Why Quantitative Easing Won't Happen Now

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.

Quantitative easing is off the table for the Fed at the moment because of Friday's GDP report. According to the Commerce Department U.S. second quarter GDP growth was 1.5%, which is mediocre, but not bad enough to justify another round of money printing stimulus.

The stock market has been juiced up on a number of occasions since June on rumors of impending QE3.  There is always connected to phrase like "the Fed will do more to help the economy." The mainstream press never raises the question of why does the Fed need to do more to help the economy. If its program worked, the economy should have recovered. If they don't, doing more of the same thing isn't likely to accomplish much. A need for a third round of QE certainly implies that the first two weren't effective — at least in creating economic growth.  Could it be that printing money out of thin air doesn't really create lasting wealth?

All the U.S. fans of quantitative easing should look across the pond at what is taking place in the UK. Its second round of QE was started last October. Yet, Britain has fallen into and remains in recession. It doesn't look like it will exit the recession by the end of the year either. So much for QE being a panacea for saving an economy.

The best case for the ineffectiveness of QE though comes from Japan. Japan has maintained a zero interest rate policy since 1999 (the U.S. had done so since 2008). After ten years of economic decline and malaise Japan began implementing quantitative easing in the early 2000s. The ten years that followed were also a period of economic decline and malaise. The Japanese stock market peaked in 1989 and over twenty years later it is still down more than 75% from its high (investors who fought the Bank of Japan are glad that they did). The various stimulus programs raised stock prices temporarily, but they eventually fell to lower lows.

The stimulus bag of tools that central banks use is meant to be effective when there is a cyclical downturn in the economy. However, they will not work if the problem is structural — and that is exactly what Japan has been dealing with since 1990 and Europe and America are dealing with today (and probably since 2000). We are at the end of the Keynesian era, where credit can no longer be extended to greater levels without creating a subsequent collapse and the economy can't grow without continual stimulus from the central banks and massive government deficits. This is sharply evident in the case of Greece and Spain at the moment, but it is just as true in the U.S., UK and Japan.

The Fed can't just cavalierly decide to engage in more QE as is. It will need to do so if there is a major financial incident in the EU and it can't waste its bullets. It is inevitable that there will be such a crisis, and the Fed knows it. Mario Draghi's assertion on Thursday that the ECB will do everything possible to save the euro was nothing but meaningless bravado. The crisis in Europe has been going on for over two years now and despite numerous bailouts and half a dozen support schemes it keeps getting worse. During the entire time, the powers that be in the EU have said that they will do everything to save the euro. Sometimes "everything" isn't enough. 

The Fed also has the problem of looking political if it acts before the election. While it is true that the Fed has acted before elections in the past, it actions weren't being closely scrutinized back then. Nor were its policies politically controversial. The House of Representatives just passed the Federal Reserve Transparency Act of 2012 by 327-98. This legislation would produce a full audit of the Fed. While it might not pass the Senate this time around, eventually it will.

While the Fed will almost certainly be doing quantitative easing again, but it won't happen until either  the problems in Europe become a full-fledge global credit crisis or the U.S. economy is in an obvious recession. In either case, it will not be something to cheer about. 

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.

Rumors of Housing's Rise From the Dead Are Greatly Exaggerated

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.

Housing starts for November were released today, December 20th, and the stock market rallied strongly on the supposedly "good" news. The statistical error rate in the housing report is so huge, that the numbers are meaningless -- and easily subject to manipulation by a government that is desperate to provide news of a recovering economy.

Housing starts peaked at 2,273,000 in January 2006. According to the Commerce Department, construction of new U.S. residences in November 2011 was 635,000. Almost five years later, housing activity is still less than 28% of what it was at the peak. Despite this almost three-quarters decline in housing activity, this is being spun as evidence of an economic recovery by the mainstream media. Would you consider it progress if your salary was only 28% of what is was five years ago?

As dismal as this statistic is, it is very possible the actual number is much worse. The housing starts report has the highest statistical margin of error of any government report. The error is so huge that is a waste of taxpayer money to produce this report. The error in the overall number can be greater than ten percent. The error on individual components can be as much as 33%. This is important because better housing start numbers in 2011 (November was not the first month when better numbers were reported, this took place earlier in the year as well), have been created by a supposed surge in apartment house construction. Apartment construction rose by 25.3% in November and this is what is making the overall number higher. Considering the huge statistical error rate, it is possible that it didn't rise at all.

Optimists who think it did rise by that much need to ponder the implications of why a lot of apartments are being built and very few single-family houses. The inescapable conclusion is that few Americans can afford to buy their own home anymore. I would hardly describe that as an indication of better economic conditions. Even more telling is that the number of completed housing units dropped by 5.6% in November even though housing starts rose earlier this year. If this is correct, a lot of housing that is begun is not being finished. While that makes no sense, nothing else about the report does 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.

More Contradictions in Third Quarter GDP

 

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 Commerce Department reported today that third quarter GDP increased at a 2.5% annual rate. A supposedly much lower inflation rate created significant improvement over numbers from earlier in the year. There was also a surge in consumer and business spending reported, although other recent surveys contradict the claims in the GDP release.

Real personal consumption expenditures (consumer spending) increased by 2.4% compared to only 0.7% in the second quarter. Most of this was caused by a 4.1% increase in durable goods purchases. Nondurables were barely changed. Delayed auto and parts shipments from Japan because of disruption from the massive March earthquake can account for more sales being reported in the third quarter, but not likely to be repeated in the fourth. Despite claims of much higher consumer sales, businesses barely increased inventories in the third quarter — something they would do if they saw their sales climbing. Moreover, consumer confidence surveys indicate consumers were gloomy in the third quarter and readings have now fallen as low as they were around the bottom of the 2008/2009 Credit Crisis. Consumer confidence surveys are not controlled by the government and act as a check of the reliability on government statistics. 

While businesses didn't seem to notice any increase in customer spending, there was nevertheless a frenzy of equipment and software buying going on. This supposedly increased by 17.4% during the quarter. Apparently, I missed the all the news about major software upgrades and equipment innovations that took place this summer. Nonresidential structure spending was almost as buoyant increasing by 13.3%. Where this building boom is taking place isn't exactly clear. Coincidentally, the unemployment rate among U.S. construction workers is also 13.3% (See Household Data Table A-14 of the September Non-Farm Payrolls Report). As bad as this is, it is still a year over year improvement.

GDP figures are also boosted if the inflation rate is lower. It's a lot easier to report better inflation numbers — all it takes is some statistical adjustments — than it is to actually improve the economy. Inflation was supposedly 3.3% in the second quarter, but only 2.0% in the third quarter. Nominal GDP is reduced by the inflation rate to get the final figure. The change in inflation, whether or not it actually took place, added much of the improvement seen from the second to third quarter, not an increase in economic growth.

Mass media coverage about GPD was of course ebullient about what good shape the U.S. economy is in. Of course, we won't know the actual number for several more years. This report is only preliminary and there are two adjustments that will be made to it and then annual revisions every July. In the last several years, adjustments have been mostly down, sometimes by very significant amounts. Even then, that number is going to still be overstated because the U.S. consistently understates its inflation rate. To find an approximate level of the actual GDP, just subtract 3% from the reported number. This will give you a more accurate sense of what is going on in the economy. 

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.

Economic Reports Indicate U.S.Economy Heading Down

 

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.

Default notices on U.S. home mortgages rose 33% in July. Retail sales and food services rose only 0.0% -- adjusted for inflation they were negative. The CPI inflation measure for August came in at 0.4%, almost as high as it was in July.  Weekly jobless claims rose again this week, coming in at 428,000.  All are pointing to an economy in trouble.

The Great Recession began in the housing market after subprime loans started to default in large numbers in 2007. The U.S. economy will continue to have difficulties until all the excesses are ringed out of house prices. Government policy has instead been geared toward stabilizing the market with temporary fixes. The Federal Reserve instituted a number of programs to funnel money into the mortgage markets to protect the banks that had too much exposure to real estate loans and the Obama administration has created programs like HAMP (Home Affordable Mortgage Program) to lower the foreclosure rate. Banks themselves have avoided or delayed foreclosures as long as possible because they don't want the properties on their books. All the government's efforts have certainly slowed down the rate of foreclosures and that may ultimately be all that they accomplish. A 33% increase of foreclosure notices in July indicates a new wave of foreclosures is likely next year.

Meanwhile, U.S. retail sales are declining if you take inflation into account. Retail sales increased strongly with rising home prices in the first years of the 2000s, but after the housing market turned south they have yet to recover. They have been held up by trillion dollar plus annual federal budget deficits, Federal Reserve money printing, and government stimulus programs including the 'Cash for Clunkers' gift to the auto industry. Despite all of these efforts, retail sales and food services were up 0.0% in July (the same 0.0% for jobs created in August). The mainstream media reported 0.1%, but this is only the retail sales component of the report. The report is not adjusted for inflation, so even if retail sales rose 10% a year, but inflation was also 10%, there would be no actual growth (although that is not the story you would get from mainstream news sources).

Retail sales are crucial for the U.S. economy because they make up approximately 70% of GDP. If they don't grow in real terms (after being adjusted for inflation), it is difficult for the economy to grow. To get a quick read on how the retail sales numbers are being impacted by rising prices all that is necessary is to look at the gasoline sales subcomponent. There is no reason to think Americans are using a lot more gasoline from year to year, if anything less is being used. Yet, year over year gasoline sales are up 20.8%. This is caused by inflation. Retail sales and food services overall were up 7.2% year over year. Adjusted for a realistic inflation rate, this number would be somewhat negative. 

That is not to say that the government is reporting an inflation rate that high. The just released CPI for August was 0.4% or 4.8% on an annualized basis. It was 0.5% in July or 6.0% on an annualized basis. Alternative inflation measures from ShadowStats.com indicate actual U.S. inflation is several percentage points higher than the official numbers indicate. ShadowStats.com calculates its inflation numbers the same way the U.S. government did in the 1970s. Since there have been many changes in how U.S. inflation is determined since then, it is not meaningful to compare current numbers to the past ones since doing so is like comparing apples to oranges. The ShadowStats numbers indicate that inflation is much higher now or if you don’t accept that, then you are left with the absurd conclusion that high inflation didn’t exist in the 1970s (you will find that this is the case if you use current methods to recalculate the 1970s inflation numbers).

The other major drag on the U.S. economy -- lack of jobs -- also seems to be getting worse. Weekly claims rose again this week to 428,000. Over 400,000 is considered a recessionary level. With the exception of a few weeks, these have been continually over 400,000 for almost three years now, indicating an ongoing recession (despite all the claims to the contrary of a recovery). The trend is actually worse than it appears however. These numbers should strongly regress toward the mean (move back to the long-term average), but haven't as of yet. As a recession goes on and on eventually everyone that is going to be laid off eventually has been and that should cause this number to decline for statistical reasons even if the economy isn't improving. That it has managed to stay at such high levels for almost three years is truly amazing.

The overall picture provided by U.S. economic reports indicates a flat or declining economy with rising inflation. Little progress seems to have been made in the last three years. The new credit crisis arising in Europe is only going to make matters worse. The U.S. economy was merely weak before Lehman Brothers defaulted, but it fell off a cliff after that.

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.

Guide to Interpreting U.S. GDP Figures

 

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.

An update for second quarter GDP figures were released today and growth was revised downward to 1.0% from the initial reading of 1.3%. There will be another revision next month and then further revisions each year in late July or early August. Expect the numbers to get worse as time goes on.

Media attention is not equally distributed to all the versions of the same GDP report. The most attention goes to the first release called the Advance Report. These have tended to be highly optimistic since the Credit Crisis began. The Second and Third Reports that follow (also known as the Preliminary and Final Reports) get slightly less attention, although these are almost always within the same ballpark. The big revisions come in the yearly updates in July and while these can be devastatingly bad, little attention is paid to them by the mainstream media. Nor is the information provided in them used by the mainstream media to interpret current data. The primary reason for this is that the mainstream media rarely interprets government statistics at all no matter how absurd and ridiculous they are. Instead, they mindlessly repeat them in a parrot-like fashion. The public then thinks it's getting real news when it isn't.

On July 29, 2011, the BEA (Bureau of Economic Analysis) revised the GDP figures back to 2006 and stated that GDP growth in Q1 2011 had only been 0.4% instead of 1.9%. There was some comment attached to this report about how seasonal adjustments had inaccurately overstated the numbers. It would be logical to think that such overstatements would be happening in Q2 as well and that these will not be corrected by the BEA until the revision in July 2012. Looking at changes made to the GDP numbers in the last few years certainly provides more than enough reason to believe that the BEA provides the best news possible when the media pays the most attention and the worst news when no one is looking.

The history of the GDP for Q4 2008, the quarter when the Credit Crisis was at its worse, provides a good example of how the government reports GDP. The first report out was a reading of -4.0% -- a bad enough reading, but much better than what was really taking place. After many revisions downward, the BEA this July said the GDP had actually changed by -8.9%. This is an absolute error of almost 5.0%. If the BEA states quarterly growth is +3.0%, you may wish to ponder if it was really
-2.0% instead, but you won't be hearing about the difference until years later. One is normal healthy growth and the other indicates a recession.

The year over year GDP figures can have even bigger errors. The difference from Q4 2007 and Q4 2008 originally indicated 3.3% GDP growth (during the worst recession since the Great Depression, this pigs-can-fly number went unquestioned by the media), but by the July 2011 revision a GDP decline of 3.3% was admitted. This is more than a 6.0% absolute difference. You might want to consider subtracting 6% from any year over year GDP number that the government provides.

The GDP figures produced by the BEA can be highly unreliable and yet the mainstream media doesn't discuss this, nor does it warn investors about it in its reporting. When hearing the news about GDP growth being a passable 2% to 3%, you should assume it might barely be positive or even somewhat negative. For reports like the recent ones that indicate growth of 1% or less, you should assume the economy is noticeably contracting. The BEA will not admit these discrepancies until well into the future however.  You can also assume other statistical manipulations being used to overstate GDP won't be admitted at all.
 
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. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Why the U.S. Economy is Turning Down

 

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 amounts of money printing. This is the official blog of the the New York Investing meetup.

A number of economic reports have come in lower than expected recently and the talking heads on TV are perplexed as to why a sudden downturn is taking place. Listening to their commentary, you will hear all sorts of fanciful explanations except the most obvious one – the massive government deficit spending that has been the reason for the apparent economic recovery has been frozen because the U.S. national debt ceiling hasn’t been raised by Congress.

The debt ceiling is currently $14.3 trillion and this was reached in May. Debt was already getting close to this figure as early as February however and federal spending was decelerating long before May. Based on the 2011 fiscal year budget (which runs from October 1, 2010 to September 30, 2011), the U.S. was on track for a deficit as high as $1.65 trillion this year. This represents approximately 11% of U.S. GDP. This 11% is just the deficit part of federal government spending, not all of it. Subtract this from GDP, you would see GDP was only around $13 trillion – lower than before the Credit Crisis began.

Moreover, the part of the GDP generated by the deficit is being paid for with borrowed or printed money. Actually, it’s mostly printed money. The amount of quantitative easing planned by the Federal Reserve in the first half of the year is enough to cover 70% of the deficit.  The government issues bonds to pay for the deficit and then the Fed buys them with printed money. This is what has been making the economic numbers look better and is being described by the mainstream media as an economic recovery.

A monkey wrench was thrown into the works however when Congress refused to raise the debt ceiling. As a consequence, deficit spending has ground to a halt for a while (expect it to return soon) and this in turn slowed down the Fed’s effort to inject newly printed money into the economy. How dependent the health of the economy is on deficit spending supported by the Fed’s phony money operation has become apparent in recent economic reports.

The May non-farm payrolls indicated only a 54,000 increase in jobs for the month. Moreover, the previous two months were revised downward by 40,000 jobs. The manufacturing sector, which has been leading the recovery, actually lost 5,000 jobs. Close examination of the figures indicates there are well over two million less people in the labor force than last year at this time. If they had remained in the labor force, the current unemployment rate would be 10.6% rather than the reported 9.1%. It would be highly unusual for the labor force to shrink at all, let alone by over two million, if the economy was growing as it supposedly has been. People leaving the labor force make the unemployment numbers look better than they are though and government statisticians are well aware of this.

Regardless of how much recovery has taken place, it is clear that the goods producing sector of the economy is weakening. While the ISM Manufacturing report for May still indicated expansion, every component was lower than it was in the April reading. New Orders and the Backlog figure were barely positive.  The highest component, as has been the case for many months, was Prices Paid – a measure of inflation. It was down from a whopping 85.5 in April to a still very high 76.5 (above 50 indicates expansion). Much of the growth in manufacturing has occurred because the items coming off the assembly line cost more, not because of there are more of them. The Durable Goods reading from April, the most recent, was down 1.2%, confirming less demand for the output of U.S. factories.

Tying it all together are the Leading Economic Indicators (LEI), an indication of where the economy is heading. These were down 0.3 in April, indicating the economy is likely to continue to lose steam. LEI will probably stay weak until the deficit ceiling is raised and newly printed money can start flowing back into the U.S. economy at its formerly prodigious rate. If this doesn’t happen, Americans might discover that just like the proverbial emperor, the U.S. economy has no clothes.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21
Author, "Inflation Investing - A Guide for the 2010s", Volume 1
http://www.amazon.com/Inflation-Investing-Guide-2010s-ebook/dp/B0051GU06W/ref=sr_1_3?s=books&ie=UTF8&qid=1307366974&sr=1-3

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

The Case Against Reappointing Ben Bernanke

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.


Economics is one of the few professions where incompetence is regularly rewarded. The attempt to keep Ben Bernanke as head of the Federal Reserve for a second term is one of the most glaring examples of this practice - and one that will have serious negative repercussions for the United States going forward.

When president Obama announced that he was reappointing Bernanke last August, the reason he gave was that 'Bernanke prevented another depression'. This sound bite has been mindlessly repeated by politicians - senate leader Harry Reid most recently - and economically challenged media commentators ever since. Until the U.S. economy returns to its pre-Credit Crisis state, we will not know whether or not that we have been saved from another depression. There is more than enough evidence to indicate that we haven't been - double digit unemployment, bank loan portfolios that continue to deteriorate, rising bankruptcies and bank failures, lack of lending by the banks, and a housing market that only functions because of numerous government programs that prop it up are just a few reasons why this claim is wrong. Obama would not be the first U.S. president to prematurely call the end to a depression, Herbert Hoover did so in June 1930 when he told the press that the Great Depression was over - it was almost three years before the bottom and at least another decade before that was indeed the case.

One thing that will be pointed to as evidence of recovery will be good GDP numbers later this week - estimates are as high as 6% annualized growth for the fourth quarter of 2009.  If GDP numbers were calculated in a way that measured actual economic growth this would indeed be encouraging. Unfortunately, they are not. U.S. GDP figures for 2008 were positive even though it is universally recognized that the U.S. was in a severe recession the entire year - this is a theoretical impossibility, yet no one talks about it. The lesson of Japan in the 1990s and 2000s warns against using GDP figures as evidence that an economic crisis is over. Japan had quarters of over 10% annualized GDP growth. They were 'saved' from a depression as many as seven times (depends on how you count) in the last two decades. Their economy has nevertheless continued a long, slow leak since 1990 and bigger problems are likely in the next decade, which will be the third one after their crisis began. In reality, Japan extended its depression over a very long period of time; none of its government's actions prevented it.

The defect in the 'saving from depression' argument is an implicit assumption that the economy has two states like a light switch, on and off, instead of an infinite number of possible outcomes. Many of those outcomes involve inflation and hyperinflation. There is no discussion of the negative consequences of Bernanke's actions among his supporters - and all economic policy actions have side effects, many of which can be extremely undesirable. Bernanke himself wrote his PhD thesis on Fed policy errors during the 1930s and demonstrated that restrictive Fed monetary policy led to the debacle. He also came to the conclusion that doing the opposite would fix the problem. If the economy was as simple as a light switch it would. In a complex system, this is not the case. Doing the opposite may simply lead to a different disastrous outcome.

Bernanke also didn't show understanding of the impending problems within the financial system, nor did he react quickly. As late as June 2007, Bernanke was assuring people that there would be no problem with subprime loans. In July the problem blew up. As late as the spring of 2008, the Fed was releasing statements that they were hopeful they would still be able to prevent a recession. The recession had already begun in December 2007, but the Fed was unaware of it. In September 2008, Lehman was allowed to fail with the subsequent excuse being given that no one was interested in buying it. Only days later AIG was nationalized when no one would buy it. The Lehman failure set off a general global financial collapse. Bernanke is now claiming credit from 'saving' the system from this collapse with his quick action. As one commentator astutely observed, this is like an arsonist wanting credit for putting out a fire that he had started.

Bernanke was originally appointed by George Bush and is one of the key economic actors along with the current Treasury secretary Tim Geithner from the Bush administration. While on one hand president Obama constantly criticizes Bush economic policies and how much damage they have caused, on the other he has gone out of his way to keep the Bush economic team mostly in place. This is reminiscent of Obama's newfound criticism of irresponsible giveaways to the big banks. For those who don't recall, the TARP bill originally failed in its first congressional vote. Presidential candidate Obama was instrumental in rounding up enough Democratic votes to get it passed on a second try. Now, Bush deserves the blame.

Bernanke's appointment runs out on January 31st. The slow-moving senate has yet to get around to voting on it. While Bernanke has had his detractors in congress, they became energized after the surprise upset in the Massachusetts special senate election last week that indicated quite clearly that American voters are angry about how the economy has been handled. Senators up for reelection in November (only one-third of the total) particularly began to have second thoughts, as indeed they should. Support for Bernanke may come back to haunt them in the future even more than support for the ill-fated health care bill. Bernanke is almost guaranteed to win the vote to reappoint him however. The White House is leaning heavily on Democratic senators to support him and hoping that the public isn't paying too much attention. Voters tend to notice though when they don't have a job.

Disclosure: None

NEXT: Consumers Lack Confidence, They Also Lack Credit

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.

Commodities, the Dollar and More Government Fantasy

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

Our Video Related to this Blog:

The Natural Gas storage report was released yesterday morning and storage was up 54 BCFs versus expectations of a rise of 51 BCFs. Within a few minutes the near term futures contract dropped at least to $2.705 (it may have gone lower). The about to expire contract closed at $2.843 down 6.7 cents from the previous day. The oil storage report was mixed on Wednesday and Nymex oil dropped below $70 a barrel subsequently, but has poked above $73 this morning. The oil/natural gas price ratio has gotten as high as 26 (if they were completely interchangeable, the ratio would be 6, it has averaged 8+ over the long term), well above the last peak of 22 in 1990. Oil is about to enter its seasonally weak period and natural gas its seasonally strong period. Regression to the mean should start taking place this fall.

The calendar should be creating a bullish environment for gold and silver as well. They tend to be strong between August and February. Gold was trading around $960 this morning on Comex and silver around $14.75. Gold has been hoovering just under the key breakout level of $1000 for some time now. Watch it closely. Once this breakout takes place, the short term target price is somewhere between $1200 and $1300.

Gold historically trades counter to the U.S. dollar, but they can become decoupled. In a global inflationary environment, decoupling will eventually occur. For the moment, the U.S. dollar is weak . For the last 6 days, the dollar has traded at least part of the day below its key breakdown level of 78.33. This is the second time so far that the dollar has stayed below this level for several days. When the stock market rallies, the dollar has been selling off and this has been going on since last March (it's not a normal pattern). If stocks rally further, it should kill the dollar. The dollar may tank regardless since the technical picture is weak. The powers that be will want to save it however. So we will have to wait to see what happens.

The stock rally has been explained as taking place because the U.S. economy is recovering. At least in some cases, valuations are as ridiculous as they were at the top of the tech bubble in 2000. Take a look at the Dow's PE for instance. This morning, the government released more 'good news' that seems to fall into the 'that can't possibly happen' category. Personal spending was up 0.2% last month, but incomes were unchanged. Even though incomes were unchanged, total wage income went up (during a time of increasing unemployment). Spending has supposedly been rising for the last three months, well ahead of income, even though the savings rate is 4.2%. Separate reports indicate that available consumer credit has been cut drastically. So even though U.S. consumers don't have the income and don't have access to credit, they are somehow spending more. I really think the U.S. government should release its statistical reports on stationary that has pictures of pigs flying in the background. That way the public would know how much credibility the numbers have.

NEXT: A Break in the Bull and China Stops Shopping

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


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

A Recovery Reminscent of 1990s Japan

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

Our Video Related to this Blog:

Economists are predicting that the U.S. recession is over or will be soon. A Wall Street Journal survey found that 57% of economists think the recession is already over. Another 23% think it will end this month or next. Their predictions for GDP growth in the third quarter are currently around 3% and range as high as 6%. Nevertheless economists are not predicting that the employment picture will be improving anytime soon or that incomes will rise. They make it clear that the recovery means "things are less bad than they were previously" and "this is definitely a recovery that only a statistician can love". Statistics are indeed one of the few things that will be manufactured while the blossoming 'recovery' takes place.

The big areas of the economy are still not doing well, even in the statistics. Retail sales surprised economists yesterday when they fell 0.1% in July. Economists had predicted they would rise 0.7%. The key to the 'improvement' was the government's cash for clunkers program which is revving up the auto industry (you should ask yourself, what is going to happen to the auto industry when this program stops?). Indeed it did, but not enough to turn retail sales positive. Excluding autos, retail sales were down 0.6%. General merchandise sales were down 0.8% and department store sales down 1.6%. Yeah, consumers are spending again all right. Consumer spending is 70% of the U.S. economy.

CPI was out this morning and prices were supposedly down 2.1% year over year. Responsible for most, if not all of the drop, were energy prices which were down more than 28%. Oil peaked last July at $147 a barrel, then dropped sharply until hitting $33 a barrel in December. Going forward the current oil price compared to last years is going to turn from a huge drop into possibly a big gain. Expect CPI figures to start rising in the fall as a result.

The industrial production figures are out later this morning and after dropping 17 months in a row are expected to be up. While this is hardly surprising, expect the press to claim it indicates recovery. This is like saying a stock that dropped 17 days in a row and then goes up on the 18th day is rallying.

New numbers were released this morning on the real estate market. At the end of the second quarter, 32.2% of all U.S. mortgaged properties were under water. This unbelievable huge number was actually down slightly from the 32.5% at the end of the first quarter. The real estate industry declared that this was "great news". While all of these mortgages are potential future foreclosures, it is currently predicted that the U.S. foreclosure rate will peak at only 4%. If the U.S. government pays off the mortgages for the other 28%, and I wouldn't put it past them, this could happen.

Essentially any good GDP numbers will be the result of government injections into the economy. This is like a company that borrows a million dollars including the million dollars as part of its earnings. Government boosting of GDP on borrowed or printed money should not be included in the figures (don't assume that reform is ever going to be made). In these circumstances, when the programs that boosted the economy end, GDP falls right back down. This is exactly what happened in Japan in the 1990s and early 2000s. The economy stayed in the doldrums for two decades.

NEXT: Japan Climbs Out of Recession ... Again

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


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

The Non-Stimulating Economic Stimulus Plan

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

Our Video Related to this Blog:

President Obama was defending his economic stimulus plan over the weekend in a radio address and in an op-ed piece in the Washington Post. He rejected calls for a new stimulus package. In a really eye popping statement in the Post, Obama stated that his stimulus program "was not expected to return the economy to full health, but to provide a boost that would stop the free fall." Now, that's a real ambitious goal! Left unanswered was, what is being done that is expected to return the economy to full health?

The Obama stimulus plan has a number of components and it is questionable how economically stimulating most of them will be as is. The first phase of $288 billion in tax cuts has mostly been implemented. The result? The U.S. savings rate went up significantly. Those people who didn't save their tax cut money, paid down their personal debt. The money didn't go into the economy. So much for that part of the stimulus plan. Tax cuts for stimulating the economy are more of a Republican idea though. Why they were the cornerstone of a 'change you can believe in' Democratic economic program is a good question.

Other components of the $787 billion stimulus include major increases in Medicaid spending, about $48 billion in highway and bridge construction and billions more to boost energy efficiency, shore up state budgets, and increase educational spending. How increasing Medicaid spending boosts the economy is beyond me. This type of spending is a drag on the economy. Bailing out state governments (the plan is not exactly doing a good job on that one so far based on what is happening in California) also is not going to stimulate the economy. It indeed might keep the economy out of free fall however. As for the alternative energy component of the plan, this is something with long term economic potential, not short term. The Democrats recent attempts to keep energy prices low by having the CFTC manipulate the market are going to undermine this part of the stimulus program because alternative energy will be too relatively expensive to be economically viable. The one component of the plan that would both stimulate the economy in the short term and long term is the money for fixing the U.S. transportation infrastructure. This accounts for only 6% of the plan's spending.

There is also no reason to think that the plan should be having any effect by now anyway. Only $60.4 billion of the non-tax component has been spent so far. As reported in the Wall Street Journal this weekend, the White House isn't changing its goal of spending 70% of the stimulus funds by September 2010 (yes that is 2010, not 2009). And people are wondering why the stimulus plan doesn't seem to be effective so far. I think I have the solution! Money spent next year can't possibly stimulate the economy this year. While this may seem obvious to anyone who isn't in a coma, it seems to have alluded the political establishment in Washington.

We are now in the 20th month of the current recession, which makes it a post World War II record breaker for the U.S. The previous longest recession was 16 months. Based on monthly statistics there is no evidence that the decline is going to stop any time soon. When the negative numbers turn positive is when recovery is taking place, not when they become less negative. Despite this Obama stated in his weekend messages that "unemployment tends to recover more slowly than other measures of economic activity", implying that recovery is taking place overall. This is not happening, things are only get worse at a slower rate. Of course, this is like saying we are sinking into a depression slowly instead of quickly. According to his Washington Post article, this seems to have been Obama's goal. With success like this, who needs failure?

NEXT: Government Sachs - Earnings and Market Manipulation

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.

Economic Statistics are Yesterday, Stock Prices are Tomorrow

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

Our Video Related to this Blog:

The Fed Beige book was released yesterday and the media reported that it saw a glimmer of hope for economic recover in the U.S. That glimmer is not yet showing up in the economic statistics, which are gloomy worldwide not just in the U.S. However the economic statistics are backward looking and usually dated on top of that by the time they are released. While the report may say March, those numbers really might be from February (or even January). Reports of Q1 activity might actually be data from Q4 at the end of the previous year (this became glaringly obvious in the 3rd quarter of 2005 when hurricane Katrina devastated the U.S. economy and the GDP figures for the quarter then came out higher than had originally been expected, but the 4th quarter GDP was much lower). People get confused when the stock market is already going up when the news is at its worse, but this makes perfect sense. The economic news you are seeing may be from two quarters in the past, while the market is being priced for what it it thinks is going to happen two quarters in the future. When making investing decisions you too should always look forward.

To make investing even more difficult for the average investor, the media constantly inaccurately states that the stock market (or oil market or some other market) can't go up until the economy improves. Historical analysis indicates that this is simply not true. Liquidity drives stock prices. The more money available for buying stocks, the more the market goes up - and this can happen when the economy stays in bad shape for a long time. Liquidity almost always revives the economy as well so eventually a recovery takes place there too (a hyperinflationary depression would be the one exception). The amount of liquidity being pumped into the financial system currently is massive by any historical standard. This is going to be reflected in the stock market first and much later on at Starbucks, where you will be paying $50 for a cup of coffee.

No matter how bad things are, markets also can't go down forever. Eventually there comes a point where everyone who is going to sell has sold. When that happens one little piece of even insignificant good news can drive the market up suddenly and sharply (look for this behavior in the natural gas market in the future). This type of rally is short-covering or if it takes place around an important support level (it doesn't have to) will be called technical. For extremely oversold markets like the one we have now, a rally to the 200-day moving average is common. You should certainly consider taking profits around that level. Also watch for stocks or sectors with a lot of stocks that manage to break through and stay above the 200-day. These are the leaders for the future.

History (something completely unknown to most U.S. financial reporters) tells you a lot about how to successfully make money in the market. Go back and read the news from June 1932. You will see the worse economic news imaginable. The U.S. economy and banking system were in total collapse. And the banking crisis didn't finally bottom until the spring of 1933, when many insolvent banks were closed down during the banking holiday, and the system wasn't stabilized until the implementation of deposit insurance in 1934. Should you have bought stocks in July 1932? If you did, you would have made around 100% in a few weeks.

NEXT: Bull Markets Climb a Wall of Worry

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.

Geithner Talks, Market Drops ... Again

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

Our Video Related to this Blog:

Treasury Secretary Geithner appeared on Face the Nation on Sunday. Stocks in the U.S. are selling off this morning (even though there was a decent rally in Asia last night). Stock selling seems to be the most likely response whenever Geithner speaks and anyone long the market should worry whenever Geithner's mouth is about to open. The interview dealt with the administration's latest imbroglio, the attempt to force GM into bankruptcy and how well the various current bank bailouts are going. Geithner did state, "we want greater lending". He didn't come up with any reason why this might happen.

When Geithner was asked whether the government will force banks to sell their toxic assets to improve conditions for lending, he said that "banks have a large incentive to clean up their balance sheets." A news item released in Europe (please note that this news was not originally published in the U.S.) last Thursday certainly brings that into question. It was reported that a number of large banks including Citigroup, Goldman Sachs, Morgan Stanley, and JP Morgan Chase were considering buying toxic assets to be sold by rivals under the U.S. Treasury’s latest one trillion bailout plan. The purpose of this plan is of course to get toxic assets off the bank's books. Nothing in the law apparently said the banks couldn't participate in the this free money government give away. So of course, they want the goodies too. The result of this congressional oversight could be a huge amount of government spending that results in just moving the toxic assets around the banking system instead of getting them out of it. Geithner also made it very clear in the interview that Treasury's "obligation is to apply the laws passed by Congress".

As for GM, Geithner stated multiple times that "GM is going to be part of this country's future." He followed up with "We want to see a strong automotive industry emerge from this recession," , and added that the government must be sure that GM "can emerge strong enough without having to have government help on an ongoing basis." As to whether GM will have to file for bankruptcy protection, Geithner said "there's a range of options. They've made some progress on restructuring but they're not there yet." What was not stated in the interview is what would the costs be of GM going bankrupt versus it being bailed out.

Bailing out GM will probably be many, many times cheaper than letting it go bankrupt. But hey, when dealing with taxpayer money, why not consider the most expensive option possible. The much higher costs of not bailing out GM are a consequence of the government already having bailed out the banks and the need to increase those bailouts if GM fails. Although the auto companies have been badly managed for years, the idea that the U.S. government knows better about how the auto industry should be run is ridiculous. How they've handled the bank bailouts is a good indication of just how much the government knows about anything to do with business.

NEXT: How to Handle Earnings Season

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

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

China's Trade Gap and the Global Economic Future

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

Our Video Related to this Blog:

China's import/export figures for November were released today. Both had significant declines. Year over year exports fell 2.2%, while only last month they were up 19.2%. Imports fell even more, declining 17.9% after being up 15.6% on the year in October. The Trade Surplus swelled. The turnaround was dramatic to say the least and gives the appearance of an economy falling off a cliff. The last time China's exports fell was in February 2002.

The sharp fall in imports is perhaps more worrisome than the export drop, even though the Chinese economy is export driven with internal demand being weak and an undeveloped component. As a manufacturing economy which imports a lot of the raw materials that it needs to produce the items it exports, large drops in imports can mean a lot less will be produced in the future. Falling prices of commodities could account for much of this drop however. Regardless, lower imports imply significant weakening is taking place in the commodity producing economies that supply China. On the other hand, lower exports imply weakening is accelerating in the world's developed economies that buy China's finished goods.

In case you might find these figures worrisome, the Wall Street hype machine has been out in full force this week to bull up expectations about the U.S. economy and stock market (you should always worry when this happens). Headlines like, "Worst of the recession upon us, forecasters say" and "Stocks most undervalued since 1974" are just some of the many examples that I have seen lately. The optimistic forecasters all work for Wall Street firms of course and even the top ranked are pretty sure that things will be getting better soon (by the way, being a top ranked Wall Street economist is an honor similar to having the best vision in the school for the blind). I particularly liked the article I read quoting a well-known investor about how it was a good time to get into the stock market. You had to look toward the end of the article to see that he was down 58% for the year and his judgment about the market had obviously been completely wrong lately.

All of the recent press also shows that Wall Street is universally in favor of the Fed lowering interest rates further (which would make the New York Investing's prediction of ZIRP - zero interest rate policy - a reality) and "flooding the economy with money". This of course would benefit the big Wall Street banks and brokers by lowering their costs and increasing their profits. And, yes the economy would likely recover for a short time before it drowned in the wave of inflation that will inevitably followed these actions.

NEXT: Unemployment - Truth Worse than Even Government Reports

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

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

The Latest Washington Free Lunches

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

Our Video Related to this Blog:

The U.S. stock market rally continued yesterday, with metals, steels and other infrastructure plays frequently having double digit rallies from usually extreme oversold conditions. What set off the rally was president-elect Obama's announcement over the weekend of the largest infrastructure-spending package since the 1950s to stimulate the U.S economy. The plan to upgrade America's deteriorating bridges and roads, increase energy efficiency in buildings, computerize health records, and increase use of broadband is certainly laudable and economically constructive unlike the visionless money-wasting programs of the historically incompetent Bush administration. While this lunch may be a lot tastier than what has been dished out in the last 8 years, the bill is still going to have to be paid one way or the other however.

An examination of the federal government's record so far in handling the housing crisis (which I would like to remind you that it helped to create and encourage) indicates that government action in that arena has so far been ineffective. Before the credit crisis U.S. foreclosures were running around a million a year. It looks like they will be about 2.25 million this year even after several government programs were instituted to limit the problem. A study just released by the Comptroller of the Currency indicates that over half of borrowers risk losing their homes again only six months after their loans have been renegotiated to lower monthly payments. Even worse, the government through the FHA is once again encouraging lenders to provide these same type of 'bound to default no matter what' loans. A recent Business Week cover story, "Subprime Wolves are Back" reveals that the FHA is supporting 100% insured loans (the government picks up the tab when they go bad) through mortgage lenders with spotty and even criminal records.

Meanwhile the Auto bailout proceeds in Washington. The current figure being discussed is $15 billion, which should stave off bankruptcy for the big three until sometime in the Spring of 2009. After that of course, another bailout will be needed and probably another and even another as well. The idea of a Car Czar is catching on adding another bureaucratic layer to an industry that is drowning because of its own bureaucratic sludge. Expect the auto bailout figures to rise next year, just as the banking/broker bailouts will. Add these figures to the up to one trillion dollars in the Obama proposed infrastructure spending - or at least that's the initial figure (pick whatever multiple you like to come up with the actual one).

It is my belief that all of these government programs and the ones that follow will indeed save the economy and once again make it robust, at least for awhile. It is not possible to spend almost unlimited amounts of money without causing inflation. When the spending is coming from essentially printing the money being spent, you can add major currency devaluation and the possibility of hyperinflation. Yes, we will get out of the frying pan, but we will wind up in the fire.

NEXT: China's Trade Gap and the Global Economic Future

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.

Economic Predictions for 2009

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

Our Video Related to this Blog:


Last night in its December 4th meeting, the New York Investing meetup released its economic predictions for 2009. The talk began with a review of the 2008 predictions made at the Dec 12, 2007 meeting and published on the website that day (can be found in the file section in the file, "Japan 1992, U.S. 2007", see: http://investing.meetup.com/21/files). All the predictions made for 2008 were accurate at least to some degree, with the prediction of recession and and government bailouts for financial institutions being particularly spot on. If the 2009 predictions are equally accurate, it's going to be a very rough year.

It is our belief that the economy next year will descend from recession to depression (this is no official declaration for depressions as there is for recessions). As part of that scenario, unemployment is likely to rise toward and possibly into the double digits (depends on how much the government fudges the figures). Bankruptcies will increase dramatically, particularly for retailers, auto related companies (suppliers, dealers, etc.), home builders, and small businesses and individuals. Shrinking consumer credit and rising defaults on credits cards will continue to damage the economy. The real estate sector will not recover and the commercial component will suffer more than the residential. The bailout for banks and brokers will continue and additional money will be have to pumped into the failing institutions that have already received government money. Bailouts are likely to be needed for big players, like Morgan Stanley, Goldman Sachs, Bank America, and General Electric. Failures of small and medium banks will rise.

The U.S. government will react to this economic deterioration in 2009 by lowering interest rates even further, essentially instituting ZIRP (zero interest rate policy), and by ballooning the deficit and the national debt. Bailouts will expand beyond companies to states and municipalities. Some municipal bonds are likely to default if not propped up as well. The feds are going to have to support money market funds again next year, just as they have done twice so far in 2008. They may have to bail out the market system itself with the possibility of an exchange failing (there have been rumors of trouble at COMEX for some time now). In general, there will be some shift toward bailouts being focused on programs that help individuals rather than corporations, which received over 95% of bailout money in 2008.

Things don't look any better on the International front either. 2009 will be the year of global recession, with simultaneous recessions in the U.S., the Eurozone, Great Britain, Japan, Australia and a number of emerging economies. China will be in danger of political instability because of contraction in its manufacturing sector. Countries that export a lot to China, such as Japan and Korea and commodity producers such as Brazil will see damage to their own economics because of China's problems. In Europe, it looks like Great Britain will be the hardest hit of the major countries. Some smaller countries, such as the Ukraine, Hungary, Romania, Latvia and Estonia could see their economies implode just as happened in Iceland this fall. Overall, the rest of the world will react to the economic crisis by lowering interest rates and 'printing' large amounts of money just as we will be doing in the U.S.

While things look dire on a number of fronts, that doesn't mean there aren't many ways to make money in the current environment. People tend to focus too much on the risks in such scenarios, instead of the opportunities. The bigger the crisis, the bigger the opportunity should always be kept in mind. Winners always keep both in balance and keep an eye out for profitable investments when others are too worried or too fearful to do so.

The notes for the talk can be found at: http://investing.newyork.com/21/files in the file, "Economic Predictions for 2009".

NEXT: Brother, Can You Spare a Job?

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.

Trojan Horse of Earnings Surprises

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

Our Video Related to this Blog:

Last spring Ford reported an unexpected profit. Even though this was inconsistent with almost all other information about the auto industry at the time,which was indicating serious collapse, the press trumpeted Ford's superior performance and that happy days were here again for the company. The stock shot up. Billionaire Kirk Kerkorian who had begun buying Ford stock in early April, announced he was willing to buy another 20 million shares at $8.50. The stock closed at $1.72 yesterday. The auto companies are now fighting for their lives trying to get desperately needed bailout money from Washington to prevent impending bankruptcies. Shareholders could get wiped out.

This morning Hewlett Packard announced surprisingly good earnings. This also seems inconsistent with reports from the rest of the industry. Intel, which has a broad international market similar to HP's was gloomy in its outlook in October. Nevertheless, HP stock shot up 15% in premarket trading and this helped prevent a drop on the open that could have sent the indices to new lows. HP's justification for its better than expected profits is that it sells printers and computers all over the world and this insulates it from economic problems in the U.S. An interesting statement considering that Intel and many other tech companies can say the same, but they are either already having problems or are negative on future business prospects. Unfortunately, the 'magic' that HP is using to produce its great numbers can't be deconstructed yet, since the full details will not be released until November 24th (Thanksgiving week when many traders in the U.S. will be away).

U.S. stock indices are once again scrapping along the bottom. All the gains from last Thursday's sudden explosive and still unexplained turnaround have not yet been dissipated, but they could be soon. A pattern of a big rally and then losing the gains in three to seven trading days seems to be the current norm. All the major indices have made three passes around their lows so far. The Nasdaq and Russell 2000 have made succeeding lower lows, while the S&P 500 tried to put in a double bottom and then made a lower low last Thursday. The Dow put in its low so far on October 10th and then has been trying to put in a double bottom subsequently. The technical picture has been improving somewhat, but in a major bear market like the one we are in, the technicals should look really good before you can put any store in them. Lows so far are 7774 on the Dow, 819 on the S&P and 1429 on the Nasdaq.

The current drama going on about the proposed auto bailout in Washington should be watched carefully. A bankruptcy filing for one of the major auto companies would be as devastating to the U.S. economy as Lehman's filing was for the stock and fixed-income markets after it took place in mid-September (the Depression era equivalent was when the Fed refused to bail out the New York Bank of the United States and this caused a chain reaction of bank and business failures throughout the economy). The lame-duck two month period between the presidential election and the new administration is a risky one for both the economy and the markets. No matter what happens, little government action should be expected.

NEXT: PPI and CPI - Don't Get Excited Just Yet

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

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

The House of Cards Economy

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

Our Video Related to this Blog:

Housing continues to deteriorate. There are now 12 million homes in the U.S. with mortgages that exceed their value. This pool of houses which is particularly vulnerable to abandonment and foreclosure represents almost a quarter of all mortgaged residential properties . By the end of 2008, it is estimated that there will be a million bank owned properties for sale, which would represent a third of homes on the market. The situation is already much worse in trend leader California, where over 50% of existing home sales were foreclosed properties last month. Median prices there have dropped 34% from the high so far. The rest of the U.S. could follow California, although increased government efforts to prop up the housing market are trying to prevent further erosion.

Last quarter 766,000 U.S. home owners received at least one foreclosure notice. Only six states accounted for a majority of foreclosure activity - Arizona, California, Florida, Michigan, Nevada, and Ohio. The last four of these states are battlegrounds in the presidential election and Arizona would be too if McCain didn't represent it in the senate (nevertheless McCain's lead in the polls there is surprisingly small even though Arizona is one of the states most likely to support a Republican candidate for president). Foreclosures were worse in the beginning of the quarter and the rate even declined by 12% in September. While it looks like the number of foreclosure notices will be lower in the future, this won't be taking place because of improvements in the housing market.

The rate is being lowered by new laws have been enacted in a number of states to delay the repossession process and the FHA is attempting to renegotiate loan terms for a number of mortgage holders at risk. Foreclosure statistics are indeed very much affected by the ease of foreclosure which varies by state and should not be considered as an absolute indication of the strength of a state's housing market. New York for instance currently has a low foreclosure rate because it is necessary to go to court first and this means a foreclosure can take well over a year, longer if the judge doesn't wish to be cooperative. The FDIC is also trying to delay or prevent foreclosures. The first thing they did when they took over IndyMac was to stop all foreclosures and they are continuing to do so.

Delay does not mean preventing the inevitable however, it usually only means it only takes more time to get there. U.S. housing was in a bubble and prices became way extended on the upside. They are going to have to come down at least to the long-term mean - and we still have a long way to go to get there - before a sustainable recovery in real estate is possible. This will be an important precondition to a healthy economy as well. A look at the past suggests this linkage. Housing prices fell approximately 50% nationally in the U.S. between 1930 and 1940. The economy wasn't in such great shape then either.

NEXT: Black Friday Panic Grips World 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.