How Today's "Deflation" Can Turn Into Tomorrow's Hyperinflation

 

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.

Since the 2008 Credit Crisis, deflation has been the primary worry of mainstream economists and monetary and fiscal policies that utilize various forms of “money printing” have been implemented throughout the world to try to stop it. Unfortunately, money printing combined with deflation can potentially lead to hyperinflation.

Hyperinflation is a little understood and little studied phenomenon. Even inflation itself is only partially understood and traditional university economic programs devote minimal attention to it (just ask someone with an economics degree what courses they took in inflation). Almost no one seems to have made the connection between deflation and hyperinflation, which are intimately related. Hyperinflation in fact could actually be defined as a self-feeding cycle of severe deflation combined with escalating money printing.

Historical analysis shows that hyperinflation is a creature of damaged and dysfunctional economies. It does not come from overheated economies that continue to grow out of control resulting in ever higher inflation rates.  This mythical view may have been created because government stimulus measures the employ money printing in its various guises to deal with   deflation can briefly make the economy fervent because of a declining currency. This creates high export demand since foreigners can buy the country’s goods cheaply and high internal demand because the population becomes desperate to get rid of any currency it holds. This phase does not last however and it takes place just prior to the final hyperinflationary spike. It was seen in Weimar Germany in 1922 because Germany had a developed manufacturing economy and most of the rest of the world wasn’t experiencing currency devaluation.

In many cases in the past, war preceded hyperinflation. This happened in Germany and Eastern Europe after World War I and in Eastern Europe and Japan and East Asia after World War II.  It also occurred in the United States after the Revolutionary War (arguably the first case of hyperinflation in history) and in the South at the end of the Civil War. Demand can collapse after a war and this will cause prices to drop (the U.S. had sharp deflation after World War I for instance). Governments, who were already printing money to support the war effort, then frequently print more to stimulate the economy.  If the economy isn’t brought back to real functionality however, a country’s currency loses its value and an ever-increasing amount of money has to be printed to create the same amount of stimulus.  

Even if there is no war, hyperinflation can exist just because an economy is dysfunctional. This would describe the cases of hyperinflation in South America, post-colonial Africa, and in Eastern Europe during the collapse of communism.  When an economy just can’t create enough demand on its own, the authorities stimulate demand by printing money. This leads to the same cycle of currency devaluation and ever-increasing money printing in an attempt to keep up with the loss of value taking place. In reality, the economy is continually shrinking, even though prices start heading toward the heavens.

While this has happened in a number of countries over time, mainstream economists continually make the claim that inflation can’t exist if there is slack in the economy. Hyperinflationary economies actually have maximum slack, with Zimbabwe in the 2000s being the extreme example. Unemployment reached 94% there, while the inflation rate was climbing to the sextillion percent level (a number so huge it might as well be infinity). Despite this real world example that took place right before their eyes, a number of economists had no trouble looking right into the TV camera and telling the public that inflation can’t exist if there is excess capacity in the economy. If they had been testifying in court, they would have been arrested for perjury.

Since hyperinflation has only occurred in certain countries at certain times, it is important to ask what it the key factor or factors that lead to it. The short answer would be: deflation created by demand destruction, followed by money printing that is taking place because the ability to borrow doesn’t exist or has been exhausted. Since developed countries have better credit and can borrow more, hyperinflation is less likely to occur in them than in more marginal economies – at least until their lending sources dry up.   

Deflation in and of itself does not lead to hyperinflation. It depends on what the root cause of the deflation is. There were deflations in the late 1800s and in the 1920s in the U.S. due to technological innovations and not demand destruction as commonly takes place after wars. Lack of demand was not the cause of falling prices, rising supply was. The exact opposite situation takes place after a destructive war or in an economy in a post-bubble era (as is the case currently in the U.S., the UK, Europe and Japan).  In the latter case, demand needs to be stimulated, in the former it doesn’t.

Countries also don’t print money if they can borrow it. Less developed countries have limited and sometimes no borrowing ability and this means they turn to money printing early on and this makes them more prone to hyperinflation.  Since developed countries can borrow money, they do so for as long they possibly can. This has allowed Japan to get its debt to GDP ratio to an astounding 229%. The U.S. is already over 100% (based on official numbers, the ratio using more realistic numbers is much worse) and rising rapidly.  Despite its twenty years of economic malaise, Japan has managed to support demand by running huge and continuing budget deficits funded by the massive savings of its people (money printing has been relatively minor).  It is not likely any other developed country will be able to accomplish what Japan has done.  Japan also seems to have reached the end of the borrowing road and will have to start revving up the printing presses in the near future.

In contrast to the Japanese, Americans save little and haven’t been able to fund their budget deficits internally for decades —the U.S. relies on foreign sources for this money. When the Credit Crisis arose, foreign lending became inadequate and money printing began in earnest. The Federal Reserve increasing its balance sheet by over $2 trillion is only one example of this. While foreign lending might have continued to fund $400 billion dollar annual budget deficits, it was not adequate to support the $1.42 trillion, $1.29 trillion and$1.30 trillion deficits that occurred in 2009, 2010, and 2011. Trillion dollar deficits are going to with the U.S. for many years into the future and the only way they can be completely funded is by printing more and more money.  The EU isn’t in much better shape either and has been unable to fund its peripheral country debt by borrowing. Its current solution is to print money through massive credit expansion.

Claims that money printing won’t be harmful in the 2010s because inflationary policies were utilized during the 1930s Great Depression and they worked well back then are moreover completely misleading. The debt level of the U.S. government, businesses and consumers were minimal at that time compared to what exists today. Huge amounts of untapped borrowing capacity existed then, but this is no longer true. Consumer credit expanded so much in the intervening years that during one month of the Credit Crisis it dropped more than the entire amount outstanding at the end of World War II. An apt analogy might be one drink of alcohol won’t be harmful. If you haven’t had anything to drink yet it isn’t likely it will be. If you have already had twenty glasses, it might cause fatal alcohol poisoning. The global financial system now risks being poisoned by money printing.

The monetary authorities worry about deflation and attempts to handle it with money printing are nothing new. The current actions are disturbingly similar to what took place in Weimar Germany in the early 1920s. They handled their deflation problem with money printing as well. As prices rose, instead of facing reality, the economics establishment acted in concert to deny the obvious. Deflation was cited as the biggest danger to the economy until it became laughable. When inflation exploded, the usual scapegoats — foreigners, speculators and minorities — were blamed by the government. Unless human behavior has changed in the last 100 years, the same scenario is likely to play itself out again in the 2010s.


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.

BOE Kicks Off New Global Money Printing Cycle

 

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.

Markets like money printing. The Bank of England (BOE) today announced its own QE2.  Statments from Fed Chair Ben Bernanke and talk of the EU recapitalizing its banks was already juicing up global stocks before the BOE took this earlier-than-expected action.

In its latest round of quantitative easing, the BOE will be purchasing 75 billion pounds in bonds. While some news reports euphemistically described this action as the BOE will be "spending" the money, the correct phraseology is that it will be "printing" this money. The BOE has previously printed 200 billion pounds to buy bonds starting in 2008 during the first credit crisis. The U.S. Fed has already engaged in two rounds of quantitative easing (only one of many ways that money can be printed) and a third should be expected.

Stocks had already turned around on Tuesday with big rallies. Fed chair Ben Bernanke made a statement that he was willing to do more to help the economy. Bernanke has been "helping" the economy since he started lowering the fed funds rate in September 2007. While he has helped the economy, the U.S. has experienced the worst recession and worst bear market since the Great Depression in the 1930s, the official unemployment numbers have remained close to double digits, the U.S. has had the largest number of bank failures since the Savings and Loan crisis, and thanks to his quantitative easing, the U.S. has been able to run a series of trillion dollar plus budget deficits that are going to lead to serious problems in the future.  Why shouldn't markets rally with more of that in prospect?

In the short term, markets don't care about dire consequences that are somewhere down the road. They rally based on liquidity and money printing provides it for them. While the news that the EU is going to recapitalize its banks sounds positive, there is little if any discussion in any article about where the money is going to come from. For the answer, picture a giant printing press spewing out fresh euro bills at break net speed. Investors should also expect a lot of nationalizations as part of this process. Belgium has just announced it will take over failed bank Dexia (described by the news media as "troubled"). Dexia is the largest bank in the country.

Market volatility is common during credit crises. Investors should expect continued market selloffs interspersed with big rallies. Ultimately, money printing will not save the day however because real value can't be created out of thin air. The day that will happen, is the day that PIIGS will fly. 

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.

Bank Failures Driving FDIC to Insolvency

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.


In December of 2009, the FDIC ordered U.S. banks to make three years of prepayments to its deposit  insurance fund. It looks like the FDIC has already blown through the $15.33 billion it collected at the end of last year and will soon be needing its own bailout.

As of July 16th, 96 U.S. banks have failed. The total was 86 at the end of the first six months of the year. A simple doubling of the number would indicate that there will be 172 failures this year. Estimates though are for around 200. More failures took place in the second half of the year in 2009. Total failures for 2009 were 140 compared to only 25 in 2008 and 3 in 2007. There is no question that the number of failures will be greater once again in 2010.

The FDIC maintains a troubled bank list and there are 775 banks on that list as of the end of the first quarter. That was up from 702 in the fourth quarter of 2009. Since failed banks are removed from the list, this indicates that more banks are getting into trouble than the number failing. As long as this continues to happen, the U.S. banking system is deteriorating further. Commercial loans going sour are now being added to the problem of too many bad residential real estate loans.

Investors should not be fooled by comparisons of current U.S. bank failures with the number of failures in the past. In the early 1900s, there were a very large number of small banks in the country. Over the last 80 years, U.S. banks have become much larger and far fewer in number so only a percentage comparison makes any sense. During the Great Depression, 9146 banks failed. That would represent over 100% of the 7932 banks that now exist. Even during the Savings and Loan Crisis there were more than twice as many banks in business than there are now. The total number of failures for the Depression and Savings and Loan Crisis are also for a period of up to 15 years. So we will have to wait until 2023 to see if banking failures are or aren't as bad now as they were during past crises.

We are not likely to have to wait very long however to see if the FDIC needs a government bailout for the first time. The FDIC states very clearly on its website that its operations are funded through member banks and it doesn't require taxpayer money. Well accepting a "loan" from the federal government or whatever they will call the bailout is taking help from the taxpayer. For a long time, I have been predicting that this event will be taking place in the fall of 2010. As of now, it looks like the FDIC may have trouble holding off insolvency even until then.

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.

June Employment Report: Where are the Graduating Students?

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.


Every May and June millions of students graduate from high school and college and enter the U.S. labor force swelling the numbers. Yet in the just released employment report for June, the BLS claimed the labor force decreased by 652,000 last month. This followed a decrease of 286,000 in May. This of course is not possible unless the U.S. economy is in the midst of a depression.

So where did the all the recent graduates go? One place most of them didn't go was to a place of employment. A survey by the National Association of Colleges and Employers found only 40% of new college graduates had a job offer before leaving school in 2010. This compares to two-thirds in pre-recession 2007.  High school graduates not going to college probably didn't do much better. The BLS lists the unemployment rate for those between 16 and 19 as 25.7%.

According to the Statistical Abstract of the United States, 3.3 million students graduated high school and another 3.3 million received college degrees in 2010. While not all of these people would have entered the labor force, it can be assumed that at least a few million did in the last two months. Nevertheless, the BLS claims that there were almost a million less people in the U.S. labor force in June than there were in April. This huge drop in participants caused the reported unemployment rate to drop to 9.5% in June since people who leave the labor force aren't counted as unemployed. The Bureau explained these disappearing participants as people who gave up looking for jobs because none were available for them - not exactly an indication of a recovering job market.

BLS figures further show that there were 301,000 less employed Americans in June than there were in May (see http://www.bls.gov/news.release/empsit.a.htm). The headline number reported a loss of only 125,000 jobs however. The BLS explained this away as a loss of 225,000 census jobs and claimed that the private sector added 83,000 jobs. If you use the 301,000 figure though, it looks like there was a loss of approximately 83,000 private sector jobs.

The insane contradictions in the BLS figures can partially be explained by 'seasonal adjustments'. This is one of the statistical tricks the bureau utilizes to try to make a sow's ear look like a silk purse. Seasonal adjustments make it possible for millions of graduating students to enter the labor force and the BLS to report that the labor force shrank while this was happening.

The employment numbers should be seen for what they are - absurd results created by gross manipulation. Many people however don't wish to believe this takes place despite all the evidence. Those are the people who really need to worry about the current state of the U.S. economy. If the labor force can decline by a million when millions or graduating students are entering it, this means it really lost maybe four or five million workers in a two-month period. That indicates that things are worse in the U.S. now than they were during the Great Depression in the 1930s.

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.

EU and UK: Raise Taxes and Cut Stimulus

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.


Europeans seem bent on acting like lemmings to the sea and jumping off an economic cliff. Not only are the eurozone and UK raising taxes and cutting spending, they want the rest of the world to follow their lead and will try to get this to happen at the next G-20 meeting in late June.

Why anyone would want to follow European countries on economic matters is a real puzzle. The EU's recent handling of the Greek debt crisis will be recorded by history as one of the major episodes of government ineptness of our time (and there is really stiff competition in that category).  Instead of dealing with the problem immediately and decisively by instituting dollarization and removing Greece from the currency union, EU leadership let the matter fester until it blew up. They then tackled the problem with an approximately one trillion-dollar bailout. The EU approach to economic problems seems to be: Why institute a simple cheap solution when an expensive difficult one is available? It's enough to make one ponder if EU policy meetings resemble a multi-lingual idiot's convention.

Over the weekend German Chancellor Angela Merkel stated that she was going to push for a swift exit from fiscal stimulus programs and a focus on debt reduction at the next G-20 meeting. It was German foot dragging on the Greek debt crisis that caused the euro to lose 20% of its value in six months. With a record of success like that, of course the rest of the world should be eager to copy Germany's economic policy ideas. Earlier in June, Merkel's cabinet unveiled substantial budget cuts and tax hikes. France did the same thing recently as have other eurozone countries. Merkel is also spearheading the drive for an international financial transaction tax with the money being used for future bailouts. The possibility that there shouldn't be government bailouts of financial institutions or that the financial institutions that might be bailed out should pay the tax themselves and not their customers seems to have eluded Merkel. Of course, financial centers like London and New York would shoulder a disproportionate amount of the burden, so it is the ultimate socialist solution - get the other guy to pay. Perhaps Merkel isn't as economically challenged as seems to be the case.

Conditions don't appear to be much better in the UK, although we won't find out until Tuesday, June 21st when an emergency budget will be announced by the Conservative-Liberal coalition government. The UK is part of the EU, but not part of the eurozone so it is not obliged to follow the 3% budget deficit to GDP limit imposed there (not that the eurozone countries themselves follow this rule). Like their fellow EU members, suddenly the Brits woke up and realized they had massive deficits (they should have been reading the papers, it's been reported there on a regular basis). Large spending cuts and tax increases are on the table. Even then, the UK's budget deficit could reach 10.5% of GDP in the 2010-11 fiscal year (still less the U.S. number for 2010). It is thought the VAT (value added tax) will be raised from 17.5% to 20.0%. There have been rumors that the capital gains tax rate will be raised from 18% to 40%. If this occurs, money will flow out of British markets at a prodigious rate.

If what's going on in Europe sounds familiar to Americans, it should. These were essentially the economic policies of the failed Carter administration in the late 1970s. During that era, the U.S. economy was chronically weak and the stock market went nowhere. This economic program instituted today could have far worse consequences. The global economy was severely damaged by the Credit Crisis and is still in a very fragile state. It is likely to go into a tailspin.  The predictable follow up will be a return to spending. This scenario happened during the Great Depression after Franklin Roosevelt tried to balance the budget after the 1936 election and the U.S. economy and stock market tanked. If elected officials today are determined to repeat the mistakes of the past, investors should take note and act accordingly.  
 
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.

Bernanke Testimony Indicates Fed Still in Denial

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.


Fed Chair Ben Bernanke testified on Capitol Hill today and didn't disappoint. As usual, his lack of insight into the true state of the U.S. economy boggles the mind.

The key takeaway from Bernanke's remarks is that the U.S. economy is strong enough to withstand the fiscal tightening ahead. Bernanke then promptly undermined this claim by admitting that the housing market has "firmed only a little" since mid-2009 and that it will take a long time before 8.5 million jobs lost during the Credit Crisis will be restored. What Bernanke left out was that even though the federal government has spent trillions on bailouts and efforts to directly and indirectly prop up the U.S. housing market, it has managed to get only slightly better. As for the jobs lost, what will that number be after the 1.2 million temporary Census workers are let go in the next few months? A 10 million lost job figure is probably more realistic.

It is of course not surprising the U.S. economy has gotten better after the government has pumped trillions of dollars in extra spending into it and given banks credit at zero percent interest. What is surprising is how little improvement there has been given these extraordinary and unsustainable measures. There is little evidence of private sector hiring in the job market and moreover the weekly unemployment claims are stuck over the 400,000 number that indicates layoffs are taking place at a recessionary level. The U.S. economy is also dependent on consumer spending. This accounted for 72% of GDP before the Credit Crisis. Consumers not only have job problems, but they are also losing access to credit. While credit card debt is dropping rapidly, there was a minuscule increase of $1.0 billion increase in overall consumer credit in April. Loans held by the federal government increased by $1.7 billion.

Nevertheless, Bernanke is confident that "gains in final demand will sustain the recovery in economic activity" even though "support to economic growth from fiscal policy is likely to diminish in the coming year". Bernanke went on to state the federal budget deficit is was estimated to decrease by $500 billion in fiscal year 2011. It was not clear where in the private sector the 'final demand' would be coming from to make up the reduced spending from the federal government. It certainly doesn't look like it will be coming from the over leveraged American consumer. As for the reduction in the budget deficit, prior to the last year of the Bush administration, the record budget deficit in total was less than $500 billion. A reduction by that amount now indicates the federal government will be spending $1.1 trillion more than it is taking in during 2011. That is still an enormous amount of deficit spending and hardly indicates an economy that can function on its own without constant ongoing government stimulus.

What led to the tragedy of the Great Depression in the 1930s were major missteps from the Federal Reserve and the federal government. The Fed put the interests of the banking community over those of the American public and this is what turned a bad recession into a bad depression. This was combined with an ongoing campaign of denial of the problem on Washington's part. Herbert Hoover gave a press conference in June 1930 announcing the Depression was over (it was only just beginning). The similarities to all the talk coming out of Washington today about economic recovery should give investors pause.

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.

An Analysis of Retail Sales Media Coverage

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.


Retail sales look like they increased 8% to 10% in March 2010 according to the International Council of Shopping Centers. Assuming the numbers are correct, and this is perhaps a very big assumption, a number of mitigating factors led to the unusual rise, including an Easter holiday that fell right in the beginning of April and very mild weather in March after a February filled with snowstorms. Nevertheless, mainstream media reports heralded that "consumers are finally coming out of hiding" and that happy days are here again.

Today's New York Times had some of the most positive reporting stating that the U.S. consumers' mood has gone from panicked to cautious to "almost a bit giddy" - a quote from Mark Zandi, chief economist for Moody's Economy.com. In coverage elsewhere, Jackson Bros., Boesel & Co. noted that this is season when chain store sales increase and that they saw interesting possibilities in Woolworth, Grand Union, and J.C. Penney.

Today's coverage in the Times noted that "import cargo volume in March also suggested a strong month for retailers", having risen for four months in a row and being up an estimated 6% in March according to the National Retail Federation.  Other publications reported that rail freight loadings in the week that ended March 21st gained more than they usually do in March and had hit a new high for the year. The implications are of course that this indicates that retail sales will be getting better in the future.

The Times upbeat coverage also included "sales are simply much stronger than companies had expected,” and the improvement extends to some of the most costly items including autos with Ford, Toyota and General Motors having robust sales increases in March. The Times did concede that incentives such as no-interest loans may have been responsible. Other sources reported that one major automaker had its third straight monthly gain of around 50% and its highest sales since last June. Dodges, De Sotos, Plymouths, and Fargos were apparently flying off the lot in March... March 1931 that is.

While the New York Times article was published on April 7, 2010, the other articles cited were published 79 years ago in early April 1931 - two years before the economy hit bottom during the Great Depression and many more years before the U.S. managed to crawl out of the economic devastation that the downturn had caused. Rosy media reports in 1931 did not mean that the economy was getting better and it is quite possible that don't indicate that in 2010 as well. Mainstream media wants to tell the 'everything is getting better' story and managed to do so in 1931 when the U.S. economy was actually falling off a cliff. Investors should assume little has changed with media reporting since that time.

What has changed since the 1930s is that the Federal Reserve is pumping huge amounts of liquidity into the financial system and the government is spending huge amounts of money it doesn't have to keep the economy functioning. Retail ETFs, such as RTH, XRT and PMR, are trading at two-year highs. While a realistic analysis of the macro picture may not justify such high stock prices for retailers, liquidity is responsible for the ongoing rally. The party should continue as long as the Fed continues to supply free booze. One it stops doing so, expect one big hangover.

Disclosure: None

NEXT: Why China is About to Change Its Currency Policy

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. Consumer Spending: Not Indicating Economic Recovery

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 Commerce Department released figures for February consumer spending on March 29th. The report indicated that consumer spending was up 0.3% in February, but personal incomes were flat. The savings rate was lower though, dropping to 3.1% from 3.4% in January. Spending increases were highest for necessities, such as food and clothing. Spending on non-durables actually fell. Nevertheless, somehow the mainstream media looked at these figures and concluded, "Both the spending and income figures in Monday's report point to a modest economic recovery".

Now for a dose of reality.

If income is not going up, but consumer spending is going up, there are only three possible explanations. Consumers have either gotten increased credit and are borrowing more, they are spending savings, or they are selling assets.  If they are spending savings or selling assets to support their spending, the economy is in very bad shape, somewhat similar to the way it was during the Great Depression in the 1930s. Since the savings rate was still a positive number, consumers were not taking more money out of their savings accounts than they were putting into them. So consumers were still saving, but at a lower rate. The 'Personal Incomes and Outlays' report (that's its official name) doesn't analyze buying and selling of assets, but does have a figure on 'Personal Income Receipts on Assets' that includes interest and dividend income. This number decreased by $16.5 billion in both February and January and that may indicate that the public is quite possibly a net seller of assets. Consumer credit is also not handled in the report, but the latest figures from the Federal Reserve indicate that revolving (read credit card) consumer credit declined at a 2.5% annualized rate in January.

While the sources for the supposed increases in U.S. consumer spending are murky at best, the amount of consumer spending in and of itself is not a determinant of whether or not economic recovery is taking place. The increased spending needs to come from economic growth and not government spending. If it comes from more government spending, better numbers are just a shell game and are actually an indicator of just how troubled the economy really is.  U.S. consumer spending rose $34.7 billion in February. Of that amount, $16.6 billion came from an increase in federal government transfer payments. That is only the one-month change in federal spending being funneled directly into consumer's pocket. Government support for the U.S. economy has increased substantially and in myriad ways since the beginning of the recession in December 2007.

While consumer credit has declined significantly since the Credit Crisis began, government borrowing has increased to make up the slack. This is why the U.S. is facing a $1.6 trillion budget deficit in fiscal year 2010.  The record levels of government borrowing are propping up the entire U.S. economy, including consumer spending. Governments don't spend more when economies recover; they spend less. Only when U.S. government spending begins to decline sharply and reports come out that consumer spending is increasing should investors consider believing that economic recovery is really taking place.

Disclosure: None

NEXT: Market Says U.S. Treasuries Riskier Than Corporate Debt

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.

Economy is Bad, but GDP Report OK

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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For those who missed it, the cover of the latest issue of Newsweek has a blaring headline, "The Recession is Over". This 'just wishing makes its so' approach to economic forecasting is being pushed by the Fed and some of its compatriots. I have yet to read though of even one industry that is showing growth in the alleged economic rebound that is taking place. Nevertheless, there was a lot of fanfare for the release of today's GDP Report and how it would show things are getting better. I had no doubt that it would considering the GDP figures are probably the most manipulated and unreliable ones that the U.S. government produces.

Yesterday I checked the 2007 and 2008 GDP figures. If you look at the BEA (Bureau of Economic Analysis) website, you will see that during 2008 the U.S. GDP increased over $450 billion. This a rather eyebrow raising figure considering that the U.S. was in the worst recession since the 1930s during all of 2008 and the classic definition of a recession is declining GDP. If only our current batch of government statisticians had been around in the 1930s they could have made the GDP numbers go up and shown conclusively that there was no Depression! Then they could have used the good GDP numbers to show people that they weren't really hungry and unemployed.

The headline number in today's GDP Report was a decline of 1.0%. For the past year the economy has declined 3.9% (or at least that's the not as bad as the real story official number). It also seems that first quarter GDP was revised downward from minus 5.5% to an even worse minus 6.4%. Looking inside the report, there is little that is positive other than the current declines are less than the previous declines. The big improvement in last quarter GDP did not come from either the consumer or business sectors, but from government spending and trade.

Consumer spending which accounts for 70% of GDP can be summarized as: spending on durable goods fell 4.0%, spending on nondurable goods decreased 7.1%, and spending on services was down 2.5%. Business investments fell at an 8.9% annualized rate during the second quarter and Inventories declined by $141.1 billion. Investments in structures dropped 8.9%, and investments in equipment and software fell at a 9.0% pace. Investments in housing went down for the 14th consecutive quarter, dropping at a 29.3% annual rate. While the actual economy itself was devastated, good news came from the government sector of GDP. Federal spending rose 10.9%! Imagine how good the GDP Report could be if the federal government printed and spent even more money?

Interestingly, the GDP deflator (the inflation rate used to calculate GDP) was 2.2%. I was amazed the government admitted to so high a number. Last year for the second quarter report it was 1.2% even though this was when oil and food prices were skyrocketing. The government claimed that there was almost no inflation at that time despite the obvious. According to classic economics, inflation can't exist during a recession. Also according to classic economics money printing causes inflation. It's quite obvious which one is winning in this case.


NEXT: Critical Juncture for Dollar and Stocks

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 Unemployment Reaches 15%

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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Just because you don't have a job in the U.S. doesn't mean the government considers you unemployed. The monthly Jobs Report was released today and the headline number was an unemployment rate of 8.1%. This is however the rosiest possible interpretation of the U.S. employment picture. While 12.5 million people were counted as unemployed, there were an additional 2.1 million 'marginally attached' workers (also known as discouraged workers) - people who looked for a job within the the last twelve months, but not in the last four weeks. These people are not considered to be unemployed. A much larger 8.6 million workers worked part time last month and are considered fully employed even though they may have worked as little as an hour a week and wanted to work full-time. If you consider the discouraged workers and involuntary part-time workers as unemployed, the U.S. unemployment rate is actually 15.0%.

This 15% is calculated using the government's own numbers. This is more than enough reason to think things might be even worse than what the government is telling us. Every employment report since the Credit Crisis began in the fall of 2007 has had two downward revisions after the initial numbers were released and these have frequently been substantial. As an example, December 2008 jobs losses were initially reported at 524,000. That was revised to 577,000 last month and in the current Jobs Report the losses have now been updated to 681,000. An additional loss of 151,000 jobs for January and December combined showed up in today's report for February employment. You should expect that the January numbers will be revised downward again next month (the numbers are revised for two months). The 651,000 loss reported today will almost certainly be larger in the April and May reports.

Looking inside the figures you would also note that three categories have gained jobs every month since the Credit Crisis began - health care, education, and government. Most education and many health care jobs are of course government related. While it is possible that employment in health care is increasing, considering the poor fiscal condition of state, local and the national government in the U.S., it is quite incredible that more and more people are working in education and directly for the government. Where is the money coming from to pay for these workers and what are they being hired to do?

In the 1930s Great Depression, U.S. unemployment is believed to have peaked around the 25% level (approximately the same rate that was reached because of the hyperinflation in Weimar Germany in the 1920s) . This is just a rough estimate because the data gathering infrastructure that exists today, didn't exist back then. If you see the alternative unemployment numbers reach 20% or so, it would be reasonable to assume that current economic conditions are as approximately bad as they were in the 1930s.

NEXT: Stocks Look for Bottom, Oil Rallies

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.

Stocks Looking for a Bottom, Oil More Bullish

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 New York Investing meetup had its March meeting last night and it was marked by controversy and intense audience reaction. Even during my first talk about the history of the Credit Crisis, two people walked out and one of them demanded their money back. While this was common a year and a half ago when we were one of the first groups to discuss the Credit Crisis and people continually left the group because they could just not believe what we were saying (almost everything we discussed at that time has since come true), it is surprising that there are still some people that want to live in denial... but there are. The second talk on Hyperinflation by Jeff Glenn was the real lightening rod for controversy however. This was indeed way over the top at certain points and one audience member attempted to shout Jeff down more than once. Other members of the audience then attempted to shout the heckler down. Fortunately, a riot didn't break out.

The market is attempting a rally as I write this, but it is probably not done on the downside in this move. The minimal requirement for this is that the Nasdaq fall to its November low of 1295. In the meetup last night we went over why a low in the month of March is likely because of the extreme oversold values of the RSI on the monthly charts. This line is below 20 for the Dow and S&P500 for February and is likely to reach the same level this month that the S&P 500 did at the market bottom in 1974. Just how oversold stocks are can be seen in a few eye popping statistics:

1. January and February marked the U.S. markets' worst first two months on record.
2. Last month marked the S&P's worst February since 1933, with the index posting a 10.9% monthly loss.
3. The Dow is down 38% in the past six months, its worst six-month return since 1932, when it plunged 41% (this was around the market bottom during the Great Depression).

Don't forget that big rallies invariably follow big drops.

The economic news is about as gloomy as it can get too and everyone is waiting to see just how bad the jobs report is going to be Friday (predictions are for around a 700,000 loss in jobs). Car sales came out yesterday and General Motors' sales fell 53 percent, Ford sales fell 48 percent and Chrysler's 44 percent year over year (the major Japanese automakers fared only slightly better). If the U.S. automakers are to survive, they will do so only with the help of continual government bailouts. Housing still isn't in good shape either, with a report this morning stating that that 20% of U.S. homeowners owe more on their mortgage than their home is worth and this number will go up substantially if house prices fall just another 5% (they are likely to fall much more than that).

While stocks may not be done on the downside, it looks like oil is. So far a double bottom has been put in on the near term futures in the 33 range in December and February. Nymex oil dropped below $40 a barrel yesterday, but popped back up above this level shortly thereafter just as it has done many times in the last two months. The market has repeatedly told us that it wants oil at 40 or above and we should be listening to it. At our introductory technical analysis seminar on Tuesday, February 17th, I recommended people start picking up DXO (200% long Nymex oil). At least one person got it a the very bottom price of 1.73 and several got it around 1.75. It went to 2.50 thereafter and provided quick short term profits for a few that cashed out. Others are holding out for bigger returns, which they will likely get.

NEXT: Quantitative Easing Today, A $50 Cup of Coffee Tomorrow

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.

NBER Admits New York Investing Was Right

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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Yesterday, the NBER (National Bureau of Economic Research) declared the U.S. is in a recession and the peak of the last expansion was in December 2007. It was at the December 2007 meeting that the New York Investing meetup predicted a recession in the U.S. Many times after that, it was stated in various meetings that it was our belief that a U.S. recession began at the end of 2007. The NBER has now corroborated that New York Investing's views on the economy were not only correct, but one year ahead of the government's.

The value of truthful and timely economic analysis is starkly highlighted by the difference in stock market values from the time that New York Investing said recession and when the NBER did so. On December 12, 2007, the date of the New York Investing meeting when recession was predicted, the S&P 500 closed at 1487. Yesterday, when the NBER made its announcement, the S&P closed at 816. If you had gotten out of the market when you heard the news from New York Investing, you would have saved yourself a 45% loss on your portfolio.

Yesterday was of course a horrendous day in the market, even though any rational person with an IQ above room temperature has known for some time that the U.S. economy is in recession. According to news reports, even many members of the NBER thought so for awhile, but for some reason they couldn't seem to reach a consensus until after the election was over. The fact that the market was surprised by this obvious news is truly amazing and indicates the level of economic fantasy that is still built into stock prices. The Dow fell 680 points or 7.7%, the S&P 500, 80 points or 8.9%, and the Nasdaq, 138 points or 9.0%. The small caps in the Russell 2000 were truly crushed with the index experiencing a 56 point or 11.9% drop on the day.

The average post-War recession has lasted 10 months. This one has already lasted longer and in five more months will break the post-1945 record of the very deep 1973-75 and 1981-82 U.S. recessions. As of now, it is inevitable that this will take place. The government may try to manipulate the figures even more than usual so it won't look like this is happening (it's a lot easier to change the reporting of what is going on in the economy, than the economy itself), but that won't change the underlying reality. The current recession indeed has little in common with the recessions in the post-War era, it is more similar to those in the pre-War era, particular those that took place during the Great Depression of the 1930s.

NEXT: Bailout Costs: $8.5 Trillion so far ... and Counting

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.

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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.

PPI and CPI - Don't Get Excited Just Yet

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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Yesterday the PPI (producer price index) indicated that wholesale prices dropped 2.8% in October, the biggest one-month decline in the 60 years that this data series has been in existence. Today the CPI (consumer price index) report had consumer prices falling 1.0% last month, the biggest monthly drop in its 61 year history. One item alone, energy prices, made a disproportionate contribution to falling prices. Oil has dropped over 60% from its high in July and gasoline prices in the U.S. are down around 50% from their top the same month, having dropped an unprecedented 60 days in a row (with sharp decreases just before the election). This entire drop is still not fully reflected in PPI and CPI and is likely not yet over either, so expect further drops in both in the next couple of months.

Core inflation (inflation minus food and energy) painted a very different picture from the headline numbers however. PPI core rose 0.4% on the month. CPI core fell only 0.1%. There is also no year over year deflation either. Prices for finished producer goods have risen 5.2% in the last year and consumer prices are up 3.7%. At least these are the official numbers. The New York Investing meetup has demonstrated several times in its meetings how consumer price inflation is significantly understated by the U.S. government. Falling prices based on drops in commodity prices also have their limitations. While there is no maximum to commodity prices, there is a minimum which is determined by the cost of production. As this is approached, less efficient wells and mines are closed down. New projects are postponed. Supply falls so that profitable prices are maintained.

How does this compare to the deflation that took place in the early 1930s during the Great Depression? Estimates are that U.S. consumer prices fell approximately 3% in 1930, 9% in 1931 and 11% in 1932 (the bottom year). Production output was also falling by similar amounts during this period. Similar drops in prices and production took place in a number of countries. The one common denominator among these countries was a fixed-exchange rate gold standard and not the inherently inflationary fiat currency standards that now prevails throughout the world. Big increases in money supply, which are inflationary, are not sustainable under a gold standard, but can now take place in seconds by hitting the enter key on a computer keyboard. While the U.S. monetary authorities actually supported deflation by constricting the money supply at the beginning of the Depression, today they are doing everything possible to expand the money supply and create inflation.

Nevertheless, there are a large number of people who maintain that deflation is taking hold in the U.S and will only get worse over time. The crux of their argument is usually that bank credit is in collapse and the amount of bank credit available determines inflation or deflation (not rising or falling consumer prices, which is everyone else's definition) . They also frequently claim that inflation is led by rising wages and can't take hold otherwise. This was indeed true in the U.S during the 1970s, but apparently unbeknownst to these people, history began before that decade. Large inflations have existed since at least the Roman Empire and have taken many forms. As for Wiemar Germany, the one case of hyperinflation so far in an advanced industrial economy, there doesn't seem to have been any major increase in bank credit, which would be required in the deflationists world view. The government simply spent money it didn't have and had to keep printing more and more currency to keep up. For something like this to happen in the here and now, the U.S would have to be running larger and larger budget deficits and the national debt would have to be skyrocketing. Or in other words, exactly what is taking place.

NEXT: Market Must Hold In Here

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.

Auto-Asphyxiation - GM, Ford Gasp for Bailout

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:

No industry better symbolizes 20th century American commerce and culture than does autos. It was in the U.S. that mass production of cars were perfected by Henry Ford and the idea that the average person could own their own vehicle first took hold. It was widespread ownership of automobiles that allowed the post-World War II U.S. to become a suburban chain store nation. Now, the three remaining major U.S. auto companies no longer seem to be viable businesses and the implications are not just economic, but social and political as well .

The problems with the auto companies didn't just happen overnight, but first became evident in the 1970s. When oil prices started to soar, the American consumer turned away from the huge gas guzzlers that Detroit manufactured and the Japanese car companies with their fuel-efficient products gained major footholds in the U.S. market. Chrysler eventually needed a $675 million bailout in 1980 to continue operating. Detroit failed to heed the warning however and the lesson it learned from the events of the 1970s was that the government would bail it out if it messed up and it should try harder to get government restrictions and limitations on foreign imports. Auto industry lobbyists also subsequently did everything possible to overturn federal laws that mandated Detroit produce fuel efficient cars. So in the last ten years, this allowed them to saturate the U.S. market with low gas mileage SUV behemoths and pickup trucks. Now another completely predictable surge in fuel prices has taken place and the Japanese along with Korean auto manufacturers are there to pick up the pieces. An industry that has repeatedly lambasted government interference in its operations and used its political power to undo government programs that could have preserved its economic viability, now is begging the government to interfere by bailing it out.

This is not to imply that auto sales aren't hurting all around because of the economy - they are. Year over year industry sales were down 32% last month and while Ford was in line with a 30% drop, GM had a much worse 45% fall. Similar figures can be found for 1930, the first year of the Great Depression by the way (read that sentence again). GM has has been bleeding red ink since the end of 2004 with a total loss of $73 billion. Ford hasn't been much better off, but managed to report a surprise profit in the second quarter of this year. At that time the New York Investing meetup pointed out that this supposed profit was completely bogus, although the financial media trumpeted it with blaring good-news headlines. For a few days Ford's stock surged, but within weeks began to collapse. The low in Monday's trading was a $1.90 and GM had fallen to a new 50 plus year low of $3.02. GM stock dropped almost 25% on the day because it had announced that its 49% owned GMAC credit arm was likely to go under and its spun off part's supplier Delphi might not emerge from bankruptcy.

Bad earnings are not what forces companies into bankruptcy though. Running out of cash is what pushes them over the edge. By this criteria, GM is likely to go under sometime next spring and Ford might last a little longer. A massive government bailout for the entire industry is of course inevitable. The bailout actually started last year with $25 billion in loans in the 2007 energy bill and an additional $25 billion loan attached to a bill for funding for the Iraq and Afghanistan wars this September. Detroit now wants part of the Wall Street bailout bill money, although the Bush administration is hostile to this suggestion, so Detroit may have to wait until early 2009 to be saved from itself by the federal government.

NEXT: AIG - Bailing Out the Bail Out ... Again

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.