September Jobs Report Indicates Economy Dead in the Water

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.


September was the 15th month with the U.S. unemployment rate was at or above 9.5%.  The underemployment rate, which includes forced part-time and some discouraged workers, rose to 17.1%. While the Great Recession supposedly ended in June 2009, well over a year later the employment figures have still failed to show any significant improvement.

Private sector hiring was tepid to say the least in September. While the BLS (Bureau of Labor Statistics) claims that there were 64,000 private sector jobs added last month, only two categories dominated hiring - 'leisure and hospitality' and 'health care and social services'. Leisure and hospitality, which includes drinking establishments, added 38,000 jobs. It is perfectly understandable why people would want to drink more considering the state of the economy.  Health care and social services (the mainstream media always leaves out the social services part), which is the only category that continually added jobs during the recession, added 32,000 jobs. Why social service jobs are counted as private sector jobs is a of course a mystery known only to the BLS. Education jobs are also counted as private sector, even though most of them are paid for with taxpayer money. Many health care jobs are of course also government funded.

Government jobs actually counted as government jobs dropped 159,000 in September. Almost half of this was accounted for by a loss of 77,000 Census positions. Considering the Census was supposedly finished months ago, this leads to the obvious question: What have these people been doing since then? Another 76,000 jobs were lost by local government. The Obama administration's February 2009 stimulus package provided a lot of funding for localities to pay for police, fireman and teachers. This funding seems to already be running out. What will happen in 2011, when the stimulus money has been completely spent?

The economic establishment has told us that the U.S. economy has had four quarters of recovery so far and we have already in the fifth. Employment hasn't shown any recovery however. Up to now, the claim have been that this is because employment is a lagging indicator (something that only showed up in the 1990s after a number of 'adjustments' had been made to how GDP and the inflation figures were calculated). The employment lag has already been several quarters and it now looks like it is heading for several years.

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.

Consumer Confidence At Recession Levels Again

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.


September consumer confidence dropped to 48.5 from a lower revised 53.2 in August. The number was below analyst expectations. Stocks dipped sharply on the news.

The latest confidence numbers from the Conference Board show the disconnect between consumer perception of the U.S. economy and the spin being presented by officialdom is getting wider and wider. A confidence number of 90 or above indicates a positive view on the economy. The current number is lower than the lowest number from the 2001 recession. It is in fact barely above the lowest number recorded during any recessionary period since 1980, except for the recent Great Recession. Yet, government officials and the mainstream media keep telling us that the U.S. economy is in recovery. Based on their own experiences, American consumers aren't buying it.

The current conditions number for September came in at a close to a rock bottom 23.1. This view on the current state of the economy has yet to make any significant move up since the Credit Crisis in 2008. What caused the overall consumer confidence numbers to rise in the last year was the expectations component, which represents consumers' view of what the U.S. economy will be like in the future. After an onslaught of 'the economy is on the road to recovery' propaganda emanating from Washington, D.C. and dutifully repeated by the mainstream media, American consumers in 2009 started becoming increasingly confident that a better economy was waiting for them down the road. After not seeing this happen month after month after month after month after month after month, consumers are starting to have their doubts though. The expectations number fell from 72.0 in August to 65.4 in September. If it remains on its current trajectory, the overall confidence number will get back to where it was during the Credit Crisis.

Consumer spending accounts for 72% of GDP. Consumers without confidence don't spend. Consumers without jobs and credit don't spend either. Nevertheless, the government has consistently reported an increase in consumer spending taking place while total wages and salaries have fallen and available consumer credit has been reduced. The savings rate is higher than it used to be as well, which should lower consumer spending even more. But the rules of arithmetic and economics are different in Washington, D.C. than they are in the rest of the universe (the only other known exceptions are in government statistical offices in other world capitals). For some reason American consumers are choosing to view the world as they see it instead of accepting fanciful claims from the Washington con machine. If this continues, even stock traders might eventually catch on.

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.

Will September be the Cruelest Month for Stocks?

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. stocks are set to close out August with the Dow Industrials dropping more than 4% on the month. If the economic numbers continue to indicate a possible double-dip recession however, stocks are likely to fall by a much greater amount in September.

Historically, it isn't crash-prone October when U.S. stocks have their worse performance, but September. Stocks are entering the month in a technically weakened state that began earlier in the summer. In July, all four major indices - the Dow Industrials, the S&P 500, the Nasdaq and the Russell 2000 - began a bear market trading pattern when their 50-day moving averages fell below their 200-day moving averages (sometimes referred to hyperbolically as a death cross). This is not enough to confirm a bear market however. The 200-day moving average needs to also start moving down. This has happened on the Dow Industrials and the S&P 500 in the last few trading days. The 200-days on the Nasdaq and the Russell 2000 have been moving sideways for a week or more and should start dropping soon. The Dow Transportation Average also needs to have a 50-day 200-day cross to confirm the negative action on the Industrials. As long as there isn't a massive rally, this will happen today. So stocks will be entering September in a technically vulnerable condition.

If more negative economic reports that indicate the economy continues to deteriorate then take place, the mix could be combustible. More hints of a double-dip recession from jobs or manufacturing would be especially damaging. Housing numbers this fall probably won't affect the market as much because things simply can't get any worse (with the exception of housing prices, which still have a lot of room to drop). The bad news on housing from the summer - numbers worse than those at the bottom of the Credit Crisis - may have a delayed impact on stocks though. Jobs have been the perennial weak spot of the attempted recovery and numbers have continually been at recession levels for over two years. Worsening unemployment figures would not be viewed kindly by stock traders. Falling manufacturing numbers won't be either since manufacturing led the economy up from its bottom in the fourth quarter of 2008.

U.S. stocks may also be following Japanese stocks down. The Nikkei dropped 325 points or 3.55% in its last day of August trade. It is now at 8824 and could easily test its Credit Crisis bottom, which is around 2000 points lower. U.S. investors need to watch the key 10,000 level on the Dow Industrials and 1000 on the S&P 500. Stocks moving and staying below these key points would damage sentiment severely. The only thing left at that point to hold up the market would be the Fed's liquidity injections. These might work until the election on November 2nd. If so, you may not want to own stocks later that week.


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.

Japan and U.S. Offer More 'Stimulus You Can Believe In'

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 mainstream media on Monday was hyping a Japanese expansion of a low-interest loan program to financial institutions after talking up Fed Chair Ben Bernanke's statement on Friday that the Fed "will do all that it can" to support the economy. Japanese stocks and U.S. stocks respectively rallied strongly on these essentially negative news items.

The Japanese have been trying to fix their economy for twenty years. They have engaged in one stimulus program after another after another after another after another and it's still dead in the water. Despite the repeated failure of the approach they have taken, this doesn't deter them from engaging in the same behavior again. There is no reason to believe things will be any different this time. Nevertheless, the mainstream media cues the cheerleaders and dutifully reports this as good news, instead of pointing out that the need for a new stimulus program indicates all the previous ones have not worked. That sounds like bad news to me.

The U.S. monetary and fiscal authorities seem to be doing their best to imitate the Japanese. The Fed though has only had three years to follow them on their road to perpetual economic failure. Bernanke's statement on Friday was made from the Fed's annual meeting at Jackson Hole, Wyoming, which the media described as a 'confab' (confab is short for confabulation, which in psychiatry means 'the replacement of a gap in a person's memory by a falsification that he or she believes to be true' - unquestionably an important concept when dealing with establishment economists). What exactly was Bernanke implying when he said that the Fed would be doing all that it can to support the economy? Does this mean that it wasn't doing all that it could have done previously? In at least one sense the answer to that question is yes. The Fed could have opened the floodgates of uncontrolled money-printing and Bernanke was intimating that this is what is going to be happening in the future.

While the Fed and its cohorts in the economic community continue to maintain that there will be no double-dip recession, Intel threw some more cold water on this assumption on Friday. The tech bellwether sharply lowered its third quarter earnings expectations after raising them only a month earlier. PC sales have been running below previous forecasts. This is a strong blow to the U.S. economy since computer and software sales were up 24.9% in the second quarter GDP report. A drop to a negative number for this category could turn the entire third quarter GDP negative. But don't worry, Ben Bernanke will be handling the situation and we all know what an excellent job he's done previously in fixing the economy. Wait, isn't that a confabulation?

Disclosure: No positions

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

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

July Durable Goods Add Support to Recession 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.


After an existing home sales report yesterday revealed that the U.S. housing market is currently in worse shape than it was at the bottom of the Credit Crisis/Great Recession, July's durable goods report today further confirmed that the U.S. economy is sinking into a recession.

The headline number, an increase of 0.3%, seemed OK if not particularly good. Only a single item, a huge 76% increase in commercial aircraft sales, was responsible for keeping the number above zero however. Durable goods orders ex transportation fell 3.8% in July. The transportation number, particularly the aircraft sales component, is highly volatile. A strong number one month can be followed by a very negative number the next month. As for the rest of the components of the report, some were eyepoppingly bad.

Machinery orders, which fell 15%, were the weakest number in the report. It wasn't just the extent of the drop that made it so awful, but more importantly it was the biggest decline on record. Yes, the drop was larger than the decline that took place at the bottom of the Credit Crisis/Great Recession when the U.S. economy was falling off a cliff. Computer orders were down 12.7%. Capital goods orders were down 8.0%, the biggest drop since January 2009, just after the Credit Crisis/Great Recession bottom. Orders for electrical equipment and appliances were down 5.9%.

Altogether, July durable goods orders indicate that the manufacturing sector of the U.S. economy is rapidly turning south. This is particularly troubling because it was manufacturing that had the biggest upturn in the last year (the four times larger service sector didn't improve nearly as much). What will provide economic growth, now that manufacturing is weakening? An even more important question is: If some of the manufacturing numbers are as bad as or worse than the bottom of the Credit Crisis/Great Recession and this is also true of the real estate market, how is it possible that the U.S. economy is not currently in another recession?

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.

Industrial Production: July Up , But June Is Now Negative

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 Fed reported that industrial production was up 1.0% in July and this got all the media headline attention. Stocks rallied on the bullish news implying economic recovery. Buried in the coverage was that June's number, originally reported as an increase, was downwardly revised to minus 0.1%.

The government's handling and media reporting of the industrial production numbers are similar to many other economic reports. Good news is reported in the initial release. Mainstream media gives the good news big headlines and coverage that is so glowing that it is amazing there aren't cheerleaders in the background waving brightly colored pompoms and shouting 'Go US economy, Go US economy, Rah, Rah, Rah' while jumping up and down (By the way, I am expecting CNBC to steal this idea. I can see the top executives hitting themselves in the head right now and saying, "Why didn't we think of that?"). The downward revisions, and sometimes there are several, that come later on and indicate things aren't so good or there is even a decline taking place get minimal and sometimes no media attention. There's no need for a propaganda ministry when the government has a deal like this with the mainstream media.

Both the June and July industrial production reports have the additional problem of unusual situations that made the numbers better. The very hot weather in June spiked the utility component. In July, auto plants didn't shut down for their usual annual retooling. Because of this, the automotive products component of industrial production increased 8.8%. Most of that in turn was "due to large increase in light truck assemblies". Looking elsewhere in the report it can be seen that 'Output of Business Equipment' was up 1.8%. This increase was driven by the transit equipment sub-component that was up 6.3%, an "increase that in large part represented the gain in light truck assemblies" according to the report. So without the big increase in light truck assemblies (which impacted a number of components), industrial production wasn't strong in July.

The report did claim that most components of industrial production were up however. The exceptions were food, beverages, clothing, appliances  ....  you know, things that are necessities. Well, what is a better indicator of the state of the U.S. economy, a 1.1% increase in the defense component due to bigger production of military aircraft or the American consumer being able to buy food and clothing? This is apparently an example of the 'uneven recovery' that economists speak about. It doesn't prevent optimists from seeing the light at the end of the tunnel for the weak economy based on July industrial production numbers. Pessimists are seeing the light (truck assemblies) at the end of the tunnel instead.

Disclosure: No positions.

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

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

Wall Street Journal’s Flawed Reasoning For Possible Crash

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 Wall Street Journal published an article entitled, “Is a Crash Coming? 10 Reason to Be Cautious” on Friday, August 13th. While a crash is certainly possible, the reasons given by the Journal have little to do with why one could occur.

The Journal did make it clear that it was not predicting a crash. The article’s author specifically stated, “I don’t make predictions. That’s a sucker’s game.” Indeed it is a sucker’s game for almost all mainstream financial journalists, just as professional basketball is for midgets – it’s just not an area of natural talent. That of course doesn’t mean that no one can do it, but the author nevertheless made this illogical leap and this nicely set the tone for the rest of his article.

Most of the reasons given in the article for a possible crash were actually arguments for a double-dip recession. These include (my comment follow in italics):

The Fed is getting nervous (more like catatonic).

Deflation is already here (if so, it will be the first time in history money printing created deflation).

People still owe way too much money.

The job picture is much worse than they’re telling you (one of the ‘they’ referred to is the Wall Street Journal itself by the way).

Housing remains a disaster.

We’re looking at gridlock in Washington (so don’t expect any more big spending programs that accomplish little and raise your taxes)

All sorts of other [economic] indicators are flashing amber (actually bright red).

This is an implied assumption in the article that market crashes are related to recessions, also an illogical leap not supported by the facts. The worse U.S. market crash of all-time took place in October 1987, five years after a recession had ended and almost three years before another one began. There were also mini-crashes in 1989 and 1997. The economy was not in recession during these crashes either, nor was it during the recent flash crash.

Economic downturns are more properly associated with bear markets – a long, slow decline in stock prices as opposed to the sudden, sharp drops that take place during crashes. They require very different trading approaches. Even bear markets can take place outside a recession however. The 1998 bear market due to the Russian debt default and the implosion of Long-Term Capital is a good example. Both crashes and bear markets can be caused by global liquidity events and as we saw recently during the Credit Crisis, global liquidity events can also lead to recessions. This did not happen in the U.S. in the 1980s and 1990s however.

Perhaps the Wall Street Journal should have entitled its article, “10 Reasons Why We Are Headed Into a Recession”. They would have to find three additional reasons of course and they would also have to be a bit shameless as well since I already wrote that article on July 8th and it was published on a number of blog sites that day. Well, at least the Wall Street Journal is making some efforts to try to keep up with the blogosphere, even though those efforts are confused and coming weeks later. Now, what can we predict from that?


Disclosure: No positions.

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

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

Q2 GDP Much Lower Because of June Trade Deficit

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. trade deficit widened to $49.9 billion in June instead of improving as expected. This figure was missing from the second quarter GDP report and could mean a downward revision to 1.3% from the originally reported 2.4%. The lower GDP number means almost all of the growth in Q2 came from inventory accumulation and not from increased economic activity.

The U.S. trade deficit has to be funded from foreign borrowing, just like the budget deficit. Before the Credit Crisis, both used to be around the same size. Then the budget deficit exploded from record levels around $400 billion to over $1.4 trillion in 2009. The trade deficit went in the other direction, decreasing substantially, but is now coming back. The deficit in June was 19% higher than in May and would be almost $600 billion annualized. Exports fell, with computers and telecommunications equipment declining. Imports rose with consumer goods hitting a record high. Ironically, this is being made possible by the huge budget deficit the federal government is running. U.S. consumers are using the money they get from stimulus spending to buy foreign goods - something that will only lower U.S. economic growth.

The trade deficit reducing the GDP number for the second quarter has far wider implications than growth just being anemic. It confirms that the economic 'recovery' that supposedly started in the summer of 2009 has been based almost entirely on changes in inventories. From the Q3 of 2009 to Q1 of 2010, around two-thirds of the growth reported came from the inventory category. This fell to 44% in the first reading of this year's Q2 GDP, still a high number, but better than the 71% from Q1. If Q2 is revised down to 1.3%, the 1.05% that inventory contributed to GDP would represent 81% of total growth. Excessive inventory accumulation means lower GDP growth or even drops in future quarters.

Stocks turned ugly yesterday, whether because of the implications that growth was much weaker in Q2 than the originally reported number or because the realities of the Fed's August meeting finally sank in, is not clear. The Dow Industrials were down 265 points or 2.5%, the S&P 500 lost 32 points or 2.9%, Nasdaq dropped 69 point or 3.1% and the small cap Russell 2000 fell 26 points or 4.1%. Market weakness continued this morning and stocks are starting to suffer serious technical damage, which could lead to much bigger drops in the coming weeks ahead.

A just released NBC/Wall Street Journal survey indicates that close to two-thirds of the American public think that the economy is going to get worse before it gets better. Mainstream economists now think GDP growth will be 2.5% in the second half of the year. The Fed still thinks it will be above 3%. For months, both have denied the possibility of a double-dip recession. Increasingly negative economic reports however indicate another recession may have already arrived.

Disclosure: No positions.

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

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

Fed Admits 3 Years of Easy Money Hasn't Fixed 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.


After three years of easy money the Federal Reserve announced yesterday that it was going to buy around $10 billion a month in treasury bonds - a pittance for an economy the size of the United States. The Fed began its current stimulus campaign with a discount rate cut in August 2007. After using every trick in the book and creating a few new ones, the U.S. economy is still in a troubled state.

In its statement after yesterday's meeting, the Fed admitted that "the pace of recovery in output and employment has slowed in recent months" and "bank lending has continued to contract." The FOMC went on to say that "the the pace of economic recovery is likely to be more modest in the near term than had been anticipated."   Considering that the Fed was hopeful of preventing a recession in the spring of 2008- months after a recession had already started, these statements imply that the U.S. economy is currently close to or even in a downturn.

The Fed doesn't plan on doing much about it however. It can't lower the funds rate any further because it is has been at zero since December 2008. The major option the Fed has left to stimulate the economy is to expand its balance sheet through quantitative easing, essentially money printing. This would be inflationary as is the case with all forms of money printing. While the Fed constantly says there is no inflation and intimates that it is worried about deflation, it is unwilling to make a move that would be inflationary. If deflation is really a risk, expanding its balance sheet becomes the correct course of action. Investors should wonder why the Fed is unwilling to do this.

What the Fed plans on doing currently is to buy 2-year and 10-year treasuries with the proceeds it gets from selling mortgage backed securities that it acquired from Fannie Mae (FNMA) and Freddie Mac (FMCC) during the Credit Crisis. The Fed has more than a trillion dollars of these on its books. This action will prevent the Fed's balance sheet from contracting. The net purchase in treasuries will be minimal. The overall impact on the U.S. economy will be close to nil.

Investors should look to Japan for a lesson on how inept central bank and fiscal policy can lead to decades of a failed economy and low stock prices. The Nikkei closed at 9213 last night, more than 75% off from its high around 40,000 on the last day of 1989. The Japanese economy has been in the doldrums for two decades now. In the United States, it's three years and counting.


Disclosure: No positions.

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

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

Will Fed Meeting Be a Turning Point for Stocks?

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 Fed has its August meeting today and stocks sold off in the morning despite media attempts to put a positive spin on the outcome. The latest phase of the rally that started in early July took place after Ben Bernanke admitted to congress that the U.S. economy was troubled. Stocks shouldn't have rallied on this news, but they did.

The stock market is supposed to be a leading indicator of the economy and should react to changes approximately six months in advance. This only works in a free market however. The more the authorities are fiddling with the financial system behind the scenes, the less stock prices will act as an early warning system. The bull market peaked in October 2007 for instance, but a recession began only two months later.

This time, U.S. stocks peaked on April 26th. May and June were bad months for the market. While stocks have not gotten back to their highs, they have been rallying since the beginning of July, when problems in the eurozone calmed down (thanks to a commitment of an almost trillion dollar bailout for the currency). The rally entered a second phase after Ben Bernanke testified before congress about the bleak prospects for the U.S. economy. The market sold off that day, but then mounted a rally on the bad news, which was supported by numerous economic reports showing the economy was turning down.

Why would anyone buy stocks when the economy was facing a possible recession? While this behavior doesn't make sense, a better question is: Who was buying stocks after this news came out? Based on the trading volume, not many market participants were entusiastic. With the exception of a few days of selling, the entire rally since early July has taken place on below average volume - a technical negative.

The 50-day moving average for volume has also been declining as well since early July. This is part of a greater trend that started in March 2009, when the bigger rally began. Volume peaked on the Dow Industrials when the market hit bottom and back then there were days when over 600 million shares were traded. More than a year later, a day when over 200 million shares traded would be considered good volume.

The market seems to be rallying on the hopes of Fed easing. With fed funds rates at zero, the traditional forms of easing are obviously no longer available. The Fed would have to engage in quantitative easing (a form of money printing), which would involve the purchase of treasury bonds and this would lower their interest rates. According to mainstream media reports, consumers and businesses would supposedly borrow and spend more money as a result. This is wishful thinking at best.

Even though the Fed has lowered interest rates to nothing and has effectively provided the big banks with free money, this has not been passed on to the consumer. Interest rates on credit cards were 14.55% in 2005 and in May 2010 they were 14.48% (see: http://www.federalreserve.gov/releases/g19/Current). Banks have not lowered their interest rates in response to the Fed's recent actions, but have pocketed the difference. This has been the major reason that they have been reporting such huge profits. It is naive to think that they are going to change their behavior.

Disconnects between markets and the underlying economy have happened many times. They don't last forever however. The two eventually have to meet. Either the economy improves to justify market pricing or market prices decline to meet the economy. The tech bubble at the end of the 1990s and the more recent real estate bubble were good excellent examples of this. Pricing that is too high will come back down to earth and the correction can last for years. Government attempts to try to hold up the market, as has happened with real estate prices, don't prevent the inevitable, they merely delay it. The current disconnect with stock prices and the economy will also self-correct and may do so suddenly. The only question is when it will occur.


Disclosure: No Positions.

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

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

More Evidence for a Double Dip Recession

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


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

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

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

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

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

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

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

Disclosure: None

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

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