The EU May Have Reached Its Bailout Limit

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.

Today, yields on Spanish 10-year sovereigns tested their yearly high yield of 7.28%, while Italian rates reached 6.16%. This was after funds for the Spanish bank bailout were approved by the EU, although the money won't be going directly to the banks. Earlier in the week, the IMF admitted that  the only solution to Europe's debt woes was to run the printing presses at full speed.

The situation in Spain is ugly and getting worse. Unemployment is almost 25% there and the country is in a recession. The Spanish economy is dependent on public spending and building empty houses that no one buys. The government has recently announced severe spending cuts and higher taxes, both of which will lower future growth. Yet, until today Spain was forecasting GDP growth of 0.2% for next year. It now thinks that GDP will decline by 0.5% in 2013. This is not just an optimistic scenario; it's a Harry Potter fantasy scenario. As is the case with Greece, Spanish economic and financial numbers cannot be trusted. Greece in the early stages of its bailout also produced optimistic projections of how easily and quickly everything would be fixed. Instead, its financial problems escalated out of control.  The same outcome should be expected in Spain.

Bailed-out Bankia is a good example of the how reliable the books are for Spanish banks. Bankia claimed to have earned a €300 million in profits in 2011, but in late May revised that to a €3 billion loss. Now Spain is in line for a €100 billion bailout from the EU, although it has claimed that it needs less. Based on how Bankia did its accounting, Spanish banks are likely to need more, maybe ten times more than that amount. This does not include money for bailing out the bankrupt Spanish government.  

Originally, the EU planned on providing the bank bailout money (structured as a long-term loan) directly  to Spain, who would in turn distribute it internally. When this caused Spain's sovereign debt rating to be downgraded, creating greater fiscal problems for the struggling government, the EU then decided to route the loan directly to the banks. Yesterday, the German parliament refused to go along. They were only willing to approve a loan directly to the Spain itself. It wasn't easy to get even that passed. Twenty-two members of Angela Merkel's coalition voted against it. The leader of the Free-Democrats described the bailout as "a bottomless pit". It doesn't look like German legislators have an appetite for any further bailouts and this is bad news for Spain and Italy as well.  

The IMF has an idea of what to do instead, but its solution could hardly be described as constructive. In a report issued on Wednesday, the organization essentially advised the EU to engage in every type of money printing possible, do a lot of it, and to start doing it immediately. The ECB has already expanded its balance sheet by more than the U.S. has and it hasn't solved the EU's problems so far. Massive money printing as suggested by the IMF would debase the euro significantly. So, in order to save the currency union, the currency it issues must be destroyed. Somehow, there seems to be a logic flaw in this line of reasoning (sort of like, a debt crisis can be solved by incurring more debt).

The bailout news today was disastrous for Spain and Italy. The Spanish IBEX index was down 5.79% dislocations  — a mini-crash and the worst drop in the two years. The Italian market was down 4.4%. The euro hit a new yearly low. The ETF FXE traded down to 120.78. This is below its bottom during the Credit Crisis, but still above the 2010 low made when the debt crisis first appeared. As the situation continues to unravel, more selling should be expected.


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.

Europe Continues Its Slide Toward the Precipice

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 Finnish finance minister has said all eurozone countries are making contingency plans in case the currency union breaks up. With debt downgrades, bond market anomalies, troubled bailouts, and austerity packages with their associated riots becoming the new EU norm, their worries are obviously justified.

Last night, Moody's downgraded Italy's government bond rating two notches from A3 to Baa2. This is just above junk status. Moreover, the outlook is negative with further downgrades possible in the near future.  So what happened in the Italian government bond auction this morning?  Did buyers  demand higher interest rates to buy Italy's increasingly risky debt as basic economic principles would predict? No they didn't. Italy sold €3.5 billion of three-year bonds at an average yield of 4.65%, much less than the 5.3% it had to pay last month.  How is this possible? Apparently Italian banks couldn't resist an urge to grossly overpay for their governments newly issued debt. The ECB was most certainly backing them up behind the scenes. If this is how Italian banks do business, can we assume that they're solvent?

There is little need to pose that question for Spanish banks. Recent data indicate that they borrowed €365 billion in June from the ECB — a record amount. This compares to €325billion in May. These numbers indicate that Spanish banks have been closed out of the interbank lending market (a good indication of insolvency). The highly troubled Spanish banking sector, which has €3 trillion in debt on its books, will be receiving an immediate infusion of €30 billion in bailout funds from the EU and another €45 billion in November. This represents 2.5% of its total debt and that amount is supposed to fix the problem. The actual funds needed will be many times that. It is impossible to say exactly how much because the financial numbers for Spanish banks are not reliable.

Spain seems to be following Greece's descent into a self-reinforcing economic collapse. This week Prime Minister Rajoy announced further budget cuts of €65 billion over the next two years.  VAT was raised from 18% to 21%. Almost a quarter of the Spanish work force is unemployed, even worse than Greece's 22.5%. Spain though seems to be making a more serious effort at fiscal austerity than Greece. According to reports in the German daily Rheinische Post, the troika on its latest visit found that the Greek government failed to implement 210 of the 300 budget savings requirements it had agreed to in exchange for its bailout money.

While interest rates are pushing against unsustainable levels in Spain and Italy, they have gone to theoretically impossibly low levels in northern Europe. Negative interest rates first appeared in government debt in Denmark and the Netherlands last December. Then Germany paid negative rates on some of its short-term bonds starting in January. This week, France sold six-month Treasuries at a yield of -0.03% and two-year bonds at -0.001%. Below zero yields are a sign of severe market stress.

The euro this week has traded below 1.22 to the U.S. dollar, but is slightly higher today. Investors should watch the 1.20 level. If the euro breaks and stays below this area of support, it could drop to parity with the dollar. The major central banks would intervene to prevent this though, so the ride down wouldn't be smooth.

Stock markets reacted bullishly in late June and early July to the news of further bailouts in the EU. Most traders didn't ask where the money would come from, nor if the plans were even legally possible. They may not be. The German constitutional court will be ruling whether or not Angela Merkel's promises to participate in the ESM (European Stability Mechanism) can go forward.  Even if they rule favorably, there is little actual money committed to the ESM. More money printing (and the ECB has already done quite a bit) is the only option left to fund the various bailout schemes to save the euro. Of course, it's logically absurd that a fiat currency could be saved by producing excess amounts of it. The same is true for trying to solve a debt crisis by taking on more debt.  But hope reigns eternal in the land of euro make believe.

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.

Can the EU Solve Its Debt Crisis with 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.

European and U.S. stocks were rallying on Friday in what appears to be a liquidity frenzy supplied by the central banks. The market is once again hopeful now that EU leaders are beginning six days of meetings on how to save Greece and the euro. Based on their previous track record, which has led to the current crisis, there is little reason for long-term optimism.

Stock prices have not been the only thing rising lately.  Interest rates have been too in the credit- challenged Eurozone countries. While yields of Greek one-year governments have fallen back to only 180%, they were as high as 189% on October 19th. Greek two-years are at a more manageable 77%. Rates keep increasing in Greece despite the bailouts and this indicates the bailouts aren't nearly large enough and will have to continue and get bigger to keep the country out of default.  The political will for ongoing and ever-larger amounts of bailout money doesn't exist in the EU or does it?

While the EU voting public doesn't approve of spending more rescue money, the EU has created the EFSF (European Financial Stability Facility) — a 440 billion euro fund to help bail out its member countries that have debt problems and to bail out the banks that lent them the money that allowed them to have those debt problems. Much remains to be decided on how the EFSF will actually function. There is disagreement of how to use it to bail out failing banks for instance (this is currently being referred to as recapitalization since bank bailouts are also unpopular with voters). There is also a proposal to leverage EFSF funds up to five times, so there will be more than two trillion euros available. This idea is apparently a "helpful" suggestion made by the U.S. monetary authorities.

While the stock market is showing almost as much enthusiasm for the leveraged bailout proposal as it did for the great innovation of triple A rated subprime mortgages in the mid-2000s, such financial trickery ended badly the first time and is likely to fall apart even faster this time. Mainstream media coverage, at least in the U.S.,  rarely looks at where the money is coming from for the EFSF. Technically, the money is being borrowed. So in order to deal with a debt crisis that is wreaking havoc on the financial system because of too much risk, more money will be borrowed and then that money will be leveraged (a form of borrowing in and of itself) to magnify the risk of the new borrowing. If this appears not to make any sense at all, that's because it doesn't. When the default comes — and there is 100% chance that it will —  the end will be much, much worse.

A case can be made however that the EFSF money isn't really borrowed, but a form of money printing instead. If governments borrow without the ability to actually pay back the money without inflating their currency, they are printing money. EU countries are already highly indebted just like the United States (Japan is in even worse shape). The fact that there is a debt crisis in a number of Eurozone countries is confirmation that the level of debt is beyond the point of no return. So a more accurate portrayal of what is going on with the EFSF is that money will be printed, this counterfeit money will be leveraged by borrowing against it and this will solve the problem of too much debt. 

The world has already lived through a debt binge in the early 2000s. The current crisis centered in Europe is simply a continuation of the unraveling of that debt. Governments handled the first implosion with trillions of dollars of bailouts, by running trillions of dollars in budget deficits, and by printing trillions of dollars of money. Debt problems keep resurfacing however. Could it be that engaging in additional reckless and irresponsible financial behavior isn't a solution for reckless and irresponsible financial behavior? EU leaders may wish to ponder this before going forward. 

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.

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.

Stocks Rally in Short Term Reversal

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.


After hitting a lower low on the open, U.S. stocks reversed their sharp downturn in late afternoon trade yesterday. The rally so far is an expected oversold bounce.  There is no reason yet to think that it will turn into something more significant.

Technicals, not fundamentals are driving stocks at the moment. Tuesday's action was an attempt to resolve an oversold condition from Friday the 14th. Seven trading days later, the major indices - the Dow Jones Industrial Average, the S&P 500, the Nasdaq and the Russell 2000 were all substantially lower. They were also well above their respective 200-day moving averages on the 14th, but all were below their 200-days yesterday.

The 200-day is the key dividing line between bullish and bearish behavior. With the exception of the small cap Russell 2000 (which is holding up best in the sell off), the major indices have violated their support at the 200-day twice in the recent sell off. The first time was during the odd crash on May 6th. Many considered the intra-day drop below the 200-day then to be a mere fluke. In the last five trading days though, the Dow, S&P, and Nasdaq have again traded below the key 200-day line at least part of the day. 

Stocks are also trading to try to fill gaps (a price range where no trading took place) in the charts. This usually occurs within a few days, although weeks and even months are possible time frames. There was a large down gap in trading on May 20th and another one before that on May 14th. The market will want to rise in the near term to at least fill the gap on the 20th. Yesterday's gap down was a short-term exhaustion gap (a gap after many down days or up days) and the markets moved up to trade into the empty space that had been left on the charts.

Technical factors are moving the market up at the moment, but once they get resolved, stocks are likely to head down again. The fundamental problems that emanate from the eurozone have not been fixed. For a major bottom to be put in, some dramatic event like a Greek default or Greece being removed from the euro currency union would be a good signal for a bigger rally. A much larger bailout, such as $5 trillion instead of a mere $1 trillion would pump up stocks as well. This is what reversed the markets during the Credit Crisis and the central bankers and treasury departments of the world will almost certainly attempt their tried and true money printing solution again. The only question is when they will do it.

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.

World Economic Leaders Need IQ Bailout

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.


There are few things investors can count on during our current era of financial turmoil. One of them is the unerring obliviousness and incompetence of the world's elected leaders and central banks. Somehow they both manage to find the highest cost, least effective solution for every Credit Crisis problem they try to solve. Moreover they usually don't bother to act until every dog in the street has been aware of the problem for some time. There was more than enough support for this view on both sides of the Atlantic today.

There was a summit meeting in the EU today, where the leaders of the 16-nation block struck a deal, at least in principle, on assisting Greece with its debt problems. No details of the rescue package were forthcoming, but there were suggestions of some form of loan program. This is enough to open up the Pandora's box of 'moral hazard', but probably won't be enough to fix the problem - at least not with the initial measures. The final cost for any help to Greece will be much more than early expectations and this will pale in comparison to the cost of future bailouts for other member states such as Spain and Italy.

The whole scenario currently taking place in the EU should seem vaguely familiar to Americans. The much maligned TARP bailout program was initially only supposed to be loans, so it wasn't really costing the taxpayers anything. A number of other bailout programs mushroomed around it and by some estimates reached $11 trillion in promised money (compared to $700 billion for TARP).  While it has been claimed that some TARP money was returned, it is not clear how much actually was. When Citibank announced it was paying back $20 billion (of the $45 billion it received), the U.S. government agreed to give it a $38 billion tax break. It's not clear how many similar deals were worked out to shift the burden from a loan program to a direct cost for the American taxpayer, who after all would have to pay extra taxes to make up for the federal government tax breaks given to the big banks.

While the EU leaders were busy sowing the seeds of future financial disaster for their currency union, the ever out of touch U.S. Fed chair Ben Bernanke was testifying on Capitol Hill about a proposed exit strategy from his easy money policy. As a reminder, Bernanke didn't realize that subprime loans would cause a problem, didn't realize the U.S. was in a recession months after it had begun, and didn't realize that not bailing out Lehman would lead to a possible collapse of the world financial system. Now he doesn't realize the recession and economic problems caused by the Credit Crisis are still not over.  At least he's consistent.

Those who think the U.S. economy is healthy only have to look at the state of the housing market. Almost one in three borrowers have mortgages that are for more than the value of their property. As of November 2009, 5.3% of U.S. home mortgages are three or more months behind in their payments. A year earlier in 2008, it was only 2.1%. In 2009, 2.8 million mortgage holders received a foreclosure notice. Current estimates are this number will rise as high as 3.5 million in 2010. Fannie Mae and Freddie Mac, both nationalized by the U.S. government, have just announced that they will buy back troubled loans contained in securities they have sold to investors (this is a major bailout for the big money players, although the mainstream media did not report it as such). Last year, the Obama administration pledged to cover unlimited losses for both companies through 2012. Draining liquidity from an economy with these conditions in the housing market would send the U.S. into a major depression.

The U.S. experience in the Credit Crisis shows that once you start bailouts, there is potentially no end in sight for how many there will be, nor any limit to the final cost. The disaster precipitated by not bailing out Lehman Brothers also indicates that you must bail out everyone once you start the process. Of course, bailing out no one is the other option. Half and half measures don't work and produce the worst results at the greatest costs. The EU seems not to be aware of this lesson. Maybe they're getting their advice from Ben Bernanke?

Disclosure: No positions

NEXT: China Worries About Inflation, The EU Needs to Worry About Growth

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.

Economists and Governments Pave the Way for Global Inflation

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


In a just given speech at the London School of Economics, famed economist Joseph Stiglitz stated that the U.S. and UK should keep on spending and printing money to prop up their economies. Stiglitz apparently did not mention that recent hyperinflation basket case Zimbabwe followed this same approach. Meanwhile, plans for either an EU or German bailout of Greece continue to swirl about, taking the EU down the road of Moral Hazard and truly huge future bailouts for its member states. Government spending, bailouts, and money printing all go hand in hand.

The Stiglitz speech will be seen as a historically significant event. Stiglitz is not some minor, unknown economist, but is an insider's insider. Stiglitz is a winner of a Nobel Prize in Economics, former Chief Economist at the World Bank, former Chair of the Council of Economic Advisors, and has held economic professorships at a number of top universities. In his speech, he essentially stated that it is impossible for the US and UK to default on their debt because they have unlimited ability to print money. While this is certainly true, it is also simplistic, self-destructive, and immoral.

Money printing erodes the value of a currency and governments that engage in it are acting dishonestly since it is essentially legalized counterfeiting. Yes, they will give their lenders back the same nominal amount of money as was originally given to them, but lenders won't be able to buy as much with it as they could have previously. Lenders usually catch on to this scam pretty quickly and demand increasingly higher interest rates to compensate for the loss in value of the government bonds they are buying. Needing to pay more interest, the government then prints more money. An inflationary spiral results and the government can't stop the printing because doing so risks an economic collapse.

Stiglitz's approach is hardly original. This is the strategy that every country in history has followed that has experienced hyperinflation. Zimbabwe is only the most recent example; there are dozens of others in the last hundred years, with Greece being one of them. In all cases, the only thing that stopped the inflation was when the money printing stopped. This was most blatantly demonstrated in Zaire in 1997 when the government couldn't pay the outside printer of its currency. It received no new paper money and its hyperinflation ended abruptly. The Weimar Republic in 1920s Germany managed to stop its money printing by creating a new currency (a common solution) and backing it with hard assets. Top German economists during the Weimar Republic backed the government's money printing plans, just as Stiglitz is doing today for the U.S and the UK. 

While the U.S. and UK are well along on their money printing agendas, the EU has lagged behind. The impending bailout of Greece will help them catch up. Greece, in and of itself, is not that big. It is only 2% of the euro zone economy. The implications of a bailout for the future are enormous however. There are a number of other countries in the euro zone that will need their own bailouts. While Ireland, Portugal and Spain are on the list, the most serious problem by far is Italy. Italy is perhaps one year behind Greece in the deterioration of its financial condition. Its economy is approximately the same size as the UK's. How is it possible to bail out an economy that large?  How much money would have to be printed to accomplish this? It would take quite a lot obviously and the euro would be damaged considerably.

We are living in times when almost every government is engaging in policies that will devalue their paper currencies. Hard assets unquestionably become more valuable under such circumstances. How much the U.S. dollar, the British pound, the euro and the yen devalue in relationship to each other remains to be seen. The Japanese have the worst debt to GDP ratio of any major economy in the world and are approaching levels last seen in Zimbabwe. The UK and the US have been the biggest money printers so far, but the euro zone might catch up and surpass them. The best approach for investors would be to avoid keeping any significant amount of liquid assets in any of these currencies.

Disclosure: No positions.

NEXT: World Economic Leaders Need IQ Bailout

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

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

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

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

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

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

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

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

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

NEXT: The Art of Inflation

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

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

Subprime Crisis #2 Coming Soon

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

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It constantly amazes me that the people running the government and reporters who cover the government seem incapable of doing arithmetic at the first grade level. This is usually all that is necessary to foresee a disastrous outcome in the future. This is certainly the case with the impending FHA (Federal Housing Administration) crisis which will be blowing up soon. The FHA insures mortgages that have less than a 20% down payment. It is currently insuring four times as many mortgages daily as it did in 2006 at the height of the last subprime crisis and has 5.4 million loans on its books. A prominent congresswomen recently stated, "without the FHA there would be no mortgage market" right now.

In congressional testimony the head of this government agency recently stated that the FHA's finances were sound. Oh really? The FHA claims to have $30 billion in cash reserves. How long will that last considering that there are $675 billion in loans on the books and 24% of the loans from 2007 are troubled and 20% of the 2008 loans are troubled so far (these numbers can rise). Those percentages could be worse in 2009 and after. If more than 4.4% of the loans insured by the FHA go bad, it could be out of money, assuming (probably foolishly) that the $30 billion they claim in cash is unencumbered. If not, the percentage could be much, much less than 4.4%.

How is it possible that there be even more problem loans on the FHA books from this year and in the future? Anecdotal reports from some areas of the country say that as much as 100% of recent housing purchases are insured by the FHA. All you need to get this insurance is apparently a 3.5% down payment. A spotty employment record doesn't disqualify you, nor does having filed for bankruptcy in the past. Even more eye popping, having a previous mortgage that went into foreclosure does not keep you from getting a new loan insured by the FHA! The FHA business model is roughly equivalent to a company offering $100,000 life insurance policies for $100 to hospital patients who are on life support. Yet, the head of the agency claims that their finances are in good shape.

The FHA is only one of many new bailouts coming. A number of state and local governments are falling deeper into the red. Tax receipts are coming it at even lower levels than anything previously thought possible (another mystery of the 'recovering' economy). Small and midsized banks are falling like dominoes because of their commercial loans going sour. The FDIC insurance fund is already insolvent and the government will have to step in to prop it up. The Credit Crisis is by no means over, we have simply finished phase one and are about to enter phase two. But don't worry, the U.S. government has a printing press and can print all the money necessary to solve these upcoming problems.

NEXT: Dollar Breaks Support ... Again

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

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

The Smoking Gun of the Economic Recovery Scam

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 Economic recovery that is supposedly taking place has been carefully arranged by the U.S. government. Unfortunately, the 'recovery' will be far more evident in the published statistics than in the economy itself. After all, it is a lot easier to change the numbers that to actually fix the economy. Apparently, the hope is that with enough cheer leading, businesses and the public will get on the bandwagon and start spending again. I can picture Bernanke, Geithner and Obama clicking their heels together and trying to wish hard enough to make it so.

The AIG earnings report came in as positive as expected on Friday. How did a company that is beyond bankrupt manage to show positive earnings? The key statement in the report about what happened was "resulting from the adoption of new accounting guidelines". These new guidelines were set by the U.S. government and probably benefited every big bank and brokerage house as well, most of which had surprisingly good earnings - even though their lending operations (the core business of any bank) were continuing to deteriorate during the quarter. So the mystery has been solved. If your earnings are disastrous, just change the accounting rules and like waving a magic wand, suddenly you're earning gobs of money. Happy days are here again!

If you want to know how well this approach works, you can take a look at Enron and GM. Enron's earnings were phony for years and then it imploded overnight. GM changed its accounting in the mid-2000s after the recession and suddenly one quarter it was earning big bucks instead of losing big bucks. To its credit, CNBC News actually reported that the big 'improvement' was merely an accounting gimmick. The stock still rallied strongly on the news (so much for the Efficient Market Hypothesis). Even though the government started pouring money into GM starting in 2007, it still went bankrupt in 2009. Now the government is supporting it to the tune of $4500 per car with the Cash for Clunkers program. Reports out today predict that autos are going to be the next big recovery area of the economy, improving both the industrial production numbers (which fell at a depression level 19% in the first quarter) and retail sales (which went up in May and June because of higher gas prices - they're not adjusted for inflation).

If the government pours huge amounts of money into any industry, the numbers will of course improve. This doesn't indicate economic recovery though, even though it is being sold that way. Will the government keep doing this every quarter? It may have to in order to keep the 'recovery' going. If you want to know how well that approach works, see Weimar Germany and Zimbabwe.

NEXT: Inconsistencies of the Economic 'Recovery'

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.

CIT DOA; Liquidity Injections Rally Market?

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

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The market had a great rally yesterday with almost all asset classes going up. This started a few days ago with the Goldman Sachs (aka Government Sachs) rally. Morgan Stanley beat expectations this morning. The Goldman rally took place BEFORE the good news was released and if yesterday was at least partially a Morgan Stanley rally, it happened before the news came out also. Don't worry though, the government announced many times last week that it was going to crack down on illicit speculation in the markets. If you had trouble not laughing when reading that last sentence, it's not surprising. There is no need to write parody, when you have the mainstream media reporting news like that.

The lack of memory on the markets part seems to be truly amazing. The no longer in existence Bear Stearns was about to announce good earnings in March 2008. The only thing that prevented it from doing so was the company went under before it could tell the world how much money it was making. This would seem to indicate to anyone with even the most minimal thinking ability that the earnings of these big Wall Street firms are meaningless. But hey, this happened last year. Traders, like government officials, don't let themselves get bogged down with the past. After all, it's not like history repeats itself.

It would not be unreasonable to assume that the market is rallying so much in the last few days because a lot of money is being pumped into the financial system. That the U.S. dollar is going down, while everything else is going up (a common pattern in market rallies since the beginning of June) supports this view. Now what could possibly be behind that? Probably the imminent failure of CIT, a lender to one-million small to medium size businesses. After giving CIT $2.3 billion in TARP funds, the U.S. government has decided to pull the plug. CIT is apparently not too big to fail (meaning that it doesn't have a lot of former alumni in highly placed positions in Washington, D.C.). Treasury Secretary Tim Geithner, part of the tweedledum and tweedledumber team of Geithner and Bernanke, is personally handling the situation.

If there is any historical analogy to CIT's failure it is the Bank of United States, actually a local New York City bank despite the name, failure in December 1930. This bank lent to lots of small and medium size business, but only in the New York metro area, whereas CIT lends nationally. The Fed refused to bail out the Bank of the United States and thought the repercussions would be minimal. Instead, the demise of the Bank of the United States set off the first of three major waves of bank failures that lasted more than two years and which wiped out a large part of the U.S banking system. But that was back in the 1930s when U.S. financial officials didn't have the slightest idea what they were doing. Instead today we have ever on the ball Fed Chair Ben Bernanke who in March 2007 said, "the problems in the subprime market would only reduce somewhat the effective demand for housing” and then followed that up in May 2007 with “given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited”. Bernanke saw no potential ill effects on the broader economy right up until June 2007. A few weeks later everything fell apart.

NEXT: Bank Profits Soar Even Though Business is Bad

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.

Geithner Talks, Market Drops ... Again

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

Our Video Related to this Blog:

Treasury Secretary Geithner appeared on Face the Nation on Sunday. Stocks in the U.S. are selling off this morning (even though there was a decent rally in Asia last night). Stock selling seems to be the most likely response whenever Geithner speaks and anyone long the market should worry whenever Geithner's mouth is about to open. The interview dealt with the administration's latest imbroglio, the attempt to force GM into bankruptcy and how well the various current bank bailouts are going. Geithner did state, "we want greater lending". He didn't come up with any reason why this might happen.

When Geithner was asked whether the government will force banks to sell their toxic assets to improve conditions for lending, he said that "banks have a large incentive to clean up their balance sheets." A news item released in Europe (please note that this news was not originally published in the U.S.) last Thursday certainly brings that into question. It was reported that a number of large banks including Citigroup, Goldman Sachs, Morgan Stanley, and JP Morgan Chase were considering buying toxic assets to be sold by rivals under the U.S. Treasury’s latest one trillion bailout plan. The purpose of this plan is of course to get toxic assets off the bank's books. Nothing in the law apparently said the banks couldn't participate in the this free money government give away. So of course, they want the goodies too. The result of this congressional oversight could be a huge amount of government spending that results in just moving the toxic assets around the banking system instead of getting them out of it. Geithner also made it very clear in the interview that Treasury's "obligation is to apply the laws passed by Congress".

As for GM, Geithner stated multiple times that "GM is going to be part of this country's future." He followed up with "We want to see a strong automotive industry emerge from this recession," , and added that the government must be sure that GM "can emerge strong enough without having to have government help on an ongoing basis." As to whether GM will have to file for bankruptcy protection, Geithner said "there's a range of options. They've made some progress on restructuring but they're not there yet." What was not stated in the interview is what would the costs be of GM going bankrupt versus it being bailed out.

Bailing out GM will probably be many, many times cheaper than letting it go bankrupt. But hey, when dealing with taxpayer money, why not consider the most expensive option possible. The much higher costs of not bailing out GM are a consequence of the government already having bailed out the banks and the need to increase those bailouts if GM fails. Although the auto companies have been badly managed for years, the idea that the U.S. government knows better about how the auto industry should be run is ridiculous. How they've handled the bank bailouts is a good indication of just how much the government knows about anything to do with business.

NEXT: How to Handle Earnings Season

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.

Geithner's appointment to Treasury - a Golden Opportunity

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

Our Video Related to this Blog:

The market turnaround last Friday afternoon was reported by the financial media as resulting from the announcement that the head of the New York Fed, Timothy Geithner, would be appointed by President elect Obama as his Treasury Secretary. It would indeed be reasonable for Wall Street to cheer Geithner's appointment and the future team of takover Timothy and bailout Benny. It sent a very clear message that the new administration's policies will be to rescue any and every company needing it. While stocks rallied sharply on this news, the inflation hedges gold and silver rallied even more - and for good reason.

Geithner was the mastermind behind the AIG and Bear Stearns deals. In the case of AIG the company was nationalized by paying 10 times the market price for the U.S. taxpayer's share (if this had been a private deal he would have been sued for malfeasance). Bear Stearns was valued well below market value as a gift to JP Morgan Chase (which has a seat on the New York Fed Board of Directors by the way). Taxpayers just got to guarantee Bear's toxic loans and were left holding the bag. While most news media reported that Geithner was in favor of bailing out Lehman Brothers, this was apparently not the case. People who were on the scene at the negotiations claim otherwise. It is now widely acknowledged that allowing Lehman to fail is what has led to the market turmoil in the last two months. The PR campaign to build up Geithner obviously felt it important to rewrite history and in doing so made it clear that a universal U.S. government bailout policy was in our future.

Despite the momentary trouble that the automakers are having in Washington on getting in on the government gravy train and the failure to bail out Lehman (somewhat similar to the failure of the Fed to bail out the Bank of the United States in 1930, which had disastrous consequences), short of complete nationalization, the U.S. government couldn't do much more to support financial firms other than pump even more money into them (this will indeed be happening). Over the weekend the government guaranteed the most worthless one-sixth of Citigroup's assets. Today, the Fed announced a $600 billion program to support the mortgage market, $100 billion for Fannie Mae and Freddie Mac (two other financial black holes for government money) and $500 billion to purchase mortgage backed securities. Additionally, the Fed will lend up to $200 billion to the holders of securities backed by various types of consumer loans. So that's another $800 billion just for today. The total in the last year is way into the many trillions and you many assume most if not all of that is freshly printed money.

The implications of these moves have not gone unnoticed in the markets. Inflation sensitive silver rallied more than any stock index on both Friday and Monday. Gold, which has not been terribly damaged in the sell off during the last two months, and beaten down oil also had good rallies. The charts for gold and silver are much healthier looking than those for the major stock indices. Sustainable rallies are possible for both, while stocks look like they will need to do more work to get to that point.

NEXT: A Black (Plague) Friday for Retail

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.

China Bails Out Asia - at Least for Today

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:

Finance ministers and central bankers from the Group of 20 (nineteen of the world's largest economies, plus the European Union) met in Brazil on Sunday and called for increased government spending to bolster the sagging global economy. The multi trillion dollar bailouts, massive liquidity injections, and sharp rate cuts in the last two months apparently haven't done the trick. To do its part, China promptly announced a $586 billion stimulus plan consisting of spending, subsidies, loser credit, and tax cuts. Unlike the rate cuts in Britain and the ECB last week, when the markets crashed the day they were announced, Asian markets rallied strongly on the news.

Not surprisingly, the Shanghai composite was up the most with a 7.3% gain. It is still down about two-thirds from its high last October, after rising in one of the most spectacular bubbles in history (bubble markets usually need somewhere between an 80% to 98% drop before they can stabilize). The Nikkei rose 5.8% on the news, after having hit a new low in its 18 year drop only recently. Intraday, the Nikkei has had approximately an 83% drop so far from its bubble high in 1990 to its current low. What the final number will be and when it will take place is anybody's guess. The Sensex in India, another bubble market, rose 5.8% as well. The dollar rallied against the Yen and natural resource stocks (inflation indicators) seemed to be the major beneficiaries of China's announcement. BHP Billiton, the world's biggest mining company was up 13%.

As the rally moved along with the sun to Europe, the enthusiasm dampened somewhat. Major European markets are up less than 3% as of this writing. U.S. pre-market futures indicate an even smaller rally here. Of course the Dow already rallied 2.8% on Friday, but this was after a two-day post election drop of around 10% (half of what would be necessary to create a bear market). The news of Circuit City's bankruptcy and AIG's third government bailout, with the total now up to $150 billion, will weigh on the U.S. market if rationality prevails - a dubious presumption at best.

In case there was any doubt previously, the economic policy makers for all the world's large economies are pursuing and will continue to pursue extreme inflationary policies. In many cases, this is being done to try to reinflate collapsing bubbles. There is no short-term likelihood of success in this endeavor. They will be successful however in igniting an inflation bubble. Although this is completely predictable, expect great surprise - and denial - when inflation starts to get out of control.

NEXT: Auto-Asphyxiation - GM, Ford Gasp for Bailout

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

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

Stock Market Enters Bermuda Triangle

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


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In technical analysis, a symmetrical triangle pattern usually indicates a continuation of a trend. The U.S. market indices look like they are making such a pattern on the charts. Triangles aren't the most reliable of chart patterns however and a break on both to the upside and downside is possible. If a downside break occurs, and this has not happened yet, then look for a test of the intraday lows of of around 7850 on the Dow, 840 on the S&P 500 and 1542 on Nasdaq. If successful, this could put in a double bottom and make a rally possible. A break of these levels would indicate a test of the 2002 lows on the Dow and S&P, at 7200 and 775, would likely take place.

While Monday was a good rally day in the U.S. markets, the action took place on below average volume indicating a lack of conviction in the buying. On Tuesday, the Dow was up an hour before the close and then experienced approximately a 250 point drop to end down 232 or 2.5% (It's volatility like this that is preventing the the market from getting anywhere on the upside). The Nasdaq was the hardest hit of all the indices because of bad tech earnings. It dropped 73 points or 4.1% to close below 1700 at 1696. The selling continued overnight in Asia, with Japan, Hong Kong and Korea experiencing another crash day. The Nikkei was down 6.8% or 632 points, but was still well above its 2003 low. Financials bore the brunt of the selling in Japan. The Hang Seng and KOSPI were down 5.2% and 5.1% respectively. Oil fell below $70 a barrel in Asian trading.

Things were a little better in European trading this morning, but not much. The 3 major indices, the FTSE, DAX and CAC-40 managed to hold their losses at the 4% level, just below the criteria for a crash. In a surprise move, Hungary raised interest rates 3% to protect the collapsing Forint. Surprisingly, despite all the global negativity, U.S. stock futures were up early on in pre-market trade. Wachovia's announcement of a $24 billion quarterly loss, the biggest for any U.S. financial company ever, seemed to have turned sentiment highly negative.

By a number of technical criteria, the U.S. markets should have bottomed by now. There has of course been a short-term rally, but the market is having trouble holding it. Not that the monetary and fiscal authorities haven't been trying to assist it, with one new program after another - and you can expect another 50 basis point rate cut from the Fed next week as well, with Fed funds returning to the 1.0% rate that caused the credit crisis in the first place. Right now bad earnings and negative outlooks are causing stocks to sell off. None of the major problems with the financial system have been permanently solved however. Expect them to continue showing up again and again, just when you least expect it.

NEXT: The House of Cards Economy

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 Fed Should be Careful What It Wishes For

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:

Volatility is still the predominant feature of the U.S. stock market, with multi-hundred point moves being a daily occurrence on the Dow. For the moment, a Monday rally pattern seems to have replaced the Monday crash pattern that began in mid-September. The media reported yesterday's big move up in stocks as the market's approval of Fed chair Bernanke's endorsement of a new economic stimulus package. This of course makes no sense. The number of stimulus packages, special Fed lending facilities, special Fed asset purchasing programs, bailouts, bailout bills and government loans since the credit crisis began is now somewhere in the double digits - there have been so many, I've lost count. The need for more is just an admission of failure for all of the other initiatives, many of which were claimed to be just what was needed to turn things around. Apparently, the turning hasn't taken place yet.

The Fed announced even another new program this morning (for $540 billion this time). It will start buying commercial paper and dollar denominated CDs directly from money market funds. If you have been following this blog, you may have thought this was already being done. However, what was taking place is the Fed has been lending banks, a $123 billion so far, the money for this type of purchase. However, $341 billion has been withdrawn from money market funds by institutional investors since that program began. So the Fed has decided to eliminate the middleman (or more appropriately the middle-bank) and put an increased amount of funding behind this operation. This new program should not be confused with the one that begins on October 27th when the Fed will begin buying up to a trillion plus of commercial paper from an array of companies. The security of U.S. money market funds was supposed to have been assured about a month ago with the (legally questionable) establishment of a $50 billion dollar government insurance fund. It looks like things aren't exactly working as planned.

Today's country to announce the latest multi-billion dollar injection into its banking system is France. The French government will provide $14 billion in funding to the nations six largest banks. This appears to be part of their half a trillion bank rescue package announced several days ago. Between these two bailout announcements, French authorities were embarrassed once again with another bank trading scandal. Caisse d'Epargne announced an $800 million loss from derivative trading that allegedly took place because of rogue traders. It makes you wonder if there are there any controls on trading operations in French banks. Regardless, the biggest banks in France, just as in other advanced economies, will be assured of survival. Smaller and medium sized banks will be the ones taking the hit from the credit crisis.

The close to infinite liquidity being poured into the world's financial system is having the immediate desired effect of lowering interbank lending rates, which fell to their lowest level in a month yesterday. While the liquidity tsunami is good in the short-term, if successful it could lead to a very ugly long-term. Examination of a U.S. Adjusted Monetary Base chart shows a line going straight up (http://research.stlouisfed.org/fred2/series/BASE). This figure is currency in circulation, plus bank reserves and a massive increase in bank reserves is what is causing its vertical rise. Since banks are not lending at the moment, the inflationary effects will be muted from these additional reserves as long as the economy remains weak. A roaring economy where banks are lending out their reserves full stop would translate to an annual U.S. inflation rate somewhere around 2000% if the current rate of increase was maintained - and that would certainly make the stock market go up.

NEXT: Stock Market Enters the Bermuda Triangle

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.

Pump up the Market, Pump up Inflation

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

Our video related to this posting:

If you examine the press coverage about the government bailouts of banks, brokers, insurance companies, Fannie Mae, Freddie Mac and now the first major system wide bailout ($700 billion to handle $13 trillion in toxic bonds somehow just doesn't seem enough), you will see little coverage of any possible consequences. Just as always, there will be no free lunch even though you aren't hearing it from the media. Lunch in fact will not only not be free, but its price will be skyrocketing.

While it is possible for governments to manipulate markets in the short-term, it is not possible in the long term. Markets will always return to their equilibrium points eventually. Blatant government interference in the U.S. stock market began last August when the Fed announced a reduction in the discount rate one hour before the futures expired, causing a dramatic reversal in their prices and wiping out the profits of the shorts. Last Friday, just before options expiration, the SEC just out and out banned shorting (of financial stocks) and then the Treasury announced a massive bailout for financial companies. If you look back you will see major Fed and/or Treasury actions around options expirations during the market meltdown in January, the Bear Stearns bailout in March and the Fannie and Freddie bailout in July (and there is other activity during other expiration dates as well).

While manipulation results in the biggest bang for the U.S. buck during an options expiration, the impact has lasted at most two months and usually not even that long. Over time, even though the government's market interference has become more desperate and more extreme, the effects are nevertheless becoming more transitory. The short-selling ban and announcement of the biggest government gift in history to financial companies rallied the Dow 369 points and the Nasdaq 75 points on Friday. The Dow then fell 373 points and the Nasdaq 95 points on Monday completely wiping out Friday's gains. The market was still off the bottom though because the big rally began Thursday, the afternoon before this major news came out. Of course, only the most cynical would think that this news was leaked to the big Wall Street players so they could take advantage of it at the expense of the small investor.

While the U.S. government on one hand is busy trying to support the collapsing floor of the stock market, it is blowing off the roof in the commodity markets related to inflation. The biggest one-day rallies ever had already taken place in gold and silver last Wednesday with gold up over 11% and silver up over 14%. Oil though put them to shame Monday when it was up $25 a barrel (or 24%) at one point . . It closed up 16.37 or 16% on the day (even more amazing than it seems since the easily manipulated U.S. dollar was also rallying). The price then fell on Tuesday after the September contract had settled and the October contract became the front month. Commodities simply do not go up these amounts in one day, but it's happening right before our eyes. While the government has done everything possible to juice up the stock market, there are reasons to believe that it has done the opposite with gold, silver, and oil, or at the very least turned a blind eye to manipulations by the big players to drive down prices in these markets. Gold, silver and oil though will have to return to their equilibrium points just like stocks. They are gushing upwards because the inflation pressure cooker, filled with government bailouts and seemingly limitless money pumping, looks like it's about to explode.

NEXT: Buffet Sacks Goldman

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.