The EU May Have Reached Its Bailout Limit

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.

Today, yields on Spanish 10-year sovereigns tested their yearly high yield of 7.28%, while Italian rates reached 6.16%. This was after funds for the Spanish bank bailout were approved by the EU, although the money won't be going directly to the banks. Earlier in the week, the IMF admitted that  the only solution to Europe's debt woes was to run the printing presses at full speed.

The situation in Spain is ugly and getting worse. Unemployment is almost 25% there and the country is in a recession. The Spanish economy is dependent on public spending and building empty houses that no one buys. The government has recently announced severe spending cuts and higher taxes, both of which will lower future growth. Yet, until today Spain was forecasting GDP growth of 0.2% for next year. It now thinks that GDP will decline by 0.5% in 2013. This is not just an optimistic scenario; it's a Harry Potter fantasy scenario. As is the case with Greece, Spanish economic and financial numbers cannot be trusted. Greece in the early stages of its bailout also produced optimistic projections of how easily and quickly everything would be fixed. Instead, its financial problems escalated out of control.  The same outcome should be expected in Spain.

Bailed-out Bankia is a good example of the how reliable the books are for Spanish banks. Bankia claimed to have earned a €300 million in profits in 2011, but in late May revised that to a €3 billion loss. Now Spain is in line for a €100 billion bailout from the EU, although it has claimed that it needs less. Based on how Bankia did its accounting, Spanish banks are likely to need more, maybe ten times more than that amount. This does not include money for bailing out the bankrupt Spanish government.  

Originally, the EU planned on providing the bank bailout money (structured as a long-term loan) directly  to Spain, who would in turn distribute it internally. When this caused Spain's sovereign debt rating to be downgraded, creating greater fiscal problems for the struggling government, the EU then decided to route the loan directly to the banks. Yesterday, the German parliament refused to go along. They were only willing to approve a loan directly to the Spain itself. It wasn't easy to get even that passed. Twenty-two members of Angela Merkel's coalition voted against it. The leader of the Free-Democrats described the bailout as "a bottomless pit". It doesn't look like German legislators have an appetite for any further bailouts and this is bad news for Spain and Italy as well.  

The IMF has an idea of what to do instead, but its solution could hardly be described as constructive. In a report issued on Wednesday, the organization essentially advised the EU to engage in every type of money printing possible, do a lot of it, and to start doing it immediately. The ECB has already expanded its balance sheet by more than the U.S. has and it hasn't solved the EU's problems so far. Massive money printing as suggested by the IMF would debase the euro significantly. So, in order to save the currency union, the currency it issues must be destroyed. Somehow, there seems to be a logic flaw in this line of reasoning (sort of like, a debt crisis can be solved by incurring more debt).

The bailout news today was disastrous for Spain and Italy. The Spanish IBEX index was down 5.79% dislocations  — a mini-crash and the worst drop in the two years. The Italian market was down 4.4%. The euro hit a new yearly low. The ETF FXE traded down to 120.78. This is below its bottom during the Credit Crisis, but still above the 2010 low made when the debt crisis first appeared. As the situation continues to unravel, more selling should be expected.


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.

More Debt Problems in 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.

While stocks weakened in the U.S. on Thursday because of disappointing economic data, they were down in Europe on the resurfacing of the debt crisis issues.

The head of sovereign ratings at S&P, Moritz Kraemer, speaking at an event at the London School of Economics said that another restructuring of Greek debt is likely, with the bailout partners such as the IMF having to take a hit the next time around. Speaking at the same event, the IMF mission chief to Greece acknowledged it would take at least a decade to fix Greece's finances. His prediction may be optimistic considering the situation in Greece is volatile and its economy is in free fall. 

Greece is of course not the only problem child in the eurozone. Portugal, Ireland, Spain and Italy also need some sort of fix. The Eurozone has attempted to put together a firewall to prevent these countries from collapsing into the same debt crisis that engulfed Greece. There are now plans to extend the ceiling of the rescue aid package to 940 billion euros ($1.25 trillion). This money is used to buy up bonds from the debt-challenged countries in order to keep their interest rates down.

The funds do not solve the underlying problem however — all of these countries are living beyond their means and until they drastically cut their expenses they will require a continual stream of rescue money. German central banker, Jens Weidmann, recognized as such when he stated, “Just like the ‘Tower of Babel,’ the ‘Wall of Money’ will never reach heaven. If we continue to make it higher and higher, we will, in fact, run into more worldly constraints".

The program has been effective in the short term however. Portuguese 10-year bond yields were at 17.39% on January 30th, but were trading at 11.52% on March 29th (still too high for Portugal to remain afloat in the long term). Italian 10-year bonds had a yearly high yield of 7.46%, but traded at 5.29% today and Spanish 10-years were as high as 6.72%, but recently went for 5.47%. The eurozone's goal is to keep these rates below 6% — the level at which Greece got into trouble.

The rescue funds should run out by 2013 and more money will have to be added to the mix. Whether or not this will be the point when additional money is not forthcoming remains to be seen, but there will be such a point. The amount of assistance Ben Bernanke is willing to provide may impact the timing. As reported by Zero Hedge, the  U.S. Fed already holds some European sovereign debt. It could easily buy more. Once again, the end will be the same unless you believe that a debt crisis can be solved by taking on more debt or by printing more and more money. At least some of the more responsible authorities are beginning to admit that this isn't possible.

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.

Greece Interrupted — Bond Swap is Not the End

 

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.

Greece is set to swap its privately-held government bonds today for new ones that will represent a three-quarters loss of the original investment. The deal will allow the country to receive 130 billion euros in funds from its second bailout. Like the money from the first bailout, those funds will eventually run out however.   

The Greek bond swap is the biggest debt writedown in history. Over 85% of  private investors (essentially banks, the deal does not include bonds held by the IMF or ECB) holding 117 billion euros ($234 billion) agreed to the "voluntary" exchange. The CEO of one major European bank described the transaction as about as voluntary as a confession during the Spanish Inquisition. The loss to bondholders is twofold consisting of a reduction in face value of 53.5% and then lower interest payments stretched over a longer period of time. All in all, private bondholders are taking an approximately 74% hit (assuming of course there isn't another writedown or Greece doesn't renounce its debt completely in the future).

Credit rating agency Moody's decided to call a spade a spade and declared Greece to be in default. Moody's line of reasoning in stating the obvious is that it considers a loss greater than 70% to be a "distressed exchange" (that's putting it mildly) and is therefore indicative of a default.  The matter is not merely academic, since there is a significant amount of credit default swaps (bond insurance) outstanding on Greek debt. On Friday, a committee of the International Swaps and Derivatives Association —  the regulatory authority on credit default swaps — ruled that the Greek debt restructuring was a credit event, and this will trigger payouts. How much CDS holders will receive remains to be seen.

Commentary from the EU political leadership on the swap deal was more mixed than after the first Greek bailout (statements back then were upbeat and generally confident that the problem had been solved and Greece was on its way to recovery). French president Sarkozy stated, "Today the problem is solved. A page in the financial crisis is turning." Christine Lagarde, head of the IMF said, "The real risk of a crisis, of an acute crisis, has been, for the moment, removed." German officials were far more cautious however. The French may be correct as long as their words are taken literally. The problem is indeed solved for today. That doesn't mean it is solved for tomorrow.

It is actually highly unlikely that the situation in Greece will be turning around any time soon because of the massive reduction in its debt load from the bond swap. If Greece had a functioning economy, there would be hope. However Greece's economy is heavily dependent on government spending and in exchange for bailout money the IMF and ECB have demanded severe cuts in Greece's budget deficits. Greece is now entering its fifth year of recession, after GDP contracted by 7.5% in 2011. Investment fell by 21% last year after sliding 15% in 2010.  For Greece to continue to operate at all, continued bailout money will be needed. Greece has effectively gone from a welfare state to a state on welfare.

Not surprisingly, some analysts are sounding a note of caution. Predictions are that the financial bleeding in Greece will show up once again later this year. Problems may arise even sooner depending on when the next election takes place (now supposedly in May) and how much power the fringe parties gain. The bond market doesn't seem hopeful either. One year Greek government bond yields were last at 1143%.  Such yields represent collapse, not solvency.

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.

Greek Deal is Another "Fiscal Solvency in Our Time"

 

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.

Once again Greece has avoided a messy default and once again its creditors have had to take a greater loss on their loans and once again standards had to be abandoned to make the deal go through. And once again, we're not done yet.

Realistically, Greece is actually undergoing a messy default; it's just doing it in slow motion. When creditors are not fully paid, there is a default. The original default terms for creditors last summer were for a 21% loss for private bondholders (read banks). This percent has been raised more than once and with the latest round of negotiations, it will be above 70% according to Jean Lemierre, who co-headed the talks for the IIF (Institute of International Finance). The ECB and national central banks in the eurozone have agreed to "forgo profits on their holdings" (presumably this means the interest payments on Greek government bonds -- something which also indicates default).The eurozone countries will reduce the interest on Greece's first package of bailout loans to 1.5% over market rates from the previous 2% to 3%. This is the first time the ECB and other eurozone central banks have agreed to take a hit on their own holdings.

What prompted the further concessions to Greece was an attempt to get its 2020 projected debt to GDP ratio down to 120%. Without them, the ratio would have been 129% even under the bailout troika's (EU, ECB and IMF) most optimistic scenario (for the non-political reader, this means the complete fantasy scenario). Projections during the first bailout deal proved too good to be true and it should be presumed that these are as well.

There are still a lot of approvals needed to ensure that the current deal goes forward. If it does, every Greek man , woman and child will have received the equivalent of $29,000 from bailout payments. Greece holds elections in April and support for the anti-bailout parties is increasing. Whether or not it will be enough to derail the bailout deal remains to be seen.

Greek one-year government bond yields reached a high of 682% today according to Bloomberg.  To say that the market is not giving the bailout deal a vote of confidence would be an understatement. Last summer, they were around 40% and have been rising continually since then. While euro-politicians are once again claiming the problem is solved, the market indicates that Greece is imploding.

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.

EU Debt Crisis Spreads Worldwide

 

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.

As the situation in Greece deteriorates further, Moody's announced today that it intended to downgrade 114 European financial institutions and 17 global banks. Hopes that China will buy up   EU sovereign debt to help prop up the faltering eurozone may wind up costing the U.S. more than it does China. 

The hostility between Greece and the EU/IMF/ECB bailout troika is palpable. Nevertheless, there are claims that a deal should be reached by Monday. Whether the severe budget cuts demanded will actually be implemented is another story. Greece's GDP is shrinking 7% this year and additional budget cuts will only make the situation worse. Athens is already riot torn and elections in April (assuming a democratic government still exists) are not likely to produce a government favorable to the bailout terms. The market remains increasingly skeptical of Greece's near-term future with one-year government bond yields reaching 528% today.

While all attention is focused on Greece, the European debt crisis permeates the continent. Banks have lent too much money to not just Greece, but to Portugal, Spain, Italy and Eastern European countries as well. There is a still a hangover of pre-Credit Crisis debt that wasn't resolved in 2008, but merely papered over with newly printed money. Moody's just announced it was planning on downgrading 114 European financial entities including 7 in Germany, 9 in Great Britain, 10 in France and over 20 each in Spain and Italy. Global banks Nomura and Bank of America are in line for a one-notch downgrade, while Barclays, BNP Paribas, Credit Agricole, Deutsche Bank, HSBC Holdings and Goldman Sachs could have their ratings lowered two notches. UBS, Credit Suisse and Morgan Stanley could be reduced three notches.

China with its vast foreign reserve holdings has been considered the potential savior of the eurozone. If this does occur, it won't be only China that is paying however; the U.S. will be sacrificing as well. China has previously announced it wants to diversify its reserve holdings. Since a disproportionate amount of these are in U.S. treasuries, the obvious implication is that it will be funding less U.S. debt as it funds more EU debt. The most recent figures for November 2011 indicate that China decreased its U.S. debt security holdings by almost 3%.

The EU debt crisis is likely to be us for some time to come. The situation with Greece is not stable and at some point it will have to leave the eurozone. Attention will increasingly focus to the other debt-ridden countries and the weak banking system. Just as the crisis spread from Greece throughout Europe, it will then spread from Europe to the rest of the world. We are already seeing this happen.

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.

Global Markets Slip on Greece

 

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.

Stocks in Asia, Europe and North America are falling as contagion from the Greek debt crisis continues to impact markets worldwide. Until there is some resolution, investors should expect this to continue along with intermittent sharp moves up due to central bank liquidity injections.  

Trouble began in Asia last night with the Hang Seng in Hong Kong falling 537 points or 2.8%. It closed at 18,918, well below the critical 20,000 support level. The Indian Sensex was down 188 points or 1.1% to 16,745. It has been leading Asian markets down and is trading on top of a very large gap made in May 2009. The Nikkei in Japan managed to buck the trend and close up 195 points to 8864 or 2.3%. It has been mostly trading below key support at 10,000 since March when the Tohoku earthquake struck. All three markets are in a technically bearish trading pattern.

No part of the globe can escape what is happening in Europe. EU finance ministers said Friday they would delay authorizing a new installment of emergency funds for Greece until October. Greece is still on its first €110 billion bailout, but the final payments have yet to be made. A second bailout has yet to be fully approved, although the terms have been set.  Greece's fiscal situation continues to deteriorate rapidly despite all the funding it has received from the EU and the IMF.  The bailout money is life support for Greece. If the plug is pulled, the patient defaults.

German stocks have been hit the hardest by the Greek crisis and have fallen well into bear market territory. After rallying from a severely oversold level last week, the DAX was down 157 points or 2.8% on Monday. The French CAC-40 was down 91 points or 3.0%. The British FTSE was down 108 points or 2.0%. UK stocks have been less affected by events in Greece (the UK is not part of the eurozone). As is the case in Asia, all major European markets are in a technically bearish trading pattern.

U.S. stocks have actually held up somewhat better than most other markets. The S&P 500 and small cap Russell 200 have the same negative technical picture found elsewhere, but the Dow Industrials and Nasdaq have so far held just above it. In early afternoon trade, the Dow was down 205 points or 1.8%, the S&P 500 21 points or 1.7%, the Nasdaq 30 points or 1.2%, and the Russell 2000 14 points or 2.0%. A report released in the morning indicated that U.S. investors have pulled more money out of equity funds since April than they did during the five months after Lehman Brothers collapsed. The real history making news however was in the bond market, where the two-year treasury hit an all-time low yield of 0.1491% -- a sign of a global credit crisis if ever there was one.

Investors should expect more market drama from the unfolding Greek tragedy in the coming weeks and months. Unless Germany and France are willing to commit to unlimited bailouts, Greece will eventually default.  Only then will we know how this affects Ireland, Portugal, Spain and Italy and the euro itself.  Stocks are vulnerable to more volatility and downside until this occurs.  

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.

Debt Crisis -- Greece 2011 Compared to Argentina in 2001

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.

Headlines such as "Hopes for Greek debt progress lift world stocks" and "Wall St opens higher on European hopes" are in the financial news today. Before investors buy into the hype, they should realize that the powers-that-be always deny an obvious and inevitable default before it takes place. Greece in 2011 is on a very similar trajectory to Argentina in 2001 and is well past the point of no return for a default just as Argentina was back then.
There are many similarities between the current Greek debt crisis and the Argentina debt crisis in 2001. Greece is not using its own currency, but a transnational one, while Argentina pegged its currency to the U.S. dollar.  A connnection to a greater currency allows only limited policy responses and prevents the usual money printing that would have take place when debt becomes too high. This in turn causes a gradual rise in inflation up to the point of hyperinflation (Greece and Argentina have both experienced hyperinflation in the past). While skyrocketing interest rates in Greece are implying there is massive inflation, the official inflation rate is under 3%. Yields on one-year Greek governments reached approximately 100% on Tuesday, telling a very different story.  

While the Greeks are certainly underestimating their inflation rate (they have been caught lying and continually underreporting their debt figures and no numbers from the Greek Statistical Office can be trusted), it is relatively minor no matter what the actual number. Inflation is caused by a falling currency and hyperinflation by a collapsing currency. Since the euro is not dropping that much and Greece uses the euro, inflation is not showing up there. Argentina tying its currency to the dollar also created a very low inflation rate as long as the peg lasted.  There is no free lunch however (even though you may have repeatedly heard that there is from politicians). Profligate government spending eventually leads to major inflation. The inflation only showed up in Argentina after it decoupled its currency from the U.S. dollar and it will show up in Greece after it decouples from the euro. Instead of gradually building inflation, sudden major inflation will take place.
The Argentina crisis began when a new government was elected in December 1999 and had to deal with years of mismanagement from the previous administration. Greece elected a new government in October 2009 and shortly thereafter it revealed that it had a lot more debt and higher budget deficits than it had claimed. In both cases, sharp spending cuts were implemented and serious riots followed. By December  2000, Argentina had acquired bailout funding from the IMF. Markets rallied and press reports indicated everything was going be OK. Greece received its first bailout from the EU and the IMF in the spring of 2010 and markets rallied and press reports indicated that everything was going to be OK.  In both cases everything that followed wasn't going OK.
By the spring of 2001, events started spiraling downward in Argentina. In the spring of 2011, events started spiraling downward in Greece. In August 2001, Argentina received an increase in its standby loan agreement from the IMF. Greece received promises of a second bailout from the EU, but with some mandatory debt swaps as part of the deal. Argentina engaged in debt swaps in June of 2001. Interest payments on Argentina's debt eventually overwhelmed rescue attempts and on December 5, 2001, the IMF announced it would not disburse promised aid to Argentina. A collapse followed shortly thereafter. The EU is now questioning whether or not to continue to make disbursements to Greece. If the disbursements stop at any point, Greece will default shortly thereafter just as Argentina did.

No government is of course going to admit that it is going to default. If it did, no one would purchase its bonds and this would cause an immediate default.  It is not surprising that the Greek government is denying the obvious, EU leaders are grasping at straws to explain how a Greek default will be avoided, or that the mainstream media is trying to spin those straws into a golden fantasy of solvency. Argentina denied that it would default right up to the end as well, just like every other country (and major company) facing the same predicament has in the past. Despite the claims that, "this time is different", it never is.

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.

Is Greece About to Default?

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.

Yields on two-year Greek governments reach 46.84% last Friday. This is roughly comparable to yields on Argentine bonds in early December 2001 -- only a month before the country defaulted on its debt.

Similar interest rates occurred this spring in Greece before the second bailout package was put together. The bailout saved Greece from defaulting back then, but the bailout is now falling apart while the fiscal situation in Greece continues to deteriorate. The risk of default in the near future has returned, but the will to stop it this time around is much weaker than in the past.

Finland and a number of other countries have already demanded collateral from the Greek government for their contribution to the bailout and this reduces the money available that can be used by the Greek government to pay off its debts.  Then talks between the Greek government and the ECB, EU, and IMF broke down last Friday (September 2nd) because Greece admitted it will not meet its deficit reduction and privatization targets for the year. This potentially puts the next $8 billion tranche in bailout payments in jeopardy. The talks are supposed to resume in 10 days. Even more challenges will have to be faced this coming week.

Citizens of the fiscally solvent EU countries are getting tired of paying to support what they see as the profligate spending habits of the EU's weaker economies.  The bailout efforts have been lead by German Chancellor Angela Merkel, but support within her country has never been strong for them. Her ruling party has lost six regional elections this year, including one in her own home state this weekend. Any more pro-bailout efforts will only further weaken her politically.

At the same time that efforts are taking place to undermine the second bailout, more and more money is needed by Greece. Like many other heavily-indebted countries in the past, Greece is dealing with a destructive feedback loop of inexorably escalating interest costs that cause its debt to continue to rise regardless of what efforts it makes to control it. The Greek government claimed a debt to GDP ratio of 120% in 2010 during the first bailout talks. It is now estimated to be as high as 160%. Interest payments on that debt could be as high as 24% of GDP at current rates (the 10-year bond is yielding over 18%). Despite the first bailout and now the second bailout, interest rates keep going higher, the national debt keeps getting bigger and the problem keeps getting worse.  

Since someone elsewhere had to lend all the money that is in danger of not being paid back, Greek debt problems are not isolated to Greece, but are having a major impact on the big banks in France and Germany (the real reason Germany and France are so anxious to bail out Greece). The debt problem moreover is being spread through contagion to Spain and Italy, both of which are much larger economies and which are ultimately "too big to bail". This is casting a wider net of impacted banks. By the last week of August, credit default swaps (insurance on bonds) were rising to crisis levels for the Royal Bank of Scotland, BNP Paribas, Deutsche Bank and Intesa Sanpaolo. The problem seems to be a shortage of liquidity, just as was the case in the fall of 2008.

It has also been reported that many European financial institutions have losses on bond holdings, despite the ECB actively supporting Spanish and Italian bond prices . The global banking system has approximately $2 trillion in exposure to Greek, Irish, Portuguese, Spanish and Italian debt. On Monday, the yield premiums on Italian and Spanish 10-year government bonds over the equivalent German Bund hit their highest in a month. Italian bonds traded at 5.5%, well above the 5% rate at which the ECB has been buying recently. Italy has to roll over 62 billion euros in bonds by the end of the month.

Stocks have of course been negatively impacted by the problems in Greece and this will continue until there is some resolution. The German DAX had another mini-crash on Monday, falling 5.28% or 292 points. The drop in Paris was just under the 5% mark that defines a crash day. London held up somewhat better as it has during the entire crisis so far. U.S. markets were closed.

At this point, the only thing that can prevent a default by Greece is if its entire debt is bailed out by the EU and IMF (this would require a third and even fourth bailout package). This is not going to happen. The second bailout itself is highly unlikely to go through as planned. Without it, Greece will default this fall.  With it, a little more time will be bought before a third bailout is needed - and support for that measure doesn't currently exist and isn't likely to exist. The important question concerning Greek default seems not to be if, but when.

Disclosure: None
Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2000s"
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. 

Greek Debt Crisis: Why Not Try Dollarization?

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.


Like a thousand page novel that never gets to the climax, the Greek debt crisis is still dragging on. Terms have yet to be worked out for the aid package from the EU and IMF and the Germans seem hesitant about providing it. The market reacted by pushing yields on two-year Greek bonds above 13% today. Even with the proposed aid, Greece's debt problem will merely be put on hold until next year and not solved.

Greece is only 2% of the EU economy, yet its debt crisis has had outsized impact on global markets. Funds have flowed out of Europe into North America and Asia because of it. This has particularly benefited the U.S. and Canadian dollars and weakened the euro. Constant talk about the potential collapse of the euro currency union has accompanied these moves. This has happened not just because of Greece, but also because of looming problems in Portugal, Ireland, Spain and Italy.

There have been suggestions that Greece leave the euro currency union, at least temporarily, and start reusing the drachma. This would be more than disruptive to say the least. I have seen no one recommend the obvious solution of dollarization. This doesn't mean Greece would use U.S. dollars; it would still use the euro, but not as a member of  the currency union. Dollarization is the generic term for when one country uses another country's currency. Panama and Ecuador for instance use American dollars as their official currency, although neither is part of a currency union with the United States. In early 2009, Zimbabwe dealt with its hyperinflation problem by allowing foreign currencies to be used in the country. One of those currencies was the euro.

The EU should consider handling the problem with Greece by temporarily suspending it from the currency union with the understanding it would still be using the euro. Greece could rejoin when its debt problems were finally resolved. This of course might not be soon. At some point a country accumulates so much debt that default becomes inevitable. That point differs for every country. Greece looks like its already gotten to that state with its debt to GDP ratio over 100%. The debt to GDP ratio for Japan is going to be over 200% though this year and it is still functioning better than Greece. Japan has its own currency though and can therefore print any amount of extra money if need be. It has funded its spending internally by borrowing the massive savings of its people. That game is over however and the situation there could eventually turn ugly almost overnight as occurred in Greece.

While Greek bond interest rates and spreads are hitting new highs, the euro itself is trying to stabilize. A look at its chart shows that it has so far made a triple bottom in late March, early April and mid-April trading. Traders are obviously getting bored with selling the euro down and the currency will be due for a rebound soon. How long that lasts depends on how the EU handles its member countries ongoing debt problems. So far, it's been only an unending number of promises with no results out of Brussels.

Disclosure: None relevant.

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.

Debt Crisis Back in Greece, U.S.Has Borrowing Problems Too

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 markets are telling us that the Greek debt crisis, which has supposedly been solved numerous times, is still with us and getting worse. Interest rates on Credit Default Swaps on Greek bonds hit a record 495 basis points on April 21st. While Greece is at the end stage of a sovereign debt problem, the U.S. is at the beginning. Some U.S. corporate bonds have recently had lower interest rates than equivalent treasuries indicating that the market believes those companies are in a better financial position than the U.S. government.

The problems that have arisen in Greece are those that occur when a government borrows too much money relative to its GDP. Eventually the interest payments on the debt become overwhelming and default becomes inevitable. Default can take place in two ways however. It can be a simple failure to make interest payments on bonds or it can result from a major inflation of a currency. With inflation borrowers get the nominal amount of money due them, but that money doesn't have the same purchasing power. Since Greece is part of a currency union and can't print its own money, it can only default by not paying off its bonds. The U.S. on the other hand, can print all the money it wants to so it can only default through inflation.

Up to now Greece has had no problem borrowing money. The problem is that the interest rate it has had to pay in the last several months is so high that it undoes the effect of budget cutting measures taken to get its fiscal house in order. The recent EU and IMF proposed 45 billion euro aid package makes funds available for Greece, but didn't do so in a manner that would lower Greece's interest payments. Unless Greece gets access to large amounts of credit at well below market rates, there is no possibility of it avoiding default. Even if it does, sovereign default in all likelihood will simply be delayed.

So what are the implications for the U.S.? The U.S. is not much more fiscally responsible than Greece is, but is does have the reserve currency of the world and a very big printing press. The U.S. can get away will a lot more than Greece does before an irreversible credit disaster begins. In the last few years, the national debt in the U.S. has been skyrocketing because of the Credit Crisis and the recession that followed. It was  estimated in the proposed 2010 federal budget that that the U.S. will owe slightly more than  $14 trillion by the end of the fiscal year. Debt service was listed as $164 billion.

Based on the budget figures, the U.S. is paying approximately a 1.2% interest rate on its national debt. Could interest rates get any lower than that? Not likely, especially considering that Federal Reserve has kept short term rates around zero. If interest rates return to a more normal, but still relatively low four or five percent, debt service would rise to around $600 billion, without any further increases in borrowing. U.S. federal debt is continually increasing by large amounts however. If 1970s interest rates return, debt service would eventually rise to around $2.4 trillion for the current debt, which is approximately the total estimated revenue for the federal government in 2010. Long before that happened, money printing would be a major source of revenue needed to run government operations on a day to day basis - and hyperinflation would become unavoidable.

The market has been sending hints lately that it is not happy with the U.S. fiscal situation. Interest rates on corporate bonds from Berkshire Hathaway (BRKB), Proctor and Gamble (PG), Johnson and Johnson (JNJ), Lowe's (L) and Abbot Laboratories (ABT) have been lower than equivalent U.S. treasuries at some point in the last few months. Corporate interest rates should never be lower than government rates, at least in theory, because corporations are supposed to be riskier than a government. The market is telling us that it sees things the other way around. Investors should consider this a long-term warning.

The euro (FXE) of course sold off on the latest developments in Greece, but did not make a new low. The market may therefore have already priced in the full impact, at least for the moment, of debt problems in the eurozone. There are more potential problems there in Portugal, Ireland, Spain and Italy however. Whether the market will continue to see those as more significant than the debt problems in the U.S. is still an unanswered question.

Disclosure: Not relevant.

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.

Euro Zone Support Package Doesn' t Solve the Problem

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.


After many press reports over the last two months about a possible bailout for Greece, euro zone leaders seem to have finally come up with a plan to handle the crisis. The plan however will only be used as a last resort, is limited to loans at market interest rates, and requires unanimous agreement from all member countries before aid can be granted. Euro zone countries would provide about two-thirds of the loan money and the IMF the remaining third. Given the restrictions, the support package is likely to have limited impact.

While no loan amount has been specified, unofficial sources indicated that 22 billion euros was the proposed amount. Greece has to borrow 20 billion euros in April and May alone. Greece has not had problems borrowing money so far, but has had to pay high interest rates to do so. The high rates are causing problems because more money has to go to debt service and this means less money for other government spending elsewhere. The country has already been plagued with riots because of its enactment of budget cuts and higher taxes. The euro zone support package though doesn't lower borrowing costs for Greece. It only assures that Greece will be able to continue to borrow in case no one else will lend to it. Essentially the euro zone, along with help from the IMF, has established a policy of acting as a lender of last resort for its sovereign entities.

Admittedly, the euro zone has to trod a very narrow path in the extent of its aid to member countries. If Greece were the only member in trouble the situation wouldn't be so delicate. The Credit Crisis has devastated Europe, just as it has the rest of the world. The more economically marginal countries have suffered the most. Greece is merely the canary in the coal mine. Ireland just released fourth quarter GDP figures indicating that its economy shrank at a 5.1% annualized rate. GDP contraction there in 2009 was the largest on record and that includes all the years of the Great Depression in the 1930s. Italy's GDP dropped 5.1% in 2009. Official figures indicate that Spain's economy was 3.6% smaller for the year. Portugal, which just had its debt rating downgraded by Fitch, claims that its GDP was down a mere 2.7% in 2009.

While all of these numbers are bad, they could actually be even worse. The media reported that Greece shocked markets and other EU nations when it admitted it falsified its statistics to make its budget deficit look much lower than it was, even though the numbers was obviously impossible. The original Greek government figures projected a budget deficit to GDP ratio of 3.75% for 2009 and below 3% (the euro zone target for members of the currency union) for 2010. Greece also claimed that its GDP would increase by 1.1% in the midst of the severe global downturn that was taking place last year (as of now it looks like GDP dropped 2.0%). While these fantasy figures were treated as reality at EU headquarters, the OECD didn't buy them. Long before the Greek government admitted to the truth, it estimated that the budget deficit to GDP ratio would be 6% in 2009. So far, it looks like it will actually be 12.7% - around 250% higher than initially claimed by the Greek government. If such outrageous fabrications could be accepted, would 50% or even 100% errors be discovered?  Greece is not the first country to lie about its economic statistics. Only the very naive would assume that there aren't many other countries doing the exact same thing. Moreover, Greece only got caught because it turned itself in.

Denial on the part of euro zone governing bodies is what has lead to the current crisis with Greece. In order to avoid future problems, the euro zone needs to assure the integrity of the numbers produced by its member countries, so no other major surprises will take place. There also needs to be a more formal mechanism to establish economic equilibrium among member nations as well. The potential trouble spots in the euro zone are characterized as relying excessively on consumer spending, having weak public finances, and relying on foreign capital to supplement low savings rates. Interestingly, this is also an excellent description of the United States.

Disclosure: None

NEXT: U.S. Consumer Spending: Not Inidcating Economic Recovery

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.

Gold Down on IMF Sales, Then Up on 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.


Two pieces of news are affecting gold's price currently.  First, the IMF just announced that it will soon begin phased sales of 191.3 metric tons of gold and this pressured the market causing a sudden sharp sell off. Shortly thereafter, the U.S. released the PPI, the Producer Price Index, for January and there was a very inflationary 1.4% rise from December. This caused gold to rally sharply. While the longer-term direction for gold is unquestionably up, the shorter-term picture is murkier.

The 191.3 metric tons (also known as tonnes or long tons) of gold that the IMF is planning on putting on the market is part of their sale of 403.3 tonnes that they announced last year. Central banks bought 212 tonnes, with India buying over 90% of that amount. Central banks still have the option of participating in the gold sale and this would keep the gold off the open market. The IMF has stated that any sale outside of those to central banks "will be conducted in a phased manner over time". While this is a positive, the IMF has missed the heavy market demand months for gold - November, January and February, and looks like it will be selling during low demand periods. The 191.3 tonnes is part of the Central Bank Gold Agreement, which limits total sales to 400 tonnes a year.

While IMF sales are a negative for the gold market, inflation is always a positive. The 1.4% rise in U.S. wholesale prices in January follows a rise of 1.5% last November. Core PPI, which excludes food and energy, was up 0.3%. Core inflation was a concept implemented by Fed Chair Arthur Burns in the 1970s as a public relations gambit to take attention away from the two major causes of inflation - food and energy. Core inflation is only relevant if food and energy prices remain relatively flat in the long term, but are volatile in the short term. This is not the case; food and energy both go up over time. A Bloomberg study done in 2008 found that not once in a forty-year period did U.S. food prices decline on a year over year basis. Oil prices are choppier, but the $147 high in 2008 was almost four times the high of $39.50 in 1980.

Over the last year PPI is up 4.6%. Almost all of the increase is being blamed on oil. The figures bear this out. However, oil prices affect the price of food and any good or service in the economy that requires transportation, so increases in energy prices percolate through the economy. The Fed's response to this inflation threat is that wage pressures remain tame in the U.S., so there can't be inflation. The wage pressure argument was also common in the 1970s and was used as an excuse by industry to justify not raising salaries. It is a politically based argument that has little to do with the realities of inflation. Inflation is caused by excessive government money creation. There is no case in history though where a government blamed itself for causing inflation even though in each and every case government actions were the root cause.

IMF gold sales will be with us for a while. After the current sale, there are likely to be others, so this could be a multi-year process. The heyday of central bank gold sales is over however. European banks sold large amounts of their gold reserves in the 1990s and early 2000s. There could still be more sales, but Asian banks are now buying. Gold is moving from Europe to Asia and this is a reflection of a greater movement of wealth moving from one continent to another. Gold sales will become less important to the market over time, while inflation is going to become more important.

Disclosure: None

NEXT: Fed Sends a Message with Discount Rate Hike

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.

Market Keeps Going as Stimulus Keeps Flowing

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:

Spot gold hit another record high on Friday, breaking the $1100 barrier for the first time. While gold hit $1102 intraday, it closed at $1097 at the end of New York trading at 5:15PM. So far this morning, gold has traded as high as $1110.60. This is another record intraday high and perhaps today will be gold's first close ever above $1100. Spot silver traded as high as $17.75 in the early going. It is still stuck in its trading range between $16 and $18. A break and close above $18 will be significant.

As the precious metals go up, the trade-weighted U.S. dollar is going down. So far this morning, the dollar has traded as low as 74.98. It is trying to take out its low of 74.94 from October 21st. There is an approximately 0.75 gap on the DXY chart today. This huge gap will have to be filled eventually. The euro broke above its 1.50 resistance again this morning and once it can remain above this level (this may take awhile), it will head toward its old high of 1.60. The U.S. dollar will in turn head toward its old low of 71.50.

As has been the case with dollar weakness since March, stocks are rallying as well. The technical damage from late October is getting undone on the S&P 500 and Nasdaq charts, both regained their 50-day moving averages last Thursday. It never existed on the Dow chart. The small cap Russell 2000 still has a severe limp however and needs to be watched carefully. Just as the Dow is holding the stock market up and trying to lead it higher, the Russell will take the lead in bringing the market down. The market survived serious technical problems last July and is trying for an encore. Just as was the case this summer, central bank stimulus which is flooding the financial system with liquidity is pushing prices higher.

The market is getting its adrenalin shot today from the G-20 meeting held over the weekend in Scotland. The finance ministers from the world's biggest economies pledged to "continue to provide support for the economy until the recovery is assured". The smart money knows this is some point well into the future. Even more eye opening was a note prepared for the meeting by the IMF. The IMF stated bluntly that the U.S. dollar is "now serving as the funding currency for carry trades" and is "still on the strong side" (so expect it to go lower). Warnings about the abrupt end of the U.S. dollar carry trade have already been appearing in media reports for several weeks now. The same thing happened when the Japanese yen became the source of a global carry trade in the 1990s. I remember hearing warnings year after year after year after year after year that this would end abruptly. Apparently it finally did in 2009. So don't get your hopes up for the dollar carry trade lasting beyond 2024!

NEXT: Bond Auction Puts Focus on Interest Rates

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.

Gold Rockets Higher

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:

In a bull market there is always a higher price down the road for those who wait for it. Gold amply demonstrated this concept by hitting a new all time high yesterday (and again this morning). Tuesday's move was sudden and vertical and it took place even though the U.S. dollar was rallying strongly and stocks were selling off. While investors constantly worry about sharp sell offs, they don't usually consider that sharp rallies are also possible for bullish assets. While gold led the way up, silver and then the miners started tagging along shortly thereafter. Eventually all of the inflation trade assets followed. Look for this pattern to repeat.

At the 5:15PM end of New York trading, spot gold closed at $1085.30 yesterday, up almost $25. This took out resistance around the $1070 level. Gold was in a trading range between approximately $1050 and $1070 for awhile before testing its $1025 breakout point. Spot gold has gotten as high as $1094.30 early this morning. This is important implied resistance at $1120. Spot silver closed yesterday at $17.20 up 73 cents. It was up almost a dollar at one point. The 200% leveraged gold ETF DGP was up 4.7% and the 200% silver ETF AGQ was up 10.4% yesterday. Some mining stocks did even better. Novagold (NG) was up 13.2% and Hecla (HL) was up 18%. The U.S. trade-weighted dollar, after rallying strongly in the morning, lost its momentum and essentially closed flat.

What seems to have caused yesterday's gold burst is a story of karma worthy of a Hindi movie. As reported in this blog early Tuesday morning, India bought 200 tonnes of IMF gold. The sale took place during a two-week period that ended on October 30th. This news was generally available in the evening New York time on Monday. Nevertheless, more the one U.S. media outlet reported that India would be or was buying 200 tonnes of gold during the trading day on Tuesday. Gold which had been meandering in price suddenly started moving straight up on the intraday charts blowing out the shorts along the way. The karmic element comes into the story if you know India's past with the IMF. In 1991, during a financial crisis, India had to borrow money from the IMF and was forced to ship its gold reserves to London as collateral. Now they are buying the IMF's gold! Will a future time come, when a Western country has to borrow money from India and in turn be forced to ship their gold to New Delhi?

The movements of gold and the U.S. dollar in the last few days are significant for another reason as well. Since the Credit Crisis began the dollar has rallied before Fed meetings, during the meeting and at least into the day after the meeting. Gold has sold off in response. Things have changed noticeably this time. The Fed met yesterday and is meeting today. The dollar had the usual pre-arranged rally before the meeting and gold was weak, but then things went screwy. Gold suddenly shot to news highs on a big rally and the dollar rally faded as the meeting began. The dollar is already selling off strongly today before the meeting has even ended. Perhaps gold is just too strong and the dollar is just too weak for this manipulaton game to go on any longer.

NEXT: Inflation Trade Picks Up

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Markets Roller Coaster Ride Powered by Media Hype

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Our Video Related to this Blog:

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

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

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

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

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

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

NEXT: Gold Rockets Higher

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

If You Ignore the Facts, Things Are Good

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:

We are going to see a lot of new economic data in the next few days, including the monthly jobs report tomorrow. How the market reacts in the first four trading days of the quarter can give us a lot of insight on where stock and commodity prices will be heading in the next few months. The Consumer Spending report was already out this morning and spending for August was up 1.3%, the biggest gain since October 2001. The rosy numbers were due to the Cash for Clunkers program which ended August 31st... so don't expect September's numbers to look as good. The ISM Manufacturing report for September will be out later this morning and might provide more insight into the post Cash for Clunkers era, although the October report next month will be more revealing.

Weekly jobs claims surged upward to 551,000 this morning. The big rise was a surprise to economists and other people who's expectations are based on fantasy. Any number at or above 400,000 indicates the economy is in recession, 551,000 indicates a somewhat severe recession. A healthy economy has weekly claims at the 300,000 level. The idea that the economy can be recovering while unemployment gets worse is absurd and merely reflects how manipulated U.S. GDP figures are. The government can also 'statistically adjust' the jobs report as well. Watch to see how many people left the labor market in tomorrow's report. This is the fudge factor that the government uses to keep the reported unemployment rate from getting too high.

While all the money pumping the Fed has done in the last year has had only temporary and limited impact on the economy so far, it has certainly revved up the stock market. Last quarter was the best quarter for U.S. stocks since the fourth quarter of 2008 - the beginning of the tech bubble blow off that lasted until the beginning of 2000 and was followed by a Depression level drop in stock prices. The last six months have been the best two quarters for U.S. stocks since March 1987. Five months later U.S. stocks dropped 40% in only a few days. That was also at beginning of a bubble blow off. Only a handful of stocks survived the 1987 crash unscathed - most of them were gold miners. So far history seems to be repeating itself vis-a-vis money pumping and stock price behavior.

The IMF (International Monetary Fund) released revisions to its GDP predictions this morning. It now expects global GDP to decline only 1.1% this year, instead of 1.4% and for GDP to increase by 3.1% next year, instead of by 2.5%. While the report had the usual cheer leading bullish tone, a remark made at the press conference inadvertently revealed the truth. The IMF spokesman stated that the report "should not fool governments into thinking the crisis is over". Apparently they wanted to make it clear that their report was only intended to fool the public. The IMF also stated that the pattern of global demand needs to be rebalanced and this could not happen at current exchange rates and that countries with huge export surpluses needed to revalue their currencies upward. Doesn't that imply that countries with huge export deficits like the U.S. will see their currencies revalued lower? So much for that good news.

NEXT: Unemployment Rises as Car Sales Collapse

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.

Unwinding the Fantasy Trade

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:

Stocks plunged after the open today on the Chicago Purchasing Managers report which indicated contraction in the largest manufacturing region of the U.S. Also this morning, commercial lender CIT, one of the largest sources of loans in the U.S. for small and midsized business, is on the verge of collapse. The company has received $5.3 billion in federal bailout money so far... and even after that, it is still having trouble staying afloat (it will be the fifth biggest bankruptcy in U.S. history if it goes under). Yesterday's September Consumer Confidence number fell instead of going up as economists predicted. Added to all this, the FDIC board voted to ask solvent banks to pre-pay the next three years of their insurance premiums so its deposit insurance fund won't run out of money. Just more evidence of how well the banking system has been 'stabilized' and how well the economic 'recovery' is doing.

The 4th quarter begins tomorrow and the first four trading days should give us a good indication about whether or not the big money will be selling stocks. A net drop in stock prices during this period will be negative going forward. The rally that has taken place since March has a typical bear market pattern to it. In the case of the Dow and S&P 500 it just shot straight up without any basing pattern forming. The rally that followed the 2000 to 2002 sell off, had a ten-month base and this is what allowed it to continue for several years. Stocks have also reached historically overbought levels based on the percentage of stocks trading above their 200-day moving average (the definition of a rally). This reached 95% on the NYSE. Previously a number in the low 70's would have been enough to create a top. While stocks have skyrocketed, Nasdaq up 68%, S&P 500 up 57% and the Dow up nearly 50%, volume has not. Volume on the Dow has continually declined during the entire rally - a very bearish pattern. Even worse a handful of junk financials, traded mostly by computer, have accounted for a large percentage of overall NYSE volume.

Stocks, and bonds as well, have had spectacular rallies because the monetary authorities have pumped an unprecedented amount of money (a lot of it newly printed) into the financial system. The U.S. government additionally changed its accounting rules and this magically made the close to worthless subprime debt held by financial companies worth a lot more overnight. The rising prices of stocks and bonds that followed have been used as evidence that the economy is recovering and along with the accounting rule changes allowed banks and brokers to report significant, but illusory, profits last quarter. The IMF has helped perpetuate this financial fantasy in a just released report that estimates that bank's losses from the Credit Crisis will only be $3.4 trillion now instead of a previously estimated $4 trillion. The logic behind their reasoning? Stock and bond prices have gone up! The IMF is still willing to admit however that U.S. banks have yet to recognize 40% of their losses and UK and euro zone banks 60% of their losses from the Credit Crisis. It warned that monetary policy makers had better consider this before deciding to withdraw the massive stimulus programs that are currently in place.

Government stimulus can only work so long in keeping stock prices up. The Japanese found this out in the 1990s and early 2000s. The Nikkei had more than one spectacular rally, but each time the rally failed because stimulus programs ended or were eventually cut back. New stimulus programs were then created and the cycle began all over again. The one thing the Japanese didn't do was fix the underlying problems with their banking system. The U.S. has not done so either and until this happens, the government can produce all the economic 'recoveries' it wants to, but they won't last. What will last is the inflation caused by all the money printing needed to produce the recoveries.

NEXT: If You Ignore the Facts, Things Are Good

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.