10 Reasons We Are in a Credit Crisis

 

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.

Yesterday's news was about a potential Greek default and it caused a global market selloff. Today,  hopes of preventing a Greek default are causing markets to rally. This alternating news flow is repeating over and over again. Investors should pay attention to the big picture however and not the noise of the day. The important thing to realize is that we are in a second global credit crisis.

Credit crises follow certain patterns, which include: recognition of overpriced financial assets, money flowing into safe havens, increased market volatility, rising costs for financial insurance, and various forms of government action to stop the problem. The specifics of the current credit crisis are below.

1. Government debt is being downgraded. This happened in Italy yesterday, the U.S. in early August and many times in Greece. This is the upfront recognition of the problem, which is almost always widespread public knowledge by the time it happens. In 2008, securitized debt containing subprime real estate loans was downgraded in mass, frequently from the triple A ratings that had previously been given.

2. Global money is flowing into safe haven U.S. treasuries. When yields hit lower levels than a previous credit crisis or all-time lows, this indicates this is happening on a mass scale. U.S. government two-year notes had a yield below 0.15% at one point this September 19th. During 2008, the two-year held above 0.60%. The ten-year yield has fallen below the 2.04% low in 2008 and below the all-time low of 1.95% in 1941.

3. Global money is flowing into safe haven currencies. In 2008, this was the U.S. dollar and the Japanese yen. In 2010, this is the Japanese yen, the Swiss franc, and gold (which needs to be thought of as a currency if it is to be analyzed correctly). The Swiss franc rallied so much that the Swiss stopped it from trading freely. The Japanese have also taken action to try to lower the value of the yen.

4. Stock market volatility has increased enormously. In 2008, there were a significant number of mini-crashes (a drop of 5% or more in one day). These were more common in the U.S. back then. Now they are more common in Germany, but they have been happening here as well. The flip side of mini-crashes is sudden sharp moves up in the market. These are also occurring.

5. Bank stocks are the focus of the big moves up and down in the stock market. U.S. banks and other financial stocks really got hit in 2008 -- a number of the companies themselves went under. This time it's European banks falling the hardest. One-day drops for some major EU and UK banks have been as high as 10%. Bank stocks aren't dropping that much in the U.S., but they are underperforming other sectors like technology.

6. Credit default swaps have hit record levels. Credit default swaps (CDSs) are bond insurance and they became a big news item in 2008 when they rose to unprecedented levels. While CDS rates for Greek sovereign debt have hit records and are rising for the other highly indebted EU countries, they have also hit records for some UK and EU banks in 2011 indicating a worse crisis than in 2008.

7. Major and ongoing bailouts are taking place. The EU had to bail out Greece in the spring of 2010 and then Ireland and Portugal. A second bailout for Greece had to be arranged this July, even though the first bailout was supposed to have taken care of Greece's debt problem. In 2008, the U.S. had TARP and arranged for failing banks to be taken over by stronger banks  (Bank America is now in trouble again because of the legacy loans from the banks it absorbed during this period). Fannie Mae and Freddie Mac had to be nationalized. 

8. Central banks are buying bonds in the open market. The EU has been buying up Italian, Spanish, Irish and Portuguese bonds in order to hold down interest rates in those countries. As long as it has an infinite access to funds, this strategy will work. The Fed began buying U.S. debt instruments in the fall of 2008 during the Credit Crisis. 

9. Global coordinated central bank intervention took place last week. The need for global action is a consequence of the interconnectedness of the world financial system. A major problem in one region (in 2011 this is Europe, in 2008 it was the U.S.) will invariably spread everywhere. Central banks coordinate their activity to try to control the contagion. 

10. The global economy is turning down.  Problems in the financial system impact the real economy and they can turn a shallow downturn into a major one as has happened in 2008. Economic figures throughout the world have flattened and there are some warnings of a bigger drop to come (extremely low consumer confidence numbers for instance). GDP contraction in a number of regions will be the final confirmation that another global credit crisis has occurred. 

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.

Interest Rate Spread Widens as Greece Heads Toward Default

 

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.

Global interest rates continue to diverge, with rates rising in the troubled eurozone countries and falling to new lows in Germany and the United States.  The same sort of divergence took place during the 2008 Credit Crisis with yields on safe-haven governments falling markedly, while yields on low-grade corporates soared.

Nowhere in the world is the current interest-rate spread more extreme than in the Eurozone (the epicenter of the current credit crisis). Greece is leading the pack with ever-rising yields on its government paper, while German rates keep falling. In Tuesday morning trade, two-year Greek government yields reached a high of 74.88% and ten-year yields a high of 25.01%. Yields on German 10-year bunds were moving in the opposite direction falling as low as 1.679%, even lower than Monday's record-low rate of 1.877% on 10-year U.S. treasuries.

Italy had an auction of 5-year bonds this morning and had to pay a 5.6% yield to get them out the door
compared to 4.9% in July.  Interest rates on the Italian 10-year were at 5.75%. They were over 6% before the ECB started buying Irish, Portuguese, Spanish and Italian bonds on August 8th to force down surging rates as contagion from Greece spread to other parts of the Eurozone. Before that, yields in Ireland had reached approximately 14%, they were over 13% in Portugal, and in Spain they were at similar levels to Italy. Intervention can only maintain below free market rates for so long however. Eventually, the ECB will run out of funds.

The trajectory of Greece's decline toward insolvency is instructive for the future of Ireland, Portugal, Spain and Italy in the near future and for other highly indebted countries such as Japan, the United States and the UK later in the decade. In early 2010, Greek 10-year rates spiked above 12%, but were then driven below 8% with the first bailout. Greece had a debt to GDP ratio around 120%. Severe budget cutting was implemented to hold the debt down. This caused the economy to contract sharply, which lowered tax revenues. Despite the first and now a second bailout a self-feeding spiral of ever-increasing interest rates began. Higher interest rates and a weakened economy have caused the debt to GDP ratio to reach the 140% level (according to official numbers, estimates are as high as 160%). Rates on credit default swaps now indicate a 98% chance of default.

What the immediate effects of a Greek default will be remain to be seen. There will certainly be damage to the Eurozone banking system, which is still in a weakened state from bad loans accumulated before the 2008 Credit Crisis. At some point, the euro will have to be restructured or
it will be weakened considerably. Economic damage will not be limited to Europe, but will affect other regions of the globe just as was the case in 2008.

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.

Global Wheat Supply Threatened by Weather

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


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

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

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

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

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

Disclosure: No positions

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

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

Market Says U.S. Treasuries Riskier than Corporate 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.


On March 24th, swap spreads on 7-year and 10-year treasuries and their equivalent corporate bonds turned negative for the first time ever. With this move, the market signaled that it thinks that U.S. corporate debt is less risky than U.S. government debt. If so, they will have to rewrite the finance textbooks.

A great deal of financial analysis is based on the risk free rate of return. Risk free in this instance means that default is not possible. This rate is the interest rate on government debt. Technically, sovereign governments cannot default on their bonds because they can simply print the money to pay them off if necessary.  This of course devalues the currency, creates inflation and thereby raises interest rates, which are other forms of risk. Corporations should always have higher interest rates than the country they operate in as long as the country is a sovereign nation and not part of a currency union such as the euro. This is the case because unlike government, corporations can't print money so they can go out of business and their bonds can default. The higher interest rates on corporate debt are needed to compensate for possible bankruptcy. The opposite situation makes no sense whatsoever and indicates that some very odd things are going on in the markets. Nevertheless, more than one market observer noted wryly that the fiscal soundness of many U.S. corporations is actually much better than that of the U.S. government.

The U.S. had a series of government bond auctions last week and they did not go well. Purchases by both indirect bidders, which includes central banks, and direct bidders, which includes domestic money managers, were both down. In the case of the 7-year for instance, indirect bidders bought 42% instead of the usual 50%. Direct bidders bought 8% as opposed to their average 11% purchase. When fewer bonds are bought at auction, primary dealers get stuck with the unsold inventory and then they usually dump it on the market. Bonds then sell off and interest rates go up. The yield on the 10-year rose 15 basis points last Wednesday and peaked at 3.94% on the week, almost as high as last June. Interest rates on treasuries of other maturities rose across the board.

Investors should pay particular attention to the lower demand from central banks and wonder if a lack of purchasing by China is behind this. There is an ongoing struggle between the U.S and China on whether or not China is keeping the yuan dollar exchange rate artificially low. There will be a ruling by the Treasury Department on April 15th on whether or not China is a currency manipulator. Needless to say, the Chinese are not particularly happy about this. China was a net seller of U.S. government bonds in December and January. A significant drop in their buying would cause U.S. interest rates to go up considerably.

Investors should keep an eye on treasury interest rates. The 10-year and 30-year rates have been on the decline since 1980. They now look like they are reversing this pattern and are poised to begin a multi-decade rise in interest rates (and lower bond prices). Shorting treasuries is the way to take advantage of this sea change. Two ETFs, TBT and TMV offer leveraged plays on long-term treasuries (twenty to thirty years) for those who think interest rates are going to rise.

Disclosure: None

NEXT: Questionable Oil Statistics More Accurate than Other Government Numbers

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 Dollar, Euro, Gold, Oil, and Treasuries

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.


Problems in Greece are still impacting the market with the seemingly never-ending on-again off-again possible bailout. Some resolution, even if temporary, is of course inevitable. Problems in the euro zone have set the tone for U.S. dollar and euro trading for almost four months now. These have in turn affected U.S. long-term treasuries, gold and oil. Long-term treasuries and oil have been trading in a sideways pattern since around May 2009. Gold sold down and has been in a sideways trading pattern since December. The U.S. dollar has temporarily broken a long-term downtrend and the euro a long-term uptrend because of the Greek crisis.

The U.S. trade-weighted dollar(DXY)traded down to its 50-day moving average recently and then bounced sharply off of it. The 50-day is above the 200-day, having made a bullish cross in mid-February. It seems that the trend indicators are trying to reconfirm the uptrend. On the flip side, the euro's(FXE)technical picture is the mirror image of the dollar. The 50-day moving average made a bearish cross of the 200-day in mid February. The price rose toward the 50-day recently - an expected move since the 50-day tends to act as a magnet on the downside as well as on the upside. The euro though didn't even reach the 50-day before a sharp drop. Trend indicators look like they are moving to reconfirm the downtrend

Gold (GLD, IAU, SGOL) is apparently trendless at the moment and trading around its 50-day moving average, which is above the 200-day moving average in a bullish configuration. The price pattern seems to be forming a triangle on the charts. A break out could take place either on the upside or downside. Seasonals for gold tend to be weak in late spring and early summer. As seasonals weaken for gold however, they strengthen for oil . Oil (DBO, USL, USO, OIL) is also trading in a sideways pattern and looking for a breakout. The bullish 50-day cross took place between late June and late July 2009 depending on which proxy is being considered. Oil has been stuck in a trading range since last May and needs to break out of that range, the top of which is around $83 a barrel for light sweet crude.

The 30-year Treasury interest rate ($TYX or ^TYX) has been in bullish pattern since May 2009 with the 50-day trading above the 200-day. It has gone nowhere fast during that time period, trading in a sideways pattern on the chart. Technically, it has extremely strong resistance from a 30-year downtrend line in interest rates. A rally in interest rates on the long-term treasuries (and sell off in the bond price) doesn't look imminent at the moment based on the technical picture. When it does, bullish trades on long-term treasury interest rates can be made through TBT and TMV.

Sideways trading (also known as basing) shouldn't surprise investors. It is the norm and not the exception. Most of the time markets are trendless and you need to be a short-term trader and willing to enter and exit your positions quickly to make money under those circumstances. Trends (either up or down) are where the real money is made. You can't make them happen however, you just have to watch and wait until they come along.

Disclosure: None

NEXT: U.S. Stock Market in the First Quarter of 2010

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.

Moody's Sovereign Debt Assurances Should Concern Investors

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.


According to ratings agency Moody's, credit ratings of the world's four largest Aaa-rated sovereign nations - the U.S., UK, Germany and France - are currently "well positioned despite their stretched finances". The agency does however admit that risks have grown. Based on Moody's past actions, this should give investors little comfort.

In the current Greek debt crisis, Moody's was behind S&P and Fitch in downgrading Greek government debt. As reported in the Wall Street Journal, it took Moody's until December 23rd to make a downgrade of just one notch from A1 to A2. After the elections on October 4th, the Greek government admitted it had lied about its budget deficit and its ratio to GDP would be 12.7%, several times higher than previously reported. Even though the original numbers from the Greek government should have seemed unbelievably rosy, this apparently didn't make the rating's agencies suspicious. Are they likely to be more suspicious of the numbers generated by the politically powerful major countries that get their top ratings?

Prior to the Greek crisis, there was Iceland. According to the Central Bank of Iceland's website, Moody's downgraded Iceland's long-term debt obligations in domestic and foreign currency to A1 (still well within the investment grade range) on October 8, 2008. This was the same day that the Iceland's krona peg to the euro collapsed. Iceland had already nationalized major banks Glitnir and Landsbanki the month before. The Iceland prime minister had stated on October 6th that there had been a real danger of national bankruptcy. That scenario would have justified a rating of C from Moody's, many notches below the October 8th rating.

Investors should also not forget the role of the rating's agencies in giving securitized sub-prime loans top triple A ratings (Aaa in the case of Moody's). Moody's had to downgrade more than 5000 mortgage securities in 2007. The ratings agencies in general blamed mortgage holders that turned out to be 'deadbeats' and not their own practices. They would like us to believe that it was unreasonable for them to have assumed that people with spotty employment, a history of not paying their bills, and who bought houses they couldn't afford would default on their mortgages. If the rating agencies can ignore those problems, investors should ask themselves what problems they are ignoring with U.S., UK, German and French government financing?

How did the rating's agencies do with problem companies? Moody's downgraded Bear Stearns to Baa1 from A2 on March 14th, 2008. The Baa1 rating is an investment grade rating for Moody's (there are five speculative rating's below that level). That downgrade took place on the last day that Bear Stearns' stock traded. Moody's was still maintaining it was an investment quality company. The rating agencies did a little better with Enron, downgrading it to below investment grade four days before it declared bankruptcy. The stock had already lost almost all of its value before the downgrades, so the move was too little too late.

In its current analysis of sovereign finances, Moody's maintains that the major countries will be able to maintain fiscal stability because interest payments are reasonable compared to government revenues. However, government debts are increasing rapidly because of weak economies. If the global economy continues to stay weak, interest payments will go higher , tax receipts lower and debt will continue to pile up. Recovery, on the other hand, will raise interest rates substantially and this could overwhelm tax receipts and create a major debt spiral. The rating agencies are unlikely to consider that the major countries are caught in a lose/lose situation though since they seem to reserve their most speculative ratings for basic logic and common sense.

Disclosure: None

NEXT: The CFTC and Manipulation of the Silver Market

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

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

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

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 Chinese just announced a second increase in reserve levels for their banks. The first increase took place less than a month ago. That announcement was the earliest of three major withdrawals of liquidity from global markets. The other two were the U.S. Fed closing down five of its Credit Crisis liquidity injection programs on February 1st and the Bank of England temporarily halting its quantitative easing (read money printing) program shortly thereafter. Stocks and commodities started selling down with the first Chinese announcement and continued selling off with the others. Global markets got hit again with the second announcement and adding to their worries was a poor GDP report coming out of the euro zone.

China has been leading the world out of the global recession. This hasn't occurred by magic. It has engaged in a huge amount of stimulus to reeve up its economy. While doing so it also froze the value of its currency, the yuan, and this has kept it tremendously under valued compared to a free market price (some estimates are that the yuan should be 40% higher, even a greater amount is possible). Economic stimulus and undervalued currencies are both in and of themselves inflationary. The combination of the two in large amounts can be explosive. So China is understandably trying to lower liquidity in its economy by reigning in bank lending. While these efforts are minimal so far, traders are anticipating more serious efforts down the road. Food inflation is a particular danger for the Chinese and too much of it can risk political destabilization. Food prices are already rising in many parts of the world and reached over 19% in next-door India at one point in December.

While the Chinese have probably engaged in the most significant stimulus measures globally for any sizable economy, the euro zone has not been as nearly aggressive. While the U.S. lowered its funds rate to zero, and the UK to 0.5%, the interest rates in the euro zone were only dropped to 1.0%. Less stimulus in the euro zone means less inflation in the future, but also means less economic recovery now. Fourth quarter GDP figures came in at 0.1%, indicating overall growth is flat. Leading economy Germany had a zero percent quarter over quarter growth rate. Much troubled Greece's economy sank 0.8% from the previous quarter. Italy was down 0.2%. For all of 2009, the size of the 16-nation euro zone economy fell 4%. Growth in the 27 member EU (a number of countries in the EU don't use the euro) was also only 0.1% last quarter. No matter how you look at it, Europe is economically weak.

In mainstream media reporting of Europe's predicament, one major news service stated, "the recovery in the third quarter now appears likely to have been due to temporary factors like government spending boosts, a build-up in inventory levels and car scrappage schemes that pay people to trade in old cars". The exact same factors have boosted GDP in the U.S., although that wasn't mentioned. The U.S. reported 1.4% quarterly GDP growth for the last quarter of 2009 and this was triumphed in news coverage. Investors can expect that number to be revised downward as was the case with the original third quarter figure. Greater stimulus in the U.S. has been one reason that American GDP numbers have been better than in Europe. Another reason is that the U.S. is willing to engage in more blatant manipulation of its economic statistics.It's a lot easy to 'fix' the economic numbers after all than it is to actually fix the economy.

A slow down in the Chinese economy will have a strong impact on the Western industrialized nations. Much of the improvement that has taken place since the depths of the Credit Crisis in the fall of 2008 has been because of increased demand from China.  The economies in the U.S., UK, Japan and Europe are still very weak. Based on recent actions, the powers that be in the US and UK seem oblvious to this. European leaders seem to be no sharper. Proposed austerity programs in the troubled euro zone economies - Greece, Ireland, Italy, Portugal and Spain will only cause further economic contraction. The fix for the Greece's debt problems - details are still forthcoming - is likely to be a win/lose situation.

Investors should expect that industrialized countries will be on inflation watch for a while longer. At some point even the incredibly oblivious U.S. Fed Chair Ben Bernanke will realize that there are still economic problems that have yet to be solved. More stimulus will follow. Stimulus is what has been behind the global market rallies that began in March 2009. Reduction of stimulus is what is behind the sell off that started in January. Investors should watch for signs that stimulus is returning. Until then, stock and commodity prices are likely to be pressured.

Disclosure: No positions.

NEXT: China is Selling Its U.S. Bond Holdings

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.Inflation Reports - Contradictions and Absurdity

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

Our Video Related to this Blog:

The PPI (producer price index) was out Tuesday and the CPI (consumer price index) was out today. Both were up 0.3% for October, but for exactly the opposite reasons. Food prices were up in the PPI with fresh vegetable prices skyrocketing 24%. Fruit and vegetable prices declined for the 4th straight month in the CPI report and helped keep inflation down. New and used motor vehicles were up so much in price that they were responsible for 90% of the increase in core inflation in the CPI report. In the PPI, car and truck prices were down so much that they caused the core to fall 0.6% (an unusually large change for core PPI). So much for consistency in U.S. government reporting of inflation.

Even if they painted a consistent picture, the official U.S. inflation figures can't be trusted as is because of statistical adjustments that were made to the calculations in the 1980s and 1990s. All of these adjustments acted to lower the reported inflation rate and make it nearly impossible for high inflation numbers to appear. Substitution effects and hedonics are just two examples of 'improvements' made to the inflation calculations. Substitution is assumed to take place when the price of something rises a lot. People supposedly buy less of it and buy some cheaper item instead (less steak, more gruel for instance). The higher price item gets less weight in the data and the lower priced item more weight. Consumers are of course getting less pleasure from their purchases. Hedonics is exactly the opposite. Improvements in manufactured items like cars and electronic goods are assumed to lower the price because consumers get more pleasure from them. Sound contradictory? Well, that's because it is. Both make it difficult though for reported inflation numbers to rise too much and that's why they are both used.

There is really no reason to pay attention to the U.S. government's official inflation numbers. All you have to do is watch the currency and gold markets. A falling U.S. dollar means there is more inflation for Americans. Gold prices however are even a better gauge and can give a global read on inflation. While gold has been hitting a series of all time highs in U.S. dollars in the last six weeks, it is also recently started hitting all time highs in a number of other currencies, including the euro, the British pound, the Swiss franc, the Canadian dollar and the Yen. The market is clearly indicating global inflation is taking place and fiat currencies around the world are losing value.

Gold hit another all time high in morning trading in New York today, with spot gold reaching $1153.90. Silver was even stronger reaching $18.86 at one point. The trade-weighted dollar traded as low as 74.90, it's third break of the 75 level. The dollar rallied strongly yesterday on Bernanke's comments that the Fed was watching the level of the dollar. He said the same thing in June 2008 and probably other times as well. Based on the dollar's performance, all the Fed has done is watch it go down. The Fed also constantly says that there is no inflation in the U.S. The markets disagree. You decide which one you want to believe.

Disclosure: Long gold and silver.

NEXT: The Real Story About Gold Supply and Demand

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 Art of 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.

Our Video Related to this Blog:

If ever there was an apt metaphor for our times, it was the sale of Andy Warhol's "200 One Dollar Bills" at Sotheby's on Nov 11th. The silkscreen, which is a black and white image of 200 U.S. $1 bills went for $43.7 million (including commissions). It had previously been purchased for $385,000 in 1986, so this sale represented an approximately 100 times increase in value in 23 years. High-end art is a place where inflation shows up first. Only when the big price increases start filtering down to lesser works though is it an indication that inflation is getting really out of control. In hyperinflations, even tertiary works experience big price increases. Art, collectibles, and antiques were favorite investment areas in the U.S. during the high-inflation 1970s.

At the rate the U.S. government is printing money and pumping liquidity into the financial system, it might take $43 million one day to buy what $200 did when Warhol created his artwork. While the Obama administration is making noises about trying to control the U.S. budget deficit by freezing expenditures or even cutting them by 5%, this is simply an empty symbolic gesture meant to placate America's creditors, Spending on the new health plan, likely to be much greater than estimates, will probably more than wipe out possible savings elsewhere and social security outlays will be rising rapidly and continually in the next decade. While budget cuts may be minimal (defense and Veteran's Affairs are excluded from cuts and these account for a big slice of total federal budget), increases in taxes may not be. The most likely outcome is a budget deficit that keeps growing and a damaged economy from higher taxes.

The Chinese have been complaining loudly recently about excessive U.S. spending and its impact on the dollar (they are estimated to hold about $1 trillion in dollar denominated assets in their reserves). Reluctance on their part to continue buying U.S. debt would cause treasury interest rates to rise significantly. Selling even a small part of their dollar hoard would damage the U.S. currency, which is already sinking fast. The trade-weighted dollar fell below 75.00 again this morning and it looks like it's only a matter of time before it test its all time low around 71.50. A falling currency is the very definition of inflation (contrary to what most economists claim).

Gold, our everyday inflation indicator, hit another all time high in early New York trading this morning. Spot gold rose to $1131.10 after having reached the $1133 level overnight. The 5:15PM New York close last Friday was $1119.50. Gold got stuck at it $1120 resistance level for only two days and then cut right through it Sunday night. Spot silver has traded as high as $17.90 so far today and still needs to trade and close above key resistance around $18. Just like high art prices and a falling dollar, gold and silver are making a very clear case that inflation is a problem.

Disclosure: Long gold and silver, short treasuries, don't own any Warhol's, but do own some actual $1 bills

NEXT: Silver Breaks Out of Trading Range

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

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

Markets Roller Coaster Ride Powered by Media Hype

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

Our Video Related to this Blog:

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

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

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

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

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

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

NEXT: Gold Rockets Higher

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


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

Central Banks Support the Dollar

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

Our Video Related to this Blog:

The U.S trade-weighted dollar had an explosive rally on Monday. The rally was by no means even during the day, but consisted of a few sharp rises that lasted only minutes. Not much happened in between. Only central banks have enough capital to account for this type of trading pattern. Not all currencies moved equally against the dollar either lending further credence to central bank intervention having taken place. Only the euro and Canadian dollar had significant moves down with the Australian dollar having a lesser drop. The Yen hardly budged. The British pound actually rose slightly on the day. Care to guess which central banks might have been involved?

Gold and silver had sharp sell offs in reaction. However this was not the only reason that accounted for their movement down. There is an options and futures contract expiration tomorrow. The same expiration affects natural gas, which also had a sharp sell off, but this was only tangentially related to movements in the U.S. dollar. The dollar intervention was clearly timed to get maximum bang for the buck (so to speak) and drive down the price of gold as much as possible. There was no technical damage on the gold and silver metals charts though. Silver partially filled a gap from the breakout earlier in the month and probably needs to trade to the bottom of the gap before it can resume its movement upward.

A number of gold and silver miners also filled their equivalent gaps from the same day in early October. GDX, the precious metal mining ETF did so and traded down to its 50-day moving average. Technical problems are showing up on a number of miner's chart however, so this sell off is probably not over. Novagold (NG) has serious problems on its 15-minute chart which indicate a lower low is quite possible in eight to ten days. A rally in the middle is likely. You might want to consider a tight stop. Buying on the dip is another option. Silver stocks like Hecla (HL) and Coeur d'Alene (CDE) are interesting possibilities. Hecla still has an unfilled gap lower down (as do a few other mining stocks). Look for the gaps and keep an eye on them before deciding to buy.

While currency intervention is keeping the U.S. dollar from collapsing, it will have a high cost over time. Everything sold off yesterday and that includes U.S. treasury bonds. When bonds go down, interest rates go up. There was a minor breakout in the 10 and 30 year bond interest rate charts Monday. The stock market is exceedingly vulnerable in here as well. The rally has been based on liquidity and the movement of that liquidy out of stocks into the dollar could damage stock prices considerably. This is the choice the monetary authorities are facing - save the U.S. dollar or save the stock market and keep interest rates low. Knowing how competent Ben Bernanke is, it will probably be none of the above.

NEXT: Markets Enter Danger Zone

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.