contract after the expiration of the December contract on November 30th. Gold futures were up 14% in November, the best monthly performance in ten years. Silver was also up 14%. Gold traded down only three days in November and hit one all-time high after another during that time. While the major U.S. stock indices were also up, gold and silver shined in comparison. Seasonally-weak oil was flat during the month. The trade-weighted U.S. dollar opened November above 76 and closed out below 75, hitting a new yearly low of 74.23 in the interim.

The price rise in gold is caused by a positive supply demand picture both for the physical metal and in the futures trading pits. For the last twenty years there have been three major sources of gold supply and three major destinations of gold demand. The sources for supply have been mining, scrap (also known as recycled gold) and central bank selling. The three majors uses for gold have been for jewelery, investment and industrial (contrary to popular belief, gold has a wide variety of uses in manufacturing, especially in electronics). Complicating the picture has been central bank leasing to miners, big banks and hedge funds that dumped significant amounts of gold on the market in the 1980s and 1990s and was a major factor in holding gold prices down. The unwinding of these positions, Barrick Gold closing out it hedge book is the most recent example, has been creating upward pressure on gold prices for several years now.

There are two major currents in the shift in market supply and demand. Central banks have shifted from the supply side to the demand side and ETFs have caused a major increase in investment demand. Up to mid-decade, central bank selling accounted for 14% of gold market supply, but in the first half of 2009, central banks became net buyers of gold. As supply dried up from central banks a new increase in demand was created by ETFs that buy and store physical gold. There are now eleven of these globally and none existed before 2003. Their gold holdings have gone from zero to 1766.40 tonnes in the last six years. The largest ETF, GLD, is now the sixth biggest holder of gold in the world (between France and China).

Gold mining has provided as little as 60% of market supply in recent decades. So far gold mining output peaked in 2001. It then fell seven years in a row until 2008. The only major producers with increasing output have been China and Russia. This may have more to do with their transitions from a communist to a more capitalistic economic model than with the contents of their gold mines however. South Africa, which was the top gold producer for much of the last 100 years, is experiencing a rapid drop in gold output and it looks like it will fall to fourth place in global rankings this year. It takes approximately ten years to open a new gold mine and gold prices only started rising in 2001 and many remained convinced for some time that the rally wouldn't last. So don't expect any significant increase in mining output until well after 2010. Barrick Gold closing out its large hedge book though is an indication that they believe gold output is likely to continue falling and prices to continue rising.

While high gold prices mean that jewelery demand will fall, the rise in investment demand will more than overwhelm any drop. In a number of developing economies, jewelery and investment demand are not actually distinguishable as is. Purchasing high-caret jewelery is the traditional method of investing in gold. While India has been the number one market for gold demand, China seems to be in the process of overtaking it. There were significant restrictions that limited gold buying by the Chinese until the early 2000s. Gold demand there has been soaring since the restrictions were lifted.

There are a number of major long-term trend changes going on in the gold market and none of them are likely to end soon. There is probably at least another decade before a new equilibrium is established and major shifts start occurring again and drive the price of gold back down. By the time that happens though, the price of gold is going to be much, much higher than it is today.

Disclosure: Long gold and silver.

NEXT: Is the Gold Rally Getting Frothy?

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


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

Fed Hits Dollar Panic Button

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

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

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

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

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

NEXT: Subprime Crisis #2 Coming Soon

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

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

IMF Selling Gold to Dampen Rally

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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Like clockwork, the IMF gold sale has reared its ugly head again as has occurred during a number of previous gold rallies since 2007. This time the IMF is actually selling the gold. It only threatened to do so the previous six times or so. It says it is looking for a central bank buyer. For some time, rumors have claimed that the central bank buyer will be China and these resurfaced again last week before the IMF announcement. China is playing coy however and says it wants the gold at a discount to the current $1000 price. Other possible buyers include Russia, the Gulf Oil States, Japan and India, all of whom have relatively low gold holdings and too many U.S. dollars.

The IMF is selling one-eight of its claimed gold holdings (the IMF is not audited, nor will it answer questions about whether its gold is held in individual contributing countries and being double counted as part of their gold reserves) or 403 metric tons. While this sounds like a lot, its is less than $13 billion at current prices. China alone has approximately 2000 billion dollars in reserves held in foreign currencies, almost half of which are in U.S. dollars. China's current gold holdings are 1054 metric tons, up from 400 metric tons in 2003. So it has less than $33 billion in gold versus almost 1000 billion in U.S. dollars. It is thought that the gold sale is being used as a way to let China get rid of some its U.S. dollars without dumping them on the open market.

There is also a two-day Fed meeting this week on Tuesday and Wednesday and a G20 meeting this Thursday. Since the Credit Crisis began two years ago, the U.S. dollar has rallied from just before the Fed meeting to just after (gold falls in response). This has happened no matter how much the Fed has announced it is debasing the currency. No one in their right mind would buy dollars under such circumstances, which leads to the obvious conclusion that global monetary authorities are acting in concert at these times to hold the dollar up. Expect this again this week. As mentioned in this blog on Friday, the dollar is too extended from its 50-day moving average and will try to rally back to that point.

Gold has traded as low as $996 this morning and the trade-weight dollar is at 76.97 at the moment (still below its 78.33 break down level). Expect general weakness in gold and the other precious metals and strength in the dollar until Thursday. A reversal for both after that is highly likely. Keep an eye out for buying opportunities, particularly in the mining stocks.

NEXT: Manipulation Fails, Gold Rallies Back

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

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

Fed Knows Inflation is Coming; Oil Supply Slips Again

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 Fed statement yesterday afternoon didn't fail to disappoint - unless of course you expected intelligent insight and rational thinking about the economy. The Fed said "the pace of the economic contraction is slowing". In other words the economy is still getting worse, but it is getting worse at a slower rate. It did admit that "economic activity is likely to remain weak for a time". And this is why the Fed is as confident as it always is that "inflation will remain subdued for some time". So of course, it can print all the money its wants to and unlike every other time in history when this has happened and resulted in massive inflation, this time is different. I wonder if they sit around and chuckle when they write these statements.

To be fair the Fed did not say there would be no inflation and the 'some time' they mentioned could be the next two weeks. Whatever the time period is, it won't be that long. The Fed admitted it would be purchasing up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year, plus $300 billion of Treasury securities 'by autumn'. Those treasuries will almost certainly be longer dated paper, since China and Russia are lowering their purchases of these and moving to the short-end of the curve. Foreign governments also dumped their Fannie Mae and Freddie Mac debt, which is why the Fed now has to buy this worthless paper. But don't worry, the Fed "is monitoring the size and composition of its balance sheet". So how could they not know lots of inflation is on the way?

As has been the case since the Credit Crisis began almost two years ago, the U.S. dollar rallied on the news that the government is debasing the currency. The mainstream media was out in full force with articles trying to bull the dollar up (I wonder if they get a commission for this). Early in the day, headlines screamed "Dollar Gains Ground". I checked and the trade-weighted dollar was up 0.15, a normal insignificant intraday move. Right after the Fed's press release, "Dollar Rises After Fed Statement". It was barely up at the New York market close at 4:00PM. These reliable logic defying dollar rallies around Fed announcements can only be explained by some form of government manipulation of the currency markets.

The oil storage report came out yesterday and at first I thought the EIA reprinted last weeks numbers. Oil inventories fell 3.8 million barrels, below expectations just like last week. Gasoline inventories however rose 3.9 million barrels and this was way above expectations, also just like last week. Oil supply has fallen enough in the last six weeks that the media is no longer saying there is a glut (there never was, they were just saying this). They may soon be saying this about gasoline however. Oil closed yesterday at 68.67, little changed.

NEXT: More Numbers that Just Don't Add Up

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


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

Building a BRIC House; Nat Gas and Market Update

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

Our Video Related to this Blog:

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

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

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

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

NEXT: Quadruple Witching Today; Fraud Update

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

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

Market Rally at Key Juncture; Russians at it Again

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 market rally is getting tired in here. Whether or not it can have one last gasp at this point will probably be decided today. The technical picture on the S&P 500 will turn decidedly negative if there is any significant sell off today. Conversely, a significant rally can turn it positive. Close to unchanged and we have to wait until tomorrow. I haven't been waiting to sell however and started doing so toward the end of last week. Most of my positions in DXO, ERX, and HWD are gone. My major energy position in now in UNG, which I plan on continuing to accumulate on major drops (this may no longer be at prices under 14, which may be a thing of the past for the moment). For those not paying attention, I sold AA long ago. I did pick up some NG and GDX yesterday however.

Like the market, oil is having trouble rallying at this point. Light sweet crude closed at 70.62, but was back above 72 again this morning. The weekly storage report comes out tomorrow and this will determine whether oil can make a run to 77 or have to fall back well into the 60s first. I will be a buyer again if it reaches the lower 60s.

The trade-weighted dollar was falling again today, but has managed to stay above 80. It once again moved on comments coming out of Russia. Last week they were selling their U.S. dollar holdings , the dollar sold off sharply. This weekend, they weren't selling their U.S. dollar holdings, the dollar had a big rally. Today, they are doing both. At a Russian/Chinese summit, the Russian president stated, "We must strengthen the international financial system not only by making the dollar strong, but also by creating other reserve currencies". Creating other reserve currencies would of course weaken the dollar considerably. Russia also wants to diversify its currency reserves by buying Chinese yuan, Brazilian reals and Indian rupees. Now I wonder what currency it would be selling so it could buy them?

Gold and silver had sell offs because of the dollar rally yesterday. Since this rally was based on fantasy, I am not currently taking it too seriously. How long the dollar can stay above its 78.33 breakdown point is anybody's guess, but it will get there evntually. The central banks that are major dollar holders are all probably trying to dump their dollars as discretely as possible at the moment. Don't expect them to advertise this on a big neon sign, even though Russia essentially did this last week. The reserve currency status of the dollar will also definitely be coming to an end sometime in the next several years as well. Few things are more certain.

NEXT: Best to Step Aside and Watch the 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.

G8 Hot Air Inflates Dollar

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 G8 finance ministers met in Tokyo this weekend. Media headlines were blaring, 'Dollar Rises as G8 Looks to End Stimulus'. As usual media headlines have little to do with what actually happened. The ministers discussed a need to prepare strategies for winding down policy measures taken in response to the economic crisis. Note that it's just talk and the talk is about coming up with strategies (they don't exist yet). There is no 'doing' involved here, nor did the G8 come up with a timetable for implementing the strategies once they are created. It's not even clear that they have a timetable for coming up with the strategies. Not only is stimulus not being ended, but there is more than enough reason to believe it will be increased. The IMF managing director commenting on the meeting stated bluntly that the worst is not over yet.

The real goal of this meeting was to jawbone the U.S. dollar up. As reported in this blog the trade-weighted dollar has been hoovering around a breakdown level of 78.33. So far this morning it has been as high a s 80.89 in pre-market trading. At the meeting, the Russian finance minister backtracked on Russia's statement last week that it was cutting its U.S. bond holdings. He stated at the meeting that over the next year or more (the media did not quote this time period, but somehow gathered it from context) he "does not see any significant changes in our policy with regards to dollar denominated paper". He also said he didn't see the dollar losing its reserve currency status in the near future. The media did not report if the pained look on his face was the result of having both arms twisted behind his back.

The effect of the G8 comments was to sink Asian and European stocks markets. Most were down around 2%. Dollar denominated assets such as commodities were hit the hardest. Oil fell to around 70, but then went back up above 71. All this on the hint that maybe sort of kinda perhaps something will done at some unstated point in the future. In past major inflations, governments have always tried to tone down the money printing, but are forced to quickly reverse course because there is an immediate negative reaction when they do so. Looks like we're already falling into this pattern.

In a side note on 'money printing' is a bizarre story coming out of Italy that the U.S. media is ignoring. Italian authorities have seized $135 billion in U.S. treasury bonds from two individuals entering the country from Switzerland and carrying Japanese passports. Among the cache were 249 bonds with $500 million denominations. While this may seem absurd, the U.S. treasury did indeed issue bonds with $500 million denominations between 1955 and 1969. Even more amazing the authorities couldn't tell immediately whether or not the bonds were counterfeit! While it seems likely the bonds are phony, why would anyone bother counterfeiting bonds with denominations so high that only a central bank could buy them? This would also be the biggest counterfeiting operation in history. Whatever is going on, there is definitely more to this story.

NEXT: Market Rally at Key Juncture; Russians at it 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.

Disaster Stalks the Dollar

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.

Gold and silver were down this morning, while the U.S. dollar was attempting a recovery. The trade-weighted dollar fell back below 80 though and the precious metals started to recover. It must be requiring superhuman efforts on the part of the central banks to prevent a major drop of the currency at this point after the body blow struck by the Russians yesterday. The natural gas storage report was mildly bullish today. Oil trade remains listless although light sweet crude was above 72 earlier today.

As usual, the mainstream media is not informing the public about a major financial story that it needs to know about. Russia is the third biggest purchaser of U.S. treasuries. Yesterday it said it is reducing its holdings by not buying new bonds when the current ones expired. Put this together with China altering its holdings of U.S. treasuries from long term to short term bonds and this spells major trouble for the U.S. When our budget deficits were hoovering around $400 billion a year, we managed through great efforts to get foreign governments to lend us enough to support our proliferate spending. This year's budget deficit will be around $1800 billion. It is estimated that only 53% of U.S. federal government expenditures will be covered by taxes (when this number fell to 69% in Weimar Germany, hyperinflation devastated the country only 5 years later - the U.S. in is much worse shape currently). To cover our budget deficit, we need to borrow or print money to make up the difference. Just as our borrowing needs are skyrocketing, foreign lending sources are drying up. It is inevitable that U.S. money printing will be ratcheting up soon.

The Russian story is even more significant however. All the foreign bond holders know there is a lot of inflation on the horizon, but most haven't acted yet. The situation is analogous to a crowded theatre where everyone smells smoke, but is ignoring it because they are busy watching the play. Suddenly someone jumps up out of their seat, runs toward the exit and shouts fire once they get there. Is everyone else going to just remain in their seats or will there be a stampede to the exits? This is the danger the dollar is now facing.

Oil is drifting up today and natural gas is doing well. The natural gas storage report was mildly bullish with expectations for an increase of 108.5 BCFs and the actual increase coming in at 106 BCFs. Oil is getting closer to its Fibonacci retracement around 77. A spike up to or above the level would be a good sell signal.

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NEXT: Gold, Oil, Dollar and Market Update

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

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

Oil Gases Up; Bear Bites Dollar

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.

Week after week after week this spring the media reported a glut in U.S. oil supply. This blog and the New York Investing meetup had to debunk this view of the state of the energy markets more than once. The supply report today once again confirms that the only glut that existed was in the imagination of reporters working for the big media outlets. Storage was way below expectations across the board for oil, gasoline and distillates. This has yet to happen in natural gas, but the market is in super contango just as the oil was in January and early February of this year. Indirectly bullish for oil and natural gas going forward was Russia's announcement today that it is reducing its U.S. Treasury holdings.

Expectations for the EIA's storage report was for a drop of 500,000 barrels of oil and an increase of 750,000 barrels of gasoline and 1.5 million barrels of distillates. Instead, oil in storage fell by 4.4 million barrels, gasoline fell by 1.6 million barrels and distillates fell by 300,000 barrels. This is the third oil report in the last four weeks that indicated a large drop in storage. The oil markets barely moved on this incredibly bullish report, although light sweet crude has been trading today around 71, above the key resistance point of 70.80.

Unlike oil, which has been rallying since mid-February, natural gas has been in the doldrums and is the worst performing commodity this year. This may be changing soon. Natural gas futures are in super contango - the distance future contract are priced well above the near term contract. The July contract is currently priced around $3.80, but the December contract is priced above $6 or more than 60% higher. Oil had the same behavior just before it bottomed and then went up for four straight months. Pay attention to this.

Although it is not getting much play so far, the most important news to come out this morning is that Russia plans to reduce its U.S. Treasury holdings. Along with China, Japan, and the Gulf Oil States, Russia is one the 4 biggest foreign holders of U.S debt. Russia says that it is not selling its U.S. bonds, but will just not replace them when they mature (you should read this as: Russia refuses to buy any more worthless U.S. debt and help us fund our deficit, so we are going to have to print even more money than we were planning). While this may sound like a minor change, it could devastating for the U.S. Dollar. Once one of the major debt holders starts bailing, there could be a stampede for the exits. Did the dollar nosedive on the news? Of course not, it actually went up afterwards. We will have to see just how long central bank intervention can forestall the market's gravitational effects.

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NEXT: Disaster Stalks the Dollar

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 Thinks It Knows Best, Market Disagrees

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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If the Obama administration is trying to crash the U.S. stock market they are doing an excellent job. If not, they should all take a class in PR 101. The U.S. government announced that it is displeased with the progress the automakers have made with their restructuring plans (like somehow the government knows how to run an auto company), got the CEO of GM to resign, and is threatening to withhold bailout money from them and force them into bankruptcy. This would be devastating to the economies of the politically important swing states of Michigan and Ohio and for this reason it is not likely to happen. Nevertheless, all investors are paying this morning for this political cat and mouse game, with both the Dow and Nasdaq selling off around 4% as I write this. A crash level drop of 5% is a real possibility at the moment.

When the automakers received their first bailout in the fall, this blog stated it was only a stopgap measure to tide them over until after the election and a new bailout would be needed then. This has indeed happened right on schedule. While we constantly say, there is no such thing as a single bailout for an insolvent financial institution, the same is obviously true in many other industries as well. There is also no question that the automakers have been some of the worse run companies in the U.S. for decades, at least until the banks and brokers took the lead in this respect in the 2000s. Bailouts almost always have long term negative consequences, but this has not stopped the U.S. from establishing a de facto 'too big to fail policy' and it now seems to be moving toward state directed corporate socialism. Government management is an oxymoron if ever there was one. This is out of the frying pan into the fire economics.

Also weighing on the market is the upcoming G20 summit. Other countries, being led by Germany, are not interested in printing an endless stream of new money for economic stimulus plans and the BRIC countries want an alternative reserve currency. A coordinated policy for global stimulus is not likely to result from the meeting later this week as was hoped for by the Obama administration. This leaves the U.S. and Britain, the big money printers, holding the bag. Consequently, both are likely to have to print more money in the future. The BRIC (Brazil, Russia, India and China) countries want to establish a new reserve currency, at first consisting of a blend of dollars, euros, yen and pounds. No immediate policy shift will officially take place at the summit, but this likely represents a sea change in international currency policy. Both pieces of news are devastating for the U.S. dollar, which somehow ignored reality this morning and rallied strongly.

While it would be nice to do so, investors can't ignore politics. Deep down, there is really very little difference in a number of respects from the current administration and the last administration. Spending huge amounts of taxpayer money on bailouts was and is part of the agenda. If the spending can't fully be funded with taxpayer money (and this was a reality from the beginning), any amount of money necessary will be printed to cover the costs. The dollar will eventually lose a lot of its value because of this and there will be a lot of inflation. The Bush administration though was at least aware of the sensitivities of the stock market, while the Obama administration seems oblivious at best. The drop this morning, taking place during a nascent rally, is not the first time the current administration has stuck its foot in it and it probably won't be the last.

NEXT: Next Few Trading Days Are Important

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.

'Good' News Drives Market Higher

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 market rally continues today and is likely to do so for awhile because the momentum is on the upside. The mainstream media is doing its best to help continue the rally with the usual bullish hype. Today's bullish stories include a 3.4% rise in durable goods, the first after a six month record decline. U.S. mortgage applications are also up on the lowest mortgage rates since records have been kept. Such 'minor' bad news as Japan's exports falling 49%, with the biggest drops in exports to the U.S., and China calling for a new reserve currency to replace the dollar have been mostly ignored by the market.

The durable goods report is being interpreted as indicating the economy is improving. You can only believe this as long as you don't look beyond the headline number (most traders don't by the way, they just react immediately without getting the details). The big rise in durable goods was led by military aircraft and parts which were up 32.4% - this is 100% the result of government demand and not likely to be repeated. Heavy machinery was the next big gainer and was up 13.5% - not exactly a consumer item. Computers were up 10.1% and this would partially be accounted for by consumer purchases, although businesses are the major buyers of computers. Fabricated metal products were the only other item with a significant gain being up 1.5%. Autos and auto parts are still in heavy decline, but there was a little noticed $5 billion government bailout of the auto parts industry a few days ago that will act to prop up the industry.

The Japanese trade numbers for February gainsay any rosy interpretation for the U.S. economy that could be garnered from the Durable Goods report. While Japanese exports overall declined 49%, the biggest drop was exports to the U.S., with exports dropping 58%. Next biggest was the EU countries where exports dropped 55%. The drop in exports to China was less than 40%. While these numbers indicate a collapsing global economy, the collapse is by no means even. The U.S. is doing the worst and Europe is a close second, but Asia is holding up somewhat better.

The Chinese released a proposal a couple of days ago to replace the U.S. dollar as the world reserve currency with a Special Drawing Rights (SDR) linked currency system. Russia supports the idea. The U.S. dollar losing its reserve currency status would be devastating to the U.S. Reserve currency status keeps the value of the dollar much higher than it would be otherwise. The impact would be extremely inflationary since we would have to pay higher prices for all imports. Nevertheless, Treasury Secretary Geithner remarked this morning that the U.S. was "quite open" to the Chinese proposal. The dollar dropped like a rock for a short time thereafter. In case you have yet to realize that Geithner isn't exactly the most brilliant Treasury Secretary that the U.S. has ever had, this should remove all doubt. Someone should also tell China that a globally neutral currency has already existed for the last 5000 years - it's called gold.

The final piece of 'good' news today was U.S. mortgage applications were up 32%. Unfortunately, 79% of those application were refinancings for already existing mortgages. New purchases were only a small part of this number. Average mortgage rates fell to a record low of 4.63% last week. U.S. policy is doing its best to try to get housing prices back up to economically absurd and unsustainable levels (doing so the first time only led to the current Credit Crisis that has threatened the stability of the world financial system). The only way this can be accomplished is to create enough inflation so nominal house prices stay the same or go up. This will cause even bigger economic problems, so you should assume that this is one area where government policy will be 'successful'.

NEXT: No Longer Gilt Edged - the Inflation Implications

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 That Rally

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, U.S. Markets returned to the level of last Friday's close, with the big rally gains of Monday being wiped out after only two trading days. If you measure a crash by a closing drop of 5% or more, it was the fourth market crash day for U.S. stocks in a little over two weeks. The drop started in Europe, with mining stocks and financials being particularly hard hit, but Europe had closed before the worse selling hit the U.S. at the end of its trading day. In Asia, the Japanese and Korean markets were pummeled, but the Hang Seng managed a partial recovery. As bad as things were, no world market could even come close to 77% total meltdown experienced in Iceland when its market was reopened on Tuesday.

Wednesday's trading pattern was somewhat unusual with the S&P 500 dropping more than the Nasdaq and much more than the Dow -the S&P is filled with both financial and energy stocks (light sweet crude dropped to $74.54 during the day and fell even further to $72.66 in Asian trading). While the Dow lost 7.9% or 733 points, the Nasdaq was down 8.5% or 151 points, the S&P fell 9.0% or 90 points. Only the Russell 2000 was off more, falling 9.5% (also representing a change, until recently small caps were outperforming big caps). The Dow broke 9000 again to close at 8578, although the S&P held above the 900 level to close at 908 and Nasdaq hasn't yet returned to the 1500s, closing at 1628. While at least one major news outlet reported this was the biggest drop in the U.S. since the 1987 crash (they were presumably taking about the S&P),it was actually only the biggest drop on the Dow since this September 29th.

Asia markets were more mixed than the U.S. The Nikkei in Japan was down over 1000 points again, dropping 11.4% or 1089 points. The close of 8458 was still above the 2002 bottom. Although, Korea dropped 9.3%, the Hang Seng rallied off a greater than 8% drop to close down only 4.8%. Surprisingly, Australia was off just 6.7%. Considering the concentration of natural resource stocks in this market and that miners had started selling down in Europe because of falling demand for commodities from China, this was a relatively good performance. Problems in Asia were followed on Thursday morning with European markets experiencing further selling so that combined with their trading on Wednesday, they experienced similar drops to those that had taken place in the U.S. The Russian market, actually opened for a change, was the worst hit Thursday with an almost 9% drop.

The U.S. markets are testing the lows from last Friday and need to hold at this level if a multi-week or longer rally is to take place. If the lows are broken more than a small amount, the next stop will be the 2002 bottom for the Dow and S&P 500 or around 7200 and 775 respectively and 1500 for the Nasdaq.

NEXT: Dr. Evil and MiniMe Loot the U.S. Treasury

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.