10 Reasons We Are in a Credit Crisis

 

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.

Yesterday's news was about a potential Greek default and it caused a global market selloff. Today,  hopes of preventing a Greek default are causing markets to rally. This alternating news flow is repeating over and over again. Investors should pay attention to the big picture however and not the noise of the day. The important thing to realize is that we are in a second global credit crisis.

Credit crises follow certain patterns, which include: recognition of overpriced financial assets, money flowing into safe havens, increased market volatility, rising costs for financial insurance, and various forms of government action to stop the problem. The specifics of the current credit crisis are below.

1. Government debt is being downgraded. This happened in Italy yesterday, the U.S. in early August and many times in Greece. This is the upfront recognition of the problem, which is almost always widespread public knowledge by the time it happens. In 2008, securitized debt containing subprime real estate loans was downgraded in mass, frequently from the triple A ratings that had previously been given.

2. Global money is flowing into safe haven U.S. treasuries. When yields hit lower levels than a previous credit crisis or all-time lows, this indicates this is happening on a mass scale. U.S. government two-year notes had a yield below 0.15% at one point this September 19th. During 2008, the two-year held above 0.60%. The ten-year yield has fallen below the 2.04% low in 2008 and below the all-time low of 1.95% in 1941.

3. Global money is flowing into safe haven currencies. In 2008, this was the U.S. dollar and the Japanese yen. In 2010, this is the Japanese yen, the Swiss franc, and gold (which needs to be thought of as a currency if it is to be analyzed correctly). The Swiss franc rallied so much that the Swiss stopped it from trading freely. The Japanese have also taken action to try to lower the value of the yen.

4. Stock market volatility has increased enormously. In 2008, there were a significant number of mini-crashes (a drop of 5% or more in one day). These were more common in the U.S. back then. Now they are more common in Germany, but they have been happening here as well. The flip side of mini-crashes is sudden sharp moves up in the market. These are also occurring.

5. Bank stocks are the focus of the big moves up and down in the stock market. U.S. banks and other financial stocks really got hit in 2008 -- a number of the companies themselves went under. This time it's European banks falling the hardest. One-day drops for some major EU and UK banks have been as high as 10%. Bank stocks aren't dropping that much in the U.S., but they are underperforming other sectors like technology.

6. Credit default swaps have hit record levels. Credit default swaps (CDSs) are bond insurance and they became a big news item in 2008 when they rose to unprecedented levels. While CDS rates for Greek sovereign debt have hit records and are rising for the other highly indebted EU countries, they have also hit records for some UK and EU banks in 2011 indicating a worse crisis than in 2008.

7. Major and ongoing bailouts are taking place. The EU had to bail out Greece in the spring of 2010 and then Ireland and Portugal. A second bailout for Greece had to be arranged this July, even though the first bailout was supposed to have taken care of Greece's debt problem. In 2008, the U.S. had TARP and arranged for failing banks to be taken over by stronger banks  (Bank America is now in trouble again because of the legacy loans from the banks it absorbed during this period). Fannie Mae and Freddie Mac had to be nationalized. 

8. Central banks are buying bonds in the open market. The EU has been buying up Italian, Spanish, Irish and Portuguese bonds in order to hold down interest rates in those countries. As long as it has an infinite access to funds, this strategy will work. The Fed began buying U.S. debt instruments in the fall of 2008 during the Credit Crisis. 

9. Global coordinated central bank intervention took place last week. The need for global action is a consequence of the interconnectedness of the world financial system. A major problem in one region (in 2011 this is Europe, in 2008 it was the U.S.) will invariably spread everywhere. Central banks coordinate their activity to try to control the contagion. 

10. The global economy is turning down.  Problems in the financial system impact the real economy and they can turn a shallow downturn into a major one as has happened in 2008. Economic figures throughout the world have flattened and there are some warnings of a bigger drop to come (extremely low consumer confidence numbers for instance). GDP contraction in a number of regions will be the final confirmation that another global credit crisis has occurred. 

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.

Three Crashes and a Second Credit Crisis

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 tech heavy Nasdaq and small cap Russell 2000 crashed again yesterday, August 18th. Nasdaq was down 131 points or 5.22% and the Russell 2000 was down 42 points or 5.90%. This is the third crash for both of them since the beginning of the month. Repeating crashes (drops of 5% or more in one day) were  common during the Credit Crisis in the fall of 2008 and indicate severe stress in the global financial system.

As in the fall of 2008, bank stocks are leading the way down. The only difference now is that bank stocks in Europe are getting hit the hardest, whereas it was U.S. and UK banks three years ago. So far, U.S. markets are holding up better than those in the EU. The Dow and S&P 500 have had only one mini-crash so far. The German DAX has had several. While continental European markets have been hit the hardest, Asian markets have continued to suffer the least from the current turmoil. The Hong Kong markets are being more impacted than those in Japan.

While U.S. banks Morgan Stanley and Wells Fargo were down somewhat more than 4.5% yesterday and Bank of America and Citigroup 6.0%.  This was much better than the 10% drop in Germany's Commerzbank, the 11.5% drop in the Britain's Barclays and the 12% drop in France's 

Société Générale. As of August 18th, the EURO STOXX Financials index was down 38% from earlier this year.

Just last week, French banks were supposedly in trouble, but this was denied by them and one major French news outlet retracted a story that claimed this was the case. Yesterday, the ECB (European Central Bank) said one bank, which it didn't identify, had paid above-market rates to borrow $500 million a day for seven days. Today, it was reported that the U.S. Fed supplied $200 million of liquidity to the Swiss National Bank in the form of forex swaps. These are two separate issues. Switzerland is suffering from a skyrocketing currency (which is going to cause massive loan defaults in Eastern Europe if it continues since many loans there are denominated in Swiss francs), whereas the ECB is trying to keep banks afloat despite the fallout from the Greek debt crisis.

The chances of a full Greek default  (a selective default with bondholders taking a 21% haircut was already part of the second bailout deal reached in July) intensified on Thursday. Finland insisted that Greece provide a cash deposit equivalent to its share of the second bailout guarantees. Four other countries then made similar demands. This of course undermines the bailout by taking away money with one hand that the bailout is providing with the other.

Financial crisis behavior was also evident in the U.S. treasury markets. The yield on the 10-year fell as low as 1.9872 on Thursday, taking out the low from 2008. The two-year treasury has been hitting a series of new lows and has been significantly below its Credit Crisis bottom for some time now. One thing that is different from the 2008 Credit Crisis is that gold is rallying strongly and is in a blowoff. The December gold futures contract hit another all-time high  at $1881.40 this morning before U.S. stocks opened.  Gold has always been a safe haven throughout history and despite claims to the contrary, it will remain so.
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.

Quantitative Easing Has Sent the Dollar Into Free Fall

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 U.S. dollar has been in free fall since the beginning of September. The Federal Reserve acting in concert with the ECB (European Central Bank) is behind the action. Most other countries are seeing rising currencies and this is going to hurt their economies and the American economy as well.

It's become a running joke globally that the U.S. follows a strong dollar policy because the evidence so blatantly contradicts this claim. Things have gotten even worse lately with the dollar-trashing activities of the Fed going into hyper drive in time for the November election.  The trade-weighted dollar (DXY) lost approximately 6% of its value in September alone. It is not coincidental that the Dow Jones Industrials went up more than 10% during the month or that gold hit one all-time high after another. Stock markets rise when a currency is being devalued. All commodities are priced in U.S. dollars, so all else being equal; a commodity's price has to go up when the dollar falls. Rising commodity prices under such circumstances do not indicate a robust economy, they indicate inflation.

A cheap currency is indeed a plus for a major exporter. Currently China is the prime example globally of a economy that benefits a great deal from a currency with a low value. The Chinese yuan (CYB) doesn't really float, it can only have a small change in value during any given time period, so it can remain underpriced. The EU has now joined the U.S. in demanding China let the yuan have a more realistic value. China denies it is manipulating its currency however. If this is the case, it should just let it float freely on world currency markets and the value would remain approximately the same. For some reason, China is reluctant to do this.

Unlike exporters, major importers like the U.S. do not benefit from declining currencies. For more than four decades, the U.S. has followed policies that have destroyed its industrial base. The private commercial sector is now 20% manufacturing and 80% services. A weaker dollar will give more business to the manufacturing 20%, while hurting the service sector's 80% with more inflation. It won't solve the U.S. unemployment problem. At the same time it will damage the economies of exporters by raising their costs for commodities and the prices of their goods. All in all, it's a lose/lose situation.

The Federal Reserve's new quantitative easing program, first announced in August, is what is undermining the dollar and wreaking havoc in global currency markets. The euro (FXE) has recovered to the 1.40 area, but this is also due to the almost $1 trillion Euro-TARP bailout of the EU currency. The Japanese yen keeps rising and hit another multi-year high today. The Japanese monetary authorities have intervened in the currency markets to stop the yen from climbing, but to no avail. The Swiss franc (FXF) broke above parity with the dollar in August. The Australian dollar (FXA) is about to follow the Swiss franc's lead. The Brazilian currency (BZF), one of the weakest on earth for much of the twentieth century, is beating the stuffing out of the U.S. dollar.    

The big drop in the dollar is not likely to continue much longer (although the charts indicate there could be another leg down). It is already causing destabilization in world markets and could lead to another global financial crisis if it does. If Fed Chair Bernanke continues with his enthusiasm for quantitative easing though, the dollar could hit an air pocket and wind up much lower overnight. While the Fed's interest in quantitative easing will probably cool suddenly after the election, it may continue to play its dangerous game of chicken with the dollar until then.

Disclosure: No positions.

Daryl Montgomery
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.

Currencies React to Ongoing Greek Debt Crisis

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 (http://investing.meetup.com/21).


The spread between Greek government bonds and their German equivalent hit a new record high yesterday (April 8th) as new worries of a possible Greek debt default emerged. EU central bank president, Jean-Claude Trichet, promptly moved to calm the markets by stating that Greece is in no danger of default and it does not require a bailout. While we have heard it all before, Trichet's remarks kept the euro from hitting a new low against the U.S. dollar and this may indicate the a temporary bottom is in place.

The latest phase of the seemingly never-ending financial crisis in Greece took place as the ECB (European Central Bank) and BOE (Bank of England) had their rate-setting meetings. Both left interest rates unchanged. The ECB kept its rate at 1.0% for the eleventh month in a row and the BOE kept its rate at a historically low 0.5%. The BOE also kept its quantitative easing target at $200 billion pounds (the figure has been raised a few times) and stated it was optimistic about low inflation going forward. The market seemed somewhat less hopeful with the pound falling below 1.54 per U.S. dollar.

Despite choppy trading in the pound, it did not test its March lows, which had last been seen ten months previously. The Euro fell as low as 132.80 against the dollar, slightly above its low in late March of 132.67. The euro's inability to hit a new low on the latest flare up of problems in Greece is bullish for the currency and indicates a bottom may have been put in. Along with the euro and the British pound, the Swiss franc also did not take out its March low. The Greek crisis has caused money to flow out of the Europe in general, not just the eurozone and this may have come to an end - at least for the moment.

The money that flowed out of Europe went to North America first and this has been bullish for both the U.S. and Canadian dollar. The Canadian has not only risen against major European currencies, but has almost hit parity with the U.S. dollar.  The Australian dollar has also held up well and has been rallying since early February. Market attention is now turning to China with reports that it might revalue its currency upward 3%.

While it looks like we have seen the crisis low in the euro, we have yet to see the final resolution of problems in Greece. The market seems confident that that will occur soon. Resolving the problems with Greek debt is in and of itself not that difficult. Greece represents only 2% of the eurozone economy. What happens with Greece will set a precedent with how debt problems in other eurozone countries will be handled however. Sooner or later the EU will have to do something about Portugal, Ireland, Spain and Italy, the other potential trouble spots in the eurozone.  How the market reacts to this remains to be seen.

ETFs/ETNs for the currencies mentioned in this article are FXA, FXB, FXC, FXF, DXY, and CYB and CNY representing the Australian dollar, the British pound, the Canadian dollar, the Swiss franc, the U.S. dollar and the Chinese renimbi respectively.

Disclosure: None

NEXT:

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.

Will Expanding Euro Crisis Continue to Benefit U.S. Stocks?

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 euro has fallen to levels last seen in May 2009, trading as low as 133.01. A downgrade of Portugal's sovereign debt from AA to AA- by rating agency Fitch has created new weakness for the euro zone currency, as a solution to the Greek crisis still remains elusive.  The British pound, the Swiss Franc and Swedish Krona all traded down more than a percent at one point on the news. Money continues to flow out of Europe in general, not just the euro zone. This has been going on since early December. The U.S. dollar has been the beneficiary, as have U.S. stocks.

The stock rally since last March has actually had two distinct phases, although this may not be immediately obvious by looking at the charts. Both phases are connected to actions in currencies. The U.S. trade-weighted dollar sold off between March and December 2009 and U.S. stocks rallied strongly during this period. This pattern has actually been common since the early 2000s. It makes sense because when a currency devalues, stock market caps in that currency need to rise assuming the real value of a company's assets remain unchanged. This drove the first phase of the rally. The driving force then shifted gears in December with capital fleeing Europe and looking for a home elsewhere. A lot of it wound up in dollar-based assets.

The U.S. stock market rally is not healthy however. The recent rally has been on low volume. Trading volume in the Dow Jones actually peaked last March during the market low and has generally declined since then throughout the entire rally. It's gotten even worse lately. Declining volume in a trend is a strong technical negative. The VIX, the volatility index for the S&P 500, has gotten as low as 16.17 - and this is a very low  (it reached the 90 level during the market sell off in 2008). It can go lower though and traded around 10 during the placid days of 2005 and 2006. The current investment environment is not exactly placid however. The VIX is a contrary indicator and low values are a negative for future stock prices, although it can bottom months before the market falls apart. Moreover, it is not even clear that the VIX has hit bottom.

Precious metal investors should keep in the mind that the price of gold and the euro tend to move together. This is also true of oil, but to a lesser extent. The euro has strong chart support in the 1.30 area and very strong support around 1.25, the low during the Credit Crisis. The trend indicators on the daily chart indicate a new sell off has begun, so a fall to 1.30 is very likely. If that doesn't hold, a test of 1.25 will take place. If the 1.25 level breaks, investors should assume that another major crisis is unfolding in the global financial system and that it could be as bad as the one that occurred in the fall of 2008.

Disclosure: None

NEXT: CFTC's March 25th Hearings on the Metal 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.

Greek Crisis Impacts World Currencies and Gold

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.


News out on March 1st indicates that France and Germany would be willing to buy $41 billion in Greek government bonds to prevent a default. This is not the first scheme to be reported for a proposed bail out of Greece and it probably won't be the last. Based on the trading patterns of all the major European currencies and the U.S. dollar, markets have yet to be convinced that the situation is going to have a happy ending. Gold, which sold off during the Greek Crisis, just as it did during the global financial collapse in the fall of 2008, is currently in a sideways trading pattern.  The commodity-based currencies are holding up quite nicely.

The crisis in Greece exists because there is a 12.7% budget deficit to GDP ratio in the country, which represents 2% of the euro zone economy. Money has flowed out of Europe and European currencies to the supposedly more stable U.S. dollar.  Based on last week's GDP revision, the U.S. had a GDP of $14.258 trillion in 2009. The U.S. has an estimated budget deficit of $1.6 trillion this year, which would give it a deficit to GDP ratio of 11.2%. This is only a little better than Greece and much worse than the euro zone overall. Nevertheless, massive amounts of money have flowed out of European currencies, not just the euro, and into the U.S. dollar.  The safe haven aspect of the dollar is based on America's potential for printing unlimited amounts of new money - something that ultimately destroys the value of a currency - not its financial condition. Greece can't print its way out of its predicament because it is part of a currency union.

The euro has been pounded - both literally and figuratively - during the crisis, along with the British pound and even the vaunted Swiss franc. The classic technical sell signal of the 50-day moving average crossing and moving below the 200-day moving average took place on February 4th for the pound, February 11th for the euro, and February 26th for the Swiss franc. The Swedish krona has so far managed to avoid giving a sell signal, but is close to doing so.

The major destination for the money flowing out of the euro has been North America. The U.S. trade-weighted dollar gave the classic buy signal of the 50-day moving average crossing and moving above the 200-day on February 19th. The overall technical picture of the rally is strong, just as the overall technical picture for the euro is weak. Moreover, there is no indication that a sudden change in the bullish or bearish picture is likely in the immediate future. The major currency with the second best technical picture is the Canadian dollar, which unlike the U.S. dollar has a longer-term bullish technical picture.

The Australian dollar, which is essentially a stand-in for gold, has also maintained its technical strength during the Greek crisis. Australia has the highest interest rates among the industrialized countries and its currency should be considered the most reliable in the world. Gold itself is currently basing in a sideways pattern and its rally is intact. Gold selling off in during a crisis is historically unusual. Money has always flowed into gold during political turmoil. There was a big rally after 911 for instance and some gold stocks actually went up during the 1987 crash. Gold selling down now indicates that the problem with the global financial system that appeared during the Credit Crisis hasn't been completely fixed yet. The next time a central banker claims otherwise, suggest they take a lie detector test. 

Disclosure: No positions

NEXT: The Outlook for U.S. Treasuries

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.

U.S.Inflation Reports - Contradictions and Absurdity

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.

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The PPI (producer price index) was out Tuesday and the CPI (consumer price index) was out today. Both were up 0.3% for October, but for exactly the opposite reasons. Food prices were up in the PPI with fresh vegetable prices skyrocketing 24%. Fruit and vegetable prices declined for the 4th straight month in the CPI report and helped keep inflation down. New and used motor vehicles were up so much in price that they were responsible for 90% of the increase in core inflation in the CPI report. In the PPI, car and truck prices were down so much that they caused the core to fall 0.6% (an unusually large change for core PPI). So much for consistency in U.S. government reporting of inflation.

Even if they painted a consistent picture, the official U.S. inflation figures can't be trusted as is because of statistical adjustments that were made to the calculations in the 1980s and 1990s. All of these adjustments acted to lower the reported inflation rate and make it nearly impossible for high inflation numbers to appear. Substitution effects and hedonics are just two examples of 'improvements' made to the inflation calculations. Substitution is assumed to take place when the price of something rises a lot. People supposedly buy less of it and buy some cheaper item instead (less steak, more gruel for instance). The higher price item gets less weight in the data and the lower priced item more weight. Consumers are of course getting less pleasure from their purchases. Hedonics is exactly the opposite. Improvements in manufactured items like cars and electronic goods are assumed to lower the price because consumers get more pleasure from them. Sound contradictory? Well, that's because it is. Both make it difficult though for reported inflation numbers to rise too much and that's why they are both used.

There is really no reason to pay attention to the U.S. government's official inflation numbers. All you have to do is watch the currency and gold markets. A falling U.S. dollar means there is more inflation for Americans. Gold prices however are even a better gauge and can give a global read on inflation. While gold has been hitting a series of all time highs in U.S. dollars in the last six weeks, it is also recently started hitting all time highs in a number of other currencies, including the euro, the British pound, the Swiss franc, the Canadian dollar and the Yen. The market is clearly indicating global inflation is taking place and fiat currencies around the world are losing value.

Gold hit another all time high in morning trading in New York today, with spot gold reaching $1153.90. Silver was even stronger reaching $18.86 at one point. The trade-weighted dollar traded as low as 74.90, it's third break of the 75 level. The dollar rallied strongly yesterday on Bernanke's comments that the Fed was watching the level of the dollar. He said the same thing in June 2008 and probably other times as well. Based on the dollar's performance, all the Fed has done is watch it go down. The Fed also constantly says that there is no inflation in the U.S. The markets disagree. You decide which one you want to believe.

Disclosure: Long gold and silver.

NEXT: The Real Story About Gold Supply and Demand

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.