10 Reasons We Are in a Credit Crisis

 

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

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

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

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

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

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

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

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

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

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

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

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

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

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Japan Leads Global Stock Market Drop

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 Nikkei closed at 8995 last night, 77% below its final price in December 1989. The rising value of the yen is what is causing the stock market drop. The yen just hit a 15-year high against the dollar and 9-year high against the euro. A richly valued yen is a big negative for Japan's export-based economy.

Japan has been trying to grapple with its real estate and stock market bubbles from the 1980s for over twenty years now. Its approach has been a zero interest rate policy (ZIRP) and an unending serious of stimulus programs (it was recently announced yet another one is being considered). The United States is currently following these same failed policies, but Washington is expecting that somehow they will work here. It is true that the U.S. real estate and stock bubbles in the 1990s and early 2000s were not nearly as bad as those that took place in Japan earlier. So maybe it won't take U.S. stocks 19 years to hit their lows (that would be 2026 by the way) as was the case for the Nikkei - or at least the case for the Nikkei so far. It cannot be said for certain that the 6695 low in March 2009 will hold.

Being the perennially weak sister, problems with global economic imbalances are showing up first in the Japanese market. The Nikkei first broke key support at 10,000 in mid-May.  It managed to trade just above that level for a few days in June, but then fell back and has traded below it ever since. The chart is very bearish.  U.S. investors need to worry about the Dow Industrials holding the same 10,000 level. The Dow is only slightly above this level in today's morning trade. The Dow Transportation Average is also on the verge of a significant breakdown. The Dow Industrials closing and staying below 10,000 at the same time that the Transportation Average gives a sell signal would be a strong negative for U.S. stocks. The S&P500, the Nasdaq, the small-cap Russell 2000 and the Dow Industrials have already given sell signals in July.

The other major development in Japan during its two lost decades was a massive bond bubble, which caused even long-term rates to approach zero. This same type of bubble is now developing globally, although the powers that be are denying that this is taking place. When massive government stimulus causes interest rates to drop, it is because of a liquidity trap - money does not flow into the real economy and so the economy doesn't significantly benefit from stimulus. Eventually a steep depression develops (what has prevented the depression phase so far in Japan is that its population had enough savings to pay for the last 20 years of stimulus - sort of like rich people who have no income, but still manage to live well by slowly selling off all of their assets). The only way out of this depression is to reignite economic growth with inflation. The Japanese have yet to figure out how to do this and U.S. monetary authorities are still reluctant to pursue this option.

Disclosure: No positions

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

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Trouble in the Euro Zone Boosts Dollar, Lowers Commodities

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


The Euro hit a 5-month low against the dollar on January 21st.  It has been selling down since the beginning of December. Troubles with peripheral euro zone debt in Greece, Portugal, Spain and Ireland are damaging the currency and boosting the U.S. dollar. The rising dollar has in turn lowered commodity prices (all commodities are priced in U.S. dollars) and commodity-based currencies such as the Australian and Canadian dollars. A combination of ballooning budget deficits and economic contraction are cited as the cause of these recent moves.

The euro has fallen as low as 1.4045 to the U.S. dollar and has breached its 200-day simple moving average - a technical negative. On the flip side the dollar rose as high as 78.81 and briefly went above its 200-day moving average for the first time since May 2009, but promptly bounced down. No major trend reversals are indicated as of yet for either the U.S. dollar or the euro. It is normal during either an uptrend or downtrend to occasionally come back to the 200-day moving average. To reverse the trend, requires rising above it or falling below it and remaining there so that the 200-day moving average itself reverses direction.

While the commodity-based currencies have sold off, they have barely broken their 50-day moving averages, which are trading well above their 200-days as is typical in strong uptrends. GLD, the major gold ETF, has also traded below its 50-day moving average, but is still far above its 200-day moving average, indicating its strong uptrend is also still in place. JJC, the copper ETF, is in even better shape and hasn't even fallen to its 50-day moving average.  The oil ETF, USO has also violated its 50-day, but is still above its 200-day. January is a seasonally weak month for oil and some selling in the commodity at this point is not out of the ordinary.

The epicenter for the problems in the euro zone is Greece. CDS (credit default swap) insurance against Greek government debt default or restructuring hit an all-time high of 340 basis points. News reports have indicated that Greece's debt to GDP ratio of 120% is behind the move. If this were the whole story, the Japanese yen would have collapsed long ago. The debt to GDP ratio in Japan is at the 200% level. The yen has barely budged, while the euro has sold off. Weakness in the euro zone economy has also been cited, with the PMI manufacturing index for January coming in at 53.6 (above 50 indicates expansion). The same day, the U.S. reported weekly unemployment claims were up 36,000 from the previous week - not exactly an indication of economic strength. To claim that the euro zone economy is in worse shape than the economy in the United States is indeed a stretch. The key difference between Greece, Japan and the U.S. is that Japan and the U.S. can print all the money they want to, whereas Greece because it is part of a currency union cannot.

In the short-term anything is possible in the markets. Manipulation - and central banks are prone to intervene with currency trading - and illusion can sway trading. The long-term trend however is that fiat currencies are all losing their value and this was already evident by the 1970s. Excessive government debt and economic weakness is a global problem shared by almost all the industrialized economies and this will accelerate the multi-decade trend of weakening currencies. Higher prices of hard assets and consumer goods are the consequence of that trend.

Disclosure: Long gold.

NEXT: As U.S. Banks Deteriorate, Obama Proposes New Regulations

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.

A China in a Bull's Shop

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 its own stock markets closed on January 12th, the PBOC (People's Bank of China) ordered a boost in the yuan reserve requirement ratio for banks by half a percentage point. U.S. stocks immediately sold off on the news, gold dropped $15 in only minutes, and the U.S. dollar also declined. The market viewed this as the beginning of a tightening cycle on the part of the Chinese. While analysts are debating this, it is almost certainly true. Claims that China beginning to tighten monetary policy now will be able to head off future inflation however are grossly overstated and can be put in the category of wishful thinking.

When it comes to bank lending, China has the opposite problem of the United States. Banks in the U.S. have yet to start lending again despite half a dozen support and giveaway programs from the Federal Reserve and Treasury Department that are meant to encourage them to do so. Bank lending in China is surging out of control though. Lending in the first week of 2010 was greater than the entire month of November 2009, which in turn was already strong. Analysts claim that PBOC's move will remove 200 to 300 billion yuan from the banking system. Bank lending in the first week of this year was 600 billion yuan, so the drop in liquidity caused by the new rules represents taking away half a week of lending. That should be about as effective as trying to take down an elephant with a fly swatter.

Only a significant change in monetary policy is going to have any impact on future economic numbers. Central bank interest rates are either zero or close to zero in most major economies. Raising that number half a point, a point, even two points still indicates an easy money policy. Even that is not going to happen in the foreseeable future. China itself uses interest rate hikes to cool down its economy and last did so in 2007. It has yet to start a new tightening cycle. Starting that cycle won't be enough to stop inflation either. Inflation is an insidious phenomenon that takes years to work its way through an economy. There is as much as a four-year lag between a period of easy money and a first peak in the inflation rate. That takes us at least to 2012. In the 1970s U.S., money supply expansion peaked in 1971 and inflation peaked nine years later in 1980. Trying to control inflation after money expansion has occurred doesn't work, unless severe measures are used.

Governments also fail to control inflation because they fail to focus on the cause. In China's cases, they froze their currency at the beginning of the Credit Crisis, so it is extremely undervalued. Keeping a currency at too low an exchange rate is highly inflationary. When inflation shows up in China in the not too distant future, the key to stopping it will be to significantly value the yuan upward. Other measures will prove to be ineffective, but like most government throughout history, China is likely to take the easy way out and avoid taking the necessary steps needed to reduce inflation.

As an interesting aside to China's bank announcement, it should be noted that the yen is selling off against the U.S. dollar. Almost every other currency is rallying against the dollar and some very strongly. It is quite clear that this was part of some central bank maneuver to drive down the yen. The large drop in the price of gold, which took place in minutes on the 12th, also required a large amount of capital backing it. Central banks have that large amount of capital. This ordinarily would have rallied the U.S. dollar strongly, but didn't. Manipulating the gold market is one of the old reliable techniques governments use to support the U.S. currency. Central bank actions rarely impact the markets for too long if there is no fundamental support backing up their moves. When the U.S. stops borrowing and printing money and raises interest rates substantially, real support for the dollar will exist. Until that happens, the long-term downtrend will continually reassert itself.

Disclosure: Long gold.

NEXT: 2009 Retail Sales Deconstructed

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

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

The U.S. Dollar in Early 2010 Trading

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


The U.S. trade-weighted dollar began a significant sell off in early March 2009 from the 89.00 level. By November 25th (the day before Thanksgiving), it hit its yearly low at 74.23. Almost as if on schedule, a rally began in December and lasted until the 22nd (right before Christmas). Trading was mostly flat in the first week of 2010, but off the December highs. Gold, which sold off as the dollar rose, rallied strongly in the first trading week of the year. The dollar is struggling and the technical picture now looks negative in the short-term. The December rally did nothing to reverse the intermediate or the long-term downward trend in the dollar. The currency hit its high in the mid-1980s.

The Euro and Swiss franc both peaked the day the dollar bottomed and bottomed the day the dollar peaked. The British pound, which should be a weak currency considering the extensive money printing taking place in the UK, peaked earlier on November 16th and bottomed later on December 29th. The Japanese yen, which rallied strongly starting in early April 2009, peaked on November 30th and bottomed so far on January 7th. The commodity-based currencies the Canadian and Australian dollar behaved somewhat differently. The Australian dollar peaked with the pound, but bottomed with the euro. The Canadian essentially traded flat.

The selling in the yen was sharp and powerful in the first few days of December and had the fingerprints of central bank intervention all over it. Export driven economies in Asia are becoming increasingly desperate to keep their currencies from rising against the dollar since this makes their goods more expensive and hurt their economies. On January 11th alone, at least four Asian central banks - India, South Korea, Singapore and Indonesia - bought U.S. dollars in the currency market. Unlike other currencies, the Chinese yuan doesn't float and this is negatively impacting its Asian neighbors and all other exporters. The Chinese are engaging in jawboning however to try to talk down the dollar. An investment strategist for the Chinese government sovereign wealth fund just commented that the U.S. dollar had bottomed, but the yen should be selling off. He further stated, "China now has a voice in influencing the dollar's exchange rate and the interest rate on U.S. government debt." For some reason, a laugh track didn't accompany the Internet postings of this news.

It is not surprising that the U.S. dollar rallied in December, even if the cause was central bank intervention. No asset, no matter how weak, can drop in price every day. There are always counter rallies, just as there are counter sell offs for assets that are going up most of the time. The underlying problem with the U.S. dollar is irresponsible monetary and fiscal policy. Until these are corrected, and it looks like they will only be getting worse for the next several years, a sustainable rally in the dollar against hard-assets is not possible. Central banks can intervene all they want, but the results will only be temporary. It should be kept in mind that exchange rates in and of themselves are not the only thing that is important. We are in an era when all fiat currencies globally are losing their value against gold. Unless something is done to stop this, paper money will eventually get to its intrinsic value, which is zero.
 
Disclosure: Long gold.

NEXT: A China in a Bull's Shop

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.

A Comparison of Major Currencies in the Last Decade

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.


One of the most consistent messages from U.S. Treasury Secretaries in the last decade was that America has a strong dollar policy. During that period the trade-weighted dollar (the U.S. dollar measured against a basket of six currencies proportional to U.S. trading activity with the respective countries) fell approximately 21%. The value of the dollar went down against the Euro, the Yen, the Swiss Franc, the Canadian dollar and the Australian dollar. It traded flat against the British Pound. One wonders what would have happened if America had had a weak dollar policy.

The U.S. trade-weighted dollar opened in 2000 around 99. It then rallied in the beginning of the decade (this was a continuation of a rise that began in 1995) and peaked with a double top just above 120 in 2001 and 2002. It was mostly downhill from there until it hit bottom in the 71.50 area in 2008. A flight to safety during the Credit Crisis rallied the dollar back to 90. It closed out the decade at 78.22. The decline of the dollar in the first ten years of the 2000s was merely a continuation of a much longer drop that began in 1985, the year that the trade-weighted dollar peaked at over 160. In the twenty-five years since then, it has lost more than half of its value.

As the dollar fell, other major currencies rose. The Swiss franc was the big winner during the decade with a 49% rally. The euro was up 37%. The Japanese yen had a more modest rise and the value of the British pound remained essentially unchanged against the dollar. The commodity-based currencies, the Australian and Canadian dollars, were up 39% and 41% respectively during the decade. In general, other major currencies bottomed against the dollar in the early 2000s. The euro was the first in 2000, it was followed by the Australian dollar in 2001, then the Canadian dollar and the Swiss franc, which made a double bottom in 2001 and 2002. The Japanese yen also hit its low value for the decade in 2002. The one exception was the British pound, which bottomed during the Credit Crisis in 2009. All the majors had significant sell offs against the dollar late in the decade because of the problems in the global financial system and if they hadn't, their rallies would have been much greater than the final numbers indicate.

For the last twenty-five years, not just the last decade, the dollar has been losing ground against the other major fiat currencies (all backed only by the credit of their issuing governments). The market has made its opinion quite clear about U.S. budget deficits, trade deficits, and monetary policy compared to those of other nations. If the U.S. dollar wasn't the reserve currency for the world, the dollar would have devalued much more than it did. Unless the U.S. puts its fiscal house in order - and just the opposite is occurring - expect dollar devaluation to not only continue, but to accelerate in the next decade.

Investors who want to invest in currencies can purchase FXA, FXC, FXE, FXF, and FXY,  ETFs which hold the Australian dollar, the Canadian dollar, the euro, the Swiss franc and the Yen respectively. UDN can be used to take a short position in the trade-weighted dollar.

Disclosure: No currency positions.

NEXT:

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

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

Gold in Technical Correction as Dollar Rallies

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:

Gold had a sharp drop on Friday, December 4th. It was down more than 5% at one point, but closed at $1161.40, off its low. Gold was overbought on both the daily, weekly, and by one measure even on the monthly charts. It needed some pressure taking off after rallying almost every day and hitting one all-time high after another in November. While the bears are coming out of the woodwork and claiming the gold rally is over (as many have claimed was imminent for several months now), there is merely a needed technical correction taking place. The gold charts are so bullish that it would take a lot more selling before the technical picture became damaged. While gold is selling down, the U.S. dollar is not surprisingly rallying since they tend to move in opposite directions. As is the case with gold, it will require a lot more than a few days to change the technical picture of the dollar.

Almost the entire drop in gold prices on the 4th took place during New York trading. What supposedly set off the drop was the U.S jobs report for November, which had much better numbers than expected. While even a cursory analysis of the report indicates that the picture is not so rosy - large numbers of part-time positions suddenly appeared out of nowhere and retailers cut employment during the height of the holiday selling season - the mainstream U.S. media trumpeted the 'good' news, while ignoring the inconvenient facts. Talk of possible sooner than expected Fed rate hikes was cited as the cause of the selling in the precious metals and the rally in the dollar. A Fed rate hike would damage U.S. stocks a lot more than gold, but stocks rallied strongly on the jobs news. So much for that theory. The price of gold is related closely to inflation and future U.S. inflation is already baked in the cake because of all the money printing the Federal Reserve has been doing. It will take years before all the inflation damage from the current bout of easy and fake money fully manifests itself.

It will also takes years before the Credit Crisis money printing operations are finished damaging the U.S. dollar. That doesn't mean it will go down every day in the interim, just like gold won't go up every day. The trade-weighted dollar has been selling off since March. It has been trading continually below its falling 50-day moving average since April. It managed to peak above the 50-day once in early November. December 4th was the first day it managed to close above it in more than seven months. To return to rally mode, the dollar would have to stay above the 50-day, rally to its 200-day moving average (well above its current level), stay above the 200-day then the 50-day would have to cross the 200-day. This would require two or three months minimally and around six months would be more likely -assuming that it is going to happen. That assumption as of now is based on one day's trading activity indicating a change in an eight month trend.

Dollar rallies in the last several months tend to be concentrated in only one or two currencies in the trade-weighted basket, indicating a helping hand from the respective central banks. The last rally in early November was based on a strong move down in the euro and Canadian dollar. The weak British pound actually went up during that time. This dollar rally has been more concentrated in the Japanese yen and Bank of Japan intervention should be assumed. The falling dollar is a risk to major exporting countries and they want to drive their currencies down versus the dollar. U.S. authorities seem quite complacent about the falling dollar however because they believe it will increase U.S. exports. Without macro policy changes such as significantly higher interest rates (that would be well above the current zero level in the U.S and a quarter, half or even a whole point rise wouldn't do it), central bank intervention to alter currency relationships gets undone pretty quickly.

The technical picture in gold is not fully resolved yet. A little more selling will be necessary. This can be mixed in with a lot of volatility. The intermediate picture is still up for gold and the other precious metals. So far, this looks like a mid-rally correction. The correction is merely taking place a lot faster than is usual. As of now, the most probable peak for the current gold rally is still in the March to May 2010 time frame.

Disclosure: Long gold and silver.

NEXT: More Government Stimulus and More 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.

U.S.Inflation Reports - Contradictions and Absurdity

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

Our Video Related to this Blog:

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

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

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

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

Disclosure: Long gold and silver.

NEXT: The Real Story About Gold Supply and Demand

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


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

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.

Central Banks Support the Dollar

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

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The U.S trade-weighted dollar had an explosive rally on Monday. The rally was by no means even during the day, but consisted of a few sharp rises that lasted only minutes. Not much happened in between. Only central banks have enough capital to account for this type of trading pattern. Not all currencies moved equally against the dollar either lending further credence to central bank intervention having taken place. Only the euro and Canadian dollar had significant moves down with the Australian dollar having a lesser drop. The Yen hardly budged. The British pound actually rose slightly on the day. Care to guess which central banks might have been involved?

Gold and silver had sharp sell offs in reaction. However this was not the only reason that accounted for their movement down. There is an options and futures contract expiration tomorrow. The same expiration affects natural gas, which also had a sharp sell off, but this was only tangentially related to movements in the U.S. dollar. The dollar intervention was clearly timed to get maximum bang for the buck (so to speak) and drive down the price of gold as much as possible. There was no technical damage on the gold and silver metals charts though. Silver partially filled a gap from the breakout earlier in the month and probably needs to trade to the bottom of the gap before it can resume its movement upward.

A number of gold and silver miners also filled their equivalent gaps from the same day in early October. GDX, the precious metal mining ETF did so and traded down to its 50-day moving average. Technical problems are showing up on a number of miner's chart however, so this sell off is probably not over. Novagold (NG) has serious problems on its 15-minute chart which indicate a lower low is quite possible in eight to ten days. A rally in the middle is likely. You might want to consider a tight stop. Buying on the dip is another option. Silver stocks like Hecla (HL) and Coeur d'Alene (CDE) are interesting possibilities. Hecla still has an unfilled gap lower down (as do a few other mining stocks). Look for the gaps and keep an eye on them before deciding to buy.

While currency intervention is keeping the U.S. dollar from collapsing, it will have a high cost over time. Everything sold off yesterday and that includes U.S. treasury bonds. When bonds go down, interest rates go up. There was a minor breakout in the 10 and 30 year bond interest rate charts Monday. The stock market is exceedingly vulnerable in here as well. The rally has been based on liquidity and the movement of that liquidy out of stocks into the dollar could damage stock prices considerably. This is the choice the monetary authorities are facing - save the U.S. dollar or save the stock market and keep interest rates low. Knowing how competent Ben Bernanke is, it will probably be none of the above.

NEXT: Markets Enter Danger Zone

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.

G8 Hot Air Inflates Dollar

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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The G8 finance ministers met in Tokyo this weekend. Media headlines were blaring, 'Dollar Rises as G8 Looks to End Stimulus'. As usual media headlines have little to do with what actually happened. The ministers discussed a need to prepare strategies for winding down policy measures taken in response to the economic crisis. Note that it's just talk and the talk is about coming up with strategies (they don't exist yet). There is no 'doing' involved here, nor did the G8 come up with a timetable for implementing the strategies once they are created. It's not even clear that they have a timetable for coming up with the strategies. Not only is stimulus not being ended, but there is more than enough reason to believe it will be increased. The IMF managing director commenting on the meeting stated bluntly that the worst is not over yet.

The real goal of this meeting was to jawbone the U.S. dollar up. As reported in this blog the trade-weighted dollar has been hoovering around a breakdown level of 78.33. So far this morning it has been as high a s 80.89 in pre-market trading. At the meeting, the Russian finance minister backtracked on Russia's statement last week that it was cutting its U.S. bond holdings. He stated at the meeting that over the next year or more (the media did not quote this time period, but somehow gathered it from context) he "does not see any significant changes in our policy with regards to dollar denominated paper". He also said he didn't see the dollar losing its reserve currency status in the near future. The media did not report if the pained look on his face was the result of having both arms twisted behind his back.

The effect of the G8 comments was to sink Asian and European stocks markets. Most were down around 2%. Dollar denominated assets such as commodities were hit the hardest. Oil fell to around 70, but then went back up above 71. All this on the hint that maybe sort of kinda perhaps something will done at some unstated point in the future. In past major inflations, governments have always tried to tone down the money printing, but are forced to quickly reverse course because there is an immediate negative reaction when they do so. Looks like we're already falling into this pattern.

In a side note on 'money printing' is a bizarre story coming out of Italy that the U.S. media is ignoring. Italian authorities have seized $135 billion in U.S. treasury bonds from two individuals entering the country from Switzerland and carrying Japanese passports. Among the cache were 249 bonds with $500 million denominations. While this may seem absurd, the U.S. treasury did indeed issue bonds with $500 million denominations between 1955 and 1969. Even more amazing the authorities couldn't tell immediately whether or not the bonds were counterfeit! While it seems likely the bonds are phony, why would anyone bother counterfeiting bonds with denominations so high that only a central bank could buy them? This would also be the biggest counterfeiting operation in history. Whatever is going on, there is definitely more to this story.

NEXT: Market Rally at Key Juncture; Russians at it 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.

Black Friday Panic Grips World Markets

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:

As I write this before the trading day begins in the U.S. markets, S&P500 futures are limit down. After having fallen 60 points, regulators will not let them trade lower until the market opens. Dow futures were down 546 points and Nasdaq 100 futures 83 points when the trading floor was established on the S&P. U.S. stock futures began sinking during the bloodbath that took place in Asia overnight and dropped further on bad news in Europe. Selling exhaustion, necessary for the market to bottom, is now a real possibility sometime between today and next Tuesday morning - assuming the U.S. authorities don't close the markets.

Even though the U.S. financial media reported yesterday's market action as positive, evidence of possible problems today could be seen in how stocks traded. Volatility, never a sign of a healthy market, was even more off the charts than it has been recently. The Dow sold off in the beginning of trading and then rallied approximately 400 points in a little more than an hour. Then in the next three hours it fell 600 points. In the last hour and a half it rallied almost 500 points to close up 172 points. Anyone of these moves is extreme for an entire day, let alone an intraday move. The VIX (the volatility index) hit a new high of 96.40 even further above the 55 reached in 2002, but still not at the 150 level in the 1987 meltdown. Watch this indicator for a sign of a possible bottom.

Overnight the Nikkei in Japan fell 9.6%, closing at 7649 or just above the 2003 low of 7603. The Nikkei has sold off for 18 years and counting as of last night. Double digit losses hit Korea, down 10.6% on the day and 20% for the week, and India, down 11%. The Hang Seng in Hong Kong and the Straight Times in Singapore were both down 8.3%. Australia was the only bright spot in the region and experienced only a modest loss. Oil fell to $64.58 despite OPEC announcing a cut in production. Selling of the U.S. dollar against the Yen was described by commentators as 'relentless'. The Yen reached 92.76, a thirteen year high.

Europe opened to Britain reporting a 0.5% drop in GDP (not nearly as bad as what is happening in the U.S. economy, just more honest). The FTSE 100 was down down in the 7% range in mid-day trading and the DAX and CAC-40 had fallen more than 8%. The pound was getting hammered, trading at 1.54 to the dollar and the euro was trading around 128. Denmark had to raise rates to defend its currency, as Hungary did earlier in the week. Hungary, along with the Ukraine and Pakistan are seeking help from the IMF. As usual , emerging and smaller markets are likely to experience the biggest losses when global selling hits.

At the moment, look for support on the Dow and S&P 500 at their 2002 lows, around 7200 and 775 respectively.

NEXT: Landslide Elections and the U.S. Stock Market

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.