How Much Stimulus Will Be Done by China, the EU and UK?

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.

Much weaker than expected trade data out of China on Friday indicates more economic stimulus will be forthcoming there soon.  Even bigger stimulus is expected from the ECB as it revs up the printing presses to bail out Spain and Italy (unless Germany stops it of course). According to a recent released report, the recessionary economy in the UK may need massive doses of quantitative easing to recover.

Exports in China rose by only 1% year over year in July and this was well below forecasts of an increase of 8.6%. Imports were up 4.7%. For a country that has an export-based economy like China does, this is a serious problem. Like the U.S., Europe and Japan, China engaged in a massive amount of stimulus during the Credit Crisis in 2008/2009, spending $586 billion or 14 percent of its GDP in addition to cutting interest rates and lowering banking reserves.  This led to a big expansion of local government debt, a major housing bubble that has yet to burst and consumer inflation. Apparently, there are unfortunate side effects when governments apply a lot of economic stimulus (notice you rarely read about them in the mainstream media).
This time around, China has already cut interest rates twice and reserve requirement ratios for banks three times since November. Its economy has slowed for the last six quarters and probably by much more than official figures indicate (China's economic numbers should be taken with a grain of salt).
China is still in spectacular shape though compared to Japan, which had a massive trade deficit in the first half of 2012. Japan has been economically troubled for 22 years and despite zero percent interest rates and an unending number of stimulus measures its economy remains in the doldrums. While all the stimulus hasn't solved Japan's economic problems, it has led to a debt to GDP ratio of over 200% (worse than Greece's).
One reason China's exports are doing so poorly is the weakening economy in Europe. On Thursday, the ECB cut its growth forecasts and is now predicting the eurozone economy will contract by 0.3% in 2012.  They are still hopeful of slight growth in 2013 however. Maybe they think it will come from all the money they plan on printing to bail out Spain and Italy. The Eurozone is basically tapped out from all the bailouts it has already done in Greece, Portugal, and Ireland (Cyprus and banks in Spain are now on the list as well). Greece needs a third bailout and is struggling to make it through the month until it receives its next welfare payment in September. The situation there is potentially explosive. The IMF has stated Ireland will need another bailout by next spring.
When ECB President Draghi said on July 9th that the central bank will take any measures within its mandate to save the euro, the inevitable conclusion was that he was willing to engage in massive money printing. The amount of money needed for the huge bailouts that Spain and Italy would require simply doesn't exist so it has to be created out of thin air. The Draghi proposal is for the ECB to buy bonds, but the ECB has already tried buying bonds under the SMP program.  The moment the buying stopped, interest rates shot right back up. This approach is costly and only effective in the very short term — a typical government program. It won't prevent the Eurozone's failure, it will merely delay it and make it worse when it happens.
The UK is not part of the Eurozone, but its economy is also contracting. Citigroup economists have stated that the UK will need to print an additional £500 billion and lower interest rates to 0.25% to prevent continued stagnation. Apparently, they don't think there are serious risks if this approach is taken. Neither did the Weimar Germans in the early 1920s, the Zimbabweans in the 2000s, the Chinese in the 1940s, the Brazilians for most of the 20th century, the Yugoslavians in the 1990s or the Hungarians in 1946. In fact, countries that create hyperinflation always claim the risks of money printing are minimal before it takes place. And there are usually a large number of top economists that support this view.  

There are serious structural problems in the major economies today. The usual Keynesian quick fixes that have been applied since World War II no longer seem to work, nor will they. These have led to a world drowning in debt and all debtors eventually reach their borrowing limit. When this happens with countries, they then try to print their way to prosperity. History makes it quite clear that this doesn't work either. 

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.

Central Bank Action Supports Credit Crisis View

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

There was another confirmation of an emerging credit crisis yesterday as central banks in various parts of the globe took coordinated action to pump money into the financial system. The banks involved though claimed it was mere coincidence that they all acted at the same time.

Central banks are generally only interested in dealing with their own internal matters. On ocassion though, they act together as they did in October 2008 at the height of the Credit Crisis. Massive stimulus from lower interest rates and quantitative easing finally allowed the markets to put in a bottom six months later.

On Thursday, the People's Bank of China cut its key lending rate by 31 basis points (a basis point in one-hundredth of a percent) to 6%. This was a previous cut less than a month ago. Manufacturing has been declining for months now in China and there are some estimates that GDP will barely be above 7% this quarter. While this would be enviable for any North American or European economy, below 7% growth would feel recessionary in China. Lowering interest rates is not without risk for China since the country also has a massive real estate bubble and this will continue to feed it. 

At the same time that China was cutting rates, the ECB cut its refinancing rate to 0.75% from 1.00%. The banks' deposit rate however was lowered to zero (obviously not much room to maneuver left there). While the ECB has still not fully implemented ZIRP (zero interest rate policy), which Japan and the United States have now maintained for years, it is so close that the difference is irrelevant for all practical purposes.  The Bank of England did not lower its 0.50% benchmark rate, but instead raised the ceiling on its current round of quantitative easing by 50 billion pounds. They've obviously come to the conclusion that once rates have gotten close to zero, money printing is the only way to go.

Absent in any obvious way from yesterday's action was the U.S. Federal Reserve. It already had its monthly meeting at the end of June and announced an extension of Operation Twist (an attempt to drive 10-year yields lower even though they had already hit all-time lows on June 1st). The market bulls were claiming that the Fed would announce a third round of quantitative easing, but they didn't. The Fed is also going to have trouble engaging in more QE in the near future because the U.S. is once again near its debt limit. National debt is now over $15.8 trillion and the debt ceiling is $16.4 trillion. The two will come together at some point this fall. To implement quantitative easing, the Fed has to buy newly issued treasuries. When the debt ceiling is reached, there won't be any. It took months to raise the debt ceiling last time and it is likely to be just as contentious an issue this time as well.

The current global financial crisis is centered in Europe and nothing has been fixed there. The EU has been trying to keep 10-year bond yields below the critical 6% level in Spain and Italy since last summer. They have utterly failed in the case of Spain. Spanish 10-year governments were over 7% in June (higher than last fall, which was in turn higher than last summer). After being driven down close to 6% twice in the last two weeks, the yield was as high as 7.04% today. Italian 10-years traded at 6.08%. Rates continually above 6% mean that Spain and Italy will need bailouts, but the necessary money will have to be printed. Germany holds the keys to the printing press however and may not let them be used.

Stock markets worldwide have held up remarkably well considering there are serious problems in the financial system and the global economy is weak. Liquidity from central banks is responsible for this. However markets have a tendency to revert to realistic prices and if they aren't allowed to do that gradually, they will do so suddenly.

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.

EU Summit Implies Massive Money Printing on the Way

 

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.

Perhaps the EU is finally realizing that a debt crisis can't be solved by issuing more debt. The proposals emanating from their recent summit in Brussels will require massive money printing instead, especially if the EU doesn't wind up issuing eurobonds.

While EU leaders didn't state that they were going to start running the printing presses at full speed, it is the only way they can produce sufficient funds to actually implement their new policy initiatives. They may not be willing to do so however. Until there is an actual big increase in money printing, there is no reason to believe that the EU will implement any of the proposed fixes for its financial problems.

All the ideas that came out of the summit have been bandied about before. Some, such as direct recapitalization of banks (described as a "breakthrough"), had already been announced before (perhaps it should have been called a re-breakthrough). This was done in response to the EU's disastrous bailout of Spanish banks that went through the Spanish government causing significant downgrades to its credit rating and thereby raising its borrowing cost significantly. A joint banking supervisory board is now going to be added though. This seems sort of late in the game, considering the teetering insolvency of many EU banks.

As a summit attendee stated, lending money directly to banks means the loans won't have to be put on a government's books. He should have followed up with, "at least not immediately". The way Ireland got into serious trouble and required its first EU bailout was that its banking system failed and the debt had to be assumed by the government. The IMF now says it will need another major bailout soon. As long as the EU is willing to commit unlimited bank bailout funding this will not happen in other EU countries.

One new approach that did come out of the summit was a relaxation of conditions for receiving bailouts. This was not described as applying to all bailouts however. Only countries that are "well-behaving" will not have stringent conditions applied to them when they ask for a handout. This of course begs the question of why a "well-behaving" country would need a bailout in the first place. While this is an attempt to treat Spain and Italy better than Greece, Portugal and Ireland, it will not work in practice. All the previous bailout countries will demand that they be allowed to spend more money and run bigger budget deficits. Since they can't raise funds in the bond market, the EU will have to increase the amount of their bailouts. This will require a continual stream of additional payments from the EU. Where will the money come from?

The short answer is sharing debt through jointly issued Eurobonds. Not that this can happen in the near future. First a report on its feasibility will be issued in October. Then all the EU countries will have to agree to it. Whether Germany will be willing to do so remains to be seen (Angela Merkel supposedly said that this would take place over her dead body). Even if this eventually happens, and 2013 would be the earliest that it would, can bonds that mix subprime borrowers and prime borrowers be successful?  The history of this is not encouraging. This is what created the housing bubble and led to a massive financial system collapse in 2008. The issuing of eurobonds means the entire EU could default as a single entity as opposed to just the weaker members. That doesn't exactly sound like an improvement over the current state of affairs.

One interesting note from the summit was the declaration from Italian premier Mario Monti that Italy did not intend to apply for a bailout. Greek and Spanish leaders said the same thing just before their countries applied for a bailout. As the French say, "the more things change, the more they remain the same". Perhaps the EU should adopt this as their new motto. At least it sounds better than "bailouts are us".

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.

Expect Market Volatility Because of Europe

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.

This week was a good one for stocks. The Dow was up almost 300 points on Wednesday and markets in Europe had powerful rallies as well. The action was technical in nature, being an oversold bounce. The problems in Europe that have been weighing on the market haven't gone away and more selling will follow.

The major indices in the U.S. — the Dow Industrials, the S&P 500, the Nasdaq and the Russell 2000 — all hit and even fell below their 200-day moving averages on Monday after many days of selling. A bounce from this level should be expected. It is a common place traders view as a support level where they should start buying. After such a bounce, they usually start selling when prices get near the 50-day moving average.

Problems in Europe haven't gone away. There is still an emerging credit crisis taking place there and it is only a matter of time before it boils over into global markets. Greece has its next election on June 17th and the anti-bailout parties are likely to gain further strength. Unemployment is 21.9% there and the GDP shrank 6.5% in the first quarter after falling 7.5% last year. Greece is in its fifth year of recession and there is no respite in sight. If it leaves the euro, it would be a major blow to German and French banks and the stability of the entire eurozone.

Spain is now potentially an even bigger problem. Its unemployment rate is 24.4% and its banking system is in serious trouble. Bankia, which was formed in 2010 by the merger of seven regional banks, claimed it had a 300 million euro profit in 2011, but it turned out that it actually had a 3 billion euro loss. Now the results of other Spanish banks are being questioned. Money is leaving Spain and on Tuesday the Treasury Minister stated that "at current rates, financial markets are off limits to Spain". The 10-year bond auction went well on the 7th however with Spain paying a yield of 6.06% (rates were as high as 6.65% in late May). It is quite obvious that the ECB was behind the buying in one way or the other. The IMF has said that Spanish banks need an immediate cash injection of $50 billion.

Some bailout of Spanish banks should be expected soon. While the market may rally on this news, don't assume that it will keep things stable for too long. Spain, which had the worst real estate bubble in the world,  is still building empty houses and the debt for these non-productive assets is still piling up in its banks. Like Greece, Spain needs to restructure its economy. Bailouts will only work if this is done and so far there hasn't been any movement in this direction. Consequently, investors should expect the markets will start to increasingly trade like they did during the last Credit Crisis 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.

Dollar Clears Resistance as Euro Falls Below Support

 

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.

As the U.S. trade-weighted dollar (DXY) breaks out from a four month consolidation pattern, the euro (FXE) is falling below major support. The movements of these currencies have important implications for the rest of the market.

The dollar has been stuck trading roughly between 79 and 82 since January. There is strong chart resistance at these levels both from recent times and two decades ago. In the last couple of years, the dollar made a double top at just under 82 in late 2010 and early 2011. In the late 1980s and early 1990s the dollar made a triple bottom at three different points in this year's trading range. The dollar finally broke above 82 on May 23rd. While there is minor resistance just under 84, major resistance is from 88 to 89 — the highs during the Credit Crisis in late 2008 and early 2009 and in mid-2010 during the first phase of the Greek debt crisis. It should be assumed the dollar will get to that level again (and possibly higher). How long it takes to do so is still an open question.

As is almost always the case, the euro is moving opposite to the dollar. The euro has strong support at and just above 125. It made a double bottom at this level while the dollar was peaking during the Credit Crisis. Recently in January, it made another low at this level. There was a clear break below on May 24th. Next stop for the euro is the low around 119 established in June 2010 when the dollar was just above 88. If the euro breaks this support, it will try to head toward parity with the dollar. The powers that be will of course do everything possible to try to prevent this.

The commodity markets are heavily influenced by the dollar/euro price actions. All commodities are priced in dollars, so a rising dollar will lower commodity prices all else being equal. Oil (USO) and gold (GLD, IAU) are generally at the forefront of this price dampening. This is one reason spot gold was down 30% during the Credit Crisis, despite its safe-haven status. WTI Oil dropped almost 80% at the same time. Stocks of the commodity producers usually fall even more than the commodity itself. Multinational stocks in general are also negatively impacted by a rising dollar because their earnings are mostly made in other currencies.

Since large moves in major currencies are destabilizing, central bankers are always concerned when they happen. They will continue to do everything possible to prop up the euro, although the currency union cannot continue to exist in its current incarnation. There is a long history of governments trying to prop up weakened currencies however and while devaluations can be delayed, they can't be avoided altogether.  

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.

Will Greek Bailout Deal Falter Now or Later?

 

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 Greek bailout deal is once again falling apart. Whether or not it is patched together another time, the end will inevitably be an ugly default.

On Thursday, news sources around the world were trumpeting that the EU and Greece had come to terms that would allow Greece to receive a 130 billion euro bailout payment that would prevent the country from defaulting by March. But late in the day, EU finance ministers made additional demands on Greece. They wanted another 325 million euros in budget cuts, that the Greek parliament pass the cuts and that a written guarantee that the cuts will be still be implemented after the April elections. On one hand these demands are not surprising since the Greeks have been less than honest about their budget numbers in the past. On the other however, they are surprising because this could be the straw that breaks the camel's back.

Greece is in its fifth year of recession and its economy seems to be in an unrelenting downward spiral. This is happening because just like the United States, Japan and a number of other nations, the economy is dependent on government spending made possible by huge budget deficits. Each time Greece has been forced to cut its budget deficit, the economy has shrunk some more. Additional cuts will only cause additional contraction. Although they receive little coverage by the U.S. media, riots have become common place in Greece (there is currently a 48-hour strike). Democracy might itself be threatened there. Greece does have a history of military dictatorship, with a military junta running the country between 1967 and 1974.

Lately, the country is becoming increasingly politically unstable. The far-right LAOS party, which is part of the governing coalition, has refused to support the new terms of the bailout. Its members resigned the coalition today. Even more disturbing, Reuters has reported that the Federation of Greek Police has issued the following statement to Greek officials: "Since you are continuing this destructive policy, we warn you that you cannot make us fight against our brothers. We refuse to stand against our parents, our brothers, our children or any citizen who protests and demands a change of policy. We warn you that as legal representatives of Greek policemen, we will issue arrest warrants for a series of legal violations ... such as blackmail, covertly abolishing or eroding democracy and national sovereignty."

Even if things are patched up once again and the next bailout payment is made, there will still be another one after that and even more to follow.  Greece is like the family that is only one paycheck away from homelessness, except one welfare check away from homelessness would be a more apt analogy. Eventually, something will give and this will have a major impact on the world financial system.

The real crisis in Europe is not Greece in and of itself, it is the stability of the banks in France and Germany that have lent money to Greece (and Italy, Spain and Portugal). These banks are in precarious shape and a Greek default will have similar consequences to Lehman's collapse in the fall of 2008. Expect the central bankers of the world to unleash a tsunami of money-printing liquidity into the system to stabilize it just as they did in 2008. They will be quicker this time around, so the collapse should be briefer. 

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.

The EU Has Fallen Into a Liquidity Trap and It Can't Get Up

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 the EU is still reeling from S&P's downgrade of the sovereign debt of nine of its members on January 13th and the latest talks to keep Greece afloat have hit a wall, there is an even bigger problem with the effectiveness of its stimulus programs -- the money is just not finding its way into the economy.

Global markets were jubilant in December when the ECB (European Central Bank) pumped 490 billion euros of three-year loans into the EU banking system. These funds were used by eurozone banks to buy high-risk government debt from the struggling peripheral countries. This indeed caused a temporary decline in interest rates, especially for Spain and Italy. Money from this program and other EU stimulus measures is stuck in the banking system however and it is doing little to keep the EU from sinking into a deep recession. As of Monday January 16th, the ECB had 493 billion euros on overnight deposit -- more than the entire December stimulus package.

Large amounts of funds on deposit at any central bank are an indication of a crisis in the banking system. Before the current EU debt crisis, eurozone banks usually kept only around 100 million euros on deposit at the ECB. Even during the height of the 2008 Credit Crisis, EU banks kept only around 33% of money lent out by the ECB on deposit. The percent now is over 70% (the ECB has lent out 664 billion euros in total) meaning things are in much worse shape in the EU than they were after Lehman Brothers collapsed. When money is trapped in the banking system, the economy suffers and extra stimulus measures don't help to revive it. EU money-printing measures meant to rescue its profligate debt-ridden members aren't likely to help its economy, which in turn will result in a self-feeding cycle of more and more debt (as happened in Japan during the last two decades) or more and more money printing (as has been taking place in the U.S. since the 2008 Credit Crisis). Like the U.S., the EU has run out of borrowing power, so debt without money printing is no longer an option.

Weaker economies mean more downgrades from the ratings agencies can be expected. On Friday, both France and Austria lost their coveted triple A ratings from S&P. They were downgraded a notch as was Malta, Slovakia and Slovenia. Italy, Spain, Portugal and Cyprus were downgraded two notches. Italy is now rated BBB+. The only countries in the eurozone that still have triple A ratings are Germany, the Netherlands, Luxembourg, and Finland. S&P put the later three on negative outlook for a possible future downgrade however. The EFSF bailout fund itself may also be downgraded.

The current debt crisis that is now impacting the entire eurozone started in Greece in late 2009. The problems there have yet to be fixed despite numerous mainstream media reports to the contrary in the last two years. Greece is now on financial life support. Any missed bailout payment from the EU will send it immediately into default. Talks have broken down once again, but as before will once again be resuming shortly. The market has never been convinced that any of the proposed Greek bailouts will work.  On Monday, Greek one-year government bond yields hit a high of 416% and 10-year yields a high of 35%. These rates have continued to rise after each bailout proposal. Greece has to make substantial bond payments this March.

The EU's debt crisis is not getting resolved because it is no more possible to solve a debt crisis with more debt than it is to sober up a drunk by giving him more alcohol. Yet, every mainstream news article has comments from well-placed sources that are hopeful that some resolution will be coming to the EU's problems soon. Rarely is it mentioned they have been hopeful -- and wrong -- for the last two years as the situation has increasingly deteriorated. Nor is it mentioned that the Japanese with similar problems in their financial system have now been hopeful for twenty years that their economy will fix itself. Wishful thinking doesn't fix markets, nor do plans involving spining straw into gold -- no matter what central bankers and their toadies claim.

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.

The Risks to the Global Financial System in 2012

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.   
As 2012 begins, markets are rallying as they did at the beginning of 2011 -- a year when the S&P 500 closed flat after many huge moves up and down. The problems in Europe that rattled markets in 2011 have not been resolved and new problems are or will be emerging in China and Japan. At the very least, investors should expect another rocky ride in the upcoming year.

The debt crisis in the EU is far from over. It is simply being momentarily contained by another short-term solution that will hold things together for a while until the crisis erupts again. The mid-December LTRO (long term purchase operations) announced by the ECB excited the markets as any money-printing scheme would. This new "solution" to the debt crisis is essentially an attempt to handle a problem of too much debt with more debt. Already close-to-insolvent EU banks are able to hold fewer assets for collateral in exchange for cheap funding from the ECB, which can in turn be used to buy questionable sovereign debt from the PIIGS. While this will keep Italy, Spain, Portugal and Ireland financially afloat for a longer period of time, it may collapse troubled EU banks sooner (the real epicenter of the debt crisis). 

Half way across the globe, problems are emerging in China. It is estimated that there are between 10 and 65 million empty housing units in the country that investors have purchased with the hope of selling at higher prices. There are in fact entire "ghost districts" there that are filled with new buildings and no residents. Prices have become so high that by last spring the typical Beijing resident would have to have worked 36 years to pay for an average-priced home. The pressure appears to be coming off though with new home prices dropping 35% in November. Beijing builders still have 22 months of unsold inventory and Shanghai builders 21 months. In the peripheral areas, existing home sales have plummeted -- down 50% year on year in Shenzhen, 57% in Tianjin, and 79% in Changsha. Investors should take note that the Chinese real estate bubble is far worse than the U.S. one that brought the global financial system to its knees at the end of 2008.

Twenty years ago, Japan had a massive real estate bubble and it is possible that prices have finally bottomed there, but that doesn't mean that they are ready to go up. Japan has had two decades of economic stagnation (and is heading toward a third, if it is lucky) because of the collapse of its real estate and stock market bubbles. Massive borrowing by the government has prevented the situation from getting worse. The debt to GDP ratio in Japan is now estimated to be 229% (well above the just over 100% in the U.S.).  More people are leaving the workforce there than entering it and this bodes ill for tax receipts. The aging population is using up its savings instead of adding to them. This is a potentially serious problem because the massive debt the Japanese government has incurred has been funded mostly internally by the savings of the Japanese people. A lot of old debt has to be rolled over in 2012 and additional debt is still being incurred. Where the money will come from is not clear.

None of the problems that could strain the global financial system originated in 2011. They have been building up for years and even decades. The first major blow up was the Credit Crisis in 2008. In every case, that problem was "solved" by more debt and money printing. This approach has of course only postponed the inevitable since taking on more debt only creates a bigger debt problem down the road and you can't create something of value out of thin air by printing money (although you will ultimately create a lot of inflation). The markets have already spent most of 2011 in an unstable state. It looks like continuing and even bigger crises await investors in 2012.
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

Gold Breaks Down, Where to Look for a Bottom

 

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.

Gold fell and closed below its 200-day moving average yesterday, December 14th. This indicates a technical breakdown and the last time this happened was in August 2008. Gold bottomed approximately 30% off its high three months later in November.

Any analysis of an investment's technical state should begin with the big picture, so recent events can be put in context. Gold is in a secular (long-term) bull market which will last until approximately 2020. This means that the greater trend will move prices higher over time. No market moves straight up however. There are always reversals in a secular bull market and these are sometimes steep. The 1987 stock market crash which took the U.S. indices down 40% and some individual stocks down 70% or even 80% took place in a secular bull market that lasted between 1982 and 2000. Stock prices went to new highs after the crash despite many pundits claiming the crash meant a new depression was coming. Anyone who realized stocks were in a secular bull market could easily have predicted stocks would recover.

Even though gold has dropped below its 200-day (40-week) simple moving average, this does not indicate that it is even in a short-term bear market. At the very least the 50-day (10-week) moving average would have to fall below the 200-day to indicate that. Gold will have to trade below it's 200-day for approximately the next two weeks before that would happen. This did indeed occur in 2008, when it could be said that gold experienced a brief cyclical (short-term) bear market.  The 10-week moving average traded below the 40-week for about four months from September 2008 to January 2009. See a four-year weekly chart of the Gold ETF GLD below.

The bearish behavior of gold in latter 2008 was caused by the Credit Crisis. While you have probably heard ad nauseum that gold is a safe haven in a crisis, this does not include credit crises
(which are crises in the financial system when the banking system has difficulty functioning). We just saw that gold went down during the 2008 credit crisis and yet many gold "experts" somehow can't figure out that it should go down during the current 2011 credit crisis coming out of Europe. In our era, gold can drop during a credit crisis because central banks lease gold at low rates to the big banks and hedge funds. These entities are desperate to raise cash, so they sell the gold into the market (they can't sell many of the assets on their books). This depresses the price of gold -- temporarily. But at some point, they have to buy the gold back and return it to the central bank it was leased from. This makes the price of gold rise again. I explained the entire process in the second volume of my book "Inflation Investing", which covers gold, silver and other metals.

Gold has support at the 65-week simple moving average, but this is not the likely bottom in a full-blown credit crisis.  In order to find that, it is necessary to look at a monthly chart. It can be seen from this that the ultimate support would be at the 40-month simple moving average. Currently, this is around 120 for the gold ETF GLD. This possible buy point, which should be considered a worst-case scenario, was discussed in the October meeting of the New York Investing meetup. See the five-year monthly chart for GLD below.



It's important for investors to focus on the big picture and not get carried away with all the distractions of day to day price movements. Markets go up and down. No market goes in one direction. Every time gold drops, commentators come out of the woodwork saying it means the rally is over and deflation is taking place -- neither is true. It is the bigger price movements that have meaning and gold is in a long-term uptrend. In any secular bull market, a large drop is always a golden opportunity to buy. Just wait until there is some evidence that a bottom has been put in.  

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.

Gold and Silver Plummet as Dollar Rallies on EU Woes

 

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

The euro fell to a yearly low on December 14th as Italian interest rates at auction hit new highs. Collateral damage to the EU crisis is showing up not only in stock prices, but in the precious metals markets as well. 

The euro fell below the psychologically important 1.30 level in European trade and is testing support from last January. If it breaks that support (and it is pretty certain that it will), the 125 level is the next stop and 1.20 after that. The euro can be tracked through the ETF FXE. At the same time the euro is breaking down, the trade-weighted dollar has broken out. The dollar has been stuck at key resistance at 80 since September. It tested  this level both in September and in November. It traded as high as 80.67 in early morning trade. There is still strong resistance just under 82. A break above that will cause the dollar will head toward 88. The dollar can be tracked through the ETF DXY.

As the dollar rises, gold and other commodities fall. Spot gold was as low as $1562 an ounce in early New York trade. Gold plummeted after the New York open and was down as much as $68 an ounce.
Gold can be tracked through the ETF GLD. Gold decisively broke its 200-day moving average (which is very bearish) and this was the first time it has traded below this level since early 2009. The next level of support is the 65-week moving average, which is currently in the high 1400s.

While gold in general should go up during a crisis, this did not happen in the fall of 2008 -- gold was down around 30% at the time. During credit crises -- and the situation in Europe is a second global credit crisis -- it is reasonable for gold to decline. Central banks lease gold cheaply to banks and large hedge funds and they sell it on the market to raise quick cash (I have explained how this is done is some detail in my book "Inflation Investing"). This time around, there is the added danger that the IMF will sell some of its large hoard of gold to raise money for a eurozone bailout.

Gold's companion metal silver is much more volatile than the yellow metal and is influenced by the economy as well as financial market events. Silver traded as low as $28.47down $2.37 after New York trading opened. This was more than a 7% drop. Silver can be tracked through the ETF SLV. It has strong support around $26. If it breaks that, expect it to head toward the $21 level.

The EU debt crisis is not over and is likely to continue for a while longer and possibly for many more months. EU leaders have come up with one "solution" to the crisis after that has failed shortly after it was announced. Look to the markets to see whether or not their future gambits will create some viable end to their problems. So far the markets have made it very clear that the situation in Europe is continuing to deteriorate and it is dangerous to be on the long side of almost any investment except the U.S. dollar. 

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.

Volcker Says U.S. Mired in Recession and 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. 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 talk given to a small audience at the American Museum of Finance on Wednesday evening, former Federal Reserve Chair Paul Volcker stated that there was an ongoing recession in the U.S. and that we will be seeing inflation in the future because of the actions of the Fed and Treasury during the 2008 Credit Crisis.

While most of Volcker's talk centered on the current crisis in Europe, he frequently made connections to what was going on in the EU to what has taken place in the United States. His remarks about the U.S. being mired in an ongoing recession were in response to a question on whether an infrastructure bank would be a good idea. As part of his answer he stated, "We're not going to end the recession in the next month or the next year. It's going to take several years before the recession is over." The U.S. government claims that the last recession ended in June 2009and has repeatedly said that the U.S. has not fallen back into recession even though unemployment and consumer confidence have continually remained at recession levels.

When discussing the bailouts during the Credit Crisis,  Volcker remarked "people said that there will be inflation... that's true over time." Volcker was critical of pro-inflation policies. He said that "the problem with inflation is that it looks so enticing, but the historical record doesn't verify that it is." He continued, "We would be very foolish if we deliberately went out and created inflation." The Federal Reserve under Ben Bernanke has kept Fed Funds rates around zero percent for three years now, which means real interest rates have been negative. Negative interest rates are highly inflationary as is money printing. The Fed has expanded its balance sheet — one of the many ways it prints money — by over $2 trillion dollars since September 2008.

Volcker described the 2008 Credit Crisis as a "regulatory failure", but added "the Fed is only one regulator". He went on to state that "the Federal Reserve took a lot of extraordinary measures" to handle events back then and "the Fed and the Treasury did not necessarily follow the letter of the law" in attempting to control the damage to the financial system. Volcker further laid part of the blame for the Credit Crisis to proprietary trading by banks and said he was "not in favor of banks being speculative entities being supported by the U.S. government".

Paul Volcker was Chairman of the Federal Reserve from August 1979 to August 1987 and is widely credited with bringing down the high inflation of the 1970s by raising interest rates. More recently he headed the President's Economic Recovery Advisory Board, which he left in February.

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.

October Consumer Confidence Well Into Recession Territory

 

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 October Consumer Confidence number fell to 39.8. It is once again approaching the all-time lows that occurred at the bottom of the Great Recession. The number has never reached the 90 level since 2009, which is the cutoff for a healthy economy. The continually poor levels of consumer confidence  bring into question whether the last recession ever really ended.

While U.S. consumers are gloomy about almost all aspects of the economy, they are most pessimistic about employment prospects. Only 3% of U.S. consumers think that jobs are plentiful. While it is true that this number could have been lower during the 1930s Depression when millions of ordinary Americans went hungry and were homeless, the lowest possible value is only zero. And the current reading could actually be zero since zero lies within the statistical margin of error for the survey. In contrast, those who say jobs are hard to get came in at 47% and that would definitely had been much higher during the 1930s.

The Present Situation Index — how consumers see the state of the economy currently — was a very dismal 26.3 in October. This number has remained at fairly low levels for four years now. What has caused the overall consumer confidence  number to rise has been expectations for a future improvement in the economy. The government and mainstream media has continually told U.S. consumers the economy is getting better and will continue to get better. So, consumers have told the survey takers that don't see things as being in good shape now, but they were hopeful about the future. Consumers are starting to lose hope however. The future expectations number fell from 55.1 in September to 48.7. Apparently, you can only fool the public for so long.

The "don't believe what you see with your own eyes, but believe what the government tells you" efforts are still going strong however. Media reports cited better retail sales and a big stock market rally since early October as indications that the U.S. economic situation is improving. Retail sales may have indeed gone up since they are not adjusted for inflation and higher prices make them look better even if fewer units are being purchased. As for the wild behavior of the stock market, explosive rallies are common in bear markets and not in bull markets. They can also occur at any point because of liquidity injections into the financial system from central bankers in Europe, the UK, and the U.S. as would happen during a banking crisis like the one currently taking place in the EU. They don't last for long however.

No matter how you look at the consumer confidence, the numbers are ugly. They are not just indicating recession, they are shouting recession. Only 11% of Americans think that business conditions are good.  The Present Situations Index has dropped six months in a row. Some of the components are at rock bottom levels. Yet, the government and mainstream media keep reporting that the economy is on track for improved growth in the second half of 2011. How can such diametrically opposed views be reconciled? The simplest way to explain the discrepancy is that someone is lying. Any guesses as to who that might be?


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.

Is Dexia Bank the Bear Stearns of the Current 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.

Over the weekend French President Sarkozy and German Chancellor Merkel said they had come to an agreement on recapitalizing EU banks. No details of their mystery plan were released. Plenty of details were forthcoming however on how Dexia bank was going to be bailed out and they indicate that it's time for EU leaders to stop talking and to start acting. 

Before its recent failure, Dexia bank was described as one of the strongest banks in Europe. It had no trouble passing the recent EU stress tests for banks (so much for the accuracy of those tests, which I have maintained for some time are nothing but a meaningless public relations gambit). Its Greek debt exposure was cited by the mainstream media as a primary reason for Dexia's demise. Dexia though had only 5.4 billion euros of Greek debt on its books out of an asset base of 518 billion euros according to Bloomberg. So, Greek debt was a little over 1% of Dexia's loans. Apparently this was enough for wholesale funding for the bank to dry up. Like most banks, consumer deposits were not enough to maintain Dexia's operations, it needed to continually borrow in the interbank market.

Dexia was a Franco-Belgium bank created 15 years ago by a merger of banks from the two countries. It also operates in Luxembourg and owns a 75% stake in Denzibank AS in Turkey, which it purchased in 2006. The Belgium government agreed to buy Dexia for 4 billion euros.  The French and Luxembourg units will be sold. Together, the three European governments will guarantee 90 billion euros of interbank and bond funding for 10 years. Belgium's share will be about 15% of its GDP. Guaranteeing bank debt has its risks and this is why Ireland required an EU bailout. Could Belgium be next?

If Dexia can fail, what EU bank is safe?  Moreover, the failure happened without a default by Greece, so it is clear many more bank failures are possible regardless of the outcome of the Greek debt crisis.
It can also be assumed that default will make the situation much worse. There are reports from German news agency DPA that Eurozone finance ministers are working on a plan involving a 60% reduction in Greek debt (previous reports indicated a 50% reduction).

The recent Dexia failure just like Bear Stearns failure in March 2008 happened because confidence from lenders in the interbank market disappeared. This can happen overnight. The monetary authorities patched things together temporarily after Bear Stearns demise, but the overall situation continued to deteriorate until Lehman Brothers failed six months later. A Greek default is likely to be the Lehman moment for the current credit crisis and Dexia's sudden collapse is similar to Bear Stearns. More bank failures in the EU will be a warning that the current crisis is escalating out of control.

Disclosure: None
Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

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

BOE Kicks Off New Global Money Printing Cycle

 

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.

Markets like money printing. The Bank of England (BOE) today announced its own QE2.  Statments from Fed Chair Ben Bernanke and talk of the EU recapitalizing its banks was already juicing up global stocks before the BOE took this earlier-than-expected action.

In its latest round of quantitative easing, the BOE will be purchasing 75 billion pounds in bonds. While some news reports euphemistically described this action as the BOE will be "spending" the money, the correct phraseology is that it will be "printing" this money. The BOE has previously printed 200 billion pounds to buy bonds starting in 2008 during the first credit crisis. The U.S. Fed has already engaged in two rounds of quantitative easing (only one of many ways that money can be printed) and a third should be expected.

Stocks had already turned around on Tuesday with big rallies. Fed chair Ben Bernanke made a statement that he was willing to do more to help the economy. Bernanke has been "helping" the economy since he started lowering the fed funds rate in September 2007. While he has helped the economy, the U.S. has experienced the worst recession and worst bear market since the Great Depression in the 1930s, the official unemployment numbers have remained close to double digits, the U.S. has had the largest number of bank failures since the Savings and Loan crisis, and thanks to his quantitative easing, the U.S. has been able to run a series of trillion dollar plus budget deficits that are going to lead to serious problems in the future.  Why shouldn't markets rally with more of that in prospect?

In the short term, markets don't care about dire consequences that are somewhere down the road. They rally based on liquidity and money printing provides it for them. While the news that the EU is going to recapitalize its banks sounds positive, there is little if any discussion in any article about where the money is going to come from. For the answer, picture a giant printing press spewing out fresh euro bills at break net speed. Investors should also expect a lot of nationalizations as part of this process. Belgium has just announced it will take over failed bank Dexia (described by the news media as "troubled"). Dexia is the largest bank in the country.

Market volatility is common during credit crises. Investors should expect continued market selloffs interspersed with big rallies. Ultimately, money printing will not save the day however because real value can't be created out of thin air. The day that will happen, is the day that PIIGS will fly. 

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.

A Terrible Third Quarter Will Be Followed by a Bad Fourth

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 third quarter of 2011 had the biggest drop and most volatility for stocks since 2008.  The fourth quarter may not be much better since the cause of the problem is a new credit crisis and an emerging global recession. Both will continue to be a drag on the market.

Except for small cap stocks, the U.S. markets did somewhat better than many overseas markets during the quarter. The Hang Seng in Hong Kong was down 25.7%, the CAC-40 in France fell 25.6% and the DAX in Germany dropped 25.0%. Only the Russell 2000 in the U.S. was lower by a comparable amount, falling 24.1% from its May 31st close. These indices are all in deep bear territory. Not much better was the Bovespa in Brazil. It lost 19.0% in the third quarter. The Brazilian market peaked in November 2010 and it too is in a bear market.

While the bigger cap U.S. indices weren't down as much, they were severely damaged nevertheless. The S&P 500 was lower by 15.9%, the Nasdaq by 14.8% and the Dow industrials by 13.2%. This was just the drop during the quarter. U.S. stocks in general peaked on May 2nd. From its high back then to its low in the third quarter, the S&P 500 dropped 19.6%. A bear market is defined as a loss of 20%.

Volatility returned to the markets with a vengeance in the third quarter. The VIX index reached a high of 48.00, not much below its peak in the 2000 to 2002 mega-bear, but well off its Credit Crisis peak around 90. Mini-crashes returned to the market, with both the Nasdaq and Russell 2000 experiencing drops equal to or greater than 5% on three different days.  There were four consecutive days in August when the Dow was up or down by 400 points or more. A volatile market is prone to selling and  markets usually need to calm down before they can bottom.

Just as was the case during the Credit Crisis year of 2008, only two major assets were up in the third quarter — treasuries and gold. The 10-year hit an all-time low yield of 1.71% (bond prices go up when yields fall). This was well below the previous low that took place because of the Great Depression in the 1930s. While the price of gold fell by 15% at the end of the quarter, it rallied from the beginning until its peak on September 6th. It wound up rising 5.8% (as measured by GLD) from its closing price on May 31st. Its companion precious metal, silver, had a quarterly drop of 23.1%.

There is no reason to think that the market will bottom until problems in Europe come to some stable resolution. Greece admitted over the weekend that it would not be meeting the budget targets that were part of the terms of the first bailout. Global markets are once again selling off, as if this was somehow surprising news — Greece has misrepresented its financial number repeatedly, it would only be surprising if they turned out to be accurate. Greece may still get its next tranche of bailout money, since the EU has shown over and over again that its standards for the currency union are meaningless. Eventually though Greece will default because too much bailout money will be needed to keep it afloat. Even at that point, Spain and Italy will have to be reckoned with.

The other issue facing the markets is a global economic downturn. While a case can be made that the post-Credit Crisis economy never got out of recession (the unemployment rate and consumer confidence remained at recession levels for instance), the important question is whether or not economic activity is declining now. Last week, even the ECRI (Economic Cycle Research Institute) admitted the U.S. economy was heading down. Since a credit crisis can make an economic decline much worse, this doesn't bode well for the markets in the upcoming months.
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.

Markets Rally on Hopes of Huge EU Bailout

  

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

In a replay of the 2008 Credit Crisis, global stock markets are now rallying strongly after a huge selloff last week. This pattern was common in late September and all during October three years ago. It seems to be replaying itself again in 2011. Huge moves down and up are common in severe bear markets.

As has happened many times so far, stocks are rallying on "hopes" of a resolution to the Greek debt problem and liquidity issues with EU banks. The Greek prime minister has stated confidently that Greece will definitely receive the next tranche of money from the first bailout and his comments got a lot of positive press attention. The mainstream press failed to inform the public that Greek officials have consistently made "misleading" statements during the debt crisis and their credibility might be considered questionable. The next payment from the first bailout has been delayed because Greece broke the promises it made for meeting fiscal objectives. Instead of listening to Greek officials, investors should consider that Greece has a CCC credit rating — the lowest sovereign debt rating in the world. If any country is going to default anywhere, it's Greece.

The numbers describing Greece's situation also speak for themselves and clearly indicate the inevitability of default.  Greece's debt to GDP ratio was 127% in 2009 in the early stages of the crisis. By the end of 2010, it was 143%. Reuters and a number of other sources report it as now around 160%. This rapid rise is taking place as Greece is getting €110 billion bailouts (the second one is in the works). Clearly the bailouts are not solving the problem, but merely slowing down an explosion of debt. Historically, once a country's debt to GDP goes over 150%, default seems to become inevitable.

The market keeps predicting default in Greece by setting astronomical interest rates. The one-year government bond had a yield of 138% on September 26th, down from its high of 142% on September 14th. Two-year debt was yielding 71% yesterday and the ten-year bond 24%. How can any entity pay these interest rates and avoid default?

All sorts of schemes are being discussed by EU leaders to handle the current crisis. There are rumors of a default plan that involves Greece paying back only half of its debt. EU officials described these rumors as just speculation, although in some cases the denials were less than firm. They also denied any enlargement of the EFSF (European Financial Stability Facility) — the EU's 440 billion euro bailout slush fund — was underway. The current global stock market rally got started when CNBC News reported that the EFSF would be leveraged up to eight-times and the European Investment Bank would issue bonds to buy up sovereign debt. The specific reaction to this report from one EU official was that it was "just bizarre". The big-money investing operations can make quite a bit of profits by planting "just bizarre" stories though because they can juice the markets up for a day or two. Then some bad news story appears and markets drop right back down. We've seen this pattern over and over again in the last two months.

At some point, the Greek debt crisis will be resolved. Until then, the EU will kick the can down the road as long as it can. At this point though, the can looks like it was run over by a freight train and then tossed around by a tornado. Greek debt holders will have to take a significant haircut on their debt and this means that banks in Germany and France will have to be recapitalized. Then something will have to be done to prevent the emerging defaults in Portugal and Ireland (both have already been bailed out once) and prevent the situation in Spain and Italy from getting bad enough to need a bail out. This will take a lot of money,  much more than the €440 billion in the EFSF.  Where will this money come from? It's quite simple — it will be printed.

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.

Gold and Silver Recover After Big Drop in Asia

 

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 Americans slept, gold and silver prices plummeted in Asia. The low took place in Hong Kong  at approximately 3AM New York time when spot gold flirted with the $1540 level and silver was around $26. A strong rally then took place after the London market opened half an hour later.

By the time Monday New York trading began at 8AM, spot gold was selling for $1626 and spot silver at $28.50 an ounce. So the average American investor wasn't able to buy into the carnage. The low prices set in Asia will almost certainly be tested in the future however and there is a good chance that  will take place during U.S. trading hours. As of now though, the $30 support level for silver is history.

In the last three days, gold has experienced it biggest drop since the 2008 Credit Crisis. Silver has had it largest decline on record. There is significant technical damage, especially for silver. On the 24-hour charts, silver has decisively broken its 325-day/65-week simple moving average -- a key line in the sand separating bullish and bearish trading behavior. This level is in the low 1400s for gold. Silver's behavior is telegraphing that gold will almost certainly hit that level. If silver can't hold the 26 level in the future, the next stop for it will be in the 21/22 range.

What is causing the big drop in precious metals? Well, both silver and gold were extremely overbought at their highs. When this happens, a lot of traders were buying heavily on margin. This creates a situation where many of them will be forced to sell at the same time if any bad news takes place. Once the selling starts, the market cascades downward. We are seeing that with gold and silver right now. Such behavior is common in any strong rally and does not by itself indicate a bubble (that would require at least a 500% to 1000% yearly price rise for the precious metals).

While a rising U.S. dollar during September and new margin requirements from the CME last Friday have led to precious metals selling, the big problem is in Europe. The Greek debt and EU bank crisis is causing a liquidity crunch for the big trading houses and they are selling whatever they can to raise cash.  The inadvertent result is that investors are being given the opportunity to pick up precious metals at bargain prices. A little patience might be advisable before hitting the buy button however.


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.