Central Banks Sucker 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.

Three major central banks met on August 1st and 2nd and none of them took any decisive action. Markets in the U.S. and Europe have been rallying since late June on expected policy easing they've been promised by reports in the mainstream media. So far, empty talk is all the central banks have delivered.

Traders had high expectations for the Fed's monthly meeting on July 31st and August 1st. A week previously, news hit the wires (only a few moments before Apple's disastrous earnings were announced) that the Fed was definitely going to do some easing at this week's meeting. The source was the Wall Street Journal and they followed up with a front page article the next day. And what did the Fed do?  Nothing, zilch, nada. So much for the Wall Street Journal being a reliable source of investing information.

For the previous meeting in June, Goldman Sachs claimed the Fed was going to be doing quantitative easing (or maybe some other form of easing, but you would have to have read the entire coverage to find that out). What happened when QE wasn't forthcoming? The market hypsters came out of the woodwork with assurances that QE3 would be announced at the July/August meeting. Now that that hasn't happened either, we are hearing "just wait until September". You might as well wait for Godot. The only way the Fed will be doing QE before the election is if the financial crisis in the Europe gets out of hand. This will not stimulate the economy, but prevent a total collapse of the stock market (not a drop, but a total collapse).

The Bank of England and the ECB also met today. No rate changes from either of them (unlike the U.S. and Japan both have rates slightly above zero and they could lower them). The Bank of England is already doing QE2 and has been doing so since the fall of 2011. The UK is in a recession and QE has not stopped its economic decline.

Mario Draghi, the ECB chair and one of the biggest windbags to ever run a central bank, held a press conference after his meeting. He said that the ECB would undertake "outright" open market operations and would be using non-standard policy measures. Bonds rallied on the news. Unfortunately, only minutes later, Draghi was forced to backtrack on his boisterous pronouncements. He admitted that he was only providing "guidance" of what was going to occur in the future and details wouldn't be available for weeks. Draghi continued that even if the ECB was ready to act now, it would not have the grounds to do so. Someone should give that man a bagpipe.

How long the markets will continue to fall for promises of stimulus that never comes remains to be seen. Whatever happens, there is no reason be confident that things will be getting better. If the Fed could fix the U.S. economy, it would already have done so. If the ECB could solve Europe's debt crisis, it also would have already done so. Doing more of the same is not going to work, so it's not worth waiting for cental bank action as is. Eventually, the markets will figure this out.

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.

Central Bank Action Supports Credit Crisis View

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.

There was another confirmation of an emerging credit crisis yesterday as central banks in various parts of the globe took coordinated action to pump money into the financial system. The banks involved though claimed it was mere coincidence that they all acted at the same time.

Central banks are generally only interested in dealing with their own internal matters. On ocassion though, they act together as they did in October 2008 at the height of the Credit Crisis. Massive stimulus from lower interest rates and quantitative easing finally allowed the markets to put in a bottom six months later.

On Thursday, the People's Bank of China cut its key lending rate by 31 basis points (a basis point in one-hundredth of a percent) to 6%. This was a previous cut less than a month ago. Manufacturing has been declining for months now in China and there are some estimates that GDP will barely be above 7% this quarter. While this would be enviable for any North American or European economy, below 7% growth would feel recessionary in China. Lowering interest rates is not without risk for China since the country also has a massive real estate bubble and this will continue to feed it. 

At the same time that China was cutting rates, the ECB cut its refinancing rate to 0.75% from 1.00%. The banks' deposit rate however was lowered to zero (obviously not much room to maneuver left there). While the ECB has still not fully implemented ZIRP (zero interest rate policy), which Japan and the United States have now maintained for years, it is so close that the difference is irrelevant for all practical purposes.  The Bank of England did not lower its 0.50% benchmark rate, but instead raised the ceiling on its current round of quantitative easing by 50 billion pounds. They've obviously come to the conclusion that once rates have gotten close to zero, money printing is the only way to go.

Absent in any obvious way from yesterday's action was the U.S. Federal Reserve. It already had its monthly meeting at the end of June and announced an extension of Operation Twist (an attempt to drive 10-year yields lower even though they had already hit all-time lows on June 1st). The market bulls were claiming that the Fed would announce a third round of quantitative easing, but they didn't. The Fed is also going to have trouble engaging in more QE in the near future because the U.S. is once again near its debt limit. National debt is now over $15.8 trillion and the debt ceiling is $16.4 trillion. The two will come together at some point this fall. To implement quantitative easing, the Fed has to buy newly issued treasuries. When the debt ceiling is reached, there won't be any. It took months to raise the debt ceiling last time and it is likely to be just as contentious an issue this time as well.

The current global financial crisis is centered in Europe and nothing has been fixed there. The EU has been trying to keep 10-year bond yields below the critical 6% level in Spain and Italy since last summer. They have utterly failed in the case of Spain. Spanish 10-year governments were over 7% in June (higher than last fall, which was in turn higher than last summer). After being driven down close to 6% twice in the last two weeks, the yield was as high as 7.04% today. Italian 10-years traded at 6.08%. Rates continually above 6% mean that Spain and Italy will need bailouts, but the necessary money will have to be printed. Germany holds the keys to the printing press however and may not let them be used.

Stock markets worldwide have held up remarkably well considering there are serious problems in the financial system and the global economy is weak. Liquidity from central banks is responsible for this. However markets have a tendency to revert to realistic prices and if they aren't allowed to do that gradually, they will do so suddenly.

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.

The Twisted Logic of the Fed's New Policy Move

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.

At the end of its September two-day meeting, the Federal Reserve announced it latest attempt to revive  the U.S. economy -- Operation Twist. This Fed launched its first program to stimulate the economy four years ago at its September 2007 meeting and the economy is still in the doldrums. While the Fed hasn't yet begun QE III, the Bank of England looks like it is about to return to this form of money printing.

The Operation Twist announcement didn't come as a surprise to the markets. It was obviously leaked to the press days ago and articles about it were common in mainstream news outlets earlier this week.  The name comes from a dance popularized by Chubby Checker in the early 1960s -- the last time the Fed engaged in a similar policy move. The rotund Mr. Checker is an appropriate symbol for the bloated U.S. national debt,  the bloated U.S. budget deficit and the bloated Federal Reserve balance sheet, which has been swollen by huge amounts of money printing. The Twist itself involves expending lots of energy going back and forth, but getting nowhere -- the very picture of the 2011 Fed.

In the current Operation Twist, the Fed is planning on selling $400 billion of short-term debt and buying treasuries with 6 to 30 year maturities. The idea is to drive down longer-term interest rates in order to stimulate the economy. Many mortgage and credit card interest rates are set based on the yield of the 10-year U.S. government bond. The 10-year interest rate is already at a record low after falling below the low of 1.95% established 70 years ago in 1941. Real U.S. interest rates (those adjusted for inflation) have been negative for some time. Thirty-year and 15-year fixed mortgage  were already at their lowest historical rates earlier this month. There is no evidence that interest rates are holding back consumers from making purchases. Lack of jobs and income are the problem and the Fed's latest move isn't likely to improve either.

Across the pond, the Bank of England looks like it will start another round of QE (quantitative easing) later this fall. The BOE already printed 200 billion British pounds in 2009 and 2010 for its initial program. This is small compared to the $2 trillion increase in the U.S. Fed balance sheet.  It is universally acknowledged that the UK economy is weakening and the BOE is willing to take this risky inflationary approach even though British consumer prices have increased by 4.5% in the last year. Real interest rates are negative there as well.

The Fed is probably anxious to start its next round of QE as well, but political pressure is holding it back.  Republican leaders in congress sent a letter to Ben Bernanke to "resist further extraordinary interventions in the U.S. economy". Apparently, they are worried that money printing and negative real interest rates will lead to serious inflation -- just as they always have throughout history. The anemic Operation Twist certainly isn't in the category of extraordinary. If anything, it's sub-ordinary. Apparently the stock market thought so with the Dow Industrials falling 284 points or 2.5%, the S&P 500 down 35 points or 2.9% and Nasdaq closing 52 points or 2.0% lower.


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.

Central Banks Pump Money to Prop Up Europe

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.

Exactly three years after Lehman Brothers filed for bankruptcy and almost brought down the global financial system, central banks in North America, Europe and Asia engaged in a coordinated money pumping operation to prevent the EU banking system from stalling. The move created a sharp stock market rally, especially in financial shares, just as was the case when similar actions took place during the 2008 Credit Crisis.

Involved in Thursday's action were the U.S. Federal Reserve, the ECB, the Bank of England, the Swiss National Bank and the Bank of Japan.  The purpose was to improve dollar liquidity among  European banks struggling because of the Greek debt crisis. The credit markets have frozen up, just as they did after the Lehman bankruptcy, and U.S. banks have been unwilling to lend dollars to European banks. The ECB will now be able to access dollars by swapping assets with the Federal Reserve. It wasn't stated in the announcement what assets were involved, but obviously they are substandard ones that wouldn't be accepted  in free market trading. This operation also increases exposure of the U.S. financial system to the new credit crisis in Europe.

Such coordinated money-pumping operations are a sign of desperation on the part of the authorities. They were commonplace after Lehman's bankruptcy on September 15, 2008. They created significant volatility in the stock market back then as they did yesterday. Both the German DAX and the French CAC-40 closed up more than 3%. Troubled banks had huge rallies, with Lloyd's Banking Group up over 7%. In 2008, even greater volatility took place, but the rallies proved time and again to be only temporary. The market ultimately nosedived.

The Friday before the Lehman bankruptcy, the S&P 500 closed at 1251.70. Lehman declared bankruptcy on Monday. At the end of the week, the S&P 500 closed at 1255.00. The day before however, the S&P rallied off of its intraday low of 1133.50 to a close of 1206.51 (that's a 6.4% intraday rally -- an enormous move for an index like the S&P). So, the first week after Lehman's bankruptcy it looked like the market wouldn't be impacted that much. It turned out that the actions of central banks provided investors with a false sense of security however.

By the end of September 2008, the S&P 500 closed at 1166.36. Then at the end of October it was down to 968.75. At the end of November, it had dropped to 896.24. It actually closed higher the last day of December at 903.25, before falling to 825.88 at the end of January. By the close of February, the S&P was trading at 735.08. It finally bottomed at 666.79 on March 6, 2009. All along the way, there were big moves up that coincided with the latest money injections of the central banks.

While mainstream media reports tend to portray the central bank actions and the big rallies they cause as good news for the market, they are actually an indication that more trouble is on the way. All investors have to do is remember what happened just three years ago. Yesterday's central bank action indicates that more volatility and lower stock prices are in our future. 

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.

German Flash Crash Shows Vulnerability of 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.

Between 3:30 and 4:00PM Central European time the DAX, the major German market index, lost around 250 points. This is roughly equivalent to a 500 point drop in the Dow Industrials in half an hour. Prior to that, the DAX had been slowly drifting lower. Then suddenly it dropped like a rock.

The pundits were quick to come up with possible explanations. A fat finger error was cited as a possibility (this is when a clerk accidentally puts an extra zero or two or three after the number of shares when entering a sell order). This was pure speculation on the part of the media however. While it is certainly possible that this was the cause of the drop, there is as of yet no evidence supporting this claim.

New problems with the evolving and unending Greek debt crisis were also thought to have led to the floor falling out of the market. Greece's central bank activated the Emergency Liquidity Assistance (ELA) program to help its struggling banks stay afloat. ELA is only for emergencies, so its use indicates that Greece is teetering toward default. So what else is new?  At this point, anyone who isn't in a coma should realize a Greek default is inevitable.  

The Bank of England also announced that it was extending a swap line to the ECB. The swap line allows the ECB to borrow British pounds at low interest rates in order to maintain liquidity in the Eurozone's banking system. Investors should ask themselves what exactly is going on that the ECB needs help maintaining liquidity. This is of course is always a problem during a credit crisis.

There were apparently also rumors about Germany banning short selling. Not so farfetched considering that France, Italy, Spain and Belgium extended their short-selling ban on financial stocks, which would have ended this week. Traders dislike restrictions and their initial reaction is to get out of the market when they appear. Authorities also don't make these bans unless there is good reason that traders want to engage in heavy short selling. They are an admission that something is rotten in Denmark or in this case, Greece, Portugal, Ireland, Spain and Italy. This news was out around the time the DAX had its precipitous fall.

If today's drop was an isolated incidence it wouldn't necessarily be anything to worry about. However, there has been at least one serious market problem each week for several weeks now. The Nasdaq and Russell 2000 in the U.S. have had three mini-crashes. The DAX has had a few itself. The U.S. Dow is moving up and down in multi-hundred point increments. The situation is not stable yet and the market is making that abundantly clear. 

 Disclosure: None

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. Investing is risky. If you don't feel that you are capable of doing it yourself, seek professional advice.

UK Q2 GDP: Unblanced, Unsustainable, and Unbelievable

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 UK economy grew by 1.1% in the second quarter according to just released figures from the Office for National Statistics. The pound rallied sharply on the news, but a look inside the numbers indicates this growth is neither balanced, sustainable, nor even believable.

Even a cursory glance at the Office for National Statistics charts shows quite clearly three components of GDP had an outsized impact in creating the good headline number - Construction Spending, Business Services and Finance, and Government and Other Services.  Without these three sectors, there was no growth in the UK economy. While these sectors were growing, there were significant decreases in the Electricity, Gas, and Water and Transport, Storage, and Communication categories. It would be reasonable to assume that these categories should be showing increases in a growing economy, but they aren't. The charts can be found at: http://www.statistics.gov.uk/pdfdir/gdp0710.pdf

The UK had a bigger housing bubble than did the U.S. and they have yet to work off the excesses of too much building earlier in the decade. Nevertheless, the biggest contributor to second quarter GDP was Construction Spending, up a whopping 6.6%. Based on the numbers, a major new building boom is taking place there. People capable of logical thought may wonder how this is possible. A reasonable explanation is an obvious statistical error since the UK changed the source for its construction numbers and for the first time is basing them on a new Monthly Business Survey for Construction. Expect some major downward revisions for this figure in the future because it is something that is just not possible in the real world (government statisticians rarely question an impossible number as long as it makes the government look good).

The next best category was the one that contained financial services. The UK has propped up its big banking institutions (and has nationalized more of them than the U.S. has) with a number of government programs. Not surprisingly, after this huge transfer of money from government coffers, they are doing much better as are U.S. banks There was a 1.3% increase in the Business Services and Finance category and this contributed almost as much to the total rise in GDP as did Construction Spending. Together these are both part of the FIRE (Finance, Insurance, Real Estate) economy, where excesses led to the Credit Crisis. The UK seems to be trying to reestablish the imbalances that led to 2008 economic collapse.

Finally, government spending was up 0.9%, almost the same as the increase in total GDP. Government spending in the UK is indeed the lynchpin for making GDP look good as is the case in the U.S. The new Conservative government is planning major spending cuts and tax increases though and this will negatively impact future GDP numbers. Going forward things are not going to look rosy for the UK economy. Perhaps this is why the Bank of England was recently discussing lowering interest rates. Either they have access to other private economic data or they simply realize how misleading the current UK GDP numbers are.

Disclosure: No positions.

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.

The U.S. Imports Inflation

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.


U.S. import price data for January indicates a rise of 1.4% from December and a 11.5% rise year over year. The price rise in January was the sixth one in a row. Higher energy prices were the major cause of both the monthly and yearly increases. The implications are inflationary.

Prices for imported oil were up 4.8% in January (the U.S. imports approximately two-thirds of its oil). Non-fuel imports were up 0.4%, led by a 1.5% price increase in industrial materials. Metals and chemicals were responsible for most of that rise. The price for foods, feeds, and beverages were up 1.3%. The report clearly indicated that commodities were responsible for almost all of the rise in U.S. import prices in January. Since all commodities are priced in U.S. dollars and the dollar rallied 0.7% during the month, the jump in import prices could have been worse - and will be if the dollar continues selling off as it did for most of 2009.

There was indeed a stark contrast between price changes for commodities and manufactured goods in January's report. Consumer goods were up only 0.2%, while capital goods and automotive vehicles decreased by 0.1%. Inflation has yet to filter into manufactured goods, which are at the end of the chain for price increases. Commodities are at the beginning. The report also indicated significant drops in air fare and air freight prices, both of which will reverse if oil prices stay high.

Over the last year there has been a dramatic change in the inflation picture based on import prices. Year over year price changes were negative and dropped each month from January to July 2009. Yearly prices decreased 12.5% in January and were down 19.1% in July. Since then, a major reversal from deflation to inflation has taken place. In November the yearly import price change became positive and was up 3.4%. It increased to 8.6% in December. In only six months from July 2009 to January 2010, the yearly change in U.S. import prices went from -19.1% to +11.5%. These are truly shocking figures.

In the last month, central banks have indicated they are starting to worry about inflation - China increased required bank reserves twice, the U.S. Fed halted five Credit Crisis liquidity programs and the Bank of England paused its quantitative easing (read money printing) program. All in all though these actions are merely very minor adjustments in monetary policies that are still highly expansionary. Inflation takes years to work its way through the financial system and by the time it is recognized, it is well-entrenched and it is too late to stop it without taking drastic action. Investors should consider the U.S. import price figures as a warning of things to come.

Disclosure: None

NEXT: Gold Down on IMF Sales, Then Up on Inflation

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.

In for a Penny, In for a Pound

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:

The third quarter GDP figures for Great Britain were released last night and GDP fell 0.4%. I particular liked the headline "UK Still in Recession After Surprise Contraction" announcing the drop. This was the sixth quarter in a row that GDP was down in the UK. So who exactly was surprised by this? Probably just mainstream economists and anyone who reads the drivel published in their reports. One survey indicated that 100% of economic analysts had predicted that British GDP would go up this quarter - and they were all wrong. This is not uncommon. Mainstream economists frequently all ere on the wrong side of a number and are the last to know what is really going on in the economy. There is probably no profession as prone to group think and making errors in its predictions.

Once the GDP numbers were released there was immediate speculation that the Bank of England would increase its quantitative easing (aka money printing) program. The British pound fell by a penny almost immediately. This helped the trade-weighted dollar rally, since the pound is one of its components. The dollar rally was most noticeable when U.S. trading opened however. Gold and silver which reacted bullishly in overnight trading to this potentially inflationary news, dropped straight down after the U.S. markets opened. We have seen this pattern over and over again. A knowledgeable cynic would claim only blatant manipulation of the dollar and the precious metals markets backed by the U.S. government could account for it.

It's only a matter of time though before gold breaks out from its current trading range between $1050 and $1070. Indians spent $2.15 billion buying gold last week during their festival period. Gold sales were 5.7% higher than last years. India has accounted for 20% of global gold demand for many years now. There were a number of reports released by the gold bears in September about how the high price of gold would severely damage gold demand in the subcontinent this fall. It is now clear that that's not going to happen. Gold has traditionally been the way to store wealth in India and this habit goes back at least 2000 years. The Indians have never trusted paper currencies and over time have accumulated massive hoards of the precious metal. This deeply ingrained preference for gold is not going to disappear any time soon.

While Indian demand for gold is likely to remain high, it will probably be overwhelmed at some point by investment demand from ETFs and other sources thanks to the quantitative easing programs in the U.S. and UK. Jewelry has accounted for a majority of gold demand in the past. In India and other developing countries jewelry is purchased as an investment (the gold is frequently almost pure 22 caret as opposed to the diluted 14 caret gold used in jewelry in the U.S.), not as a luxury item as is the case in developed economies. Eventually, Westerners will find that the ancient habits of the East are just as good today as they were long ago.

NEXT: Interest Rates Break Out

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.

The Latest from Fantasy Land

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:

AIG was up as much as 66% yesterday on rumors that it would show a profit for last quarter when it reports its earnings this Friday. For those of you who may not remember, AIG is the derivatives poster child for the Credit Crisis. It was nationalized by the U.S. government, which purchased 80% of its stock and grossly overpaid for it. It was of course impossible not to overpay since the actual value of the stock was well below zero. The feds have had to continue to pour money into AIG to keep it afloat and any 'profit' it shows would be the result of the U.S. government putting more money into the company than it is losing. Now that's a great business model. What investor wouldn't want to get a piece of that action?

Just consider AIG another example of how the economy is 'recovering'. The AP wire service published a piece this weekend about how U.S. real estate prices have bottomed and the market is turning up. According to AP, the crisis is OVER and happy days are here again. Interestingly in the same article, AP projected that U.S. unemployment would be increasing until well into 2010 - just the type of situation that prevents people from buying homes and banks from lending to them. Foreclosures are up too and that of course doesn't create a drag on the housing market. The increase in foreclosures is even worse in Great Britain, although house prices are supposedly going up there as well. The 'recovery' is going so great that the Bank of England announced a big increase in their quantitative easing (aka money printing) program this morning. Yeah, things are really going great when you have to fund government spending with money created out of thin air.

As pathetic as British government finances are, and they are indeed quite pathetic, the pound still has managed to rally against the U.S. dollar during the last two months. What does this say about the market's view of U.S. government finances and our much acclaimed economic 'recovery'? The recovery wasn't looking so good yesterday when the ISM service index came out. It FELL from 47.0 in June to 46.4 in July (anything under 50 is contraction). While the manufacturing index was above 48 (still in contraction), the service component of the U.S. economy is much bigger than the manufacturing component - and it's not doing well. Also not doing well are retail sales (consumer spending is approximately 70% of the economy). Most chain store sales were strongly negative. So the economy is 'recovering', but this doesn't include any of its major components.

The trade-weighted dollar declined again yesterday, making it three days in a row that it has been below it break down price of 78.33. Gold sold off slightly. Oil tanked on the weekly EIA storage report, but then managed to close higher. Mainstream media reported this took place because of dollar weakness. One financial service also had an article that said gold went down because the dollar had been strong in the morning (I missed that). I commented on their website that these two articles were contradictory and this looked like some form of manipulation of the news. That comment was censored - just like much of mainstream financial news reporting.

NEXT: Non-Farm Payrolls and Its Statistical Quirks

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.

Only TARP Recipients Should Worry About Deflation

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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Finally some minor logical restriction has been added to the historically wasteful TARP program. TARP is essentially welfare for Wall Street and companies receiving welfare should be forced to live like people who used to receive it, if they want the handouts. The $700 billion of taxpayer money was supposed to be used for lending, but nothing in the bill mandated that would happen. There aren't even records of where the money is going, although maintaining exorbitant executive salaries and bonuses is obviously one of destinations for the funds. President Obama has now restricted these salaries to a still generous $500,000 (the President of the U.S. is paid only $400,000). Stock options are allowed, but only once the U.S. is paid back the money it has given to these financial companies. This is only likely if major inflation reduces the debt (and your savings and retirement payments) to essentially nothing.

Anyone who reads this blog is well aware that we have been predicting just such an economic scenario for a long time. Central banks throughout the world are engaging in policies that will insure massive inflation is inevitable and they are covering their irresponsible policies by waving the threat of deflation flag. The Bank of England just cut rates to 1.0%, down from 1.5% (which was already the lowest since the late 1600s - yes, 1600s). The BOE has more than hinted that this is just another step on the way to ZIRP (zero interest rate policy), which now exists in the U.S. and Japan. It also stated that it WILL BE expanding the money supply (as if somehow they haven't already been doing this). Like the U.S. central bank, the BOE claims that it is worried about deflation, even though the official inflation rate in Britain is 3.1% (you may assume the actual rate is somewhat to a lot higher) and the pound is dropping precipitously, which is highly inflationary. Lower interest rates and increased money printing will only weaken the currency further. Yet the BOE is worried about deflation.

Central banks are taking the disastrous decisions to create inflation in a desperate attempt to prop up their collapsing economies. The true depth of the economic downturn is being hidden from the public by manipulation of the data and a compliant press that fails to question even the most absurd claims of the government statistical offices. As an example, the U.S. Labor Department released productivity figures for Q4 2008 today. Productivity (the amount of output per hour of work) was allegedly soaring at the end of last year. The claim is that the number of hours worked is dropping a lot faster than output. The alternative (and correct) explanation is that the government has lied about output and overstated it considerably. While there is a lot of evidence to support that U.S. GDP is being overstated, you will not see it in mainstream press coverage of the Productivity story... just an emphasis on the ridiculous headline numbers.

The press articles on Productivity are also being used to prop up the deflation bogeyman. One AP article (likely to be reprinted in hundreds of papers across the U.S.) stated, "The results underscore how the deepening recession has removed the threat of inflation". No AP, the results underscore the depth of lying that the U.S. government will engage in to hide the real economic story from the American public.

NEXT: U.S. Unemployment Rate Rises to 13.9%

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.

Unlimited Liquidity Today, Unlimited Inflation Tomorrow

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 U.S. Federal Reserve, the ECB, and the central banks of England and Switzerland agreed over the weekend to "provide unlimited U.S. dollar funds to financial institutions" to support inter-bank lending. The Euro-zone will also guarantee bank debt until the end of 2009 and will assist its countries in buying preferred shares in failing banks in order to help recapitalize them. As this agreement was being worked out, Britain nationalized three of its major banks to prevent their failures. Meanwhile, the United States has altered the focus of its Wall Street bailout plan to concentrate on the purchase of non-voting bank shares and it looks like the American taxpayer won't be getting any equity in return (as the bill supposedly guaranteed).

The Euro-zone is essentially following the lead of Great Britain (the country that sold half of its gold in 1999 at the market bottom and which has a worse housing crisis than even the United States). Britain is now injecting $438 billion in loans to its banking sector - a sum that is proportionately much larger than the $700 billion U.S. bailout, but probably still not nearly enough. Its three bank nationalizations this weekend include the Royal Bank of Scotland (on the New York Investing meetup's likely bank failure list in September) where the taxpayers will get a majority 60% stake. Lloyds TSB and HBS were also merged by the government, which then bought a 40% ownership position in the new combined bank.

As the British banking system is being rapidly nationalized, the U.S. seems to be backing away from this socialist model. Instead of buying bad debt with the Wall Street bailout money, it now appears that preferred stock will be purchased (although media reports in this regard are garbled to say the least). Preferred stock is non-voting and represents no ownership rights in a company. It is merely a loan in perpetuity. Europe in general seems to be trying to adopt this approach as well. If there is any profit made on the government's money pumping (and there always is), none of it will be going to the respective taxpayers of any country that handles the banking crisis this way.

Where all the money is going to come from to pay for the 'unlimited' liquidity injections into the collapsing American/European financial system has not been stated. It is highly unlikely that it will dropping from the sky attached to a big balloon. Printing more money is the only possible option. This makes the inflation hedges gold and silver even better investment possibilities going forward. Amazingly they are both at particularly low prices - at least in the futures markets. While both had severe sell offs in the U.S. markets on Friday (sell offs for gold and silver that take place only in U.S trading have happened many times), anecdotal reports indicate that people were rushing coin shops and bullion dealers to purchase them.

NEXT: Stock Market Rallies Like It's 1932

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.