GDP Revision Indicates Recession Isn't Over

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 final report for third quarter GDP was released on December 22nd. The numbers were revised down ... again. According to the latest government figures, GDP grew by 2.2% last quarter. Previously it was 2.8%. Before that, it was 3.5%. Do you note a pattern here? The rosy 3.5% number got the most media attention as the first release always does. Far fewer people pay attention to the final number. Even this number is likely to be revised downward in future multi-year revisions as were the numbers for all of 2008.

There were three major sources of growth in third quarter GDP. In order of importance they were: government stimulus, government stimulus and government stimulus. The Cash for Clunkers program, a government give-away to the auto industry and people who were foolish enough to buy gas guzzling vehicles, added 1.7% to the GDP total. Government backed housing initiatives, including tax credits for home buyers and FHA mortgage insurance, may have added another 1.0%. Those were only two small components of government spending however. Overall, increases in federal spending were up 7.9%. Subtract all of these components and there was negative GDP growth in the third quarter and the recession is ongoing.

While the government spending component of GDP is robust, the consumer and business components are still weak. Since they are essentially most of the real economy, this should be cause for concern. The latest revisions had consumer spending, commercial construction, and business investment (now down 5.9%) as weaker. Consumer spending, which accounted for 72% of the economy before the Credit Crisis, was still listed as up 2.8%. How this is possible with double digit unemployment, record drops in available consumer credit, and a rising savings rate is one of the mysteries of our time. There is no obvious source of money to fund this supposed increase in spending.

The sad state of the economy is evidenced by the business inventory number, if not by the headline GDP number. Inventories dropped by $139.2 billion in the third quarter compared to a drop of $160.2 billion in the second quarter. This lower drop added almost 0.7% to the 2.2% GDP total. Yes, when it comes to inventories, all it takes if for things to get less worse for GDP to go up. Keep this in mind when you see a positive GDP number. Don't assume it means that things are getting better.

Mainstream economists are now forecasting GDP growth in the strong 4% range for the 4th quarter. Meanwhile, the Fed is stating that it is keeping interest rates at zero for the foreseeable future. The Obama administration proposed a new stimulus package less than two weeks ago and the House passed an additional $100 billion in economic aid last week. While the powers that be keep telling the public everything is not just fine but getting better with the economy, their actions indicate that there is still panic on the Potomac. Perhaps they know something that they're not telling us?

Disclosure: Not applicable.

NEXT: The Santa Claus Rally and the January Effect

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.

CIT - Last Minute Reprieve

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:

In a last minute development, commercial lender CIT has secured a $3 billion bailout from its bondholders thereby saving the company from filing for bankruptcy protection - at least for the moment. The rescue includes a $3 billion loan which is not due until 2.5 years from now. $2 billion is going to be committed immediately and another billion is to become available within 10 days. The bailout is supposedly taking place without government intervention (and the moon is made of green cheese). The media is trumpeting that this represents a new phase of the financial crisis and indicates how much things are improving. Don't believe it for a moment.

CIT is going to restructure its debt. Lenders are trying to get $825 for each $1000 worth of notes. There is a billion worth of senior notes alone. The company has established a steering committee of bondholders that will work on drawing up a number of debt swap offers designed to alleviate CIT's debt burden and further shore up the company's cash position. A question everyone should be asking is who are the people who are going to put the money up for this and what is their relationship with the Fed and U.S. Treasury.

Meanwhile a report is out that some of the biggest recipients of TARP bailout funds, including Bank of America and Morgan Stanley, increased their spending on lobbying in the second quarter as Congress began to look closely at revamping the rule system for financial institutions. Fortunately, members of congress aren't known to be for sale. Their votes are another story however.

NEXT: Bernanke Says Not to Worry - You Should 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.

Ron Paul on the Wall Street Bailout Plan - Part 2

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.

Today's Blog: Congressman Ron Paul's insights on the proposed Wall Street bailout

Washington's current approach to today's credit crisis is the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

F.A. Hayek won the Nobel Prize for showing how central banks' manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years [late 1920s], all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the [1930s] depression.

The only thing we learn from history, I am afraid, is that we do not learn from history.

The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

Oh, and did you notice that the bailout is now being called a "rescue plan"? I guess "bailout" wasn't sitting too well with the American people.

The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose (calls to the capitol have been running up to 100 to 1 against the bailout). The very fact that some of you seem to think you're supposed to have a voice in all this actually seems to annoy them.

NEXT: Three Bank Monty - Monday's Global Bank Failures

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.

Pinnochio's Reflection in Washington's Crystal Ball

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:

Dire warnings of a bleak economic future for the American economy have been prognosticated by Fed Chair Ben Bernanke, Treasury Secretary Hank Paulson and President Bush in the last few days - unless of course their proposed emergency Wall Street bailout plan is passed immediately by the U.S. congress. These statements represent a complete turnaround of what the three of them have been saying during the last year and as recently as a couple of weeks ago. This immediately raises the question of whether they were lying then or are they lying now? To be fair, it is possible that Bernanke, Paulson and Bush have not purposefully been lying, but they just don't have the slightest idea of what's going on. Regardless of whether their behavior can be explained by dishonesty or incompetence, they have assured us that if we just follow their lead now, everything will be OK.

The consistent message from the economic triumvirate this week has been that a recession will be taking place in the future along with increased unemployment, home foreclosures, and bank failures unless congress gives $700 billion to the big Wall Street banks. In his testimony on Tuesday, Ben Bernanke bluntly warned of this scenario. He followed up with, "the financial markets are in quite fragile condition and I think absent a plan they will get worse". In his testimony, Paulson suggested that the fallout from the credit crisis would hit almost everyone in the pocketbook unless forceful action was taken.

President Bush in his speech on Wednesday night echoed Bernanke and Paulson's concerns and while requesting the biggest corporate bailout in U.S history made the following obviously insincere statements:

1. "I'm a strong believer in free enterprise ..."
2. "I believe companies that make bad decisions should be allowed to go out of business."
3. "This rescue effort is not aimed at preserving any individual, company or industry."

Like Bernanke, Bush was also worried about the stock market going down and specifically stated that without the bailout, "the stock market could drop even more". But he assured the nation there was no need to worry if his recommended actions were taken because "the plan is big enough to solve a serious problem" and "we expect much, if not all, of the tax dollars we invest will be repaid". If you believe that, I have a bridge in Brooklyn that I would like to sell you.

The reality is that $700 billion is not going to be able to deal with an estimated $13 trillion in toxic debt and that only the most worthless of this debt will be transferred to the government in this bailout. There is no chance whatsoever for the taxpayers getting their money back. Furthermore, the U.S. is already in a recession and the government has been jiggling the figures to hide it and that recession is going to get worse along with unemployment, home foreclosures and bank failures regardless of what bailout package is passed by congress. And you may assume that Bernanke, Paulson, and Bush know perfectly well that this is what's going to happen.

NEXT: This Weeks Largest Bank Failure in U.S. History

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.

Exposing Fannie Mae and Freddie Mac - Origins

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 for this posting can be found at: http://www.youtube.com/watch?v=Ennn4Qq8MUY.

After the market close on September 4th, 2008, it was announced that the U.S. government would likely be taking over mortage giants Fannie Mae and Freddie Mac in what would be the biggest financial bailout in U.S. history. Congress had already passed a bailout bill a month earlier making this action possible. The New York Investing meetup had already predicted that the need for the bailout the previous fall. This topic was raised in the December 2007 meeting and in the April 2008 meeting, Fannie Mae and Freddie Mac were on our list of the dirtiest dozen financial companies.

The origins of Fannie and Freddie were innocent enough and didn't presage their ultimate blowup many years later. New Deal mortage progams actually started with the FHA, which was created in 1934 to insure mortgages that had less than a 20% down payment (most mortgages in the 1920s had much higher down payments). Fannie Mae was then established in 1938 to buy FHA mortgages, creating a secondary mortgage market. For the first 30 years of its existence Fannie Mae had limited impact on the U.S. housing market because it had acess to little credit and significant restrictions on the size and type of mortage it could back. All of that changed around 1970 however.

That year, the U.S. government ranamed the existing Fannie Mae, Ginnie Mae, and then created a new Fannie Mae that would be a quasi-govenment backed company that could purchase riskier mortgages (Fannie's charter allowed it buy even 100% mortages as long as the amount over 80% was insured). The reason for making Fannie Mae a publicly traded company was the government wanted to provide expanded mortgage services, but didn't want the debt on its own books. In tandem with Fannie Mae's creation, Freddie Mac was also created as a GSE (government supported enterprise). Its purpose was to package mortgages into bonds, known as mortgage backed securities (MBSs) and sell them to investors thereby recycling the capital available for mortages. Freddie didn't become a fully traded public company until 1989.

The scope and extent of Fannie's operations expanded greatly in the 1980s and 90s. In 1978, Fannie was allowed to back mortgages for multifamily dwellings. In 1981, it added adjustable rate mortgages to its operations and in 1983, even riskier second mortgages. At the same time, the maximum amount of a mortgage that Fannie could back was also rising going from
$108,300 in 1980 t0 $252,700 in 2000. After 2000, this amount increased at a much faster clip, reaching $417,000 in 2006 and $730,000 for awhile in 2008. By raising the mortgage caps repeatedly, the U.S government created a bubble feedback loop that made the U.S. housing bubble possible - housing prices went up; the amount of a mortgages that could be gotten by a homebuyer went up; housing prices went up again; and the amount of a available mortgage went up again and so on and so on.

Between 2001 and 2007 alone, the amount of mortgages backed by Fannie Mae went from 2.5 trillion to $5.0 trillion. U.S. housing prices approximately doubled as well during this same period. Most amazingly, all of this took place even though one of Fannie and Freddie's major purposes was to increase home ownership for the poor. Acting to constantly support higher and higher U.S. housing prices didn't seem to be a particularly efficacious approach to accomplishing this goal.

NEXT: Exposing Fannie Mae and Freddie Mac - Corruption

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

Government Investment Pools Dry Up

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.

While the downgrades of the bond insurers threatened U.S. municipalities with higher future interest costs, it became obvious in November 2007 that there were far more immediate risks to public finances when there was a run on Florida's Local Government Investment Pool . The run began when word got out that the Investment Pool had exposure to $1.5 billion in defaulted and downgraded SIVs. Florida had to freeze withdrawals to prevent the fund from collapsing. The municipalities that got out early were lucky, all others had to find emergency funding to meet their payrolls for police, firemen, hospital workers, teachers, and other employees.

Local, State and Government investment pools existed in at least 20 states and were essentially special money market funds that bought short-term debt and were set up to get higher yields that would otherwise have been available. Little did they know that these slightly higher yields were being produced by taking on massively higher risk through exposure to subprime toxic waste that the big brokers (Lehman in Florida's case) were more than willing to sell to them. Problems were by no means isolated to Florida either. In the last days of November, Montana school districts, cities and counties withdrew 10% of the total $2.4 billion in its investment fund after the rating on one of the pool's holdings was lowered to default. The state of Maine had invested 3% of it money, apparently on Merrill Lynch's advice, into a fund only two weeks before its credit rating was lowered to junk status. Financial difficulties with government investment pools were also reported in Orange County, California and Seattle, Washington.

While the losses of the Government Investment Pools were certainly serious, were they isolated of were they likely to spread? If these ultra-sophisticated money-market funds got into trouble, wouldn't it be reasonable to assume that the money market funds open to the individual investor might suffer similar problems in the future? By the late fall of 2007, it had already been reported that Bank of America, SunTrust, Wachovia and Legg Mason had taking steps to prop up money market funds that contained securities of possibly questionable worth. And it looked like the formerly safest of investments were in some cases becoming among the riskiest.

Next: Subprime Freezes Over

Daryl Montgomery
Organizer, New York Investing meetup

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

The U.S. Government Goes From Lying with Statistics to Just Lying

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.

In the first Friday of October 2007, the U.S. government released a revision for its employment report for August. It was in this revision that federal government statisticians made a key transition from lying with statistics to simply lying. The original figures indicated a loss of 4000 jobs and that 300,000 workers had vanished from the work force. A month later the workers who had mysteriously disappeared, just as mysteriously reappeared. Instead of a loss of 4000 jobs, there was suddenly a gain of 89,000 jobs. Almost all the newly found jobs were government workers. The government statisticians claimed they had trouble 'estimating' correctly the number of government jobs that were created. Cynics wondered if the same people who had claimed the non-existent weapons of masss destruction existed in Iraq were now working for the Bureau of Labor statistics.

The purposeful fudging of Federal government statistical was by no means a new thing and had been honed to a fine art when it came to producing U.S. inflation numbers that made the people in charge look good (Please see our video on the topic: "America's Perfect Little Goldilocks Economy - Or is it? at: http://www.youtube.com/watch?v=puC4_6OV3p8). For about 25 years, 'improvements' had been added to U.S. inflation calculations that reduced the official reported level of inflation (interestingly no 'improvement' wound up increasing reported inflation). First, instead of measuring the cost of housing by comparing house prices from one period to another, owners-equivalent rent was introduced to measure housing inflation (rents usually go down on a relative basis when house prices go up). While no reputable statistician would use a substitute number for something that could easily be directly measured, government statisticians had no such qualms.

The concept of substitution effects and geometric weighting was then introduced. The idea behind a substitution effect is that when the price of some items goes up, consumers will buy less of it and more of something else. Geometric weighting means the cheaper item gets more importance in a basket of goods and the more expensive item less. This approach lowers reported inflation significantly because items go up in price at different rates and the ones that go up the fastest get less and less importance as they do. The classic example for a substitution effect is hamburger versus steak. Steak becomes expensive, eat more hamburger. So in the case of substitution and geometric weighting, if your quality of life goes down, inflation goes down as well.

The government then introduced hedonics into inflation calculations, where if your quality of your life goes up, inflation also goes down as is does with substitution. In hedonics, if you get a better product (which in an modern economy continually happens for many products), even though you pay the same price, you are considered to have paid less. For instance, if the new car you bought has more functionality than the previous car you bought several years ago, even though the actual price may have gone up, the government will say it went down because the new car is 'better' than your old car. So when hedonics is combined with substitution effects and geometric weighting, essentially no matter what prices you are paying for what combination of products, officially reported government inflation stays under control through statistical trickery. Unfortunately, the money you need to support your lifestyle is determined by the actual inflation rate and not the fantasy government figures.

Next: The Myth About the Trade Deficit and the U.S. Dollar

Daryl Montgomery
Please see the New York Investing meetup web site for more information about us: http://investing.meetup.com/21.