Don't Confuse Inflation with Economic 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.


While U.S. government generated data claims inflation is tame or non-existent, industry reports strongly contradict this view. The ISM reports on the state of U.S. Manufacturing and Services in March are indicating a great deal of inflation. Higher prices make the ISM data look better, as is also the case for the retail sales numbers issued by the government, but they are not the same as economic growth. Mainstream media reporting generally ignores this important difference.

The CPI figures for February, the latest available, had consumer inflation as zero month over month and up only 2.1% from the previous year. The low numbers reported in the statistics are used to maintain the Federal Reserves claims that inflation isn't a problem (cynics claim that it is the other way around). But industry can't be so cavalier about its statistics because if it has to rely on them to make business decisions. Industry group ISM - Institute of Supply Management - reports have been indicating inflation for nine months now.  Frequently the strongest component of the reports has been 'Prices Paid'. In the March report, 'Prices Paid' was at 75.0 and was up 8.0 from February.  No other item was growing as fast as prices. In the ISM reports, 50.0 is the dividing point between expansion and contraction. A number like 75.0 indicates very strong expansion. Anecdotal comments in the report corroborated this view, with one of the respondents stating, "We are also seeing dramatic price increases."

The ISM Non-Manufacturing, more commonly known as Services, report for March also had 'Prices Paid' as the fastest growing component. The number was a strong, but not out of control, 62.9. While inflation was pumping up the overall number in the Services report, the Inventories, Supplier Deliveries and Employment components were bringing it down because they were still contracting. Service employment has now contracted for 27 months in a row according to the ISM. The government's Non-Farms Payroll report last Friday indicated that the service component of the private sector added approximately 82,000 jobs. Apparently the ISM can't find any of them.

While the mainstream media has continually been reporting that the U.S. economy is recovering, investors shouldn't consider this to be of particular significance. Reports of an improving economy always take place after severe downturns. They may or may not be accurate. If you went back and looked at U.S. news coverage during the 1930s recession, you would be able to find a number of stories about how the economy was getting better and showing evidence of recovery. These reports went on for many years. After more than a decade of misplaced optimism, the U.S. economy finally did recover thanks to World War II.

Disclosure: Long oil

NEXT: Inflation Denial Won't Keep Prices Low

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.

Gold Down on IMF Sales, Then Up on 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.


Two pieces of news are affecting gold's price currently.  First, the IMF just announced that it will soon begin phased sales of 191.3 metric tons of gold and this pressured the market causing a sudden sharp sell off. Shortly thereafter, the U.S. released the PPI, the Producer Price Index, for January and there was a very inflationary 1.4% rise from December. This caused gold to rally sharply. While the longer-term direction for gold is unquestionably up, the shorter-term picture is murkier.

The 191.3 metric tons (also known as tonnes or long tons) of gold that the IMF is planning on putting on the market is part of their sale of 403.3 tonnes that they announced last year. Central banks bought 212 tonnes, with India buying over 90% of that amount. Central banks still have the option of participating in the gold sale and this would keep the gold off the open market. The IMF has stated that any sale outside of those to central banks "will be conducted in a phased manner over time". While this is a positive, the IMF has missed the heavy market demand months for gold - November, January and February, and looks like it will be selling during low demand periods. The 191.3 tonnes is part of the Central Bank Gold Agreement, which limits total sales to 400 tonnes a year.

While IMF sales are a negative for the gold market, inflation is always a positive. The 1.4% rise in U.S. wholesale prices in January follows a rise of 1.5% last November. Core PPI, which excludes food and energy, was up 0.3%. Core inflation was a concept implemented by Fed Chair Arthur Burns in the 1970s as a public relations gambit to take attention away from the two major causes of inflation - food and energy. Core inflation is only relevant if food and energy prices remain relatively flat in the long term, but are volatile in the short term. This is not the case; food and energy both go up over time. A Bloomberg study done in 2008 found that not once in a forty-year period did U.S. food prices decline on a year over year basis. Oil prices are choppier, but the $147 high in 2008 was almost four times the high of $39.50 in 1980.

Over the last year PPI is up 4.6%. Almost all of the increase is being blamed on oil. The figures bear this out. However, oil prices affect the price of food and any good or service in the economy that requires transportation, so increases in energy prices percolate through the economy. The Fed's response to this inflation threat is that wage pressures remain tame in the U.S., so there can't be inflation. The wage pressure argument was also common in the 1970s and was used as an excuse by industry to justify not raising salaries. It is a politically based argument that has little to do with the realities of inflation. Inflation is caused by excessive government money creation. There is no case in history though where a government blamed itself for causing inflation even though in each and every case government actions were the root cause.

IMF gold sales will be with us for a while. After the current sale, there are likely to be others, so this could be a multi-year process. The heyday of central bank gold sales is over however. European banks sold large amounts of their gold reserves in the 1990s and early 2000s. There could still be more sales, but Asian banks are now buying. Gold is moving from Europe to Asia and this is a reflection of a greater movement of wealth moving from one continent to another. Gold sales will become less important to the market over time, while inflation is going to become more important.

Disclosure: None

NEXT: Fed Sends a Message with Discount Rate Hike

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

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

Economists and Governments Pave the Way for Global Inflation

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


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

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

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

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

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

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

Disclosure: No positions.

NEXT: World Economic Leaders Need IQ Bailout

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

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

Toothless CFTC Tries to Bite Gold and Silver

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. CFTC (Commodity Futures Trading Commission) announced on January 14th that it was going to investigate trading in the gold and silver markets. This follows the commission's high profile hearings on speculation in the oil and natural gas markets held in the summer of 2009. Those led to the demise of the popular ETF, DXO and caused the natural gas ETF UNG to trade so irregularly that it no longer behaved like an ETF.  Both of these were investment vehicles for the small investor. Big-time speculators went on their merry way untouched and unscathed by the CFTC's action that was supposedly aimed at protecting the public. Anyone who was the least bit cynical might conclude that the CFTC's actual purpose was to protect the profits of the large commercial users of the commodities it regulates.

The CFTC efforts in investing oil and natural gas were in reality a thinly veiled attempt at price controls. Governments almost without exception resort to price controls when inflation becomes a threat. Price controls are of course extremely effective - not in controlling prices, but in creating shortages and driving prices much higher than they would have been if controls hadn't been implemented. Governments never learn however. In the short-term, the CFTC managed to drive natural gas prices to the low levels that were common in the 1990s. Natural gas was already trading at multi-year lows before the CFTC investigations and half of all natural gas rigs in the U.S. had already been shut down. The impact on natural gas was only collateral damage though from the CFTC's real target, which was oil.

Nothing has a greater impact on consumer prices than does oil and governments know that controlling its price is one of the keys to controlling inflation. Around the same time that the U.S. CFTC announced its hearings, the prime minister of England, Gordon Brown, and the president of France, Nicolas Sarkozy made a joint proposal that an international body of government bureaucrats should set the price of oil instead of the free markets. They suggested the price should be kept in the $70 to $80 range. For those who don't recall, Gordon Brown was the British government bureaucrat that sold half the UK's gold for under $300 in 1999 and the early 2000s. Gold has since quadrupled from the price where he sold it, so the UK didn't get that profit. The U.S. dollars that Brown bought from the gold sale then subsequently lost at least 30% of their value. This is the type of market 'genius' that government brings to the table. Would you like to let a government bureaucrat make investing decisions for your 401K?

The CFTC has more ability to impact oil and natural gas than it does gold and silver. ETFs that deal with energy commodities have to do so through some type of futures trading. Oil and natural gas cannot be easily stored as is the case with gold and silver. While there are ETFs for both gold and silver that only trade futures, there are 11 ETFs globally that buy physical gold. None of them store that gold in the United States. They are beyond the reach of the CFTC and the claws of the U.S. government, which for those who don't remember confiscated all of its citizens gold in 1933 and silver in 1934. In aggregate, the gold ETFs have become the sixth largest holder of gold worldwide since the first one was created in March 2003. They hold more gold than China, but less gold than France. In several more years, they could easily have more gold in storage than any central bank.  

Both oil and gold are completely international commodities (natural gas trades in regional markets). If regulation becomes too onerous in the United States, trading can and will shift elsewhere, just as trading in ETFs will shift from those that invest with futures to those that hold physical metal. When the CFTC made its announcement that it would be investigating gold and silver trading, the London Metal Exchange said it would offer clearing for gold over-the-counter (OTC) contracts in London by the second half of 2010. Hong Kong, Singapore, Zurich, Sydney, Tokyo, and Mumbai would probably like to have the trading business too if it leaves the U.S. commodity markets. The CFTC's action is just another government- motivated attempt to prop up the U.S. dollar by trying to hold the price of gold down. It won't work. The CFTC doesn't have the power to make it happen. Prices will eventually have to move to the point that the market dictates, just as they always do. 

Disclosure: Long gold and silver

NEXT: Lessons for Investors from the U.S. Senate Race

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.

2009 Retail Sales Deconstructed

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. retail sales for December 2009 were down 0.3%. News outlets reported this as a surprising turn of events. While I am tempted to agree with that viewpoint, it is only because there is enough inflation in the system to make retail sales look better. The retail numbers are not adjusted for price increases and this should always be kept in mind when viewing them. Higher retail numbers don't necessarily mean a better economy.

The Commerce Department reported retail sales were up 5.4% year over year. It would have been almost impossible for them to be lower, since December 2008 was when the Credit Crisis was close to its worse point. Nevertheless, three major retail categories - Electronic and Appliance Stores, Building Materials and Garden Equipment and Supplies, and Furniture and Home Furnishings - had lower sales in December 2009 than they did a year earlier. These three retail sectors are dependent on the health of the real estate market. 

So what went up to improve the numbers?  Gasoline sales rose 34% year over year and by themselves accounted for almost 50% of the total increase in the raw numbers.  This is pure inflation. It is not likely that actual gasoline use is up, especially with the Cash for Clunkers program having subsidized more fuel-efficient vehicles for American motorists.  Sales for Motor Vehicle and Parts Dealers were up 6% from 2008 and this accounted for another 19% of the increase in the yearly total. Government bailouts and stimulus programs are responsible for this increase. If you removed the inflation factor, and gasoline sales represent  only some of the inflation that might be in the numbers, and government programs that directly created higher sales, how much improvement would there have been?  Not much and there may have been none at all - so much for economic recovery.

There was one other important piece of information in the report for December that has significant ramifications. Sales at non-store retailers were up over 10% in 2009. Shifting of buying to the Internet is a strong negative for retailers doing business in physical stores, which are still struggling because of the economic downturn. This indicates that commercial lending, currently one of the major weak points in the U.S. banking system, will be even more troubled than it would have been from just the recession alone. Investors should assume more bailout money will be needed and this problem will go on longer than anticipated. However, as the retail sales report shows, government money can prop up an ailing sector of the economy, can make the economic numbers look better, and can create inflation, but it can't necessarily buy a recovery.

Disclosure: Not applicable.

NEXT: Toothless CFTC Tries to Bite Gold and Silver

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 Dollar, the Fed, Housing and the Economy

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. dollar was in free-fall last night in Asia. The trade-weighted basket fell as low as 75.21 (another new yearly low), well below the significant support level of 76.00 and approaching the next weak support level of 74.00. Some form of intervention took place after European markets opened and the dollar was saved from oblivion (at least for now) and shot straight up. Gold, and silver to an even greater extent, declined sharply on the dollar reversal. The pattern of gold and silver being strong in Asian trading and weakest in the U.S., which has been going on for several days now, continues. Oil remains strong this morning because unlike gold and silver it is difficult to manipulate on a daily basis.

The high price of oil has inflationary implications that will soon be manifested. Expect CPI figures to start jumping up significantly starting at the end of the year. Oil fell as low as $33 last December and it is going to be way above that level this year. Energy prices are the most important swing factor in the inflation numbers. Long-term bond prices are likely to rise on the news. The Fed will still keep short-term rates at zero however and Ben Bernanke will have an increasingly pained look on his face. The Fed released the minutes of its September meeting yesterday and little noticed was a statement that it was reserving the option of continuing any of its current programs. The most important one of those for bond investors is the money printing being used to buy U.S. treasuries. This is supposed to expire on October 31st. It's not likely to happen, at least not for long. The Fed has concentrated these purchases in the 7 to 10 year range of the yield curve, which keeps interest rates for mortgages and other loans down. Foreign governments have moved their buying to even shorter durations. The long end of the curve between 20 and 30 years is being left unsupported. Double short long bond ETF TBT should benefit from this situation.

How can we be so sure that the Fed's money printing extravaganza will continue? Housing, the ground zero of the Credit Crisis, remains troubled for one. Almost one million U.S. properties were involved at some stage of the foreclosure process in the third quarter (the summer). This number has been reached even though there are a number of federal programs to prevent foreclosure (and there have been a number of state programs that have put a moratorium on foreclosures). Anecdotal reports indicate that there are mortgages that haven't been paid for 18 months or more that still haven't entered even the first stage of foreclosure, let alone repossession. Banks don't want these properties on their books and the federal programs (plus a lot of bailout money) lets the banks avoid taking them back. A new wave of mortgage resets to higher interest rates is also just beginning and will last through next year. It will only add to the problem.

The second motivation for more Fed money printing will be the consumer economy. Constant stimulus is needed to keep it going. Retail sales figures were down 1.5% in September and revised down to 2.2% from 2.7% in August. The Cash for Clunkers program caused the August spike, but once it was over retail sales went negative again. Retail sales figures are not adjusted for inflation and this accounts for much of any 'growth' outside of stimulus programs that is being seen in this area. While almost every mainstream U.S. economists thinks the recession is over, they will all admit that unemployment is likely to get worse for at least another 6 months if not a year or longer. Consumer credit is also dropping sharply. So how is the consumer going to spend? More stimulus from the government will be the answer. Don't expect the printing press to be mothballed any time in the near future.

NEXT: Bank Earnings Reveal True State of Economy

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

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

Precious Metals Watch

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

Our Video Related to this Blog:

The Fed and G20 meetings from last week both had a consensus that government generated stimulus of the U.S. and global economies should continue. The U.S. and UK and are printing substantial amounts of new money in order to engage in this stimulus. This should have been bearish for the dollar and pound and bullish for the precious metals. While the pound did indeed slide, the dollar went up and precious metals went down. These counter intuitive market reactions, common since the beginning of the Credit Crisis, should end soon.

Spot gold fell as low as $987 in overnight trading. Spot silver was as low as $15.73. The U.S. trade-weighted dollar traded between 77.12 and 77.26 on Friday. It was trading at 76.87 around the opening today. After hitting a yearly low of 75.83 four days ago, the dollar bounced of its support at 76.00. It is trying to head toward 78.00, where it has strong resistance from its 50-day moving average. Stronger resistance is just above that at 78.33, the low from the dollar sell off in the late 1980s and early 1990s.

The Fed reiterated in its post-meeting statement that it "expects that inflation will remain subdued for some time." The mainstream media is filled with commentary about how inflation isn't a problem. Comments like "many economists argue that inflation is only an issue when the economy is humming along" are common. Someone should have told Zimbabwe with its 94% unemployment rate (if that economy was humming, it was tone deaf) that it was impossible that it was having sextillion percent inflation. When discussing all the money printing the U.S. Fed is doing, media articles invariably state that it "isn't so clear whether this will create an inflation headache down the road for the Fed". No article has yet to cite one case in the entire economic history of the world where excess money creation didn't lead to major inflation. Somehow by magic it might not happen in the contemporary U.S. though. Indeed magic is the operative word because that it the only thing that will prevent inflation going forward.

The idea that too much currency creation leads to price rises is not new. The 'quantity theory of money' originated with Copernicus, better known for his 'earth revolves around the sun' theory, in the early 1500s. It was further developed in the following centuries by at least half a dozen other economic thinkers long before Milton Friedman repackaged it as a new idea and won a noble prize for his 'original' thinking. Governments always claim that printing too much money isn't a problem and the lesson that it is needs to be learned over and over and over again. Buying gold and silver has always been the protection from excess government money creation. Smart investors only need to learn this lesson once.

NEXT: The Longer Term U.S. Interest Rate Picture

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 Break in the Bull and China Stops Shopping

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

Our Video Related to this Blog:

August has not been a good month for Chinese stocks. In mid-month, the markets were down 20%, but some recovery took place and it looked like the bull market which had moved stocks up 80% or more was holding. The month ended badly last night though. After dropping 3% on Friday, Shanghai was down 6.7% and Shenzhen down 7.1% last night. Volatility, and Chinese stocks have certainly been volatile in August, is classic sign of a bubble top. The market's plunge last night took place because of concern about a drop in bank lending. Like every other major government in the world, China has been pumping massive stimulus into the economy. Even the threat that the stimulus might be reduced is enough to tank the markets. What would happen if it actually was reduced?

There was no China contagion in the other Asian markets last night. They all had relatively minor drops. The Nikkei in Japan was even up strongly in the morning, but closed down slightly.
Initial bullishness was because of the election news. The ruling party, which has been in power almost continuously since 1955, was crushed at the polls. After approximately half a dozen recessions in the last 19 years, the Japanese electorate finally became fed up enough to try something else. The U.S. electorate is not likely to be so understanding for so long.

There are lessons for what has just happened in Japan for the U.S. Japan has been producing much better economic statistics lately. GDP turned strongly positive last quarter. Industrial production figures out last night were up for the fifth month in a row. Exports have been rising (thanks mostly to China - anything happens to the Chinese economy and the GDP will go right back in the tank in a number of countries). The real estate market turn up last year (after a 15 year drop) Despite the 'improving economy' unemployment is up and retail sales are very weak. The average Japanese citizen sees his or her personal situation deteriorating. Based on how the vote went, they obviously no longer believe the government's upbeat reports on the economy.

The picture in the U.S. right now is remarkably similar to Japan's. Economists predict 3% U.S. GDP growth this quarter. Industrial production is up. Real estate prices are supposedly going up (well, that's the claim at least). Exports are supposedly doing better. However, just like in Japan, unemployment is up and retail sales are in bad shape. The economy the average person sees is deteriorating. Without massive government stimulus, it would look like the 1930s depression. Government stimulus was also the key component in improving the Japanese economy, as has been the case over and over again since 1990. Keeping the U.S. economy out of recession, will require ongoing stimulus as well and in our case this means massive money printing. When governments are forced to chose between recession and inflation, inflation always wins out. No government can risk ongoing recession and survive - even in Japan apparently.

NEXT: Next Five Days Critical for Stock Rally

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.

Durable Damaged Goods

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

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The June Durable Goods Report was released this morning and the number fell 2.5%. The Bloomberg headline for the report was "U.S. Durable Goods Orders, Excluding Cars and Planes, Unexpectedly Advance". There you have it, once you remove the bad components of some report, it's actually bullish! Unfortunately, things are only bullish in Never Never Land and not in Reality Land where those of us who don't work in government agencies or for the mainstream media have to live. Attempts to mute the stock market reaction to the report obviously came directly from the Federal Reserve. Media articles stated that an unnamed top official (now who could that be) said the U.S. economy is likely to see moderate growth in the second half of 2009, as signs grow that the recent severe contraction is waning. If this happens, it will be one of the Fed's first accurate predictions in over two years.

Too much attention shouldn't be paid to one Durable Goods Report, the numbers are highly volatile and the government has little idea what they really are as is. A fall of 12.8% in transportation damaged the numbers. Surprisingly, car sales were down very little (you should be suspicious of that number). The star component was orders for primary metals, which rose 8.9%. The most important number was shipments, which fell 0.2% for a record eleventh straight monthly decline. Yeah, that certainly looks bullish.

There are still some shoes to drop for the economy with commercial real estate being at the top of the list. Fed Governor Janet Yellen admitted to this in a talk yesterday. She also said, "Concern that the massive federal budget deficit will cause inflation is misplaced, deficits don't cause inflation". But she did admit that they can cause higher interest rates, with the implication that this is somehow not related to higher inflation (it was not reported if the audience was doubled over with laughter by that point). Of course, the U.S. is printing money to pay for the deficits and this unquestionably causes inflation. Yellen didn't discuss that rather unpleasant topic and may have even denied that that was the case as well. She did mention she thought core inflation would under 2% for years to come. Yellen is quite possibly the dullest member of the Fed (the competition is strong, so this would be some honor).

News that just crossed the wires indicates that the Fed bought 2.99 billion in treasuries so far this morning. This is with printed money. By the end of the week, the amount is likely to be a lot higher. But, don't worry, this is not going to cause inflation - in Never Never Land that is, in Reality Land there's going to be a lot of problems.

NEXT: Oil Update - EIA, CFTC, and USD

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 and Natural Gas

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

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Fed Chair Ben Bernanke was on Capital Hill for a second day of hearings yesterday. This time he appeared before the Senate. As he did in his testimony before the House, Bernanke spent a great deal of time assuring the Senate that the Fed could "exit" the policy moves of the Fed (including increasing its balance sheet by over a $1 trillion and massive increases in bank reserves) he has made before inflation pressures mount. This is like saying Pandora's Box can be closed again after it was opened. I do not know if our elected representatives burst into hysterical laughter or chuckled in an amused manner when Bernanke made these statements. This was not recorded in the hearing transcripts.

Once again Bernanke also emphasized that "monetary policy remains focused on fostering economic recovery". Apparently the focus isn't working. A number of senators complained that businesses in their states reported that banks were refusing to lend funds because of the crisis. Since nothing in U.S. government policy requires them to do so and the Fed and U.S. Treasury have made it possible for banks to earn riskless money, why should they lend? Bernanke at least admitted that reducing unemployment was "difficult and challenging". So his policies aren't working for anything that they are supposedly 'focused' on fixing. Maybe that's because they are focused on creating inflation instead.

In one of the great hypocritical moments in contemporary American politics, Senator Chris Dodd asked Bernanke, "When can the American people expect the recovery that they have funded?" Dodd himself publicly demanded the policies Bernanke has followed and supported the programs the Treasury has implemented. He also has a history of questionable dealings with Fannie Mae and was an enthusiastic supporter of government policies that led to the Credit Crisis. Now of course he's complaining the Fed and Treasury haven't cleaned up the mess he helped create. For his part, Bernanke said that Congress should try to reign in its spending. This of course would cause the economy to contract and make Bernanke's policies even less effective than they already are.

But the American public can rest assured that the Fed's no interest rate policy will continue no matter what. Bernanke made it clear that interest rates would not be raised any time soon. My guess is that the Fed is also pumping huge amounts of liquidity into the financial system currently (so there would be no complaints from congress about the stock market falling apart). This would explain both the stock rally and the weak dollar (trading just above its breakdown level for the third day in a row). Gold closed at $953 an ounce yesterday, a six-week high.

In presumably unrelated news, the weekly Natural Gas storage report was out this morning. Storage was up 66 bcfs versus an estimate for a rise of 67 bcfs. Stocks are 458 bcfs above the 5-year average. Natural gas futures fell 0.6% after the report was released.


NEXT: Is It 1998 All Over Again?

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



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

Silver, Oil, Gold - Market Screams Inflation is Coming

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

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Silver is having its best month in 22 years. It was up to 15.49 in overnight trading, getting close to important resistance around 16.00. Gold traded as high as 974 before the U.S. markets opened, inching closer and closer to that key 1000 level. Light sweet crude was trading at 66.18 at 8:00 AM New York time. It's next resistance is in the 67 area and then 70 after that. Resource stocks were up significantly in Asian trading last night. Expect gaps up in SLV, GLD, DXO, and ERX when the U.S. market opens. Keep in mind that at some point those gaps will have to be filled.

Markets tend to be bullish at the beginning of a month, so early next week is a favorable period. While it may not happen today, silver, oil and gold will become too extended from their 10-day moving averages and will have to come back down to that line. Traders with a shorter term horizon need to take this into account. If you have a longer term perspective, you can wait until key resistance is reached. Oil is heading toward the 75-78 price level. While it may not finally peak this summer until it gets to around 100, profits should be taken in the mid-70s and oil should be swing traded shorter term at that point. You don't have to worry about gold until 1200 and silver until it reaches 21. They haven't even begun their rallies yet.

Marc Faber, a very well-known market investing advisor and market commentator that appears in Barron's annual roundtable has come out with a report stating hyperinflation in the U.S. is inevitable. While, I would certainly agree that lots of inflation here is inevitable, I don't yet think the 50% a month inflation rate needed for hyperinflation is a done deal. It is certainly a possibility though. To get to that point will take incredibly inept government policy and oblivious monetary authorities. You would practically have to have a central banker throw money out of a helicopter! By the way, the Fed is still currently worried about deflation, while printing money Zimbabwe style.

The market for all commodities is bullish going forward, but that doesn't mean there aren't going to be tradeable pull backs. Which ones you pay attention to depends on how short term your trading perspective is. Other than too much extension above the 10-day moving average, you need to be aware of the 200-day moving average - HWD (Harry Winston) is caught there at the moment, but it has a textbook perfect bullish chart - and the 38% Fibonacci retracements. If you sell with a short term perspective, you must be willing to buy back with a short term perspective as well. If you can not do this, and most people can't, wait until major resistance is hit before pulling the trigger.

NEXT: How Susan Boyle Provides a Lesson for Stock Investing

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.

Dollar Weakens; S&P's British Outlook, TED Back From Dead

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

Our Video Related to this Blog:

Minutes for the Federal Reserves April 28-29th meeting were released yesterday and they revealed that the Fed thought that more purchases of long-term debt might be necessary to spur the economy into recovery (and uncontrolled inflation... but they left that part out). More quantitative easing would require the 'printing' of additional currency and debase the dollar even further. Not surprisingly the dollar fell on the news and hit a 7-month low of 80.002 (if it breaks key support of 79, watch out below). While the condition of the U.S. government's finances are in worse shape than Britain's, S&P revised Britain's credit rating outlook to negative this morning. While the pound fell for a short time, it is way above its lows against the dollar. Even though the central banks are flooding the world with more fiat money, the TED spread, a measure of stability in the global financial system, has returned to normal levels - this is a necessary, but not sufficient condition for recovery.

The need for the U.S. to print more money well into the future could easily be determined by anyone with knowledge of elementary arithmetic. Nevertheless, the market is constantly surprised such a thing will be necessary. Bonds and the dollar should sell off on this news, but stocks and oil are getting hit today as well. Oil, which has to be purchased in U.S. dollars, should automatically go up if the dollar falls or if there is news about increasing inflation. NYMEX crude closed at $62.04 yesterday and is still above its breakout point of 60. Gold was flat this morning and silver down slightly. They should be zooming.

Although S&P changed Britain's credit outlook to negative, this is not as bad as being on credit watch. S&P reaffirmed Britain's triple A credit (they also rated a large number of subprime mortgage bonds triple A, so take that into account when considering the accuracy of this rating). S&P is worried that Britain's government debt will rise to 100% of GDP by 2013. If the U.S. doesn't beat Britain to this milestone, we will indeed be lucky. If there was an accurate measure of both out national debt (it's understated) and our GDP (it's overstated), we might indeed already be there. Perhaps S&P will be making an announcement on this matter soon?

The TED spread was mentioned frequently in this blog last fall. When the financial system is in stress it zooms upwards. Its long term average is around 50 basis points. It went over 450 last October, substantially exceeding its peak during the 1987 market meltdown. It was 48 this morning. This indicates that the global banking system has returned to normal interbank operations. This was an important goal of central bank policy that they have been successful in accomplishing it. Now that stabilizing the banking system has been achieved, the possibility of economic recovery exists.

NEXT: A Golden Opportunity with a Silver Lining

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 Meltup in Mumbai

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

Our Video Related to this Blog:

Last night, half way around the world in Mumbai, the hyperinflation early warning system sounded the alarm. The major Indian stock index, the Sensex, exploded up over 17% in a short period of the time. The market had to be closed because circuit breakers were triggered by the stock buying panic that sent the market into a meltup. What set off the bull frenzy? The ruling Congress party retained power in the recent elections - a relatively ordinary event. The stockplosion on the subcontinent should make every investor realize that India is a market awash with massive liquidity, otherwise a big market move like this would not be possible. India moreover is by no means unique, it's just early. The excess liquidity there is part of a global phenomenon that could create an inflation tsunami that raises or wipes out asset values throughout the world.

Despite what the mainstream media tells you, liquidity is what moves markets. The economy can be in the tank and staying there, but if there is a lot of liquidity in the system, stock prices can and do go up. The New York Investing meetup has constantly demonstrated at our meetings that the Fed is pumping liquidity into the U.S. banking system that is 10 to 50 times greater than anything during the last half century. Many economic 'experts' (mostly the same people who didn't see the credit crisis coming) are optimistic that somehow all of this huge money creation is magically not going to result in a massive inflation surge that is like nothing the world has ever seen. The events in Mumbai last night are telling us otherwise.

Hard assets are the investments of choice during inflationary times. Gold, silver, oil, and food are the four pillars of investing during these periods. The price of stocks go up as well because the price of everything goes up, although they are rarely the best performing asset class. You want to get into inflation sensitive investments early and you want to wait once you do. Based on last nights events, it is quite possible that the wait won't be that long.

The New York Investing meetup is having a class on Inflation Investing Tuesday May 19th. For more information, please see the website: http://investing.meetup.com/21.

NEXT: Market Puts on Inflation Trade Becuase of Mumbai Mamba

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 Pull Back or Top?

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

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Stocks had a sharp drop yesterday. Some people have already stated that the market has topped out. While certainly this is possible, the argument is weak. The market doesn't go up every day, although this may not have seemed to be the case lately. Even the best rallies have sharp drops. As was mentioned in this blog several days ago, there were a lot of stocks in the market that were overextended and floating way beyond their 10-day moving averages. A decline for them was inevitable and is now taking place. If they drop enough, they offer a major trading opportunity. In general, small oil producers and drillers offer the best deals in this scenario. While some areas of the market may already be in decline, others will perk up. The PPI report today indicated a whiff of inflation and you can expect much worse in the future.

The Nasdaq was down 3% yesterday. It is the only major stock index that has hit its 200-day moving average - classic resistance in a bear market rally. It hoovered at that level for 9 days. The Dow and S&P 500 have yet to get to this key level. It is not unreasonable to assume they will before the rally ends. Oil managed to go down slightly despite a massive drop in oil and gasoline in U.S. storage. I have noticed this lack of reaction on the storage news several times during the rally that began in February. The market has only reacted to the good or bad news two or three days later. So much for the Efficient Market Hypothesis.

While oil itself dropped a small amount, small cap oil stocks were down as much as 15%. The ones that were floating well above their 10-day moving average need to come down to at least their 20-day (the 30-day or 40-day would be even better) moving average to restore some balance. They become good trading buys at that point, especially if gaps are filled by the drop and the RSI has fallen to around 50. HTE, which had about a 50% rally in only four trading days is a good example of this type of stock. PDS less so. In many cases, coal stocks were even more extended than oil and they need even more selling to get to a bargain price. Take a look as MEE for example (don't buy it, at least not yet, just take a look at it). The incipient rally in natural gas has another type of profile (a rally at the beginning and one that has been going on for awhile have different trading rules). UNG needs to come back down to its 50-day moving average before it becomes interesting.

While inflation effects oil and other commodity prices, it is even more important to gold and silver. The PPI report this morning was up 0.3% after dropping 1.2% in March. Year over year, PPI is down 3.7%, although core prices are UP 3.4% (yes up, they have never been negative). Food prices rose 1.5% in April with a record jump in eggs and large price increases in vegetables and meats. Energy prices supposedly fell last month (yeah, that's realistic). The deflation that the government claims took place in its highly manipulated reports is dependent on falling oil prices. Once they go back up - and this has been happening since February - the deflation that never really existed is going to turn into very ugly inflation. Unlike the deflation, the inflation will be real.

NEXT: The Scamdemic in Insurance, Autos and Swine Flu

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.

No Longer Gilt Edged - the Inflation Implications

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

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Yesterday, a regular government bond auction in Britain failed for the first time since 1995. There were more 45-year gilts for sale than buyers willing to purchase them. The British government is only printing money to buy its bonds in the 5 to 25 year range and it is now obvious the printing presses are going to have to be reved up to expand this program if Britain wants to fund its various bailout and stimulus packages. Meanwhile the U.S. bond auction yesterday was a 'success', although in order to insure that success the Fed had to purchase a higher amount of bonds than was previously thought necessary. The inflation implications of more money printing did not escape the market's attention with almost every commodity rallying strongly this morning.

The commodity rally took place even though the economic news was gloomy across the board. U.S. fourth quarter 2008 GDP was revised further downward to a drop of 6.3%. Businesses and consumers are both cutting spending and unemployment roles are swelling weekly. The mainstream press has continually told investors that commodity prices can't pick up until demand increases and this will require the economy to start picking up. They have been continually wrong. Commodities are all inflation hedges and the big money is well aware of this. Even the most cursory examination of the charts indicates many commodities bottomed last fall and their prices have been moving up since then. You should ask yourself why doesn't the press just report this simple factual information?

This blog has covered the mainstream media's misreporting of the oil market in detail many times. Headlines for the weekly supply picture from Cushing, Oklahoma were uniformly bearish yesterday. Oil in storage increased 3.3 million barrels, instead of the 1+ million increase that had been predicted and was more than 15% higher from the same time last year. As usual the press quoted 'experts' indicating demand has to pick up or the current rally will falter (as opposed to the previous reporting that stated that demand has to pick up or there wouldn't be a rally). Oil indeed sold off on this bearish news. What the press didn't report or buried at the bottom of its coverage was that demand for gasoline has actually risen for the last four weeks (even though the press will tell you this is not possible during a recession - the facts sometimes get in the way of the story the media wants to tell you). Gasoline in storage is actually more than 5% below year ago levels and the beginning of the heavy usage summer driving season is only two months away.

Investors should all keep in mind that commodities are inflation hedges and the U.S. and Britain are admitting they are printing new money. This doesn't mean that they just started printing additional money, but that the money printing is so out of control that it can't be hidden any more. There is no time in history where the money supply hasn't been expanded beyond the economic growth rate and inflation hasn't resulted. The inflation this time is going to be considerable. If you haven't done so already, you should be adjusting your portfolio accordingly. By the time the mainstream media tells you to do so (they are currently telling you the deflation is your big worry), it will already be too late.

NEXT: In the Eye of the Financial Hurricane

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.

Quantitative Easing Today, A $50 Cup of Coffee Tomorrow

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

Our Video Related to this Blog:

This morning, the Bank of England (BOE) lowered interest rates (already at 300 year lows) to 0.5% and the European Central Bank (ECB) lowered them to 1.5%. Like the U.S. Fed, both central banks are worried about deflation, which is like someone in the Amazon worrying about the next blizzard. The Bank of England even announced it was embarking on a quantitative easing program (as if this is something new) that would purchase $106 billion of commercial paper and government bonds. British gilts soared on the news (interest rates went down) and inexplicably the pound rose and then more logically fell. Why someone would buy a currency, just after the issuing government announces it's embarking on a currency debasing program is something to ponder.

Quantitative easing is the creation of money out of thin air by a central bank, followed by its injection into the country's banking system. Central banks can accomplish this by using the new money to buy government bonds in the open market, lending the money to banks, or buying assets from banks in exchange for currency. It is not the only form of new money creation, just the most extreme. Quantitative easing causes government bond rates to go down. It should also lower the value of a country's currency.

The U.S Fed has effectively been using quantitative easing since late 2007. Note that government bond interest rates have gone down substantially during this time (and the U.S. dollar had a massive sell off from the fall of 2007 until spring of 2008). Records also indicate that only 20% of U.S. treasuries are in private hands. The rest are held by the Fed, its subsidiaries and foreign central banks. The U.S. government has essentially been printing money and then buying its own bonds with this newly printed money. According to many economic experts, including noble prize winners, this is somehow not going to lead to inflation.

The thinking (or lack thereof) of central bank heads on the deflation issue was demonstrated clearly in the rate cut announcements this morning. Both the ECB and BOE are worried about inflation rates falling below 2%. Trichet the ECB head, admitted that the a sharp drop in commodity prices was the cause of this 'deflation' (although official inflation rates in the Eurozone are still above 1%) and apparently he thinks commodity prices can continue falling below the cost of production and there won't be any reduction in supply (did he take economics 101?). This argument is used by the U.S. as well, along with the 'inflation can only happen if wages are rising' line of reasoning. That argument is false as well and is based on the interpretation of the mechanism of the course of inflation in the U.S. in the 1970s. Even if this wage rate argument was true, revised figures came out this morning showing U.S. wages actually rose sharply in Q4 2008, instead of falling as had originally been 'mistakenly' reported by the government.

Ultimately, inflation comes down to whether of not the value of a country's currency is maintained and all other issues are secondary. When countries issue money faster than justified by economic growth, whether in the form of actually printing it as hyperinflationary superstar Zimbabwe has done or by using the more sophisticated tricks of the U.S Fed, the value of that country's currency declines against hard assets and consumer prices rise. Only if the money does not flow into the greater economy because it gets stuck in banking system because you have continual recession/depression, can you avoid inflation. Either way you lose.

NEXT: U.S. Unemployment reaches 15%

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 Real Deflation is Taking Place in Bank Stocks

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

Our Video Related to this Blog:

PPI came out this morning and the U.S. government is now claiming that there has been wholesale price deflation in 2008. At least this is what the headline number indicates. Core inflation wasn't as benign, rising the most since 1988. The media is of course now hyping the headline number, which it downplays when it indicates inflation and ignoring the core number which gets a lot of attention when it's the better number (the advantage of having two numbers, one is likely to look better). The prices that are really dropping are assets, not those that are consumer related, with bank stocks yesterday taking a real hit.

According to the BLS wholesale prices in the U.S. fell by 1.9 percent in December. The yearly drop of 0.9% compares with a rise of 6.2% in 2007. As has been pointed out repeatedly in this blog, recent drops in the PPI are due almost exclusively to declining energy prices. These led the price declines last month, with energy prices overall going down 9.3% and gasoline dropping by a record 25.7%. For a change, food prices also fell, or at least the reports indicates a 1. 5% drop for the month (there was no drop for 2008, nor have U.S. food prices fallen year over year in the last four decades). Core inflation told a very different story however. It was up 0.2% in December and 4.3% in 2008. The last time it was higher was 20 years ago.

Mainstream media reporting on the PPI, as has been the case recently, has indicated the risks of consumer price deflation because of the headline numbers. The media usually reassures the public that economists (almost all of whom missed the Credit Crisis, the recession and are usually wrong in almost all of their predictions) have "confidence that the Federal Reserve (which has totally and completely mishandled the Credit Crisis since its inception) has the tools needed to keep deflation from becoming a problem". The media usually follows this up with 'isn't it great that the Fed had the foresight to cut interest rates to zero'. Certainly, you can not argue that what the Fed is doing will keep the threat of deflation away. Central Bank monetary policies that have given rise to hyperinflation in the past are usually very effective in preventing prices from falling.

While there is no actual deflation going on in consumer prices as the mass media would have you believe, assets prices are indeed deflating (the two are not interchangeable) because of the collapsing financial system. That collapse is by no means done. Bank America actually hit a new yearly low in aftermarket trading yesterday. Citigroup fell over 20% into the 4's (its yearly low is just above 3, a price that large cap financial stocks trade at only if they are on the verge of oblivion). Wells Fargo was also down quite a bit. The charts for JP Morgan, Goldman Sachs and Morgan Stanley are not looking particularly healthy either. Even after the U.S. government has pumped almost an unlimited amount of money into these companies, they are faltering again. As we have said in the New York Investing meetup over and over, "there is no such thing as a single bailout for an insolvent financial institution". We'll just have to see what the government does next.

NEXT: Bank(rupt) of America Gets Government Bailout

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

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

Early Year Trading Signal Goes Neutral

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

Our Video Related to this Blog:

The market had a sharp sell off yesterday where essentially every stock group got hit. The major averages moved right back to where they started the year, making the early year trading indicator neutral. Still there were important messages within the internal trading patterns that can be used as a guide for investing . While things don't look horrendously bad as they did in the beginning of 2008, there is no cause for optimism just yet. As of now, 2009 looks more likely to be a year of ups and downs in a bigger sideways trading pattern. Nevertheless, investors should look closely at the market for signs of trend change around the beginnings of each of the next three quarters.

Oil which took the lead on the way up, was the hardest hit yesterday, with the ETF dropping 12.5% on the day. Silver was second, falling 4.3%. The small-cap Russel 2000 had the biggest loss among the indices, ending down 3.4%. Nasdaq, the S&P 500 and the Dow followed with losses of 3.2%, 3.0% and 2.8% respectively. GLD was down 2.8%. The Dow ended 2008 at 8776 and ended the fourth trading day of 2009 at 8770; the S&P 500, 903 and 907; the Nasdaq 1577 and 1599; and the Russell 2000, 499 and 497. If you had slept through the first 4 days, you wouldn't have known anything had happened.

Despite energy being hard hit yesterday, energy stocks garnered the most investor interest in the beginning of the year. Agriculture performed almost as well. Mining was next and the Aerospace group was fourth. The top three groups are all inflation sensitive. On the downside, no group can compare with Savings and Loans. Not surprisingly, Banks were next to the bottom. They were followed by Computer Software, Utility stocks, and Semiconductors. Anyone tempted to bottom fish among these group should follow the highly cyclical semiconductors. While they are strongly impacted by the economy, they also tend to do well in higher inflation environments. When the economy turns (and no one right now knows when that will be), these stocks will do particularly well.

All in all, investors should be watching oil and looking to pick it up or energy related stocks on pull backs. The bottom in oil may still be a ways off, but a lot of buying interest has now been established at the prices reached in December. Mining and agricultural plays should also be kept on the radar. Keep in mind that there is always money to made in the stock market - as long as you know where to look.

NEXT: Economic Reports - From Very Bad to Even Worse

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

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

Seesaw Market Action Continues on Day Three of 2009

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

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After rising on the first and falling on the second trading day of the year, U.S. markets rallied on the third. The seesaw action indicates that the big money is still ambivalent about whether or not to put money into the stock market. Nevertheless, certain sectors of the market are seeing major buying committments, with energy being the top performer by far. Mining and Agricultural stocks have also done quite well. All three groups are inflation plays. On the flip side, industry groups strongly impacted by recession and the Credit Crisis remain investing pariahs. Market players lack of interest in these stocks indicate they do not forsee that the current recession will be over soon, nor that the financial system is yet on its way to recovery.

While the market rallied yesterday, it was nothing to write home about. The Dow was up 0.7% and the S&P500 0.8%. Nasdaq did much better, rising 1.5% and small caps did the best of all with the Russell 2000 rising 1.9%. While trading volume rose on the day, it was still below average for the Dow (trading volume below average indicates lack of enthusiasm for the move). For a third consecutive day, the only really outstanding volume was in oil.

While energy stocks once again did well, they were only the second best perfoming group yesterday. Mining stocks moved to the number one position. Double digit gains have been seen in the big international miners so far this year making them some of the biggest winners in the market. Overall, a higher percentage of energy related stocks have done well though. Joining these group toward the top of the list were Agriculture, Tranportation, and Chemicals.

As usual, the bottom position was held by Savings and Loans. There seems to be absolutely no buying interest in this group . Next to the bottom were the safe-haven Utilities, which are apparently not considered so safe at the moment (this group is usually held up by their high dividends, although these could become insignificant during a period of high inflation). Just above Utilities were Consumer, Food/Beverage, Retail and Medical stocks. Consumer and Retail stocks are deeply impacted by recession so it makes sense for them to be on this list. Food/Beverage and Medical stocks are usually safe-havens in a recession. The big money doesn't seem interested in putting any more money into these sectors however.

As of this writing the fourth trading day of the year looks like it will be down. If so, it will only add to the apparent lack of interest on trader's part in putting money into stocks in 2009. Without that, the fuel needed for an overall sustainable rally will just not be there.

NEXT: Early Year Trading Signal Goes Neutral

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.