Financial Non-Reform Won't Save the Market

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


Two years after the global financial meltdown, details of the so-called Financial Reform bill meant to reign in the excesses and abuses of Wall Street have finally been worked out. Former SEC chair Arthur Levitt described the bill as having been "bled dry of every meaningful protection for investors". As the senate was fiddling around with its usual back room deals and sweetheart arrangements for the special interests, evidence of further deterioration of the U.S. economy and global financial system mounted.

U.S. GDP for the first quarter was revised downward again today. Official figures now have it 2.7% and the reason cited for the drop was less consumer spending than originally thought. Before the Credit Crisis, consumer purchases were responsible for 72% of the economy. Because of high unemployment consumers have less income and they also have less access to credit because banks have reduced lending. Where consumers are getting the money from to increase their spending by any amount is a mystery apparently known only to statisticians who calculate the GDP. Moreover todays downward move of the GDP looks like it is a precursor to much bigger drops that will be taking place later this year. Leading indicators from the ECRI, which predicts the economy six months in advance, have turned negative.

While U.S. GDP is slowly crumbling, problems with the global financial system continue. French sovereign debt has come under pressure today. Credit default swaps for Greek debt now indicate Greece is the second most likely country in the world to default - only quasi-communist Venezuela is considered to have worse finances. Greece has a very small economy though and yet problems there have managed to rattle world markets. Investors should ponder the impact of a default in larger Spain or even much larger Italy.

Problems in Europe have caused capital to flow into the U.S. dollar and treasuries, a common response when the financial system is stressed. Interest rates on two-year treasuries just fell to 0.63%, only a tinge above their all-time low of 0.60% at the height of the Credit Crisis. Is the market telling us that the current eurozone crisis is just as bad as the 2008 global meltdown?

After peaking in late April, the U.S. stock market has been declining for the last two months. Both the S&P 500 and Dow are on course for giving a bear market signal next week. The stock market itself is a leading indicator and should be turning down around six months before the economy does. The Financial non-Reform legislation just passed by congress is not going to help. It would not have prevented the Credit Crisis meltdown, nor will it prevent the next meltdown. Investors need to realize that the possibility of another 2008 exists and it could even happen later this year.

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.

Withdrawal of Liquidity Threatens Second Global Meltdown

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.


A global market sell off began today, February 4th, when the British Central Bank announced that it was calling a temporary halt to its quantitative easing (also known as money printing) program to gage the impact it was having on the British economy. This follows the U.S. Federal Reserve's announcement during its late January meeting that on February 1st it would be closing down five of its programs that have been providing liquidity to the financial system. The market rally since March 2009 has been based on liquidity and even a small reduction can cause a market drop, a large reduction can cause a crash.

Major European bourses were all down over 2% on the news. The U.S. stock market sold off strongly. All the major indices - the Dow, the S&P 500, the Nasdaq and the Russell 2000 - were already below their 50-day moving averages and are now almost certain to fall to their 200-day moving averages in future trading. If they don't hold at that level, the bull market that began last spring will be over.

The U.S. dollar rose as is common when the financial system is threatened, as was the case in the fall of 2008. The trade-weighted dollar almost hit 80.00 and has been over its 200-day moving average since last week. It's 50-day is rising and a cross of the 200-day from below would announce a new bull period. The  euro is breaking down even further, despite progress having been made with Greek debt, which has been weighing on it for the past month. The charts indicate that the British pound is entering a new bear period today.

When the dollar starts rising for deflationary reasons, commodities will be hit. Silver gapped down and broke below a lower support line established in 2008 and also fell below its 200-day moving average. Gold then followed and broke below recent support. Expect Gold to test its 200-day, which is around other key support at $1000.

The global market collapse in the fall of 2008 was caused by a massive withdrawal of liquidity from the financial system. The world's central banks stopped it with a massive and unprecedented money pumping operation. This stabilized the system and lead to the rally in stocks and commodities. It did not however fix the underlying problems. It merely neutralized them. The industrialized economies are still heavily damaged and yet to recover, even though the central banks are acting as if they have. This will be their key mistake this time.

In the Great Depression of the 1930s, the U.S. Fed withdrew liquidity from the system as the crisis began and this worsened the collapse. While our current central bankers have learned the lesson to pump money into the financial system initially, they don't seem to realize that they need to continue to do so. They will get the idea sooner or later because the impact of liquidity withdrawal will become more than obvious and a political firestorm will follow if it goes on too long.

It looks like we are beginning the second phase of the great global meltdown. In this phase, central bankers will realize they must continue to print money to keep their economies functioning. Massive inflation is the ultimate outcome of this scenario. If they don't, ongoing recession that can morph into a depression is the alternative. Investors need to shift their porfolios with central banker's policy moves.


Disclosure: No positions.

NEXT: U.S. Employment Report: 617,000 More Jobs Lost in 2009

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.