U.S. Trade Deficit - There's Good News and Bad News

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

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The U.S. Trade Deficit dropped by a whopping 29% in November, one of the biggest drops in history, if not the biggest. Much of the 'improvement' was accounted for by price changes in imports (the numbers are not adjusted for inflation or deflation as is the case for most U.S. government economic reports) Nevertheless, both imports and exports declined significantly, indicating a shrinking global economy. Imports of course dropped much more than exports and this took place because of falling oil prices.

Oil prices (the U.S. is a major oil importer) have the biggest influence by far in determining the U.S. Trade Deficit. The trade deficit overall dropped 29% and oil imports dropped by a similar amount. Based on the average price for a barrel of oil used in the report, oil prices dropped 27% during the month, although the report itself states that 'petroleum prices' fell 32%. Imports of industrial supplies, the category in the report that includes petroleum products and natural gas, fell by 25%. Based on these figures it looks like a little less oil is being consumed by the U.S., but not much. Almost the entire change is merely a change in pricing.

On the flip side of the equation, imports were also falling in November, but that decline seems somewhat more related to an actual drop in trade than a drop in prices. U.S. exports of industrial supplies, capital goods, autos, consumer goods, and food and feed all fell. The one significant rise was in the aircraft category, which jumped 7.1%. This was caused by a strike in Boeing ending and should be assumed to be a one-time event. Drops in imports and exports of services were approximately equivalent.

The average price of a barrel of oil used for the November report was $66.72 a barrel and oil has fallen much lower since then. 'Improvements' in the U.S. Trade Deficit are likely for the next few months because of this. As the price of oil gets to its cost of production, the 'improvements' will disappear however. When the price of oil rises again, the 'improvements' will reverse. The drop in U.S. exports is actually the much bigger story. It was a collapse in U.S. exports that was a key marker of the Great Depression in the 1930s.

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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 Mega Move Up in Gold and Silver

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. 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 posting:

It looks likes gold and silver had their biggest one day move up in history, both in absolute and percentage terms, on Wednesday . The price run up looks even bigger than the one that took place the day the previous commodities bubble peaked in 1980. The underlying picture between then and now is quite different however. While the move in 1980 indicated the end of a major rally, the move yesterday indicates the beginning of a new one.

In 1979 and into the beginning of 1980, gold and silver prices were going straight up in what is termed a blow off top. A huge move up, similar to what took place yesterday, ended the rally and the secular bull market that had been in place for the previous decade. What had preceded yesterday's rally was six months of selling for gold and silver, not buying. From high to low, gold was down 29% and silver 52%. Both had hit major areas of support - 738 for gold and 10 to 11 for silver. Gold then moved up 11.3% (or $90) and silver moved up 14.4% (or about $1.50) from the previous day. The gold miners index, the GDX was up 11.7%. These moves took place on high volume, more than triple the average for the GLD ETF and more than double for the SLV ETF, confirming the bullish picture.

The bullishness was furthermore limited to gold, silver and to a lesser extent oil (up 6.6%) and food commodities (up about 3%) . It was not part of an overall commodities rally, copper was actually down on the day, nor even a precious metals rally. Platinum was up 1.7% and palladium up only 0.5%. This rally was massive short-covering linked to increased inflation expectations and pessimism about the future of the U.S. dollar. The trade-weighted dollar fell 1.4% - a huge one-day move for a major currency. The hyper response of gold and silver to this drop indicates that much of the previous selling had been short selling and not traders dumping their positions as has been repeatedly reported in the media.

While panic buying was hitting the gold and silver market, panic selling was taking place in stocks. All of the major U.S. indices almost hit the mini-crash level of down 5%. Nasdaq came closest with a 4.9% drop on volume 50% greater than average. The Dow had a lesser drop at 4.1%, but it took place on double average volume. The S&P was down 4.7%. Since August 2007, whenever the U.S. stock market has started falling apart, the Fed has come in with some sort of major liquidity injection to prop it up. By last night one of the biggest liquidity injections ever, involving most of the world's major central banks, had been arranged. What a surprise!

NEXT: Central Bank Liquidity Tsunami Returns

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 Inflation Versus Deflation Argument - Part 1

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.

One of the Federal Reserves two major purposes is to provide price stability for the American economy, a goal they chose to abandon in September 2007. While the Fed's interest rate policies after that time were highly inflationary, Fed officials excused their actions by denying that inflation was a problem, making rosy predictions that it would subside, and by assuring the public that they were capable of handling it and taking care of it in case it became a problem. None of this was true of course and the Fed's position increasingly lost credibility as gasoline and food prices skyrocketed in the U.S.

The Fed's biggest cover for its actions was the official inflation figures produced by the U.S. government statistical agency, the BLS (Bureau of Labor Statistics). The method of calculating the CPI (Consumer Price Index) was modified several times during the 1980s and the 1990s, with each modification producing a lower reported inflation number. Essentially these modifications involved reducing the importance in the CPI calculations of anything that was experiencing significant prices rises, thereby automatically lowering the final reported inflation numbers. It was hard for significant inflation to show up in the official government figures given this approach. By May of 2008, year over year CPI was only 4.2% in the U.S. despite rapidly rising energy and food prices during that period.

Recalculating CPI using the 1970s methodology indicated U.S. inflation was more likely around 12% (for more info: http://www.shadowstats.com/), almost as bad as it had been at its height in 1980. It became increasingly hard to convince the public otherwise, when the average U.S.consumer saw regular price increases at the gas pump and in the supermarket. Nevertheless, U.S. media continued to dutifully report the unrealistic official inflation figures as if they were true, helping the Federal Reserve perpetuate the fantasy on which it based its irresponsible monetary policy.

While the Federal government altered inflation calculations to produce the desired numbers in order to fool the general public about current inflation, lying about future inflation could not be done so easily. The augurs of where inflation was going, the money supply, are generally only looked at by the financially sophisticated. To solve this problem, the Federal Reserve simply stopped publishing the broad M3 money supply figures, the most telling number series of all, in 2006. Since many people realize that when a government hides information, its almost always information that would be particularly damaging if known, attempts to reconstruct M3 by private parties began immediately. By the spring of 2008, the reconstructed figures indicated that M3 was growing at approximately 20% (MZM, zero money, or cash and its equivalents was growing at an over 30% rate). The money supply figures indicated that U.S. consumer inflation was likely to peak at a minimum of 20% to 30% sometime around 2011. Depending on future readings, much higher inflation levels were possible.

The U.S. government's long-term misinformation campaign about inflation rates and its secrecy concerning money supply figures apparently didn't provide enough cover for the Federal Reserve. One group of apologists for the Fed (and the Fed had a legion of apologists who were feeding off the easy money gravy train that it was providing them at the expense of the American public) began publishing arguments about the risks of deflation in the U.S and how this justified an even easier money policy. Claiming that deflation actually existed in a period when inflation was getting out of control was by no means a new idea. It was in fact a prelude to some of the worse inflationary episodes in history.

NEXT: The Inflation Versus Deflation Argument - Part 2

For notes related to this talk, please see, 'Inflation vs Deflation Argument' at:
http://investing.meetup.com/21/Files

Daryl Montgomery,
Organizer, New York Investing meetup

For more about us, please see our web site: http://investing.meetup.com/21

All The Glitters Isn't Gold, It's Also Silver

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.

Commodities are priced in U.S. dollars. When the Fed began its rate cutting campaign in earnest on September 18, 2007, it became inevitable that the U.S. dollar would fall. While the value of the dollar goes up and down all the time, this time the drop would have serious consequences. The trade-weighted dollar was hoovering just above all time lows in August and would fall through multi-decade support by the end of September to reach levels never before seen. Since the dollar was hitting all time lows and commodities were priced in dollars, everything else being equal, it was reasonable to assume many commodities would subsequently be hitting all time highs. This is exactly what happened to commodities that were consumer necessities or that were currency substitutes.

The biggest price rises took place in food commodities. Wheat had already started rallying in mid-2007. Once it became clear that the Fed was beginning a new easing policy in mid August, the price of wheat on the charts started to move straight up. By the end of September its price would almost be double what it had been only three months before. Major rallies in soybeans, corn, and rice also occurred taking them to multi-decade or all time highs as well. These rallies in turn showed up in rising global food prices, up 20% for 2007 and 75% since the lows of 2000. While U.S. consumers were paying more at the supermarket just like consumers elsewhere, the Federal Reserve continued it long term policy of generally ignoring rising food (and energy) prices because they were 'volatile'. While food prices can indeed be volatile, a report by Bloomberg News found there had not been a year over year drop in food prices in the United States for at least 40 years.

Like food, energy prices were also not a part of core inflation, so the Fed tried its best to ignore them as well. U.S. consumers unfortunately did not have this option. By the end of September, oil had broken through it's all time high set in mid-2006 and headed toward a $100 a barrel, which it reached around the turn of the year. While this was a new nominal high, it was approximately only the 1980 high adjusted for (official) inflation. Interestingly, the price of gasoline at the pump did not break its 2005 post-Katrina high, when oil was only $70 a barrel, until March of 2008.

Finally, the money-substitute commodities, gold and silver, also had significant rallies. Gold broke its April 2006 high before the end of September, while silver lagged by several weeks. Gold would break its January 1980 nominal closing spot-price high in November and the all-time intraday high of $875 an ounce somewhat thereafter. Gold would reach 1000 in March 2008. Unlike oil, gold was not even near its (official) inflation-adjusted high of approximately $2200 an ounce. While percentage wise, Silver had an even bigger rally than gold, reaching $21 an ounce in March of 2008. This was not even near its approximately $50 nominal price high in January 1980, not to mention its over $130 inflation adjusted high.

For more on this topic, please see notes for the talks, "Thinking Outside the Bucks - Inflationary Investing" and "How to Profit from the Falling Dollar" at: http://invesing.meetup.com/21/files
and our video, "Commodity Investing - How to Profit From the Falling Dollar" at:
http://www.youtube.com/watch?v=IG5zApWcOk0.

Next: Australian and Canadian - the Only Dollars Worth Holding

Daryl Montgomery
Organizer, New York Investing meetup

Please see our web site for more about our group: http://investing.meetup.com/21.