The Three Big Economic Lies of 2009

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.

Investors have trouble making money in the markets because the information they receive from the government is not a reliable accounting of what is actually going on. The mainstream media then repeats this information, no matter how absurd it is, without critical commentary or analysis. While financial media reporting has been filled with misinformation this year, there are three major ongoing themes in 2009 that investors especially need to realize don't hold up under scrutiny. These are: The economy is in recovery; Unemployment is a lagging indicator; and Inflation is not a problem. Let's examine why each one of them is not true.

1. The U.S. economy is in recovery.

This is based on the U.S. GDP going up in the third quarter (by 2.8%) and the contention that a reported increase in GDP indicates the end of a recession. This would be the case if the numbers were reliable - they are not - and they didn't turn positive as the result of government stimulus programs - which they did.

There have been a number of changes in how U.S. GDP has been calculated in the last three decades. These changes have caused better numbers to be reported. Consequently, it is now almost impossible for U.S. GDP to be negative. The original numbers published for 2008, indicated an economy doing well, not one that was in the worst recession since the 1930s. After an extensive revision of GDP numbers in mid-2009, the much reduced GPD number for 2008 was still positive - a theoretical impossibility - and absolute proof that the U.S. GDP numbers are unreliable and should not be believed.

Even with the extensive manipulation of the GDP figures, if you removed the impact of government stimulus programs for autos and housing and other forms of government spending, there still wouldn't have been a positive number in the third quarter. This game has been played before in Japan. Government spending brought the country out of recession in 1993, 1997,1998,1999, 2001, 2004 and 2009. Did they have a septuple dip recession? No, they have had one long two-decade recession masked by government stimulus programs - the modern version of a depression when Keynesian economic policies are pursued. The Japanese learned that an economy that does well solely due to government stimulus is not an economy in recovery. The U.S. should pay attention to this lesson. So far, it hasn't.

For a fuller discussion of the recent U.S. GDP numbers, please see my blog post: Mark to Model GDP at http://nyinvestingmeetup.blogspot.com/2009/10/mark-to-model-gdp.html.

2. Employment is a lagging indicator.

It would actually be more correct to state that GDP is a leading indicator of economic recovery (if things go right that is). The lag of employment to GPD only became very noticeable during the minor recessions in the early 1990s and 2000s and was a result of statistical 'adjustments' that made GDP look better so that it gave premature readings of economic improvement. In the major recessions in 1973-1975 and the double dip recession in 1981-1982, unemployment bottomed the quarter that GDP turned positive. It did not do so in the third quarter of this year. If unemployment was a lagging indicator, the lag should be much greater after major recessions than it is after less serious recessions. This is not the case and is a major contradiction to this viewpoint. What has actually happened is that statistical 'adjustments' made by the U.S. government to improve unemployment calculations have lagged the 'adjustments' made to improve the GDP numbers.

For my blog post on the latest U.S. unemployment figures please see: http://nyinvestingmeetup.blogspot.com/2009/12/us-employment-figures-dont-add-up.html.

3. Inflation is not a problem:

This oft repeated mantra from the Federal Reserve will prove in the future to be the biggest lie of all. Their argument that low capacity utilization prevents inflation is not true based on historical analysis. Nor are there any cases in the past when governments have 'printed' large excess quantities of money as the Fed is doing now and inflation didn't follow. The Fed's own figures also indicate that massive future inflation is possible. The Adjusted Monetary Base, a measure of future inflation potential, has gone up more in the last year than it has in the entire preceding 50 years. The rise of the Adjusted Monetary Base in the 1970s, when U.S. inflation reached 15% on a monthly basis at it height, is a mere blip compared to the current vertical rise.

The Fed has hinted that it will be able to take care of any potential inflation problem. This is the same Fed that didn't realize sub-prime loans were a problem almost up to the moment they started to bring down the financial system and the same Fed that was claiming in the spring of 2008 that it thought it could prevent the U.S. from sinking into a recession. Unfortunately, the recession had begun months before. The Fed was unaware of it however. The Fed will also be unaware that inflation is a problem right up to the point where every dog in the street knows about it.

For a thorough debunking of the inflation news, please see my blog post:
http://nyinvestingmeetup.blogspot.com/2009/12/why-inflation-is-and-will-be-problem.html.

Lack of honest government statements to the public about the economy is nothing new. Governments almost always try to hide the bad news. More than once in history, manipulation of the economic numbers has evolved into outright fabrication. It is also common for the mainstream economic community to support the government's view with fanciful obfuscations. When things have gotten to this point, the situation is already very bad and likely to get much worse. As usual, things will not be different this time. They never are.

NEXT: Why Interest Rates Will Rise in 2010

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.

Unemployment - Truth Worse than Even Government Reports

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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Today's weekly jobless claims came in at 573,000, well above the cut off of 400,000 level which is usually considered recessionary. The four-week moving average, which is considered more important because it is assumed that the errors in each weekly report will cancel each other out, came in at 540,500. Continuing claims, all the people who are collecting unemployment, reached 4.43 million. Both numbers are the highest level since the deep recession of 1982 when official unemployment reached double digits. The increase in people on the unemployment rolls was the biggest since 1974, another year of major recession and a major bear market.

While no one could argue that these numbers aren't bad news, the truth is actually much worse. Somewhat less than half of the American labor force is eligible for unemployment. This part of the population never shows up in the official numbers cited above. This does not mean however that you can just double all the government figures to get at the true numbers. You would have to assume that the half of the U.S. labor force not eligible for unemployment is equally likely to be unemployed as the half that is and this is certianly not true. On the other hand, it is also certainly true that the ignored half or the labor force does not have an unemployment rate of zero.

The monthly unemployment figures published by the BLS also underestimate unemployment, but do so in a different way. People who are "no longer looking for work" also known as discouraged workers are not counted. The underemployed or people who have worked even a minimal amount part-time are counted as employed. The Labor Department does publish an alternate measure of unemployment, which counts part-time workers who want full-time work, as well as anyone who has looked for work in the last year. This number which still cuts out a number of people indicates that the current U.S. unemployment rate is closer to 13%, not the 6.7% officially reported in last months employment report (almost double, but not quite).

In times of great economic calamity for developed economies, unemployment can reach a quarter of the labor force. It was estimated to be 25% at the bottom of the U.S. Great Depression in the 1930s and almost that same number during the hyperinflationary collapse in Germany in the early 1920s. If the alternative unemployment figures reach 20% or more this time around, it can safely be said that the current economic crisis has gone beyond recession and has become a depression.

NEXT: Herbert Hoover Policy - Working Just as Well Today as in the 1930s

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.

Brother, Can You Spare a Job?

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 employment report was released this morning and the news can only be described as devastating. There was a loss of 533,000 jobs in November, the most this year so far. This was also the biggest drop in 34 years, when 602,000 jobs were lost in December 1974. On top of November's reduction in jobs, September and October was revised sharply downward with losses those months much worse than initially reported. Despite the large drop in jobs, the official unemployment rate rose only to 6.7% last month from 6.5% the month before. Unemployment would have been even higher if government statisticians hadn't decided that 422,000 people had left the labor force. Still, even this 'modified' figure is at a 15-year high.

The unusually low reported unemployment rate isn't the only thing in the report that should make you suspicious either. It is obvious that the government grossly and conveniently underestimated job losses before the presidential election where the state of the economy was a major issue damaging Republican electoral prospects. The September figures were the last ones reported before the election. Initially, there was a loss of 159,000 jobs, which is pretty bad, but not nearly as bad as what really happened. Right after the election, this number was revised downward to a loss of 284,000 jobs. In today's report it was revised downward further to a loss of 403,000 jobs. Total yearly jobs losses reported before the election were 760,000. Today that number is being reported as 1.9 million - a rather steep increase and much more dismal picture than voters were given just one month ago when they went to the polls.

Job losses last month were widespread, hitting factories, construction companies, financial firms, retailers, leisure and hospitality, and others industries. Nevertheless, there were job gains in government, education (mostly government as well) and health care. Every bad employment report this year has in fact shown an increase in government employment, even though many states, local governments, and school districts are severely strapped financially. If you extrapolated these increases out, you would also see that they indicate in the long-term we will all be government employees. For some reason, I have trouble finding them credible.

All in all it can be said that the deteriorating employment picture is the result of two factors. First, the U.S. economy is indeed falling apart and already in deep recession. Secondly, a lot of deterioration in the employment picture that is being reported now, has actually taken place over the last several months. The U.S. government is just admitting the truth. Of course, the past figures may be somewhat worse than even what we have been told so far.

NEXT: Tribune Bankruptcy Has it All

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.

Five Year Lows are Bad, Eleven Year Lows are Worse

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:

On Wednesday the Dow hit a five year low. Yesterday the S&P500 broke its key long term support around 775 to hit an eleven year low. The import of this event should not be underestimated. The market sell off that began in the spring of 2000 and which first ended after two and a half years has now been extended to eight and a half years - at least for the S&P500. The Dow and Nasdaq have still not broken their 2002 lows, but the Dow is close to doing so and this would represent another violation of key support that would have ugly implicatons for future stock prices. The Nasdaq is holding well above this support level, but this provides scant comfort considering that that this represents an approximately 78% drop from its 2000 high.

The market statistics for this year alone are already devastating enough. After Thursday's drop the Dow Jones is down 43%, the S&P 500 49% and the Nasdaq 50% in less than eleven months. The S&P's drop matches the one that took two entire years in the crushing market sell off in 1973/74. As of now, it is worse than the 47% drop in 1931 - the year with the biggest drop in stock prices during the Great Depression. All the U.S. indicies had crash level drops once again yesterday, but in an unusal pattern the S&P fell the most with a 6.7% loss and the Nasdaq the least with a 5.1% drop. For the record the closing prices were 7552 on the Dow, 752 on the S&P 500, 1316 on the Nasdaq and 385 on the Russell 2000.

Financial stocks bore the brunt of the selling with Citigroup losing 24% after a 23% loss the day before. Citi closed at 4.71 even after (or possibly because) Saudi prince Al-Waleed said he would raise his stake in the bank back to 5% (this was the amount he has held for many years and if he has to buy to get back to this level, he has obviously been selling recently). Citi announced this morning that it was considering auctioning off the firm in parts or selling itself wholesale. It also requested the SEC ban short selling on its stock again. JP Morgan was damaged almost as much as Citi, with a 18% decline and Bank America did a little better dropping only 14%. GE was down 11%. Morgan Stanley and Goldman fell 10% and 6% respectively. While Goldman did a little better at the close, its intraday low at 49.00 was a much bigger drop. Morgan Stanley fell back into the single digits. So much for TARP, the Wall Street welfare bill, that was supposed to save the financial system from a meltdown.

Wiffs of panic in the financial system were palpable yesterday. The VIX (the volatility index) closed over 80. Interest rates on 3-month T-bills fell to 0.1% in flight to safety buying. A little better than the brief negative interest rate on the 1-month T-bill reached awhile ago, but not by much. Oil continued its relentless decline, falling to $49.42 a barrell. Weekly jobless claims spiked to a 16 year high of 542,000, with continuing claims the highest since 1982 (less than half of employed workers in the U.S. are eligible for unemployment by the way, so you may want to double all numbers to get a more realistic picture of the U.S. employment situation). One market commentator ventured that the current slowdown could be the "worse since the Great Depression". Perhaps he should have used the word than.

NEXT: The Citi that Should be Put to Sleep

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.