Quantitative Easing Has Sent the Dollar Into Free Fall

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. dollar has been in free fall since the beginning of September. The Federal Reserve acting in concert with the ECB (European Central Bank) is behind the action. Most other countries are seeing rising currencies and this is going to hurt their economies and the American economy as well.

It's become a running joke globally that the U.S. follows a strong dollar policy because the evidence so blatantly contradicts this claim. Things have gotten even worse lately with the dollar-trashing activities of the Fed going into hyper drive in time for the November election.  The trade-weighted dollar (DXY) lost approximately 6% of its value in September alone. It is not coincidental that the Dow Jones Industrials went up more than 10% during the month or that gold hit one all-time high after another. Stock markets rise when a currency is being devalued. All commodities are priced in U.S. dollars, so all else being equal; a commodity's price has to go up when the dollar falls. Rising commodity prices under such circumstances do not indicate a robust economy, they indicate inflation.

A cheap currency is indeed a plus for a major exporter. Currently China is the prime example globally of a economy that benefits a great deal from a currency with a low value. The Chinese yuan (CYB) doesn't really float, it can only have a small change in value during any given time period, so it can remain underpriced. The EU has now joined the U.S. in demanding China let the yuan have a more realistic value. China denies it is manipulating its currency however. If this is the case, it should just let it float freely on world currency markets and the value would remain approximately the same. For some reason, China is reluctant to do this.

Unlike exporters, major importers like the U.S. do not benefit from declining currencies. For more than four decades, the U.S. has followed policies that have destroyed its industrial base. The private commercial sector is now 20% manufacturing and 80% services. A weaker dollar will give more business to the manufacturing 20%, while hurting the service sector's 80% with more inflation. It won't solve the U.S. unemployment problem. At the same time it will damage the economies of exporters by raising their costs for commodities and the prices of their goods. All in all, it's a lose/lose situation.

The Federal Reserve's new quantitative easing program, first announced in August, is what is undermining the dollar and wreaking havoc in global currency markets. The euro (FXE) has recovered to the 1.40 area, but this is also due to the almost $1 trillion Euro-TARP bailout of the EU currency. The Japanese yen keeps rising and hit another multi-year high today. The Japanese monetary authorities have intervened in the currency markets to stop the yen from climbing, but to no avail. The Swiss franc (FXF) broke above parity with the dollar in August. The Australian dollar (FXA) is about to follow the Swiss franc's lead. The Brazilian currency (BZF), one of the weakest on earth for much of the twentieth century, is beating the stuffing out of the U.S. dollar.    

The big drop in the dollar is not likely to continue much longer (although the charts indicate there could be another leg down). It is already causing destabilization in world markets and could lead to another global financial crisis if it does. If Fed Chair Bernanke continues with his enthusiasm for quantitative easing though, the dollar could hit an air pocket and wind up much lower overnight. While the Fed's interest in quantitative easing will probably cool suddenly after the election, it may continue to play its dangerous game of chicken with the dollar until then.

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.

Gold, Bonds, and Currencies Move on Fed Money Printing

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.


Two-year Treasury notes sold at a record low auction yield on Monday. Gold hit another all-time high on Tuesday. The Australian dollar hit a two-year high on Wednesday. Excess Fed money printing ties all three events together.

The two-year Treasury has hit a series of all-time low yields in the last few months. The yield at Monday's auction was 0.441%. The two-year traded as low as 0.40% around the auction. How much lower it can go depends on how much money the U.S. Federal Reserve continues to print and what percent of that gets recycled into treasury bond purchases. The U.S. has to fund its massive deficits in some way and this is one way it is doing it.

At the same time that money printing is lowering yields on U.S. treasuries, it is raising the price of gold. Just as the 2-year has hit a series of record low yields, gold has hit a series of record high prices. Money printing devalues currency, so more has to be paid for any given unit of gold. A currency losing value is the very definition of inflation and gold is highly inflation sensitive for that reason.

Of all the currencies in the world, the Australian dollar trades closest to gold. Australia is also a fiscally responsible country compared to the debt ridden basket cases of Japan, the EU and the U.S. So the currency should be strong as is. U.S. money printing policy enhances its value however. Overall, the Australian currency should become and remain the strongest currency in the world thanks to the actions of the American Federal Reserve. The same actions are trashing the U.S. dollar.

While the Federal Reserve and its mainstream economist toadies claim deflation is a problem, the evidence points to the opposite. Excess money printing has always led to inflation and things will be no different this time. The other thing that will be no different this time is that the government bodies responsible for creating inflation will deny that it exists and when it becomes so obvious that it can't be covered up anymore, they will then deny responsibility. Before this continues any further, you might want to pick up some hard assets and strong currencies.

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.

Greek Crisis Impacts World Currencies and Gold

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.


News out on March 1st indicates that France and Germany would be willing to buy $41 billion in Greek government bonds to prevent a default. This is not the first scheme to be reported for a proposed bail out of Greece and it probably won't be the last. Based on the trading patterns of all the major European currencies and the U.S. dollar, markets have yet to be convinced that the situation is going to have a happy ending. Gold, which sold off during the Greek Crisis, just as it did during the global financial collapse in the fall of 2008, is currently in a sideways trading pattern.  The commodity-based currencies are holding up quite nicely.

The crisis in Greece exists because there is a 12.7% budget deficit to GDP ratio in the country, which represents 2% of the euro zone economy. Money has flowed out of Europe and European currencies to the supposedly more stable U.S. dollar.  Based on last week's GDP revision, the U.S. had a GDP of $14.258 trillion in 2009. The U.S. has an estimated budget deficit of $1.6 trillion this year, which would give it a deficit to GDP ratio of 11.2%. This is only a little better than Greece and much worse than the euro zone overall. Nevertheless, massive amounts of money have flowed out of European currencies, not just the euro, and into the U.S. dollar.  The safe haven aspect of the dollar is based on America's potential for printing unlimited amounts of new money - something that ultimately destroys the value of a currency - not its financial condition. Greece can't print its way out of its predicament because it is part of a currency union.

The euro has been pounded - both literally and figuratively - during the crisis, along with the British pound and even the vaunted Swiss franc. The classic technical sell signal of the 50-day moving average crossing and moving below the 200-day moving average took place on February 4th for the pound, February 11th for the euro, and February 26th for the Swiss franc. The Swedish krona has so far managed to avoid giving a sell signal, but is close to doing so.

The major destination for the money flowing out of the euro has been North America. The U.S. trade-weighted dollar gave the classic buy signal of the 50-day moving average crossing and moving above the 200-day on February 19th. The overall technical picture of the rally is strong, just as the overall technical picture for the euro is weak. Moreover, there is no indication that a sudden change in the bullish or bearish picture is likely in the immediate future. The major currency with the second best technical picture is the Canadian dollar, which unlike the U.S. dollar has a longer-term bullish technical picture.

The Australian dollar, which is essentially a stand-in for gold, has also maintained its technical strength during the Greek crisis. Australia has the highest interest rates among the industrialized countries and its currency should be considered the most reliable in the world. Gold itself is currently basing in a sideways pattern and its rally is intact. Gold selling off in during a crisis is historically unusual. Money has always flowed into gold during political turmoil. There was a big rally after 911 for instance and some gold stocks actually went up during the 1987 crash. Gold selling down now indicates that the problem with the global financial system that appeared during the Credit Crisis hasn't been completely fixed yet. The next time a central banker claims otherwise, suggest they take a lie detector test. 

Disclosure: No positions

NEXT: The Outlook for U.S. Treasuries

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.

Trouble in the Euro Zone Boosts Dollar, Lowers Commodities

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 Euro hit a 5-month low against the dollar on January 21st.  It has been selling down since the beginning of December. Troubles with peripheral euro zone debt in Greece, Portugal, Spain and Ireland are damaging the currency and boosting the U.S. dollar. The rising dollar has in turn lowered commodity prices (all commodities are priced in U.S. dollars) and commodity-based currencies such as the Australian and Canadian dollars. A combination of ballooning budget deficits and economic contraction are cited as the cause of these recent moves.

The euro has fallen as low as 1.4045 to the U.S. dollar and has breached its 200-day simple moving average - a technical negative. On the flip side the dollar rose as high as 78.81 and briefly went above its 200-day moving average for the first time since May 2009, but promptly bounced down. No major trend reversals are indicated as of yet for either the U.S. dollar or the euro. It is normal during either an uptrend or downtrend to occasionally come back to the 200-day moving average. To reverse the trend, requires rising above it or falling below it and remaining there so that the 200-day moving average itself reverses direction.

While the commodity-based currencies have sold off, they have barely broken their 50-day moving averages, which are trading well above their 200-days as is typical in strong uptrends. GLD, the major gold ETF, has also traded below its 50-day moving average, but is still far above its 200-day moving average, indicating its strong uptrend is also still in place. JJC, the copper ETF, is in even better shape and hasn't even fallen to its 50-day moving average.  The oil ETF, USO has also violated its 50-day, but is still above its 200-day. January is a seasonally weak month for oil and some selling in the commodity at this point is not out of the ordinary.

The epicenter for the problems in the euro zone is Greece. CDS (credit default swap) insurance against Greek government debt default or restructuring hit an all-time high of 340 basis points. News reports have indicated that Greece's debt to GDP ratio of 120% is behind the move. If this were the whole story, the Japanese yen would have collapsed long ago. The debt to GDP ratio in Japan is at the 200% level. The yen has barely budged, while the euro has sold off. Weakness in the euro zone economy has also been cited, with the PMI manufacturing index for January coming in at 53.6 (above 50 indicates expansion). The same day, the U.S. reported weekly unemployment claims were up 36,000 from the previous week - not exactly an indication of economic strength. To claim that the euro zone economy is in worse shape than the economy in the United States is indeed a stretch. The key difference between Greece, Japan and the U.S. is that Japan and the U.S. can print all the money they want to, whereas Greece because it is part of a currency union cannot.

In the short-term anything is possible in the markets. Manipulation - and central banks are prone to intervene with currency trading - and illusion can sway trading. The long-term trend however is that fiat currencies are all losing their value and this was already evident by the 1970s. Excessive government debt and economic weakness is a global problem shared by almost all the industrialized economies and this will accelerate the multi-decade trend of weakening currencies. Higher prices of hard assets and consumer goods are the consequence of that trend.

Disclosure: Long gold.

NEXT: As U.S. Banks Deteriorate, Obama Proposes New Regulations

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 U.S. Dollar in Early 2010 Trading

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. trade-weighted dollar began a significant sell off in early March 2009 from the 89.00 level. By November 25th (the day before Thanksgiving), it hit its yearly low at 74.23. Almost as if on schedule, a rally began in December and lasted until the 22nd (right before Christmas). Trading was mostly flat in the first week of 2010, but off the December highs. Gold, which sold off as the dollar rose, rallied strongly in the first trading week of the year. The dollar is struggling and the technical picture now looks negative in the short-term. The December rally did nothing to reverse the intermediate or the long-term downward trend in the dollar. The currency hit its high in the mid-1980s.

The Euro and Swiss franc both peaked the day the dollar bottomed and bottomed the day the dollar peaked. The British pound, which should be a weak currency considering the extensive money printing taking place in the UK, peaked earlier on November 16th and bottomed later on December 29th. The Japanese yen, which rallied strongly starting in early April 2009, peaked on November 30th and bottomed so far on January 7th. The commodity-based currencies the Canadian and Australian dollar behaved somewhat differently. The Australian dollar peaked with the pound, but bottomed with the euro. The Canadian essentially traded flat.

The selling in the yen was sharp and powerful in the first few days of December and had the fingerprints of central bank intervention all over it. Export driven economies in Asia are becoming increasingly desperate to keep their currencies from rising against the dollar since this makes their goods more expensive and hurt their economies. On January 11th alone, at least four Asian central banks - India, South Korea, Singapore and Indonesia - bought U.S. dollars in the currency market. Unlike other currencies, the Chinese yuan doesn't float and this is negatively impacting its Asian neighbors and all other exporters. The Chinese are engaging in jawboning however to try to talk down the dollar. An investment strategist for the Chinese government sovereign wealth fund just commented that the U.S. dollar had bottomed, but the yen should be selling off. He further stated, "China now has a voice in influencing the dollar's exchange rate and the interest rate on U.S. government debt." For some reason, a laugh track didn't accompany the Internet postings of this news.

It is not surprising that the U.S. dollar rallied in December, even if the cause was central bank intervention. No asset, no matter how weak, can drop in price every day. There are always counter rallies, just as there are counter sell offs for assets that are going up most of the time. The underlying problem with the U.S. dollar is irresponsible monetary and fiscal policy. Until these are corrected, and it looks like they will only be getting worse for the next several years, a sustainable rally in the dollar against hard-assets is not possible. Central banks can intervene all they want, but the results will only be temporary. It should be kept in mind that exchange rates in and of themselves are not the only thing that is important. We are in an era when all fiat currencies globally are losing their value against gold. Unless something is done to stop this, paper money will eventually get to its intrinsic value, which is zero.
 
Disclosure: Long gold.

NEXT: A China in a Bull's Shop

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

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

A Comparison of Major Currencies in the Last Decade

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.


One of the most consistent messages from U.S. Treasury Secretaries in the last decade was that America has a strong dollar policy. During that period the trade-weighted dollar (the U.S. dollar measured against a basket of six currencies proportional to U.S. trading activity with the respective countries) fell approximately 21%. The value of the dollar went down against the Euro, the Yen, the Swiss Franc, the Canadian dollar and the Australian dollar. It traded flat against the British Pound. One wonders what would have happened if America had had a weak dollar policy.

The U.S. trade-weighted dollar opened in 2000 around 99. It then rallied in the beginning of the decade (this was a continuation of a rise that began in 1995) and peaked with a double top just above 120 in 2001 and 2002. It was mostly downhill from there until it hit bottom in the 71.50 area in 2008. A flight to safety during the Credit Crisis rallied the dollar back to 90. It closed out the decade at 78.22. The decline of the dollar in the first ten years of the 2000s was merely a continuation of a much longer drop that began in 1985, the year that the trade-weighted dollar peaked at over 160. In the twenty-five years since then, it has lost more than half of its value.

As the dollar fell, other major currencies rose. The Swiss franc was the big winner during the decade with a 49% rally. The euro was up 37%. The Japanese yen had a more modest rise and the value of the British pound remained essentially unchanged against the dollar. The commodity-based currencies, the Australian and Canadian dollars, were up 39% and 41% respectively during the decade. In general, other major currencies bottomed against the dollar in the early 2000s. The euro was the first in 2000, it was followed by the Australian dollar in 2001, then the Canadian dollar and the Swiss franc, which made a double bottom in 2001 and 2002. The Japanese yen also hit its low value for the decade in 2002. The one exception was the British pound, which bottomed during the Credit Crisis in 2009. All the majors had significant sell offs against the dollar late in the decade because of the problems in the global financial system and if they hadn't, their rallies would have been much greater than the final numbers indicate.

For the last twenty-five years, not just the last decade, the dollar has been losing ground against the other major fiat currencies (all backed only by the credit of their issuing governments). The market has made its opinion quite clear about U.S. budget deficits, trade deficits, and monetary policy compared to those of other nations. If the U.S. dollar wasn't the reserve currency for the world, the dollar would have devalued much more than it did. Unless the U.S. puts its fiscal house in order - and just the opposite is occurring - expect dollar devaluation to not only continue, but to accelerate in the next decade.

Investors who want to invest in currencies can purchase FXA, FXC, FXE, FXF, and FXY,  ETFs which hold the Australian dollar, the Canadian dollar, the euro, the Swiss franc and the Yen respectively. UDN can be used to take a short position in the trade-weighted dollar.

Disclosure: No currency positions.

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.

Markets Roller Coaster Ride Powered by Media Hype

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

Our Video Related to this Blog:

Yesterday, stocks in the U.S. went on an a roller coaster ride that saw a steady significant move up, followed by an almost vertical descent (which included a 30 point drop in the Dow in just one minute), then a gradual climb back up into a positive close. The European Central Bank seems to have continued interfering in the currency markets (in one way or the other) by supporting the euro behind the scenes and this is what caused the intraday drop in the stocks. One asset though managed to stay in positive territory and gain technical strength yesterday - gold. More hairpin turns and sharp up and down moves should be expected for awhile. The mainstream media seems intent on publishing stories that will keep the volatility going.

Spot gold closed at $1060.60 (up $14.60) at the 5:15PM end of Globex trading yesterday. It broke through the $1050 resistance level and stayed above it all day. Gold traded as high as $1064.00. It then got as high as $1066 overnight on news that the IMF sold 200 metric tons of its gold to India (the price of course dropped the moment New York trading opened). The IMF board voted to sell 403.3 metric tons of its 3,217 tonne gold holdings on Sept 18th after telling the market multiple times over two years (each time driving the price of gold down) that it was going to do this. It was widely believed China would buy the entire amount of the IMF gold for sale using this as an opportunity to get rid of some of its massive dollar reserves. China stupidly didn't do this however. It might buy the remaining 200 tonnes of IMF gold or any number of Gulf oil states could. In general, gold is leaving the central banks for Europe and moving to the central banks of Asia.

Gold went up yesterday in U.S. trading because of inflation concerns. The ISM Manufacturing report for October came in at 55.7, up from 52.6 in September (above 50 indicates expansion). The strongest of the 10 components of the report? - Prices Paid, which is an inflation indicator. This number came in at 65.0, up from 63. 5. It was the highest number in the September report as well. While inflation was the biggest news in this report, I saw no mainstream media article that even mentioned it, let alone headlined it. Instead stories like "Dollar Falls After Strong Factory Data" appeared and claimed the dollar was going down because of heightened risk appetite, the current fantasy the media has spun to take investor's attention away from inflation. This article did hint at inflation though in the 18th paragraph (most people don't read to the end of articles), when it mentioned that a flood of liquidity from central banks might have something to do with the way the market is reacting.

Media coverage reached even lower levels this morning. The glaring headline, "U.S. Stock Futures Drop Sharply", could be found many places online. When I clicked on a major financial website's version, an article with a different headline appeared, " U.S. Stock Futures Off Lows ....". People who didn't click wouldn't know the news had changed though. Traders frequently only see headlines. What was the 'sharp drop' in futures? The Dow was down 61 points, the S&P 500 down 7 points and Nasdaq down 7 points - completely ordinary meaningless moves.

There is risk for stocks today because the euro had a sharp drop overnight after the Australian central bank raised rates by a quarter of a point to 3.5%. Australia was the first central bank to start raising rates last month, which is one reason the Australian dollar is so strong. This move should be more threatening to the U.S. dollar than the euro however, but the trade-weighted dollar is rallying on the euro sell off. Ironically, this could damage U.S. stocks the most because if you check you will see their best correlation has been to movements in the euro since last March (the euro represents over 50% of the trade-weighted dollar). Gold seems to have been hardly impacted by the currency move at all. Traditionally gold and the euro should be moving together and the stock currency relationship should be more tangential.

As if the first two days of the week aren't exciting enough, the end of the week will see the U.S. monthly employment report. I would also like to remind everyone that this is the beginning of the month and the first four days of trading should be positive. At the moment it's hard to say if the bears or bulls will win out. It is easier to predict a lot of volatility, which is a classic sign of a top.

NEXT: Gold Rockets Higher

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 Decision Today; Dollar, Bonds and Gold

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 FOMC concludes its two-day meeting today and will issue a statement around 2:00PM New York time. There is no chance the Fed will be tightening its zero interest rate easy money policy, although it may announce some vague longer term liquidity reduction that will take place at some indeterminate future date (like the IMF gold sale that was announced over and over again for more than two years before it actually happened). The Fed knows that without its super low interest rates the economy would go into a tailspin and the stock market would tank. Don't expect the Feds quantitative easing (aka money printing) policy, which is slated to be terminated at the end of October, to be stopped either. Interest rates would skyrocket overnight (treasury bond prices would plummet) and the U.S. wouldn't be able to fund its massive budget deficits. It is not likely there will be an announcement about this today however.

While easy money leads to stock rallies (and higher precious metals prices), it undermines a nations currency. The trade-weighted dollar hit a new yearly low in pre-market trading this morning. The ETF DXY had an ugly gap down yesterday. It was as low as 76.00 on Tuesday (a key support level) and fell to 75.89 in pre-market trading today. Ironically, this was the low one year and one day ago. Perhaps less ironically, I constantly see headlines cross my computer screen about the dollar rallying, but every time I look at the price it has gone down. Can the dollar hold its support in here? There are rumblings from the central banks in a number of countries about supporting the dollar in order to lower the value of their currencies. Look for some possible hints of this from the G20 meeting tomorrow, but don't expect action.

The approximately zero short-term interest rates in the U.S. has led to a carry trade. Traders sell U.S. dollars to buy high yielding currencies like the Australian and New Zealand dollar. This is one reason that Australian and New Zealand dollars have been going up in value. Currencies from countries with upgraded credit also benefit. Brazil just had its sovereign debt rating raised to investment grade. Don't expect the credit rating agencies to ever lower the U.S. sovereign debt rating to junk status though. This should have already been done.

Gold has continued to perform admirably. It has closed above its breakout level of $1003.50 for eight days in a row as of yesterday. The close on Tuesday was $1015.50. Silver closed at $17.16. There can still be some overhang on the precious metals market until the G20 meeting is over. Gold still needs to trade intraday above $1033.90 to finish its breakout. Hopefully soon.

NEXT: Market Sells Off as Dollar Rallies ... As Usual

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.

Inflation Versus Recession

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:

Gold hit its second highest price ever yesterday. Interestingly, the U.S. dollar is not close to its all time low. For any given dollar level, gold prices have been rising over time. Inflation is when a currency decreases in value and this has been happening for the dollar when measured against gold. Looking at the value of one currency versus another can obfuscate that inflation is taking place. All fiat currencies are declining in value against gold and this indicates that a widespread global inflation is taking place.

The trade-weighted dollar fell as low as 77.02, but closed at 77.19 yesterday. This is well below the 78.33 breakdown level. The dollar is at an 11 month low and even if it stays at current levels or rises somewhat will hit a yearly low within 3 weeks. This will be very bearish. The U.S. dollar is already at a yearly low against the euro and Australian dollar, both of which hit new highs yesterday.

While inflation is taking place, the same thing can't be said about an economic recovery. Consumer spending accounts for 72% of U.S. economic activity and under current conditions can not improve in the foreseeable future. Consumer Credit for July was released yesterday and it fell by $21.55 billion or at a 10.4% annual rate. Credit card debt fell at an 8.5% annual rate. It was the 11th straight monthly drop. While consumer credit is contracting, so is consumer income. At the same time, the savings rate is rising. All three indicate less consumer spending and ongoing contraction in almost three-quarters of the U.S. economy.

The one-month drop in consumer credit in July was four times greater than the entire consumer debt in the U.S. in 1944. The 60 plus year post World War II expansion was fueled by ever increasing consumer credit. Like all expansions inevitably do, this one has come to an end. Initially, there was real growth that went along with the expansion, but in the last three decades U.S. growth has been based on increased spending made possible through excess credit. Going forward inflation is going to make this impossible.

NEXT: CFTC Kills Off DXO

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.