Gold, Bonds, and Currencies Move on Fed Money Printing

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-year Treasury notes sold at a record low auction yield on Monday. Gold hit another all-time high on Tuesday. The Australian dollar hit a two-year high on Wednesday. Excess Fed money printing ties all three events together.

The two-year Treasury has hit a series of all-time low yields in the last few months. The yield at Monday's auction was 0.441%. The two-year traded as low as 0.40% around the auction. How much lower it can go depends on how much money the U.S. Federal Reserve continues to print and what percent of that gets recycled into treasury bond purchases. The U.S. has to fund its massive deficits in some way and this is one way it is doing it.

At the same time that money printing is lowering yields on U.S. treasuries, it is raising the price of gold. Just as the 2-year has hit a series of record low yields, gold has hit a series of record high prices. Money printing devalues currency, so more has to be paid for any given unit of gold. A currency losing value is the very definition of inflation and gold is highly inflation sensitive for that reason.

Of all the currencies in the world, the Australian dollar trades closest to gold. Australia is also a fiscally responsible country compared to the debt ridden basket cases of Japan, the EU and the U.S. So the currency should be strong as is. U.S. money printing policy enhances its value however. Overall, the Australian currency should become and remain the strongest currency in the world thanks to the actions of the American Federal Reserve. The same actions are trashing the U.S. dollar.

While the Federal Reserve and its mainstream economist toadies claim deflation is a problem, the evidence points to the opposite. Excess money printing has always led to inflation and things will be no different this time. The other thing that will be no different this time is that the government bodies responsible for creating inflation will deny that it exists and when it becomes so obvious that it can't be covered up anymore, they will then deny responsibility. Before this continues any further, you might want to pick up some hard assets and strong currencies.

Disclosure: No positions.

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

The First Trading Day of 2010 - The Message From the Market

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.


Observant investors can find moneymaking opportunities if they pay attention to what takes place during the first four trading days of the year. This idea was already part of market lore over a hundred years ago and was confirmed by academic research decades ago. The reason the beginning of the year is more important is that more investment money gets allocated or reallocated on those days than at other times. Whether we like it or not, investing is influenced by a quarterly calendar with the beginning of the first quarter having outsized significance. Which parts of the market money flows into or out of as annual trading begins indicates the aggregate opinion of investors on each sector of the market and the various asset classes. If you want to know what they are thinking, follow the money.

The best way to approach this analysis is with a top down approach. First look at how the major asset classes - stocks, bond, commodities, currencies - are trading. For U.S. stocks you can look at the four major indices: the Dow Jones Industrial Average, the S&P 500, the Nasdaq and the Russell 2000 or their respective ETFs, DIA, SPY, QQQQ (actually the Nasdaq 100), and IWM. For stocks outside the U.S., EFA (Europe, Far East and Australia) and EEM (emerging markets) can be used. For bonds, intermediate maturity U.S treasuries are a good place to start. IEF can be used for treasuries in the 7 to 10 year range.  Overall commodity performance is best tracked through DJP, which is the ETN for the Dow Jones AIG Commodity Index. The two major commodities gold and oil should also be watched. Either their spot prices or GLD and USO can be used to do this. For a quick read on currencies, DXY gives the performance of the trade-weighted dollar.

This initial cursory view can then be refined further based on what assets are doing best or by an investor's particular interests. For stocks, the next step is to look at performance by country, market cap and the nine major sectors of the market. This can then be refined one more step by looking at sub-sectors for the sectors that have done the best. In the end, investors should look for opportunities in the top performing countries and sectors by market cap size (small, mid or large). While stocks are the most complex to analyze, commodities and currencies are the easiest because there are only a small number of them. The performance of each one them can be ranked and it is immediately apparent which ones are the best. Keep in mind seasonal factors can create bullishness or bearishness though, especially for commodities. Bonds are of course more complicated since they can be government or corporate, have a number of maturities and exist in a number of countries.

As can be seen below, based on the first trading day of the year, money was flowing into almost all markets. Stock markets outside the U.S. did the best with emerging markets being the strongest. Small cap stocks did better than large caps. Commodities generally did better than stocks. Interest rates were barely changed. The U.S. dollar lost ground, while other major currencies rallied.

STOCKS:               DIA             Up        1.5%
                               SPY             Up        1.7%
                               QQQQ        Up        1.4%
                               IWM            Up        2.5%
                               EFA             Up        2.6%
                               EEM            Up        3.0%

BONDS:                 IEF              Up        0.3%

COMMODITIES:   DJP             Up        2.0%
                               GLD            Up        2.3%
                               USO            Up        2.4%

CURRENCIES:      DXY           Down    0.5%

Please see 'The Second Trading Day of 2010 - The Message From the Market' to find out more.

Disclosure: Long gold.

NEXT: The Second Trading Day of 2010 - The Message From the Markets

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.

Australian and Canadian - the Only Dollars Worth Holding

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.

By the November 14, 2007 meeting of the New York Investing meetup, deterioration of the U.S. dollar had become pronounced. The trade-weighted dollar had fallen further through its long-term support level and hit a series of new all time lows. Not surprisingly, the euro hit a series of new highs reaching an exchange rate of 1.47 to the dollar. The rallies in the Australian and Canadian dollars (both economies are based on food and commodity production) were even stronger however. At one point, it had taken approximately two Australian dollars to get one U.S. dollar, by November of 2007 only around 1.1 Australian dollars were necessary to get an American dollar. In the early 2000s, one U.S. dollar got you 1.61 Canadian dollars, but by November you would only get 91 Canadian cents.

There were two talks that month at New York Investing that dealt with what was going on in the currency market and the implications for investing, "Investing Like It's 1979" and "How to Profit from the Falling Dollar" (see http://investing.meetup.com/21/files). Currency movement don't exist in a vacuum of course, but affects the price of commodities because they are priced in U.S. dollars. By November 2007, Oil had gotten to $97 a barrel making a series of all time highs, although it first broke its nominal 1980 high of $39.50 a barrel in 2004. While oil was a leader in reacting to the value of a declining U.S. dollar (the dollar had been falling since 2002), gold's reactions were more coincident to changes in the American currency. Gold had reached $848 an ounce getting close to its nominal intraday high of $875 in 1980, but not enough to establish a new record. Of the three inflation-related commodities, silver was by far the laggard, reaching only $16 plus and ounce, not even near its $50 an ounce high from 27 years earlier.

The specifics of how to invest in currencies and commodities, such as ETFs (exchange traded funds) and foreign currency denominated CDs and accounts were not only handled in the talk, "How to Profit from the Falling Dollar", but in three videos produced by the New York Investing meetup. These videos represented an investing blueprint for the average investor on how to handle the new inflationary environment the Federal Reserve had created. Please see these video for more on this topic:

Currencies I – How to Profit From the Falling Dollar
http://www.youtube.com/watch?v=dTImG1dWT4k

Currencies II – How to Profit From the Falling Dollar
http://www.youtube.com/watch?v=XhfwatOCx_k

Commodity Investing – How to Profit From the Falling Dollar
http://www.youtube.com/watch?v=IG5zApWcOk0

Next: Sub-prime Housing Leads to Sub-prime Financial Institutions

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please go to: http://investing.meetup.com/21

The Markets React to Helicopternomics and so does New York Investing

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.

The U.S. Federal Reserves 50 basis point rate cut on September 18, 2007 would prove to be a seminal event in U.S. economic history. As is the case for many actions that have potentially disastrous impacts, there was a swift and stupendously negative reaction after the Fed lowered rates. It was clear immediately to almost everyone except the Fed and its Wall Street supplicants that the rate cut decision had been the wrong one.

Starting that day, the trade-weighted dollar (the value of the dollar against the currencies of the Americas largest trading partners) already down 33% from its peak level during the Bush administration, started selling off and looked like it was setting itself up for a potential collapse. On the Monday following the Fed’s move, the U.S. dollar hit the first of a series of all time lows By the end of September, the value of dollar would be down against almost every currency on the planet, including the Philippine peso, the Brazilian real, the Turkish lira and the Botswanan pula. People everywhere were desperate to get rid of their dollars and even preferred to hold currencies from countries that had previously been so monetarily irresponsible that they had experienced hyperinflation.

In the future, people would see this episode as the beginning of the end of the U.S. dollar as the reserve currency for the world. Years of excessive government, consumer and business borrowing and irresponsible U.S. monetary policy were finally turning the dollar into a currency that people wanted to avoid rather than hold. Loss of reserve currency status would be definitive once the world oil producers stopped pricing their wares in dollars. While this was still some time in the future, the inevitability of this outcome had now become a certainty.

The fallout from the Fed's monetary easing was unfortunately not limited to its impact on the U.S. currency. The falling dollar acted as the spark that ignited a rally in the commodity markets. Since most commodities were priced in dollars, everything else being equal, their prices had to go up as the dollar fell. A large basket of commodities tracked by the CRB index rallied over 8% during the month of the Fed rate cut, the biggest such increase since the high-inflation 1970s. It was perhaps even more disturbing that the commodities most sensitive to inflation, gold and oil, had some of the strongest rallies. Only three days after the Fed’s cut, gold hit a 27-year high. Oil hit a series of all time highs breaking through $80 a barrel and then $90 a barrel only weeks later. Most investors were so euphoric at the Fed’s largess to Wall Street, that they failed to notice that the markets were not just saying there was serious inflation on the horizon, they were screaming it.

The seriousness of the damage the Fed was causing and was intending to cause to the U.S. economy motivated the New York Investing meetup to spread it's message beyond its membership. After the September Fed meeting, New York Investing did its first videos on the topics of inflation and the falling dollar (See, "Protecting Yourself From Inflation and the Credit Bubble", http://www.youtube.com/watch?v=2d8k75N0qpA). The first of these five videos were done with Alex Paul Morris from MoMoney.TV interviewing organizer Daryl Montgomery. Subsequently, the New York Investing meetup would do its own videos and publish them on You Tube and in a number of other venues.

Next: More Collateral Damage from the Fed's First Helicopter Drop

Daryl Montgomery
Organizer, New York Investing meetup

For more information about the New York Investing meetup, please go to: http://investing.meetup.com/21