Don't Confuse Inflation with Economic Growth

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.


While U.S. government generated data claims inflation is tame or non-existent, industry reports strongly contradict this view. The ISM reports on the state of U.S. Manufacturing and Services in March are indicating a great deal of inflation. Higher prices make the ISM data look better, as is also the case for the retail sales numbers issued by the government, but they are not the same as economic growth. Mainstream media reporting generally ignores this important difference.

The CPI figures for February, the latest available, had consumer inflation as zero month over month and up only 2.1% from the previous year. The low numbers reported in the statistics are used to maintain the Federal Reserves claims that inflation isn't a problem (cynics claim that it is the other way around). But industry can't be so cavalier about its statistics because if it has to rely on them to make business decisions. Industry group ISM - Institute of Supply Management - reports have been indicating inflation for nine months now.  Frequently the strongest component of the reports has been 'Prices Paid'. In the March report, 'Prices Paid' was at 75.0 and was up 8.0 from February.  No other item was growing as fast as prices. In the ISM reports, 50.0 is the dividing point between expansion and contraction. A number like 75.0 indicates very strong expansion. Anecdotal comments in the report corroborated this view, with one of the respondents stating, "We are also seeing dramatic price increases."

The ISM Non-Manufacturing, more commonly known as Services, report for March also had 'Prices Paid' as the fastest growing component. The number was a strong, but not out of control, 62.9. While inflation was pumping up the overall number in the Services report, the Inventories, Supplier Deliveries and Employment components were bringing it down because they were still contracting. Service employment has now contracted for 27 months in a row according to the ISM. The government's Non-Farms Payroll report last Friday indicated that the service component of the private sector added approximately 82,000 jobs. Apparently the ISM can't find any of them.

While the mainstream media has continually been reporting that the U.S. economy is recovering, investors shouldn't consider this to be of particular significance. Reports of an improving economy always take place after severe downturns. They may or may not be accurate. If you went back and looked at U.S. news coverage during the 1930s recession, you would be able to find a number of stories about how the economy was getting better and showing evidence of recovery. These reports went on for many years. After more than a decade of misplaced optimism, the U.S. economy finally did recover thanks to World War II.

Disclosure: Long oil

NEXT: Inflation Denial Won't Keep Prices Low

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.

Markets Roller Coaster Ride Powered by Media Hype

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.

Our Video Related to this Blog:

Yesterday, stocks in the U.S. went on an a roller coaster ride that saw a steady significant move up, followed by an almost vertical descent (which included a 30 point drop in the Dow in just one minute), then a gradual climb back up into a positive close. The European Central Bank seems to have continued interfering in the currency markets (in one way or the other) by supporting the euro behind the scenes and this is what caused the intraday drop in the stocks. One asset though managed to stay in positive territory and gain technical strength yesterday - gold. More hairpin turns and sharp up and down moves should be expected for awhile. The mainstream media seems intent on publishing stories that will keep the volatility going.

Spot gold closed at $1060.60 (up $14.60) at the 5:15PM end of Globex trading yesterday. It broke through the $1050 resistance level and stayed above it all day. Gold traded as high as $1064.00. It then got as high as $1066 overnight on news that the IMF sold 200 metric tons of its gold to India (the price of course dropped the moment New York trading opened). The IMF board voted to sell 403.3 metric tons of its 3,217 tonne gold holdings on Sept 18th after telling the market multiple times over two years (each time driving the price of gold down) that it was going to do this. It was widely believed China would buy the entire amount of the IMF gold for sale using this as an opportunity to get rid of some of its massive dollar reserves. China stupidly didn't do this however. It might buy the remaining 200 tonnes of IMF gold or any number of Gulf oil states could. In general, gold is leaving the central banks for Europe and moving to the central banks of Asia.

Gold went up yesterday in U.S. trading because of inflation concerns. The ISM Manufacturing report for October came in at 55.7, up from 52.6 in September (above 50 indicates expansion). The strongest of the 10 components of the report? - Prices Paid, which is an inflation indicator. This number came in at 65.0, up from 63. 5. It was the highest number in the September report as well. While inflation was the biggest news in this report, I saw no mainstream media article that even mentioned it, let alone headlined it. Instead stories like "Dollar Falls After Strong Factory Data" appeared and claimed the dollar was going down because of heightened risk appetite, the current fantasy the media has spun to take investor's attention away from inflation. This article did hint at inflation though in the 18th paragraph (most people don't read to the end of articles), when it mentioned that a flood of liquidity from central banks might have something to do with the way the market is reacting.

Media coverage reached even lower levels this morning. The glaring headline, "U.S. Stock Futures Drop Sharply", could be found many places online. When I clicked on a major financial website's version, an article with a different headline appeared, " U.S. Stock Futures Off Lows ....". People who didn't click wouldn't know the news had changed though. Traders frequently only see headlines. What was the 'sharp drop' in futures? The Dow was down 61 points, the S&P 500 down 7 points and Nasdaq down 7 points - completely ordinary meaningless moves.

There is risk for stocks today because the euro had a sharp drop overnight after the Australian central bank raised rates by a quarter of a point to 3.5%. Australia was the first central bank to start raising rates last month, which is one reason the Australian dollar is so strong. This move should be more threatening to the U.S. dollar than the euro however, but the trade-weighted dollar is rallying on the euro sell off. Ironically, this could damage U.S. stocks the most because if you check you will see their best correlation has been to movements in the euro since last March (the euro represents over 50% of the trade-weighted dollar). Gold seems to have been hardly impacted by the currency move at all. Traditionally gold and the euro should be moving together and the stock currency relationship should be more tangential.

As if the first two days of the week aren't exciting enough, the end of the week will see the U.S. monthly employment report. I would also like to remind everyone that this is the beginning of the month and the first four days of trading should be positive. At the moment it's hard to say if the bears or bulls will win out. It is easier to predict a lot of volatility, which is a classic sign of a top.

NEXT: Gold Rockets Higher

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.

Inflation News Sends Gold Soaring

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 ISM Services Index was released this morning and it came in at 48.4, which indicates only a slight contraction. While the mainstream media put the usual bullish spin on the news, it was actually nothing short of disastrous. One component was overwhelmingly responsible for the improvement from last month - Prices Paid. Prices Paid is a measure of inflation. It came in at an eye popping 63.1 in August versus 41.3 in July. The biggest increase in the Manufacturing Index yesterday was also Prices Paid (new orders was a very close second though, there were no close second in today's Service report). In the manufacturing report, prices paid was 65.0 in August versus 55.0 in July. None of the ISM reports are adjusted for inflation, just like most of the government's economic reports. In both cases, higher inflation as opposed to better economic activity can make the numbers look better. Financial media usually fails to mention this.

Spot gold reached $987 this morning. It is approaching once again the key $1000 breakout level. Spot silver almost reached $15.80, just below important resistance at $16. Gold has traded just over $1000 twice. The first time was in March 2008 and the second time in February 2009. This key level was reached at the end of gold's bullish seasonal period which ranges from August to February. This time the $1000 level will be reached at the beginning of the strong seasonal period. Expect silver to follow gold up. Once it breaks above $16, it will head toward $21.

While you would think that the U.S. dollar would nosedive on this news, it was down only slightly from yesterday's close of 78.38. After dipping just below the 78.33 breakdown level, it started rallying and is now up. This illogical trading of the dollar has been common since the Credit Crisis began. Why would traders rush to buy it, when the currency is constantly being debased by the central bank? They wouldn't, at least not voluntarily. Nations, including the United States, have a long history of trying to maintain the value of their weakening currencies by manipulating the market. The manipulation always fails in the end however.

Fed chair Ben Bernanke has said over and over again that there can't be inflation because there is spare capacity and slack in economic production. While he may be an expert in the U.S Depression, he apparently never studied hyperinflation where just such a scenario is common.
Bernanke has also been repeatedly wrong in everything he has said and done. For those who would like a video review of Bernanke's appalling record, click on the link below:
http://www.youtube.com/watch?v=HQ79Pt2GNJo

NEXT: No Recovery in Jobs

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.

Synchronized Contractions Give Birth to Global Recession

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:

Recently released manufacturing numbers in the U.S., Europe, and Asia are off the charts. Unfortunately the part of the charts they are off is the downside. While the media was trumpeting the biggest global expansion ever last year, the New York Investing meetup pointed out that every economic expansion in history has been followed by a contraction and therefore the biggest expansion ever was likely to be followed by the biggest contraction. The most recent figures for manufacturing activity show that this is exactly what is taking place.

In the U.S., the ISM fell to 36.2 (anything under 50 indicates contraction), the lowest since the recession of 1982. The Prices Paid component fell to 25.5, the lowest since 1949. Falling commodity prices were blamed for the sharp drop. The Order Backlog component was the lowest ever. Manufacturing in Europe isn't in any better shape. In Britain, the Chartered Institute of Purchasing and Supply index fell to 34.4. The VTB Bank Europe Index for the Eurozone including Russia fell to 39.8. In Asia, two purchasing manager surveys in China fell to 38.8 and 40.9 respectively. The Yuan fell limit down on the news. As further corroboration of a global contraction, the most recently released semiconductor sale figures indicated a drop of 2.4% in sales year over year.

The markets didn't react kindly to this plethora of bad economic reports. As of this writing, NYMEX oil has dropped as low as $50.76. The markets in Europe had crash level drops on the day, with the exception of the FTSE in Britain, which missed the cut off by a hair. In the U.S., the Nasdaq and S&P 50 are trading at crash levels so far. This is taking place after the biggest up week for the U.S. indices since the mega-bear market in 1974. Last week the S&P 500 rose 12%, the Nasdaq 11%, and the Dow 9%. Too much, too fast is never sustainable in stock market action and today's trading is showing that once again the validity of this rule.

Retail reports for Black Friday aren't much to cheer about either. While sales supposedly went up 7.2% from last year, surveys indicate that 70% of shoppers purchased only deeply discounted items. So sales might hold up, but retail profits are likely to plummet. The desperation for bargains was so acute that a Walmart worker on Long Island was trampled to death. In bad economic times, the public's actions can indeed become quite ugly.

NEXT: NBER Admits that New York Investing Was Right

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.