Why Quantitative Easing Won't Happen Now

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.

Quantitative easing is off the table for the Fed at the moment because of Friday's GDP report. According to the Commerce Department U.S. second quarter GDP growth was 1.5%, which is mediocre, but not bad enough to justify another round of money printing stimulus.

The stock market has been juiced up on a number of occasions since June on rumors of impending QE3.  There is always connected to phrase like "the Fed will do more to help the economy." The mainstream press never raises the question of why does the Fed need to do more to help the economy. If its program worked, the economy should have recovered. If they don't, doing more of the same thing isn't likely to accomplish much. A need for a third round of QE certainly implies that the first two weren't effective — at least in creating economic growth.  Could it be that printing money out of thin air doesn't really create lasting wealth?

All the U.S. fans of quantitative easing should look across the pond at what is taking place in the UK. Its second round of QE was started last October. Yet, Britain has fallen into and remains in recession. It doesn't look like it will exit the recession by the end of the year either. So much for QE being a panacea for saving an economy.

The best case for the ineffectiveness of QE though comes from Japan. Japan has maintained a zero interest rate policy since 1999 (the U.S. had done so since 2008). After ten years of economic decline and malaise Japan began implementing quantitative easing in the early 2000s. The ten years that followed were also a period of economic decline and malaise. The Japanese stock market peaked in 1989 and over twenty years later it is still down more than 75% from its high (investors who fought the Bank of Japan are glad that they did). The various stimulus programs raised stock prices temporarily, but they eventually fell to lower lows.

The stimulus bag of tools that central banks use is meant to be effective when there is a cyclical downturn in the economy. However, they will not work if the problem is structural — and that is exactly what Japan has been dealing with since 1990 and Europe and America are dealing with today (and probably since 2000). We are at the end of the Keynesian era, where credit can no longer be extended to greater levels without creating a subsequent collapse and the economy can't grow without continual stimulus from the central banks and massive government deficits. This is sharply evident in the case of Greece and Spain at the moment, but it is just as true in the U.S., UK and Japan.

The Fed can't just cavalierly decide to engage in more QE as is. It will need to do so if there is a major financial incident in the EU and it can't waste its bullets. It is inevitable that there will be such a crisis, and the Fed knows it. Mario Draghi's assertion on Thursday that the ECB will do everything possible to save the euro was nothing but meaningless bravado. The crisis in Europe has been going on for over two years now and despite numerous bailouts and half a dozen support schemes it keeps getting worse. During the entire time, the powers that be in the EU have said that they will do everything to save the euro. Sometimes "everything" isn't enough. 

The Fed also has the problem of looking political if it acts before the election. While it is true that the Fed has acted before elections in the past, it actions weren't being closely scrutinized back then. Nor were its policies politically controversial. The House of Representatives just passed the Federal Reserve Transparency Act of 2012 by 327-98. This legislation would produce a full audit of the Fed. While it might not pass the Senate this time around, eventually it will.

While the Fed will almost certainly be doing quantitative easing again, but it won't happen until either  the problems in Europe become a full-fledge global credit crisis or the U.S. economy is in an obvious recession. In either case, it will not be something to cheer about. 

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.

Stocks Rally on Bernanke's Admission That the Fed Has Been Ineffective

 

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.

Stocks rallied Monday based on comments that Fed Chair Ben Bernanke made at the National Association for Business Economics spring conference. Long-term interest rates however went up.

The Dow Industrials rose 100 points not too long after the market's open, apparently on the hopes that more quantitative easing might be coming. Bernanke made no such promise in his talk and it would be a stretch to have made that interpretation, but as usual mainstream media reports put a positive spin on Bernanke's remarks.

The takeaway that got buried was that the Fed Chair admitted that the economy remained weak and there has been no significant recovery yet. In relation to job gains, Bernanke specifically stated, "we have not seen that in a persuasive way yet." He followed up by saying that without much stronger GDP growth, the unemployment rate was unlikely to fall much further.

Essentially, Bernanke's remarks are an admission that the Fed's policy of zero percent interest rates for almost three and a half years now and two rounds of quantitative easing (combined with trillion plus dollar budget deficits for four years in a row) have been a big dud. The average American however wouldn't know this based on what they read in the papers and hear on TV. There have been three years of reports from the mass media informing the public about the "recovery" that is taking place.

Every time Bernanke has made comments, whether specific or indirect, about more stimulus from the Fed, stocks have rallied strongly — one of the few things that easy money has accomplished. The Fed has also been successful in driving interest rates down, although this seems to be changing. Long-term rates rose on Bernanke's remarks even though the Fed's Operation Twist program is still ongoing. Mortgage rates, after being at all-time lows, rose above 4% last week.

Stock traders make their decisions on very short-term time horizons. Liquidity drives stock prices up, regardless of what else is going on in the background. Bernanke has delivered on greater liquidity on a massive scale since the Credit Crisis in 2008. Not surprisingly, the stock market has had a nice rally during that time. Liquidity was also behind the previous real estate market rally in the first years of the 2000s that led to the Credit Crisis and before that the late 1990s tech stock bubble that was followed by an 80% crash in the Nasdaq. There will be serious consequences again this time around, but that type of long-term thinking isn't an important consideration for most traders.

Investors should ask themselves,: If the Fed's ZIRP (zero interest rate policy) and money-printing quantitative easing are such good ideas, why haven't they been done before and why don't we just always do them? While ZIRP is historically unusual, money-printing is nothing new. It's been done hundreds of times (if not thousands) and has always been followed by major inflation and frequently hyperinflation. The risks of these policies are extreme and this is why they have been avoided by responsible governments throughout time.

Ben Bernanke is not worried about inflation though. He claims he hasn't seen it yet (obviously he doesn't go food shopping or buy gas for his car). Of course, U.S. government statistics are manipulated so it is difficult for them to show inflation except when it is really elevated. Inflation is also one of those things that once it shows up, it is difficult to stop — sort of like a tsunami.

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.

Recovery Goes Jobless in August

 

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.

More evidence that the U.S. economy is grinding to halt was provided by the August non-farm payroll numbers today. According to the BLS (the Bureau of Labor Statistics), the U.S. economy produced no additional jobs in August, the unemployment rate remained unchanged at 9.1%, and average hourly earnings declined. The June and July numbers were revised downward with 58,000 less jobs than originally reported.

Almost every category lost jobs in August except for health care and social assistance, professional and business services, and mining and logging. Health care and social assistance added 30,000 jobs. This category was the one perennial gainer during the Great Recession and its aftermath. Even though many of these jobs are government related, they are classified as private sector by the BLS. Professional and business services added 28,000 jobs. A footnote in the report states that this number includes jobs from other unspecified categories (could those be government jobs that are included to make it look like private sector employment is better than it actually is?).  Mining and logging added another 6,000 jobs.

Year over year comparisons were even more dismal than the monthly numbers suggested. There were only 400,000 more people employed in the U.S. this August compared to August 2010 (see Household Data, Summary Table A on the BLS website for the details). This is the actual net number of new jobs created in the last year. This has averaged 33,000 a month. At the same time, the non-institutionalized civilian population has been growing at almost 150,000 per month. Yet, during this time period, the unemployment rate fell from 9.6% to 9.1%.  This has happened not because a lot of jobs were created, but because approximately 2.3 million people left the labor force.

Despite close to zero percent interest rates and the trillions of dollars of stimulus thrown at it, the U.S. economy seems incapable of producing jobs. The only thing that has prevented the reported unemployment rate from rising into the double digits is the large numbers of people exiting the labor force (they are not counted as unemployed). This doesn't happen when a real economic recovery takes place. People rush into the labor force as jobs become more plentiful. Unemployment rates also don't remain at the 9% level if the economy is doing well as has constantly been reported. Mainstream press claims to the contrary,  a "jobless recovery" just doesn't exist in the real world (nor are there tall midgets or thin obese people). Based on the jobs numbers, investors should assume that the U.S. has been in a chronic state of recession and chronic stimulus is needed to keep things from getting worse.   

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide
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.
 

ZIRP Failed in Japan, So They're Doing 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. 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 what is being billed as a surprise move, the Bank of Japan lowered interest rates back to zero and is planning on more quantitative easing. Along with an unending number of stimulus programs in the last twenty years, Japan has done it all before. If these economic policies actually worked, it wouldn't have to be doing them again. U.S. policy makers are following Japan's lead.

On October 5th, the BOJ announced that it cut interest rates to 0.0% to 0.1%. Rates had been 0.1% since December 2008. Japan had previously maintained a zero interest rate policy (ZIRP) between 2001 and 2006. The U.S. Fed funds rate has been at 0.0% to 0.25% since December 2008. The Bank of Japan also announced a $60 billion quantitative easing program that will purchase government bonds, commercial paper and corporate bonds. Last month, the Japanese government announced a 915 billion yen stimulus package. The Japanese economy has been in the dumps for 20 years and stimulus programs, super low interest rates, and quantitative easing hasn't fixed it. Yet, despite encountering failure over and over and over and over again, the government still repeats these same actions with the belief that somehow they will work this time.

The Japanese government was the most important player in creating the country's massive stock market and real estate bubbles in the 1980s. The last twenty years has been the hangover from those bubbles. Incompetent government policy both led to the creating of the problem and then prevented it from being fixed. It took over 18 years for the stock market to hit a low (assuming it doesn't go lower in the future). Government policy delayed the inevitable, but didn't prevent it. Japan now has the highest government debt to GDP ratio (over 200%) among developed countries. Its debt is so high from its repeated stimulus programs that it makes teetering-on-default Greece look fiscally conservative. The inevitable outcome of Japan's actions will be collapse and not recovery.

In dealing with the Credit Crisis and its aftermath, the U.S. has followed Japan's lead. Just yesterday, Fed Chair Ben Bernanke said the U.S. central bank should engage in more quantitative purchases of treasury bonds because it would "ease financial conditions". Moreover, Bernanke claims the first round of quantitative easing (also known as money printing) was a major success. The figures certainly don't show that this is the case. U.S. unemployment was around 7% when quantitative easing began the first time and is now around 10%. The Fed doesn't actually claim that economic conditions became better, since the obvious facts make that impossible, but instead claims things would have been much worse without their policy actions. How do we know things wouldn't have been better?  How do we know that things didn't become better in the short-term, but will become much worse in the long-term? We do know what has happened in Japan because of the same policy actions that the Fed is following. But like the Japanese, the U.S. Fed apparently also believes in miracles.

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Japan Leads Global Stock Market Drop

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 Nikkei closed at 8995 last night, 77% below its final price in December 1989. The rising value of the yen is what is causing the stock market drop. The yen just hit a 15-year high against the dollar and 9-year high against the euro. A richly valued yen is a big negative for Japan's export-based economy.

Japan has been trying to grapple with its real estate and stock market bubbles from the 1980s for over twenty years now. Its approach has been a zero interest rate policy (ZIRP) and an unending serious of stimulus programs (it was recently announced yet another one is being considered). The United States is currently following these same failed policies, but Washington is expecting that somehow they will work here. It is true that the U.S. real estate and stock bubbles in the 1990s and early 2000s were not nearly as bad as those that took place in Japan earlier. So maybe it won't take U.S. stocks 19 years to hit their lows (that would be 2026 by the way) as was the case for the Nikkei - or at least the case for the Nikkei so far. It cannot be said for certain that the 6695 low in March 2009 will hold.

Being the perennially weak sister, problems with global economic imbalances are showing up first in the Japanese market. The Nikkei first broke key support at 10,000 in mid-May.  It managed to trade just above that level for a few days in June, but then fell back and has traded below it ever since. The chart is very bearish.  U.S. investors need to worry about the Dow Industrials holding the same 10,000 level. The Dow is only slightly above this level in today's morning trade. The Dow Transportation Average is also on the verge of a significant breakdown. The Dow Industrials closing and staying below 10,000 at the same time that the Transportation Average gives a sell signal would be a strong negative for U.S. stocks. The S&P500, the Nasdaq, the small-cap Russell 2000 and the Dow Industrials have already given sell signals in July.

The other major development in Japan during its two lost decades was a massive bond bubble, which caused even long-term rates to approach zero. This same type of bubble is now developing globally, although the powers that be are denying that this is taking place. When massive government stimulus causes interest rates to drop, it is because of a liquidity trap - money does not flow into the real economy and so the economy doesn't significantly benefit from stimulus. Eventually a steep depression develops (what has prevented the depression phase so far in Japan is that its population had enough savings to pay for the last 20 years of stimulus - sort of like rich people who have no income, but still manage to live well by slowly selling off all of their assets). The only way out of this depression is to reignite economic growth with inflation. The Japanese have yet to figure out how to do this and U.S. monetary authorities are still reluctant to pursue this option.

Disclosure: No positions

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Japan's Economy Shows Limits of Keynesian Policies

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.


Second quarter GDP figures show that the Japanese economy has fallen behind China's and is now only the third largest in the world. Japan has engaged in 20 years of massive government stimulus programs and kept interest rates low, but this has failed to reignite GDP growth. Instead, its economy continues to slowly sink.

In the 1980s, Japan was an unstoppable economic juggernaut that everyone feared. It all ended when a spectacular stock market and real estate bubble blew up in the early 1990s. These bubbles were the ultimate outcome of excessive stimulus over many decades. Initially, that stimulus acted to revive the Japanese economy from the ruins of World War II. In the end, huge asset bubbles resulted. These collapsed throughout the 1990s and the first decade of the 2000s. One government stimulus program after another during that time only had temporary impact on the economy. As soon as the stimulus ended, economic growth disappeared. The U.S. is currently finding itself in the same situation.

A continual backdrop of close to zero short-term interest rates, known as ZIRP - zero interest rates policy - also did not revive the economy. Japanese government longer-term bond interest rates also collapsed, with the 10-year rate falling below 0.5% at one point. Extremely low government bond rates indicate too much liquidity exists in an economy and the government is getting too big a share of it. Businesses can be starved for capital under such circumstances and this in turn limits economic growth instead of stimulating it. This same pattern is emerging in the United States right now. The two-year bond interest rate has been at record lows for weeks. Rates fell to 0.48% this morning. The lowest rate during the Credit Crisis was 0.60%.

Keynesian economics became the almost universal approach for economic policy in the developed economies after World War II.  Keynes recommended initiatives, stimulus during a downturn and paying off the stimulus debt during the recovery, got horribly mangled to more and more stimulus during a downturn and somewhat less stimulus during a recovery. This is essentially an ongoing money-printing scam. Like many scams, it works well as long as it doesn't get out of control. Eventually though some huge crisis becomes inevitable after decades of excessive stimulus and the economy falls apart. Stimulus no longer works then. After two decades, the Japanese have failed to realize this. The economic establishment in the U.S. is equally oblivious.

China is only in the early stages of the stimulus manipulation of its economy and is now the world's current economic powerhouse. It surpassed the UK (the world's largest economy until the U.S knocked it out of the box around 1880) in 2005, Germany in 2007, and now Japan in 2010. Media reports in 2009, estimated that China would overtake Japan in 2012 or 2013.  Time seems to be speeding up. The Washington Post also predicted last year that China could overtake the U.S. as early as 2027, which was much sooner than other predictions, which are as late as 2040. Even 2027 might prove to be optimistic however.

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.

July Payroll Report Marks 3 Years of Job Losses

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. lost 131,000 thousand jobs in July. It has now been three years since the first job losses appeared in August 2007. Despite over three trillion dollars in government deficit spending since then, the employment situation has yet to turn around.

While job losses date back to August 2007, they didn't become consistent until 2008 and 2009.  Every month in that two-year period, except November 2009 had a decline in payrolls. Job gains were reported between January and May 2010, with payrolls increasing over 200,000 in March, April and May. The U.S. economy needs to add 200,000 jobs a month just to stay even because of new entrants into the labor force (recently the mainstream media has downgraded this long accepted number to 100,000 in an effort to make things look better). Unfortunately, most of those jobs added in the spring were part-time temporary Census positions and now those people are being fired, so job losses have returned. There was a loss of 221,000 jobs in June - revised downward from the originally reported loss of 125,000.

The BLS (Bureau of Labor Statistics) reported this month that the private sector added 71,000 jobs. Only three sectors accounted for most of these 'gains' - Health Care, Motor Vehicles, and Transportation and Warehousing. Health care and Social Assistance added 27,000 jobs. Health care has been the only sector to continually add jobs during the downturn. Government and Education were the other two categories that frequently added jobs. Education and Health Care jobs mostly come from the government or are paid through government programs and should not be considered private sector. Motor Vehicles gained 21,000 jobs through the magic of seasonal adjustments, not by actually hiring more workers. Transportation and Warehousing added 12,000 jobs.

The headline unemployment rate (U-3) for July was reported as 9.5%. This compares to 4.6% rate in August 2007. Including forced part-time workers and some discouraged workers (U-6), sometimes referred to as the underemployment rate, the July 2010 rate was 16.5%. The reported unemployment rate would have been much worse if close to a million people didn't supposedly leave the U.S. labor force in May and June of this year. This was a truly amazing finding considering as many as 6.6 million American students graduated from high school and college in those two months. While all of them didn't enter the labor force, most of them that did were without jobs when they graduated. Where are they in the statistics?

The U.S. labor situation began to deteriorate three years ago. Since that time, trillions were spent in bailouts, there has been approximately $3.5 trillion in federal deficit spending, and the Fed has kept interest rates as zero percent starting in December 2008. The public was promised over and over again that each program would make things better. The stock market has rallied on that good news over and over again. Empty promises and fantasy statistics will only work for so long however. At some point we will find out for just how long.

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.

Consumer Confidence Still Worse Than Last 4 Recessions

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


Fed Chair Ben Bernanke said yesterday that he expected a recovery in consuming spending. Media headlines blared the good news and stocks rallied. The details of 'sometime in the next several quarters' got lost in the shuffle however. Nor did the media report that Bernanke has rarely made a prediction that has turned out to be correct.

An examination of where consumers are now compared to previous recessions can help shed some light on any impending consumer recovery. The Conference Board's consumer confidence number was 50.4 in July. The highest number in the 'recovery' so far was 63.30 this May. The number 90 is used as the dividing line between a lackluster and healthy economy. U.S. consumers haven't registered confidence levels anywhere near that level since December 2007 when the recession began. Confidence was 90.6 that month and then fell and has remained below 90 since that time.

Consumer confidence behaved differently before the 1990/91 recession than afterwards as is the case for a host of economic data. It was after 1990/91 recession when the first 'jobless recovery' took place. Prior to that time, unemployment bottomed during the same quarter that GDP bottomed. Only after U.S. government statisticians started making 'adjustments' to how the economic numbers were calculated in the 1980s, did such impossibilities as 'jobless recoveries' (an oxymoron if ever there was one) start to occur. Consumer confidence is affected by unemployment, so the confidence numbers would reasonably be expected to begin to lag the official recession dates as well.

The two recessions before the 1990/91 recession took place between January 1980 and July 1980 and July 1981 and November 1982. Consumer confidence bottomed in May 1980 at 50.10 (almost the same as the current value) right in the middle of the 1980 recession. The low number for the 1981/82 recession was 54.30 in October 1982, just before the recession's end. The worse point for consumer confidence in the 1982 recession was better than the July 2010 reading. The recovery we are supposed to be in now wouldn't have been recognized in the 1980s.

The 1990/91 recession took place from July 1990 to March 1991. During that period, the low point in consumer confidence was 55.10 in January 1991. That wasn't the ultimate low however. That was 47.30 in February 2002 - eleven months after the recession officially ended. A slow to improve employment picture kept consumers in a subdued state.

The 2001 recession was unique in that it was the only recession in history where consumer spending didn't decline. Since consumer spending accounts for around 70% of U.S. GDP, it is very difficult for a recession to take place at all is there isn't a drop in consumer spending. During the official dates of the recession, March 2001 to November 2001, the low point in consumer confidence was an amazingly high 84.90 in November. The ultimate low was 64.30 in March 2003 -relatively good for a recession bottom. The low point for the 2001 recession is almost the high point that we have experienced in the current recovery.

Recently, the low point in consumer confidence was 25.30 in February 2009. That is not just the bottom for the current recession, but the all-time low (the all-time high was 144.70 in 2000). After committing trillions of dollars for bailouts, $3 trillion in federal deficit spending in the last two years, and zero interest rates since December 2008, we have now managed to achieve a consumer confidence number that is worse than or around the low point for the last four recessions. From the consumer's perspective, government efforts to handle the current downturn look like the most expensive failure in history.

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.

Five Recessions the Fed Failed to Predict

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 Federal Reserve is confident that a double-dip recession won't be taking place. One of the major forecasting tools they use to determine this is yield curve analysis. This approach has never really worked and can't possibly work in a ZIRP (zero interest rate policy) environment.

According to their yield curve model, the Fed is predicting there is only a 10% chance of a recession in the near future. Before breathing a sigh of relief, investors should ask themselves how well this model has worked in the past. Here are the relevant questions and answers:

Did the model accurately predict the 2007-09 recession, the worst since the Great Depression?  Well, no it didn't.

Did the model accurately predict the 2001 recession? Err, well no it didn't do that either.

Did the model accurately predict the 1990-91 recession? Well, it missed that one as well.

Did the model predict the huge downturn in 1973-75?  Well no, it failed then too.

Did the model predict the 1969-70 downturn?  No, that was another one it missed. 

The only time the model predicted a greater than 50% chance (and it was only a little above 50%, so the prediction was basically no better than tossing a coin) of a recession was for the 1980 and the 1981-82 recessions. This had nothing to do with the double dip nature of those recessions, but was a factor of the high interest rate environment that made it possible for short-term interest rates to be higher than long-term rates. It is quite obvious that the higher interest rates are, the better this model works. The model in fact can't work at all when short-term rates are close to zero as they are now. In such circumstances, the yield curve can't invert because nominal long-term interest rates would have to be negative - an impossibility. So with our current low interest rates, the Fed model will never predict a recession.

As usual when the economy is falling apart, the Fed is making its usual positive comments of how things are really in good shape and the public should ignore all the reality-based signs of trouble. Dallas Fed President Richard Fisher was on CNBC on Wednesday and stated with confidence, "while the recovery has slowed, it is unlikely the U.S. will fall back into recession". The Fed was also very confident of avoiding the Great Recession as well and continued to say so long after the recession had begun.

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.

Fed Statement Not so Bullish This Month

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. Fed ended its two-day meeting today and left its zero interest rate policy in place. While this was unsurprising, the statement the Fed issued provides investors with some insight into its current thinking on the economy. It was much less bullish today than in April, but still contained a lot of spin and denial. 

In past articles on March 17th and April 29th, I have discussed how the Fed has waited two to three years after the end of a post war era recession before raising rates and that this would be happening again.  That would mean the earliest Fed rate rise would take place around July 2011. Nevertheless, at that time many economists at the biggest U.S. bond dealers were predicting that a rate rise was likely at the Fed meeting this June. Since then, an article by the Federal Reserve Bank of San Francisco has appeared that suggested that the Fed should possibly wait until 2012 before raising rates (a three year period after the end of the recession). After reading that, the highly paid economists at the too big to fail institutions changed their tune and now almost all of them are predicting that the Fed won't raise rates until next year or even 2012. Your taxes were used for government bailout money to pay the salaries of many of these 'can't think for themselves' economists.

Almost all of these same economists are also parroting the Federal Reserve mantra that there can't be inflation while resource slack exists in the economy. One chief economist for a major bank recently stated, "inflation will hardly be a threat in an economy where massive labor-market slack is suppressing wages". Was he discussing the U.S. where unemployment is around 10% or Zimbabwe where it reached 94%? Of course, everyone would say it must be the U.S. because Zimbabwe had the second worse hyperinflation in world history. Truly massive resource slack always accompanies hyperinflation, but don't expect to get facts like that from the typical mainstream economist. They're paid to provide views that help their institutions make money, not to give the public the facts.

In its April meeting, buffoonish Ben and his stalwart crew of fed governors broke out the cigars to congratulate themselves on the great state of the U.S. economy.  The Fed statement released after the meeting was filled with glowing statements about the economy such as: "economic activity has continued to strengthen and the labor market is beginning to improve", "growth in household spending has picked up recently", "business spending on equipment and software has risen significantly", and "financial market conditions remain supportive of economic growth". There was one fly in the ointment however, " bank lending continues to contract". The Fed didn't seem too concerned. After all that only impacts the real economy, small and medium size businesses, and the guy on Main Street. Lack of lending can also cause recessions however. The Fed has apparently woken up to this unpleasant annoyance recently and behind the scenes reports indicate that it has been studying what to do in case the U.S. economy takes a second nosedive.

The Fed statement from the June meeting wasn't quite as optimistic after a number of recent economic releases indicated a weakening U.S. economy. Before the meeting ended today, it was revealed that new homes sales plunged 33% to record low level in May. The May employment report was unimpressive and indicated most new jobs were temporary and coming from the Census. Despite the obvious economic deterioration taking place, the Fed said in today's statement, "Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually".

The Fed continued to maintain that household spending was increasing, but admitted that it was constrained by high unemployment, lower housing wealth and tight credit (that certainly sounds like something that's going to be taking off in the near future). The Fed also stated that investment in commercial real estate continues to be weak and that "employers remain reluctant to hire". It acknowledged that "housing starts remain at a depressed level" (it would be hard to argue that something that was at the lowest point ever was anything but). The Fed further stated that financial conditions had become less supportive of economic growth and then blamed the Europeans. Moreover it reiterated once again that "bank lending has continued to contract in recent months". The Fed then ended its statement still upbeat about the future.  Maybe they just don't think recession is such a bad thing after all.

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.

Fed Will Leave Rates at Zero Until Inflation Shows 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.


The Federal Reserve left the fed funds rate in the zero to 0.25% range at its April meeting. This is the 16th month that the Fed has maintained rates at an all-time low. While the Fed was a bit more upbeat about the economy than it has been at recent meetings, it still pledged to keep rates near zero "for an extended period of time".

When it comes to the Fed and other government representatives, investors would be best off by paying attention to what they do and not to what they say. The Fed was certainly more upbeat in its statement from the April meeting than it was in previous meetings. It noted that "economic activity has continued to strengthen and that the labor market is beginning to improve","growth in household spending has picked up recently" and  "business spending on equipment and software has risen significantly". You would think happy days were here again and short-term rates will be 5% before you know it. Well maybe not, it turns out.

While strong economic growth leads to inflation, apparantly there is no risk of that (inflation that is) as far as the Fed is concerned. The Fed went on to say that "with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time". So the Fed seems to be talking out of both sides of its mouth. Either growth is not sustainable in the long-run and it thinks this will keep inflation subdued or the Fed has pumped so much money into the financial system that this is creating economic expansion (at least for the moment) and inflation will follow.

The first scenario was seen in Japan during the last two decades, especially after its two-year recession in the early 1990s. The economy was supposedly recovering nicely without inflation for a few years. Instead, it gradually fell into the abyss and a deflationary spiral. In the second case, uncontrollable inflation is possible - and this can take place with a great deal of resource slack. Rapidly declining and eventual collapse of resource utilization is the marker of hyperinflation. Fed chair Bernanke should tell Zimbabwe that it couldn't have possibly had the second highest inflation rate in world history, sextillion percent, because it had an unemployment rate of 94%. Weimar Germany, with a mere 100 trillion percent inflation rate, had unemployment that reached almost 25%.

The Fed statement also had two telling comments that provide significant insight in the Fed's thinking. These were, "financial market conditions remain supportive of economic growth" and "bank lending continues to contract". Taken together these indicate that the financial conditions that are supportive are the Fed's low interest rates and the high prices of stocks - the paper economy. While the paper economy is going great, as indeed it was before the Credit Crisis and during every other bubble in history, the real economy is struggling. It can't function well without adequate credit from banks. In other words, the Fed's positive view of the economy is based on economic make believe.

If the Fed really believed the economy was improving, it would be raising rates or at least getting ready to do so and not say it was maintaining its ZIRP (zero interest rate policy) for a long time. As I have documented in previous articles, there is usually a two to three year lag from the end of a recession until the Fed starts raising rates. If we assume optimistically that the recession ended in July 2009, that would take us until at least July 2011 before rates went up. Any rate rise before that date would indicate significant inflation risk and a rate rise after July 2012 would indicate a serious deflation problem.  In either case, the Fed's response will be too little, too late.

Disclosure: None Relevant

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.

More Government Stimulus and More Debt

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 future of U.S. fiscal policy can be seen in Japan today. The Japanese government announced on December 8th a new $81 billion stimulus package to prop up their sagging economy. This is only the latest of a long string of stimulus measures that have been enacted since the early 1990s. All of them worked for only a short time and then had to be followed up by new stimulus measures. The same day, President Obama was announcing a new job creating stimulus package for the U.S., even though the U.S. economy is supposedly already in recovery and the December jobs report indicated an improved employment picture. Investors should keep in mind that action speaks louder than words (and questionable statistics).

The latest Japanese stimulus package will be used to prop up regional economies, for public works projects (a perennial favorite of their failed stimulus packages for more than 15 years), for energy efficiency initiatives and loan guarantees for small businesses. In contrast, the Obama plan will focus on helping small businesses, energy efficiency initiatives, and public works projects involving transportation infrastructure. Looks like a copy of the Japanese approach to me. The idea is to pay for it with $200 billion of unused TARP funds. The only impediment to that is that the original bill specified that this money should be used for reducing the U.S. budget deficit. The Obama administration clearly has no intention of doing this and the implications for an already out of control budget deficit and spiraling U.S. national debt are clear.

The Japanese were once fiscally responsible, but that ended long ago with the failure of their banking system in the early 1990s. The picture in the U.S. for 2007 and 2008 is quite similar - in regard to the banking failures that is, not the fiscal responsibility. Despite an almost endless succession of stimulus plans, the economy has fallen into recession over and over again. This should be thought of as the modern Keynesian version of a depression. The cost of all the government programs has been tremendous. The ratio of public debt to GDP in Japan is estimated by the IMF (International Monetary Fund) to be 218% this year. This is the highest by far of the top economies. It is expected to rise to 246% by 2014. The Japanese budget deficit this year is expected to exceed tax revenue. They have only managed to get away with this by keeping interest rates close to zero for more than a decade. Time is running out for them however. They are already engaging in money printing to pay for government operations and this will eventually turn their long running deflation into a very serious inflation problem.

The U.S. which is at the earlier end of the 'banking crisis with never ending bailouts' curve currently has a public debt to GDP ratio that is supposedly only 83% (if you adjusted the official government GDP numbers to something more realistic, it would be 110% or more). The budget deficit in fiscal 2009 was $1.42 trillion - and that was considered good because it was less than expected. The national debt increased by $1.9 trillion however. Intergovernmental transfers and off-balance sheet items account for the discrepancy. The U.S. national debt is now over $12 trillion and rising rapidly. Keeping short-term interest rates close to zero allows this to continue since 44% of the debt is funded with bills of one-year duration or less. An examination of the 2010 U.S. federal budgets shows that 40% of the funding is expected to come from borrowing. Money printing would be included in the borrowing category.

There are worries in the Eurozone about Portugal because it expected to have a public debt to GDP ratio of 90% by 2011. The official U.S. numbers could be just as bad (the actual ones much worse). As the largest economy in the world and the issuer of the world's reserve currency, the U.S. has a lot more leeway in fiscal irresponsibility. The limits of that leeway will probably be revealed in the next few years in Japan.

Disclosure: Not relevant.

NEXT: Is the Gold Correction Over

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 Wants to Play Good Bank, Bad Bank

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 buzz on the wires yesterday was talk that the Obama administration is considering a good bank, bad bank policy. This would entail the government becoming the bad bank (like somehow that hasn't already happened) by buying up most, if not all, the toxic assets in the banking system. For anyone who missed it, this was the original intent of the biggest waste of government money of all time TARP program (Troubled Asset Relief Program). The Federal Reserve has also been doing this is various ways as well. Yesterday's reports said that the federal government would take on an (additional) trillion dollars in bad debt. As usual, the downside risk of major inflation that would result from implementing this policy was ignored by the media.

There was plenty of other 'good' news for the market to rally on as well. The House passed an $819 billion stimulus bill (it still has to be approved by the Senate). The bill would cut taxes at bottom instead of the top of the income structure (the most effective way to stimulate the economy), provide billions of dollars for infrastructure projects, help states balance their budgets, and provide relief to people who've lost their jobs or homes. Getting in touch with their Herbert Hoover roots, every Republican in the House voted against it. Just as a reminder, all the Republican leadership supported TARP and provided the votes from the rank and file to insure its passage.

The Fed also held up its end of the bargain yesterday as it two day meeting ended. To no ones surprise, it announced that it was keeping its zero interest rate policy in place. The Fed also reiterated that it will continue to buy mortgage-backed securities and other assets. The stock market rallied on this and all the other highly inflationary news and and as been the case for many months, the U.S. dollar counter intuitively rallied (only counter intuitive if you don't assume the government is manipulating it behind the scenes). Beaten down financial stocks led the way up.

Wells Fargo was one of the biggest winners, rising 30%. It only lost $2.55 billion last quarter.... or so it claims. Those results didn't include its Wachovia purchase, which would have increased Wells Fargo's loss by $11.2 billion (based on the reported figures, the reality is actually much worse). The bank took a whopping $37.2 billion in credit write downs at Wachovia. Even without the Wachovia losses, Wells Fargo still lost 79 cents a share. Analysts were completely off the mark as they have continually been since the Credit Crisis began and were expecting a 33 cent gain. While this should have tanked the stock, it didn't. Wells announced it was keeping its dividend and wouldn't need any more TARP funds (which is has been using to pay its dividend), so the stock shot up. Whoever said Disney was the king of fantasy, never looked at the U.S. banking system.

NEXT: GDP - Report is Bad, Reality Worse

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.

East Meets West, The Triumph of Communo-Capitalism

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

Our Video Related to this Blog:

China lowered its interest rates last night for the fourth time since September. It's not yet close to zero interest rates like the U.S. and Japan, but will be be continuing to approach that level next year as will Great Britain. In China the government directly owns the banks and meddles in banking policy. While in the U.S. and Britain, it would be more appropriate to say that the banks own the government, or at least the central bank, and can directly meddle in the government policy that impacts them. In the end is there that much difference? The result is a financial system rife with corruption that engages in economically absurd behavior, which the government then has to bail out.

Final figures for third quarter GDP have just been released for the U.K. and the U.S. According to the official figures (take these with a big grain of salt and assume the reality is worse), the U.K. economy declined by 0.6% and the U.S. economy by 0.5% annualized last quarter. In the U.K. this is the biggest decline since the recession of the early 90s and in response the central bank has dropped interest rates to the lowest level since 1951. For the fourth quarter, a decline around 1.0% is expected in the U.K, while in the U.S. the consensus forecast is the economy will fall off a cliff with at least a 6.0% annualized drop - something worthy of a depression. As a reminder, both Federal Reserve chair Ben Bernanke and Treasury Secretary Paulson testified to congress in September that if the $700 billion Wall Street welfare bill, better known as TARP, wasn't passed, the U.S would face a severe recession. At the time, New York Investing said a severe recession was inevitable no matter what.

TARP is an example of fiscal profligacy, and while it is one of the worst examples, it is by no means the only one. Supporting all of the government's spending is the Fed's out of control money printing, which even mainstream economists are now starting to mention (better late than never I guess). Charts from the St. Louis Fed that New York Investing first showed in October are now getting some press attention. One of these charts, the U.S. Monetary Base shows an 86% increase during 2008, but around a 1000% increase annualized in the last 3 months. Another chart, Adjusted Reserves, shows this indicator exploding from $100 billion to $700 billion since mid-September. These charts (and around a dozen others) are so damaging that I am expecting they the numbers will either be 'adjusted' in the future or the Fed will stop making them available altogether as it did with M3 a few years ago.

While deflation is the headline issue today (based on very little reality), some economists are starting to point out that the Fed and the rest of the world's money printing central banks are going to have a lot of trouble draining all of this liquidity once there is economic recovery. History indicates that this indeed does not happen, but a hyperinflationary spiral is much more likely. This is just starting to dawn on some mainstream economists (but by no means all). The New York Investing meetup laid out this scenario in its September 2007 (yes, 2007) meeting -and so far events seem to be unfolding as predicted.

NEXT: Changes in Wall Street Firms That Led to the Credit Crisis

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 Enters Buy Zone

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:

At the extremes of sentiment, there is nothing more bullish than a bearish commodity. When oil got to around $12.50 a barrel in 1998, surveys showed that only 3% of traders had a positive price outlook . Within days it was trading over $17 a barrel. The turnaround was sudden and explosive. The few contrarians who saw the opportunity made a lot of money in a short period of time. It turned out that $12.50 wasn't the low however, that was in the $10 range and it took a few more months to reach it. Similar behaviour is possible this time around.

Nymex oil fell as low as $33.44 in overnight trading. This represented a sharp drop in 24 hours after more than five long months of steep selling. It is common for markets to have six month sell offs. It is also common for the selling to end with a big drop at the end. Keeping that in mind, I started buying OIL today, even though I do not think oil has hit its low just yet. I suspect that this will be somewhere between $22 and $28. The set up for a good short term trade or the beginning of accumulating a position seems to exist though.

As I have said many times, the bottom price of oil will be determined by the cost of production. This is much higher than it was in 1998 because there is less easy to get to oil available. Much of the oil that has come on line in the last few years is oil that is expensive to produce, such as tar sand oil from Canada. This supply will start disappearing with oil selling in the 30s and the loss of supply will become extreme in the 20s. While you can find any number of news articles about how the demand for oil is going down because of the economy, you will see little about the supply also decreasing, which is the bullish side of the equation. Economic arguments that deal with the demand picture without mentioning supply are meaningless and should always be discounted.

Oil is one of the four pillars of inflationary investing (along with gold, silver, and food commodities). Keep in mind that it is priced in U.S. dollars and the Fed basically said this week that it intends on printing any amount of currency necessary to get the U.S. out of its current depression (my word not theirs). Just last night the BOJ in Japan lowered interest rates to 0.1%. England will likely institute ZIRP sometime in 2009. With the world's central banks engaging in hyperinflationary policies, it is only a matter of time before the price of inflation-linked commodities skyrocket. You just need to time your entry and wait for that to happen.

NEXT: Bailouts: It's Not Just Banks, It's not Just the U.S.

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.

Welcome to 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.

Our Video Related to this Blog:

Yesterday ZIRP (zero interest rate policy) became a reality in the United States. The Fed cut its overnight funds rate to a range of zero to 0.25 percent. The New York Investing meetup predicted such a possibility in the fall of 2007, when I first said that if things became bad enough the Fed would lower interest rates to zero. In our December 4th meeting two weeks ago, we predicted that 2009 would be the year of ZIRP with the Fed lowering interest rates to around zero and keeping them there. Things apparently have become bad enough.

Yesterday, the Fed bluntly announced that it would print as much money as necessary to deal with the current economic contraction (read depression). And this has allowed the American press to finally acknowledge in its articles that the Fed has been printing money to cope with the credit crisis - something that I have been repeating like an obsessive-compulsive parrot for more than a year. Since this September alone the Fed's balance sheet has more than doubled (that's in only 3 months... think about that) from around $900 billion to more than $2 trillion. With its new programs to buy up worthless mortgage-backed securities that number will be up to $3 trillion. You may safely assume it will go much higher after that.

The authorities and their allies in the mass media assure us that we needn't worry about the obvious (hyper)inflationary implications of the Fed's moves. It is claimed that deflation is the big problem facing us (and War is Peace and Hate is Love, etc. see Orwell's novel 1984 for similar government assertions). The facts, as well as simple common sense, indicate otherwise. The government's own highly manipulated numbers which grossly understate inflation, still indicate prices are going up. The big drop in price increases can be traced to falling oil prices and literally nothing else. Since commodities can only fall to their cost of production, oil is not likely to fall much further and the 'deflation' threat could disappear overnight. The market will then have to deal with a mountain of government printed money instead.

Apparently we needn't worry about that either. While the economic establishment admits that the Fed's actions are potentially dangerous, former Fed Vice Chair Alan Blinder himself said yesterday "If that much money is left in the monetary base, it would be extremely inflationary", it claims the money can be withdrawn as the economy recovers and then everything will be fine. The German authorities said the same thing about their money printing in the early 1920s. But every time they tried to stop it, there was an immediate negative reaction in the economy, so they restarted it again immediately. The U.S. Fed in the 2000s will be no different. Money printing is a form of addiction and addicts will do anything to maintain their high until they hit bottom.

NEXT: The Truth About Deflation - A Crude Analysis

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.

Economic Predictions for 2009

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:


Last night in its December 4th meeting, the New York Investing meetup released its economic predictions for 2009. The talk began with a review of the 2008 predictions made at the Dec 12, 2007 meeting and published on the website that day (can be found in the file section in the file, "Japan 1992, U.S. 2007", see: http://investing.meetup.com/21/files). All the predictions made for 2008 were accurate at least to some degree, with the prediction of recession and and government bailouts for financial institutions being particularly spot on. If the 2009 predictions are equally accurate, it's going to be a very rough year.

It is our belief that the economy next year will descend from recession to depression (this is no official declaration for depressions as there is for recessions). As part of that scenario, unemployment is likely to rise toward and possibly into the double digits (depends on how much the government fudges the figures). Bankruptcies will increase dramatically, particularly for retailers, auto related companies (suppliers, dealers, etc.), home builders, and small businesses and individuals. Shrinking consumer credit and rising defaults on credits cards will continue to damage the economy. The real estate sector will not recover and the commercial component will suffer more than the residential. The bailout for banks and brokers will continue and additional money will be have to pumped into the failing institutions that have already received government money. Bailouts are likely to be needed for big players, like Morgan Stanley, Goldman Sachs, Bank America, and General Electric. Failures of small and medium banks will rise.

The U.S. government will react to this economic deterioration in 2009 by lowering interest rates even further, essentially instituting ZIRP (zero interest rate policy), and by ballooning the deficit and the national debt. Bailouts will expand beyond companies to states and municipalities. Some municipal bonds are likely to default if not propped up as well. The feds are going to have to support money market funds again next year, just as they have done twice so far in 2008. They may have to bail out the market system itself with the possibility of an exchange failing (there have been rumors of trouble at COMEX for some time now). In general, there will be some shift toward bailouts being focused on programs that help individuals rather than corporations, which received over 95% of bailout money in 2008.

Things don't look any better on the International front either. 2009 will be the year of global recession, with simultaneous recessions in the U.S., the Eurozone, Great Britain, Japan, Australia and a number of emerging economies. China will be in danger of political instability because of contraction in its manufacturing sector. Countries that export a lot to China, such as Japan and Korea and commodity producers such as Brazil will see damage to their own economics because of China's problems. In Europe, it looks like Great Britain will be the hardest hit of the major countries. Some smaller countries, such as the Ukraine, Hungary, Romania, Latvia and Estonia could see their economies implode just as happened in Iceland this fall. Overall, the rest of the world will react to the economic crisis by lowering interest rates and 'printing' large amounts of money just as we will be doing in the U.S.

While things look dire on a number of fronts, that doesn't mean there aren't many ways to make money in the current environment. People tend to focus too much on the risks in such scenarios, instead of the opportunities. The bigger the crisis, the bigger the opportunity should always be kept in mind. Winners always keep both in balance and keep an eye out for profitable investments when others are too worried or too fearful to do so.

The notes for the talk can be found at: http://investing.newyork.com/21/files in the file, "Economic Predictions for 2009".

NEXT: Brother, Can You Spare a Job?

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.