If an EU Leader Says It, Don't Believe It

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.

German leader Angela Merkel revved up the markets on Thursday by saying once again that she and the other EU leaders would do everything possible to save the euro. If traders realized how reliable previous official statements concerning the Eurozone debt crisis have been, markets would have experienced a major selloff.

When the debt crisis first appeared in Greece, Merkel said there would be no bailout and the Greeks would have to solve their own financial problems. ECB President Trichet made it clear that Greece wouldn't receive any special treatment. It wasn't long before they both backtracked on their public statements. On April 11, 2010, a €30 billion bailout was agreed to and this was raised to €45 billion on April 16th. By May 2nd, a total package of  €110 billion had been arranged. This amount was meant to fix Greece's debt problems once and for all. The Washington Post reported that IMF director, Dominique Strauss Kahn, and EU Commissioner Olli Rehn stated, "the plan would lead to a more dynamic  economy that will deliver the growth, jobs, and prosperity that Greece needs in the future". If there were a worst-forecasting-prediction-of-all-time award, both Strauss-Kahn and Rehn could be potential winners.

Not only did the Greek economy not prosper, but it went into a tailspin. Other claims made by the EU proved to be equally absurd as well.  As reported by BBC News, the Greek debt to GDP ratio was supposed to rise from 115% at the time of the bailout to 149% in 2013, when it would then fall. Instead it rose to 165% in 2011. Greece's budget deficit was expected to be down to 3% of GDP (the EU target rate that all members states are obligated to meet). If Greece is lucky, it's deficit will only be 7.3% of GDP this year. It is expected to rise again in 2013 however to 8.4%. So much for that.

Even though Greece missed the EU and IMF's projected targets by a mile, this was only possible because a much bigger bailout took place in 2012. Greece received an additional €130 billion  and got to effectively write off almost 75% of its government debt held by private bondholders (the ECB and IMF were exempt from the write down). Certainly Greece must be better off after €240 billion in bailouts and writing off a big part of its debt, isn't it? Well, no it isn't. Before the first bailout in 2010, Greece had around €300 billion in government debt. Just released figures indicate in now has €303 billion in debt. While debt is no lower, GDP has collapsed, falling over 9% in 2011 alone and currently on target for an over 6% drop this year. Unemployment has skyrocketed with the someone under 25 being more likely not to have a job than to be working. By almost any criteria you wish to chose, the EU, IMF and ECB program has been a complete failure.

Now the EU and its partners are preparing to bailout Spain. Already a €100 billion loan has been committed for Spanish banks. This doesn't include any funds to bailout the government. How bad is the situation in Spain?  Well, Reuters has reported that one of Spain's regional mayor robbed a number of supermarkets last week and distributed the stolen food to the poor. As a member of  a regional parliament, he is immune from prosecution. Government stealing from those that have is of course nothing new, but apparently in Spain there's no attempt to hide it.

It looks like Spain will be asking for a full-fledged bailout soon. The EU will then directly take over its finances.  The total bailout could easily involve a trillion euros or more, unless some EU country stops it after realizing the damage this is going to cause the EU itself, let alone Spain. The long-term implications are likely to be quite ugly for both.

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.

2011 Budget Deficit Third One Over a Trillion Dollars

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.

U.S. budget deficit figures released on Friday afternoon indicate that the deficit for fiscal year 2011 (ending on September 30th) came in at $1.3 trillion. This is slightly higher than the 2010 deficit and the third trillion dollar deficit in a row.

Total federal spending (on-budget items) came in at $3.6 trillion. Revenues were $1.3 trillion, over 4% higher than in fiscal year 2010. Revenue rose slightly to $2.3 trillion. As bad as the budget deficit appears (and a trillion dollar deficit is really extreme), the Congressional Budget Office estimated in January that the 2011 budget deficit would reach $1.5 trillion. The fight over raising the budget deficit ceiling postponed federal spending for a few months until a deal was reached in August however. It is likely that this spending will show up in the 2012 fiscal year.

While there is a special congressional committee looking for $1.5 trillion in savings, its actions are not going to reduce the total federal spending by enough to reduce the budget deficit to something manageable. The amount being cut is for a 10-year period and averages only $0.15 trillion per year. If this had been done last year, the 2011 budget deficit would have been $1.15 trillion — still an astronomical amount.

It is also safe to assume that the budget deficit in the next five years can easily grow much faster than the intended cuts. When they did their projections for future fiscal years, the Obama administration assumed that U.S. GDP would be growing by over 5% a year until 2016. While this figure was never plausible because it is much higher than the potential growth rate of the U.S. economy, now that the U.S. is facing a possible recession and negative GDP growth, it is even more absurd.

Investors should assume that a continual stream of major budget deficits awaits the U.S. in the future. At this point, the massive cutting that is necessary to get the budget under control will cause a hit to the economy resulting in lower tax revenues, which in turn will make the budget deficit worse, not better.  This is the downward spiral that Greece currently finds itself in. More cutting actually is leading to a higher debt to GDP ratio. The U.S. debt to GDP ratio is approaching 100%. Once this number is over 90%, a country's economy becomes permanently weakened. When it reaches 150%, and it will  for the U.S. if its budget deficits remain as large as they currently are, the probability of default becomes almost 100% certain.

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.

Why the U.S. Economy is Turning Down

 

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 amounts of money printing. This is the official blog of the the New York Investing meetup.

A number of economic reports have come in lower than expected recently and the talking heads on TV are perplexed as to why a sudden downturn is taking place. Listening to their commentary, you will hear all sorts of fanciful explanations except the most obvious one – the massive government deficit spending that has been the reason for the apparent economic recovery has been frozen because the U.S. national debt ceiling hasn’t been raised by Congress.

The debt ceiling is currently $14.3 trillion and this was reached in May. Debt was already getting close to this figure as early as February however and federal spending was decelerating long before May. Based on the 2011 fiscal year budget (which runs from October 1, 2010 to September 30, 2011), the U.S. was on track for a deficit as high as $1.65 trillion this year. This represents approximately 11% of U.S. GDP. This 11% is just the deficit part of federal government spending, not all of it. Subtract this from GDP, you would see GDP was only around $13 trillion – lower than before the Credit Crisis began.

Moreover, the part of the GDP generated by the deficit is being paid for with borrowed or printed money. Actually, it’s mostly printed money. The amount of quantitative easing planned by the Federal Reserve in the first half of the year is enough to cover 70% of the deficit.  The government issues bonds to pay for the deficit and then the Fed buys them with printed money. This is what has been making the economic numbers look better and is being described by the mainstream media as an economic recovery.

A monkey wrench was thrown into the works however when Congress refused to raise the debt ceiling. As a consequence, deficit spending has ground to a halt for a while (expect it to return soon) and this in turn slowed down the Fed’s effort to inject newly printed money into the economy. How dependent the health of the economy is on deficit spending supported by the Fed’s phony money operation has become apparent in recent economic reports.

The May non-farm payrolls indicated only a 54,000 increase in jobs for the month. Moreover, the previous two months were revised downward by 40,000 jobs. The manufacturing sector, which has been leading the recovery, actually lost 5,000 jobs. Close examination of the figures indicates there are well over two million less people in the labor force than last year at this time. If they had remained in the labor force, the current unemployment rate would be 10.6% rather than the reported 9.1%. It would be highly unusual for the labor force to shrink at all, let alone by over two million, if the economy was growing as it supposedly has been. People leaving the labor force make the unemployment numbers look better than they are though and government statisticians are well aware of this.

Regardless of how much recovery has taken place, it is clear that the goods producing sector of the economy is weakening. While the ISM Manufacturing report for May still indicated expansion, every component was lower than it was in the April reading. New Orders and the Backlog figure were barely positive.  The highest component, as has been the case for many months, was Prices Paid – a measure of inflation. It was down from a whopping 85.5 in April to a still very high 76.5 (above 50 indicates expansion). Much of the growth in manufacturing has occurred because the items coming off the assembly line cost more, not because of there are more of them. The Durable Goods reading from April, the most recent, was down 1.2%, confirming less demand for the output of U.S. factories.

Tying it all together are the Leading Economic Indicators (LEI), an indication of where the economy is heading. These were down 0.3 in April, indicating the economy is likely to continue to lose steam. LEI will probably stay weak until the deficit ceiling is raised and newly printed money can start flowing back into the U.S. economy at its formerly prodigious rate. If this doesn’t happen, Americans might discover that just like the proverbial emperor, the U.S. economy has no clothes.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21
Author, "Inflation Investing - A Guide for the 2010s", Volume 1
http://www.amazon.com/Inflation-Investing-Guide-2010s-ebook/dp/B0051GU06W/ref=sr_1_3?s=books&ie=UTF8&qid=1307366974&sr=1-3

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.

State of the Market in Early December 2010

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 is a lot of controversy currently on whether the markets are bullish or bearish as we enter December. Most investors are on the bullish side, yet there are voices of caution saying the market has gotten too frothy. There is substantial evidence that the market is indeed over done on the upside. Yet, there is a case to be made that it can get even more overpriced.


The first thing investors should note is that the U.S. stock market has entered a period of volatility, with the Dow Jones Industrials commonly going up or down more than 100 points in a day. Such wild swings are not healthy for a market. They indicate indecision on the part of traders. The market, like everything else, will eventually break if it is bent too much.

Certainly investors are generally very bullish, probably much too bullish at this point. At the end of November, Investors Intelligence had the bulls at over 55% and the bears at around 21%. These are classical points where the market frequently turns. When too many people become bullish, there is eventually no one else to buy and too many bears mean there is no one else to sell. A recent global survey supports this view with large money managers having only 3% of their funds in cash – the lowest level ever recorded. The large funds, who move the markets with their actions, are basically tapped out and have no more money to invest. So where is the money coming from for the rally we saw the first three trading days of December?

Quite simply, it’s coming from the Federal Reserve. This doesn’t mean the Fed is buying stocks. It means the Fed is pumping money (newly printed money) into the financial system and this money is finding its way into the markets. For its current quantitative easing program the Fed bought $8.17 billion in treasuries on December 1st, $8.31 billion on December 2nd and $6.81 billion on December 3rd. Not only did this drive U.S. stocks up, but gold broke above $1400 an ounce and oil hit $90 a barrel – both inflation indicators. The rising price of oil is particularly significant since oil tends to hit seasonal lows in December and February and yet it is going up now instead of down. Higher oil prices percolate through the economy and lead to higher prices for a large number of items. They also increase the U.S. trade deficit, which means the government has to borrow or print even more money in order to fund it.

Despite the obvious inflationary implications of quantitative easing, the Fed consistently denies it will lead to inflation even though excess money printing has always led to inflation in the past. The original form of money printing was cutting the amount of gold or silver in coins. It only took a short time before coinage was invented in 600 to 700 B.C.E. before one of the Greek city states caught on to this idea – the government had over borrowed and wanted to pay back the money it owed with cheaper currency (this should sound familiar to Americans in 2010). Paper money was invented by the Chinese before 1000 A.D., but they eventually had to stop using it because they made so much of it that it led to huge inflation. The lessons of what happens when too much money it created go way back – yet governments continue to it over and over again and with the same predictable outcome. Yet, even though I have researched this extensively, I have not found any government that ever admitted its role in creating inflation. It’s always someone else or something else that is responsible.

Most market observers are bullish on the market because expansionary Fed policies should make stocks go up. We have not only had a zero interest rate policy (ZIRP) since December 2008, but the Fed is on its second round of money printing through quantitative easing. Under ordinary circumstances, the stock market should be rising. However, circumstances have hardly been ordinary since the Credit Crisis began.

We only have to look at what happened to the Japanese stock market to predict the long-term impact of current Fed policies. The Japanese have had close to zero interest rates for most of the 2000s. They also started engaging in quantitative easing. This didn’t keep the Nikkei, which was close to 40,000 at its height at the beginning of 1990, from falling below 8000 in 2003 and in 2008/2009. The Japanese made other attempts to push their stock market up as well – and these worked temporarily. Ultimately economic reality prevailed however. In the long run this approach is not likely to work any better for Fed Chair Ben Bernanke.

The current quantitative easing program of the Fed is not working as planned either. Interest rates were supposed to go down and so was the trade-weighted U.S. dollar. Neither has happened. Interest rates went up – and this is a negative for the market – and the dollar also went up instead of going down. Interest rates are possibly going up because foreigners are selling some of their large holdings of U.S. treasuries (the exporting countries are extremely angry at Bernanke’s policies). The dollar is going up because of the banking crisis in Ireland. The 85 billion euro bailout there has not calmed markets because everyone realizes that there are major problems remaining in Portugal and Spain. Both countries deny they need a bailout, but so did Ireland right up to the last minute.

The market is also rising on economic data that is being reported as ‘good’. This is mostly wishful thinking on the part of the mass media and the government press releases that they publish without much examination or by putting in context. Auto sales and consumer confidence have been two oft cited pieces of evidence of an improving economy.

Auto sales which are supposedly taking place at a rate of 12.2 million a year have frequently been brought up as evidence of a recovering economy. At the bottom of the Credit Crisis, when the economy literally stopped dead in it tracks, auto sales were approximately 10 million a year and at the top they were 17 million a year. So, they are indeed doing better than they did when the economy was completely frozen (whether this can be referred to as a recovery is quite another matter). The improvement in auto sales taking place now though is nothing compared to the increases in the 1930s during the Great Depression, which lasted for many years after the first big increases in auto sales were reported.

Consumer confidence rising to the 54 level also got a lot of hype. The number needs to be over 90 to indicate an economy that is doing just OK. The number during a boom would be well over 100. The slight chances in this figure are nothing but statistical noise – meaningless changes caused by random movements. What caused the slight increase were consumers becoming more confident about the future state of the economy. This is not surprising since they keep reading in the papers and hearing on TV that the economy is getting better, even though they don’t see it in the everyday lives. The ‘present conditions’ number is still at an incredibly low 24. It has been stuck around this level for a quite a long time.

The November employment figures last Friday also threw some cold water on the economic recovery scenario. The government admitted to unemployment rising to a rate of 9.8%. The underemployment rate, which includes some discouraged workers and people forced to work part time was 17.0%. There has been little change in these figures during 2010. Investors should remember that the stimulus bill from early 2009 was supposed to prevent unemployment from rising above 8.0%. The Fed’s first round of quantitative easing was also supposed to fix the economy. Even though both failed, Washington is one of the few places where lack of success isn’t a reason for not repeating an action.

The failure of Washington’s policies can be seen by how little the GDP improved despite the massive stimulus that has been applied. In fiscal year 2010 (ending September 30th), the U.S. ran a budget deficit of 1,290 billion dollars (or $1.29 trillion). During the same time period, the GDP increased by 635.5 billion dollars or slightly less than half of the budget deficit. So for every two dollars being run in deficits, the U.S. is getting less than a dollar of economic growth (and this is with a zero interest rates on Fed funds, the return would diminish as interest rates got higher). The borrowed money for the deficit still has to be paid back or reduced by creating inflation. There is no way the U.S. will be able to pay back its national debt (the accumulation of all the annual deficits) and the higher the total becomes the greater the inflation that will eventually be necessary to deal with it.

At the moment, the U.S. stock market looks like it could be topping. Along with the volatility, the technical indicators, such as the RSI, MACD and DMI are fairly negative. The Dow industrial Average broke below its 50-day moving average in late November, but rose above it on December 1st. The Dow is leading the market down and it should be watched for the future direction of the market. The other major indices – the S&P 500, the Nasdaq and the small cap Russell 2000 - have still managed to stay above their simple 50-day moving averages. Until all the indices have fallen below their 50-day moving averages, the stock market should still be considered to be in an uptrend.

While there will always be some stocks that go up no matter how bad the market, at the moment, it is a generally a good idea to avoid buying any more stocks or commodity ETFs. The upside profit potential is probably limited. If you have large profits, you should consider taking some money off the table. The classic trading rule of thumb is that if you have a 100% profit in something, you should sell half of your position. It also a good idea to keep reasonable stops (an automatic sell at a price you have selected before hand). What is a reasonable stop depends on how much profit you are willing to potentially give up.

If you have a large portfolio and wish to hedge it or you just want to take a short position on the market, you can do so by buying the VXX, the ETF for the VIX (the volatility index). The VXX is not perfect because it unfortunately doesn’t precisely track the VIX. The big advantage of the VIX is that when it gets very low, there is limited downside risk of loss (shorting a stock can have an infinite risk of loss). In the current environment, a VIX around 18 or below seems to be a good buy. It is possible that the VIX still has to fill a gap in the 16s to 17s. If this happens - and it may not – this should be considered a very good buy point. Like all investment positions, it’s generally not a good idea to buy 100% of the position you ultimately want all at once. Buying on days when the market is up a lot is the best approach.

Investors should be cautious at this point. The bullishness seems overdone and things always look best at a top. The market could indeed go higher, but a lot of risk is being taken on to make whatever extra money can be made. If you are a day trader or very short-term trader, this can be a profitable time for you. For position traders, with a trade horizon of several months or more, this is not the best of times for additional long positions.


Disclosure: Own VXX.

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

This posting is editorial opinion. Investing is risky and the possibility of loss always exists. The above content should not be considered a recommendation to buy or sell any security.




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More 'Good' Pre-Election Economic News

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.


Consumer income had a nice rise in August thanks to extended unemployment benefits (not regular unemployment benefits). The final budget deficit figures for fiscal year 2010 have been leaked and the U.S. is supposedly only in the hole for a massive $1.3 trillion. The ISM manufacturing index came in at 54.4 and the the mainstream press is citing a strong manufacturing sector as the reason the U.S. stock market had its best September since 1939. Altogether, this news could be summed up as 'stupidity you can believe in'.

By almost every measure except the headline number, the ISM report was a disaster. The highest number inside the report was prices paid, an inflation measure, which came in over 70. Prices apparently went up a lot in August. This component had the biggest increase by far, which wasn't difficult because only one other component went up - inventories. Inventories usually pile up because sales are slowing down. The negative big gains were more than matched with negative big losses in the report. Order backlogs, supplier deliveries, employment, and the production components all had big drops. Well, that certainly should have led to a big stock market rally all right.

As for the supposed improved budget deficit figures, as of this August, $1.377 trillion dollars had already been borrowed to fund the federal government in fiscal year 2010. This number would have been $115 billion larger (for a total of $1.492 trillion) if there hadn't been 'financing by other means'. Financing by other means had a big increase in August and is projected to have another big increase in September. There are also substantial 'off budget outlays'. See http://www.fms.treas.gov/mts/mts0810.pdf for the August Treasury report on 2010 fiscal year spending. Makes you wonder if the U.S. government is using the Enron Accounting Manual to do its books.

Finally, some people might argue that an economy that is dependent on extended unemployment benefits for increased consumer spending could just perhaps be somewhat troubled. Few if any of these people write for the mainstream press of course, which generally treated the news of an increase in consumer income and a rise in the savings rate to 5.8% as just more rosy news. If this is such good news, obviously the U.S. should institute ultra super extended unemployment benefits. After all, look at what these policies have done for Europe – riots in the streets and turmoil in the bond markets. The euro has been rising though and obviously this must be due to improved manufacturing in the U.S., if you follow the logic of the mainstream press. If not, you might just conclude that there is a whole bunch of government manipulation of the markets going on.

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.

More Predictable Changes in Weekly Unemployment Claims

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.


Weekly unemployment claims increased to 465,000 last week rising by 12,000. The number was above analyst expectations, although it shouldn't have been.

Weekly unemployment claims almost always have a significant drop around major holidays and then rise afterwards. This happened right on schedule for the Labor Day weekend. The last major drop was around the July 4th weekend. It was reported today that the four-week moving average is now the best since late July. Somehow, mainstream media reports failed to mention the reason for this was because both periods contained major holidays.  The major reason for the holiday drops is that the bureaucrats responsible for processing the claims and reporting the numbers seem to take longer vacations than anyone else. Nine states were missing data for the week before Labor Day, so the numbers had to be 'estimated'. For some reason, this very important piece of information didn't appear in press reports either.

What the press did report was that weekly unemployment claims were suddenly improving and this was evidence the economy wasn't falling into another recession. This was an amazing analysis considering a claims number under 400,000 would be needed to justify that statement and the best number around Labor Day wasn't even below 450,000. Furthermore even the most casual examination of the claims data shows that claims have been consistently in the 450,000 to 500,000 range all year. So instead of reporting "Not Much Changes in Employment Picture" or "Weekly Claims Improve As Usual Because of Holiday", the press fell all over itself to report a big improvement in the U.S. employment picture. The only thing they left out was cheerleaders in the background and audio that intermittently said 'rah, rah, rah'. Stocks rallied strongly on the surprising news that seemed to indicate a strengthening economy.

Maybe the mainstream media had already pre-written their articles about the 'recovery summer' that the administration had promised and didn't want to waste good copy. As for the recovery summer, there was essentially no change in weekly unemployment claims, or in the overall unemployment rate. Claims are somewhat better now though than they were a year ago when they came in at 538,000. It took around $1.5 trillion of on-the-books deficit spending to achieve the improvement to 465,000. Apparently a trillion dollars of borrowed money just doesn't go as far as it used to.

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.

July Payroll Report Marks 3 Years of Job Losses

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


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

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

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

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

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

Disclosure: No positions.

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

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

A Tale of 3 PMIs: China, the EU, and U.S.

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.


Stock markets in Europe, Asia and the U.S. rallied strongly on August 1st even though reports from purchasing managers in China, the EU and the U.S. did not bode well for future economic activity.

In China, the HSBC PMI (purchasing managers index) for July was 49.4. This indicates Chinese manufacturing contracted last month (50 is the dividing point between expansion and contraction for all the PMI indices). The official Chinese government report though came in at 51.2, indicating a slight expansion was still taking place. China is the growth engine of the world economy and a downturn there has negative implications far and wide. Mainstream media tried to put a positive spin on the news by saying the Chinese government wanted to slow the Chinese economy down, so a drop in manufacturing activity is good news. What the government actually wanted to do was slow down the property bubble created by their massive stimulus program during the Credit Crisis. They did not wish to slow down activity related to exports, which is their bread and butter. That seems to be an unfortunate side effect of their actions however.

While the news out of China was unabashedly bad, traders in the EU were ebullient that the EU purchasing managers July number was revised up to 56.7 from a previous estimate of 56.5. This change is statistically meaningless. Based on the data available, it also looks like Germany was almost single-handedly responsible for the good number. Exports were the key. The big drop in the euro to 1.18 in early June (from around 1.50 late last year) would certainly have boosted exports from the EU since it made their goods much cheaper - and Germany's economy is export based. However, the report also indicated that export orders are slowing (as the euro rises) and new orders are well below this year's peak. The service providers in the report also had the most negative outlook for future activity in eight months.

The U.S. PMI was 55.5 for July, down from 56.2 in June. Of the components in the index, New Orders were down the most, dropping 5.0. The second biggest decline was in Production, which fell 4.4. The Backlog of Orders category was also lower by 2.5. All of these are indicators of future activity. The biggest increase in the report was Inventories, which were up 4.4. Looks like goods are being produced, but are piling up in the warehouse. Together, these components all seem to indicate that U.S. manufacturing will be slowing down later this year.

Manufacturing was the big success story of the stimulus spending that started during the Credit Crisis. This had a greater impact in China than in the Western economies because manufacturing is a greater component of their economy. In the U.S., the service sector is four times bigger than the manufacturing sector, so a buoyant manufacturing sector is not enough by itself to create a strong recovery. This is one reason the American economy remains lackluster despite $3 trillion in budget deficit spending in the last two years. Stimulus spending though will be declining in the U.S. and in the EU into the foreseeable future. We are already seeing what impact that will have based on the PMI reports coming out of China.

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.

More Evidence for a Double Dip Recession

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. economy continues to look weaker and serious problems with the financial system are still lurking in Europe. EU countries are trying to outdo each other to see who can increase taxes and cut spending the most. Copper, known as the commodity with a PhD in economics, is in a confirmed sell off.

U.S. Existing Homes Sales were released this morning and they came in well below expectations. This is only one of a number of reports lately where analysts have proven to be much too bullish. Despite the federal government tax credit that was juicing up home sales, they still managed to drop 2.2% (the credit expired on April 30th, but buyers have until June 30th to close and the sales figures are based on closings). The annual sales rate in May was 5.66 million units, compared to over 7 million in 2005. Inventories of homes for sale managed to drop just below 4 million last month. In 2005, they were under 3 million and the year before barely over 2 million. So a lot less homes are being sold now and there are a lot more homes available for sale. A number of sources are claiming that both HUD and the big banks are holding back on foreclosures to prevent the inventory of unsold homes from becoming even worse.

In a separate report, more people have dropped out of the Obama administrations HAMP (Home Affordable Mortgage Program) that have stayed in it. At best, this program is delaying foreclosures and it appears unlikely that it will ultimately prevent very many - all at a huge cost to the American taxpayer of course.

Meanwhile in Europe, the future stall engine for the world economy, the UK announced its plans to eliminate its budget deficit in five years. Higher taxes and big spending cuts are the approach it will be taking. Capital gains taxes will be raised from 18% to 28% (investing capital will flow to countries with lower rates) and the VAT will go up from 17.5% to 20%. Similar moves are taking place throughout the EU.

There seems to be no realization on the other side of the pond that higher taxes are a negative for economic growth. The proposed spending cuts will also have the same impact. Significantly lower economic growth and lower tax receipts are not being projected for the future however by the Europeans. Obviously they are going to be as surprised as they were by the euro crisis. Problems in the region's financial system have not gone away as is.  Fitch today slashed its view on BNP Paribas, the largest bank in the eurozone.

The augurs of a renewed recession can also be found in the ECRI weekly leading indicators, which indicated a growth rate of -5.7% last week (this number shouldn't be interpreted literally) and by looking at the price of copper. It is amusing to see the spokesperson for the ECRI trying to explain away the negative implications of the ECRI's leading indicators after the company has spent decades building up their credibility. It's enough to make one wonder if the company is changing its emphasis to providing economic cheerleading instead of an accurate view of the U.S. economy?

The price behavior of copper is confirming the ECRI data. Copper is more sensitive to economic activity than any other commodity. If you look at a chart of its ETF JJC, you will notice that the 50-day moving average crossed the 200-day on Monday producing a classic technical sell signal. Over time, copper has proven itself to be a lot smarter than the politicians that run the world's economies.

Disclosure: None

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

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

Retail Sales Drop in May Shouldn't Be a Surprise

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. government released its Retails Sales report for May this morning. Analysts expected an increase, but sales dropped 1.2%. The markets were surprised that American consumers were spending less even though the unemployment rate is stuck around 10% and credit card debt has dropped for 19 months in a row.

The expectations for higher retail sales came from the massive amounts of federal government stimulus being pumped into the economy. There is a $1.6 trillion dollar budget deficit projected for fiscal year 2010 (the deficit for 2009 was $1.42 trillion) and this money is making all the economic numbers look much better than they would otherwise. The deficit alone is approximately 11% of the official U.S. GDP number (which is grossly overstated), but still represents less than half of all federal government spending.  Investors should ask themselves: Given all of this support, how weak is the U.S. consumer?

This is an important question because the U.S. has built an economy based on consumer spending, which reached 72% of GDP before the Credit Crisis. The consumer also became very over indebted in the 2000s and the saving's rate hovered around zero mid-decade.  To spend more, consumers need more income and credit (the amount available from savings is limited). A jobs recovery is needed to increase consumer income and even Washington admits that that is not happening in the foreseeable future. As for credit, the big banks are borrowing from the Federal Reserve at zero percent, but are not passing the savings on to the consumer. They are also decreasing credit card lines, not increasing them. Autos are one of the only areas where cheap credit has filtered down to the consumer level.

Auto sales have also directly benefited from government programs like Cash for Clunkers. There were no special government programs active in May and auto sales fell 1.7%. The drop in retail sales was essentially across the board though. Department stores were down 1.8% and general merchandise sales decreased 1.1%. Hardware stores were really hit hard with sales falling 9.3%. The only bright spot was a 3.3% drop in gasoline sales. This took place because gas prices dropped, not because less gas was purchased. The Retail Sales numbers are not adjusted for inflation.

For some time now, the message coming out of Washington has been one of economic recovery. This has been based on economic numbers pumped up by incredible levels of stimulus. The retail sales report today and the employment numbers in general show that stimulus is not working so well this time around. The basic idea for excess government spending is that it jumpstarts the economy just as an electric jolt jumpstarts a battery. If the battery is really dead however, no amount of electricity brings it back to life. The same is true for stimulus in a dead economy.

Disclosure: None

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

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

A New Theory of Sudden Hyperinflation

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.


While everyone acknowledges that governments are printing and printing excess amounts of new money, more market observers are currently worried about deflation rather than inflation. There is a smaller group concerned about hyperinflation, but the theoretical underpinnings have been missing up to now that would justify how this could be possible. There is an explanation though and this indicates that hyperinflation can not only take place, but that is can happen suddenly.

There have been a number of impediments in how economists look at hyperinflation that have prevented original thought (and sometimes any thought at all) in this area.  Here are the necessary ideas:

1. Inflation is a currency losing its value (an idea most mainstream economist can't seem to grasp).
2. Severe deflation is a precursor to hyperinflation. They are not inconsistent events as is generally thought, but deflation sets the stage for hyperinflation.
3. Disinflation/deflation and inflation need not by symmetrical. For instance, if there is 30 years of disinflation, this doesn't have to be balanced by 30 years of inflation. The same amount of inflation could take place in only months or even weeks, let alone 30 years.
4. Inflation doesn't have to be a continuous phenomenon. The chart can have gaps in it with prices going up significantly overnight. Furthermore this can start from a low point where almost no inflation exists.

The origins of hyperinflation are with excess 'money' printing by a government. It is not possible to produce an ever-larger amount of currency and have each unit of that currency maintain its value. If it were, real money could be created out of thin air and everyone in the world could become infinitely rich overnight. This would also violate the basic laws of arithmetic. So excess money printing always devalues a currency and because of this less and less can bought with each unit of that currency.

This becomes a potentially dangerous problem when severe deflation takes place because of a shock to the financial system (the Credit Crisis for instance). To make up for the loss in value of assets (deflation), the government prints a huge amount of money. The printing causes devaluation of the currency and requires more printing to try to make up for the additional loss of value. A self-feeding money printing cycle then develops.

Even though huge money creation has occurred because of the Credit Crisis, we still haven't seen significant inflation yet. Indeed, the American government claims the U.S. inflation rate has fallen close to zero. How is this possible? The answer can be found in the banking system. The feds have pumped huge amounts of money into it (U.S. bank reserves have increased approximately 100 times or 10,000% since the Credit Crisis began) and banks have received this money at close to a zero percent interest rate.  Yet, if you look at commercial and consumer bank lending, you will see that they have been declining. So where did all this money go?  It was used to buy treasuries and this is what is allowing the federal government to fund its massive deficits. For all intensive purposes, this is a massive Ponzi scheme being run by the U.S. government.

Ponzi schemes though don't follow the same rules as normal businesses or economic statistics. They build to a crescendo over time and then suddenly collapse to zero instantly. The analogy for inflation will be the opposite however. Inflation will go to zero and then suddenly jump up to some very high level. In theory, zero interest rates should produce infinite inflation (hyperinflation), but nothing mandates that this has to be a gradual, long-term process. If you think about it, the Credit Crisis seems to have come out of nowhere. It didn't of course; there was a slow, long-term build up behind the scenes that just exploded suddenly. Inflation is likely to follow that same path of development. Global governments eventually got control of the Credit Crisis collapse by throwing trillions of dollars at the problem. That solution however won't work for dealing with inflation.

Disclosure: None

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

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

Bernanke Testimony Indicates Fed Still in Denial

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 testified on Capitol Hill today and didn't disappoint. As usual, his lack of insight into the true state of the U.S. economy boggles the mind.

The key takeaway from Bernanke's remarks is that the U.S. economy is strong enough to withstand the fiscal tightening ahead. Bernanke then promptly undermined this claim by admitting that the housing market has "firmed only a little" since mid-2009 and that it will take a long time before 8.5 million jobs lost during the Credit Crisis will be restored. What Bernanke left out was that even though the federal government has spent trillions on bailouts and efforts to directly and indirectly prop up the U.S. housing market, it has managed to get only slightly better. As for the jobs lost, what will that number be after the 1.2 million temporary Census workers are let go in the next few months? A 10 million lost job figure is probably more realistic.

It is of course not surprising the U.S. economy has gotten better after the government has pumped trillions of dollars in extra spending into it and given banks credit at zero percent interest. What is surprising is how little improvement there has been given these extraordinary and unsustainable measures. There is little evidence of private sector hiring in the job market and moreover the weekly unemployment claims are stuck over the 400,000 number that indicates layoffs are taking place at a recessionary level. The U.S. economy is also dependent on consumer spending. This accounted for 72% of GDP before the Credit Crisis. Consumers not only have job problems, but they are also losing access to credit. While credit card debt is dropping rapidly, there was a minuscule increase of $1.0 billion increase in overall consumer credit in April. Loans held by the federal government increased by $1.7 billion.

Nevertheless, Bernanke is confident that "gains in final demand will sustain the recovery in economic activity" even though "support to economic growth from fiscal policy is likely to diminish in the coming year". Bernanke went on to state the federal budget deficit is was estimated to decrease by $500 billion in fiscal year 2011. It was not clear where in the private sector the 'final demand' would be coming from to make up the reduced spending from the federal government. It certainly doesn't look like it will be coming from the over leveraged American consumer. As for the reduction in the budget deficit, prior to the last year of the Bush administration, the record budget deficit in total was less than $500 billion. A reduction by that amount now indicates the federal government will be spending $1.1 trillion more than it is taking in during 2011. That is still an enormous amount of deficit spending and hardly indicates an economy that can function on its own without constant ongoing government stimulus.

What led to the tragedy of the Great Depression in the 1930s were major missteps from the Federal Reserve and the federal government. The Fed put the interests of the banking community over those of the American public and this is what turned a bad recession into a bad depression. This was combined with an ongoing campaign of denial of the problem on Washington's part. Herbert Hoover gave a press conference in June 1930 announcing the Depression was over (it was only just beginning). The similarities to all the talk coming out of Washington today about economic recovery should give investors pause.

Disclosure: None

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

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

Debt Crisis Back in Greece, U.S.Has Borrowing Problems Too

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 markets are telling us that the Greek debt crisis, which has supposedly been solved numerous times, is still with us and getting worse. Interest rates on Credit Default Swaps on Greek bonds hit a record 495 basis points on April 21st. While Greece is at the end stage of a sovereign debt problem, the U.S. is at the beginning. Some U.S. corporate bonds have recently had lower interest rates than equivalent treasuries indicating that the market believes those companies are in a better financial position than the U.S. government.

The problems that have arisen in Greece are those that occur when a government borrows too much money relative to its GDP. Eventually the interest payments on the debt become overwhelming and default becomes inevitable. Default can take place in two ways however. It can be a simple failure to make interest payments on bonds or it can result from a major inflation of a currency. With inflation borrowers get the nominal amount of money due them, but that money doesn't have the same purchasing power. Since Greece is part of a currency union and can't print its own money, it can only default by not paying off its bonds. The U.S. on the other hand, can print all the money it wants to so it can only default through inflation.

Up to now Greece has had no problem borrowing money. The problem is that the interest rate it has had to pay in the last several months is so high that it undoes the effect of budget cutting measures taken to get its fiscal house in order. The recent EU and IMF proposed 45 billion euro aid package makes funds available for Greece, but didn't do so in a manner that would lower Greece's interest payments. Unless Greece gets access to large amounts of credit at well below market rates, there is no possibility of it avoiding default. Even if it does, sovereign default in all likelihood will simply be delayed.

So what are the implications for the U.S.? The U.S. is not much more fiscally responsible than Greece is, but is does have the reserve currency of the world and a very big printing press. The U.S. can get away will a lot more than Greece does before an irreversible credit disaster begins. In the last few years, the national debt in the U.S. has been skyrocketing because of the Credit Crisis and the recession that followed. It was  estimated in the proposed 2010 federal budget that that the U.S. will owe slightly more than  $14 trillion by the end of the fiscal year. Debt service was listed as $164 billion.

Based on the budget figures, the U.S. is paying approximately a 1.2% interest rate on its national debt. Could interest rates get any lower than that? Not likely, especially considering that Federal Reserve has kept short term rates around zero. If interest rates return to a more normal, but still relatively low four or five percent, debt service would rise to around $600 billion, without any further increases in borrowing. U.S. federal debt is continually increasing by large amounts however. If 1970s interest rates return, debt service would eventually rise to around $2.4 trillion for the current debt, which is approximately the total estimated revenue for the federal government in 2010. Long before that happened, money printing would be a major source of revenue needed to run government operations on a day to day basis - and hyperinflation would become unavoidable.

The market has been sending hints lately that it is not happy with the U.S. fiscal situation. Interest rates on corporate bonds from Berkshire Hathaway (BRKB), Proctor and Gamble (PG), Johnson and Johnson (JNJ), Lowe's (L) and Abbot Laboratories (ABT) have been lower than equivalent U.S. treasuries at some point in the last few months. Corporate interest rates should never be lower than government rates, at least in theory, because corporations are supposed to be riskier than a government. The market is telling us that it sees things the other way around. Investors should consider this a long-term warning.

The euro (FXE) of course sold off on the latest developments in Greece, but did not make a new low. The market may therefore have already priced in the full impact, at least for the moment, of debt problems in the eurozone. There are more potential problems there in Portugal, Ireland, Spain and Italy however. Whether the market will continue to see those as more significant than the debt problems in the U.S. is still an unanswered question.

Disclosure: Not relevant.

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

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

Why China is About to Change Its Currency Policy

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.


Reports are out today, April 8th, that China is about to abandon its fixed rate currency policy instituted in July 2008. It is likely to let the renminbi revalue upward a small amount immediately and then trade in a narrow trading band on any give day after that. China took such an approach in 2005. The U.S. has been pressuring China for this change.

The Obama administration had a report that was supposed to be delivered to congress on April 15th on whether or not China was a currency manipulator. This has become an increasingly sore point in U.S. China relations. It was abruptly announced a few days ago that the report would be delayed. Treasury Secretary Geithner has since gone to China and met with officials to get them to be more flexible with the renimbi's exchange rate. The Chinese have remained adamant that their currency isn't undervalued. If that was indeed the case, they should simply let it float freely and everyone would be happy. There is of course zero chance that that is going to happen at this point in time.

Keeping the value of a currency artificially low is a boon for a country's exporters because it makes their goods cheaper. Business and labor interests in the country with the artificially high currency necessarily lose out. This is a good description of Japanese U.S. trade situation in the 1970s and early 1980s. Now China has a huge trade surplus with the United States and has accumulated approximately a trillion dollars in reserves of U.S. currency.  The U.S. gains from China's undervalued currency policy because China recycles the hoard of dollars its gets from its trade surplus by buying U.S. treasuries (Japan did the same thing). This allows the U.S. in turn to run massive budget deficits because it can borrow a lot of money from China. That game may be up however. China was a net seller of treasuries for three months in a row up to this January (the latest month for which figures are available).

Keeping a currency undervalued is not without its risks. One of those major risks is inflation. China has compounded that risk even further by engaging in a massive stimulus program while its currency was frozen. Inflation does seem to be bubbling up internally within the country and even beyond its borders in higher prices for commodities. Chinese buying is the key driver of commodity prices.  China is in fact the epicenter for potential global inflation and this will impact the U.S. despite any moves the Federal Reserve takes to try to dampen rising prices.

In the long-term, China will have to let the renminbi peg to the U.S. dollar, China will still need to maintain stringent capital controls to prevent big moves in its currency if the renminbi is inappropriately valued (many experts claims it would rise 40% if it floated freely).  Economic forces always win in the end and the Chinese leadership will eventually find this out.

ETNs that can be used to take a position in the renminbi are CYB and CNY.

Disclosure: None

NEXT: Currencies React to Ongoing Greek Debt Crisis

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

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

U.S. Consumer Spending: Not Indicating Economic Recovery

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 Commerce Department released figures for February consumer spending on March 29th. The report indicated that consumer spending was up 0.3% in February, but personal incomes were flat. The savings rate was lower though, dropping to 3.1% from 3.4% in January. Spending increases were highest for necessities, such as food and clothing. Spending on non-durables actually fell. Nevertheless, somehow the mainstream media looked at these figures and concluded, "Both the spending and income figures in Monday's report point to a modest economic recovery".

Now for a dose of reality.

If income is not going up, but consumer spending is going up, there are only three possible explanations. Consumers have either gotten increased credit and are borrowing more, they are spending savings, or they are selling assets.  If they are spending savings or selling assets to support their spending, the economy is in very bad shape, somewhat similar to the way it was during the Great Depression in the 1930s. Since the savings rate was still a positive number, consumers were not taking more money out of their savings accounts than they were putting into them. So consumers were still saving, but at a lower rate. The 'Personal Incomes and Outlays' report (that's its official name) doesn't analyze buying and selling of assets, but does have a figure on 'Personal Income Receipts on Assets' that includes interest and dividend income. This number decreased by $16.5 billion in both February and January and that may indicate that the public is quite possibly a net seller of assets. Consumer credit is also not handled in the report, but the latest figures from the Federal Reserve indicate that revolving (read credit card) consumer credit declined at a 2.5% annualized rate in January.

While the sources for the supposed increases in U.S. consumer spending are murky at best, the amount of consumer spending in and of itself is not a determinant of whether or not economic recovery is taking place. The increased spending needs to come from economic growth and not government spending. If it comes from more government spending, better numbers are just a shell game and are actually an indicator of just how troubled the economy really is.  U.S. consumer spending rose $34.7 billion in February. Of that amount, $16.6 billion came from an increase in federal government transfer payments. That is only the one-month change in federal spending being funneled directly into consumer's pocket. Government support for the U.S. economy has increased substantially and in myriad ways since the beginning of the recession in December 2007.

While consumer credit has declined significantly since the Credit Crisis began, government borrowing has increased to make up the slack. This is why the U.S. is facing a $1.6 trillion budget deficit in fiscal year 2010.  The record levels of government borrowing are propping up the entire U.S. economy, including consumer spending. Governments don't spend more when economies recover; they spend less. Only when U.S. government spending begins to decline sharply and reports come out that consumer spending is increasing should investors consider believing that economic recovery is really taking place.

Disclosure: None

NEXT: Market Says U.S. Treasuries Riskier Than Corporate Debt

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.

Euro Zone Support Package Doesn' t Solve the Problem

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 many press reports over the last two months about a possible bailout for Greece, euro zone leaders seem to have finally come up with a plan to handle the crisis. The plan however will only be used as a last resort, is limited to loans at market interest rates, and requires unanimous agreement from all member countries before aid can be granted. Euro zone countries would provide about two-thirds of the loan money and the IMF the remaining third. Given the restrictions, the support package is likely to have limited impact.

While no loan amount has been specified, unofficial sources indicated that 22 billion euros was the proposed amount. Greece has to borrow 20 billion euros in April and May alone. Greece has not had problems borrowing money so far, but has had to pay high interest rates to do so. The high rates are causing problems because more money has to go to debt service and this means less money for other government spending elsewhere. The country has already been plagued with riots because of its enactment of budget cuts and higher taxes. The euro zone support package though doesn't lower borrowing costs for Greece. It only assures that Greece will be able to continue to borrow in case no one else will lend to it. Essentially the euro zone, along with help from the IMF, has established a policy of acting as a lender of last resort for its sovereign entities.

Admittedly, the euro zone has to trod a very narrow path in the extent of its aid to member countries. If Greece were the only member in trouble the situation wouldn't be so delicate. The Credit Crisis has devastated Europe, just as it has the rest of the world. The more economically marginal countries have suffered the most. Greece is merely the canary in the coal mine. Ireland just released fourth quarter GDP figures indicating that its economy shrank at a 5.1% annualized rate. GDP contraction there in 2009 was the largest on record and that includes all the years of the Great Depression in the 1930s. Italy's GDP dropped 5.1% in 2009. Official figures indicate that Spain's economy was 3.6% smaller for the year. Portugal, which just had its debt rating downgraded by Fitch, claims that its GDP was down a mere 2.7% in 2009.

While all of these numbers are bad, they could actually be even worse. The media reported that Greece shocked markets and other EU nations when it admitted it falsified its statistics to make its budget deficit look much lower than it was, even though the numbers was obviously impossible. The original Greek government figures projected a budget deficit to GDP ratio of 3.75% for 2009 and below 3% (the euro zone target for members of the currency union) for 2010. Greece also claimed that its GDP would increase by 1.1% in the midst of the severe global downturn that was taking place last year (as of now it looks like GDP dropped 2.0%). While these fantasy figures were treated as reality at EU headquarters, the OECD didn't buy them. Long before the Greek government admitted to the truth, it estimated that the budget deficit to GDP ratio would be 6% in 2009. So far, it looks like it will actually be 12.7% - around 250% higher than initially claimed by the Greek government. If such outrageous fabrications could be accepted, would 50% or even 100% errors be discovered?  Greece is not the first country to lie about its economic statistics. Only the very naive would assume that there aren't many other countries doing the exact same thing. Moreover, Greece only got caught because it turned itself in.

Denial on the part of euro zone governing bodies is what has lead to the current crisis with Greece. In order to avoid future problems, the euro zone needs to assure the integrity of the numbers produced by its member countries, so no other major surprises will take place. There also needs to be a more formal mechanism to establish economic equilibrium among member nations as well. The potential trouble spots in the euro zone are characterized as relying excessively on consumer spending, having weak public finances, and relying on foreign capital to supplement low savings rates. Interestingly, this is also an excellent description of the United States.

Disclosure: None

NEXT: U.S. Consumer Spending: Not Inidcating 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.