Weekly Claims and Trade Deficit Not as Good as Reported

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 reacted enthusiastically to the weekly unemployment claims for the week ending September 3rd and to the improvement in the U.S. trade deficit during July. As usual, the mainstream media hyped up the headline number, but 'forgot' to report some important details.

Weekly claims falling the week before or during a major holiday is a hardly unusual and has nothing to do with an improving employment picture. The 451,000 number reported for the week before Labor Day was the lowest number since the week that contained the July 4th holiday. The problem is not that unemployment offices are closed, but the bureaucrats that tabulate the statistics can't work faster to produce the numbers in a timely fashion. In this report, apparently 9 states didn't have their numbers ready, so two of them estimated their numbers and the BLS estimated the numbers for the other seven. This information doesn't appear to have been included in the intitial press release from the BLS. Some bloggers caught on to it though and Bank of America sent out a note later about what had happened.  Stocks in both the U.S. and overseas rallied on the BLS release showing an improving jobs situation based on incomplete data.

The market was also excited about the trade deficit decreasing in July. While no trade deficit is definitely a good thing (something that hasn't occurred in the U.S. since the 1970s), this is not necessarily true for a lower trade deficit. If the trade deficit is decreasing because of surging exports, that is indeed a positive. If it is decreasing because of a big decline in imports, this can indicate business and consumers are spending less because of poor economic conditions. Falling imports accounted for most of the July decrease. Of the increase in exports, capital goods accounted for 82%. This is surprising considering the July durable goods report showed a significant decline in production of capital goods in the U.S. If exports are surging for capital goods, why is production falling?  There seems to be some contradiction here.

The stock market shouldn't have been happy with either of these government reports. Without the positive spin the mainstream media gave them, it probably wouldn't have been. The truth is that weekly unemployment claims have been continually at recession levels for over two years now and there is no evidence yet of their improvement (even a one week drop below the 400,000 recession level, quite possible before the election on November 2nd, wouldn't mean employment is on an upswing). As for the trade deficit, it was cut in half during the Credit Crisis because the economy was collapsing. An improving trade deficit can actually be sending a negative message. Investors need to know the details and the historical context of any given economic report before they can react appropriately to it. Lots of luck in getting that from the mainstream media.


Disclosure: No positions.

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

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

August Beige Book Admits Economy Heading Down

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 Fed just released its Beige Book summarizing U.S. economic conditions up to the end of August and the takeaway was "widespread signs of a deceleration compared with preceding periods". In general though the report was a mastery of double-speak and attempted obfuscation.

The Beige Book is a compilation of anecdotal reports on various sectors of the economy from the Fed's twelve regional districts (Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco). The Fed uses it as an additional source of information when determining economic policy. If they trust the numbers produced by the U.S. government statistical agencies, it's not clear however why it's necessary to produce this monthly study.

The Beige Book for August seemed particularly strained in its attempt to put some rosy spin on its findings. This was most evident in the section on Consumer Spending and Tourism. The opening sentence was positive and gave the picture of a slow growth economy (the story the Fed is trying to sell to the voting public):

"Reports on consumer spending were mixed but suggested a slight increase on balance. Most Districts reported that non-automotive retail sales rose compared with the previous reporting period or were above their levels from 12 months earlier."

The details that followed however indicated that consumers throughout the country were acting as they do during a recession:

"Atlanta reported a decline in the level of sales, and Richmond noted that sales "sputtered" in August, while New York and Dallas reported that growth in retail sales slowed. Several Districts noted an emphasis on necessities and lower-priced goods. Boston reported that back-to-school purchases were focused on immediate needs; in Cleveland, consumers focused on "value-priced seasonal items;" and in St. Louis, Kansas City, and San Francisco, sales were relatively stronger for lower-priced items."

Interestingly, the report goes on with a positive view of auto sales, even though they fell by 21% year over year in August and 5% on a monthly basis according to industry source Autodata:

"Most Districts also reported that sales of new automobiles and light trucks were largely stable or up slightly during the reporting period."

The Beige Book's authors would have provided a more accurate description of the state of the U.S. economy in August 2010 if they simply stated the following:

"Consumer spending was reported to be slow in most Districts, with purchasing concentrated on necessary items and retrenchment in discretionary spending. Districts reporting on auto sales described them as falling or steady at low levels."

This would have made their work much easier as well, since this is a statement from the Beige Book for August 2008.  That report was issued just before the U.S. economy fell off a cliff.

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.

Sorting Out Contradictory Jobs Information

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.


Four jobs related reports were released in the first two days of September and they seem to indicate a contradictory view of the U.S. employment situation.

The weekly unemployment claims number was 472,000 for the last week of August, almost exactly the same as the 470,000 figure for the first week of January. Payroll processing firm ADP predicted yesterday that the U.S. private sector lost jobs in August because of a big employment drop in the 'goods producing sector'. At almost the same time, the ISM manufacturing index was released and indicated substantial hiring took place in U.S. manufacturing companies in August. Adding more confusion to the mix, outplacement firm Challenger, Grey, and Christmas said there was a sharp drop in planned layoffs in August.

The rule of thumb for recession is a weekly claims level over 400,000. This has existed continuously in the data for over two years now. Eight months into 2010, the only difference from the beginning of the year is that the four-week moving average is now 20,000 higher at 485,500. At no point during the 'recovery' did weekly claims fall to a level indicating the Great Recession actually ended. Weekly claims however should automatically fall during a protracted recession because big companies can only cut so many jobs until they get to a bare bones staff. This doesn't mean the economy is getting better, it means there is no one left to lay off. The Challenger, Grey and Christmas report on planned layoffs supports this view. Weekly claims will remain high under such circumstances if a lot of companies are going out of business because of ongoing recessionary conditions.

While there is no inconsistency with the weekly claims and the Challenger, Grey and Christmas data, the ADP and ISM employment data directly contradict each other. ADP's numbers are based on payroll processing while ISM's numbers are based on a survey of purchasing managers (the government's employment report is also based on surveys). The ADP report stated there was a significant drop in manufacturing hiring in August and the ISM report claimed there was a significant gain. The ISM report also showed a decline in the new orders component (Why would there be a substantial increase in hiring when there is less work to do?). Perhaps we will get some clarification in the government's August employment report tomorrow. 

There will be no sustainable economic recovery until private sector hiring picks up. This hasn't happened yet. While the mainstream media has reported otherwise, government numbers on private sector hiring include education jobs (almost all of which are government) and health care jobs (many of which are paid for indirectly by government programs). The private sector temporary jobs category in the employment report also has a footnote stating jobs from other categories are included. Could those other categories be government jobs? Looks like it, since once the Census stopped hiring, new temporary employment seems to have dried up. At the moment, it looks like any real recovery in private sector employment is a long way off.

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.

Some Recovery, Half a Million More Unemployed Last Week

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 more than a year of economic 'recovery', the Department of Labor reported weekly unemployment claims rose to 500,000 last week. Any number at 400,000 or higher indicates recession. The last time weekly claims were below that number was the week of July 17, 2007 - more than three years ago.

The unemployment problem has two components - not enough hiring in the private sector and too many job losses for people who have jobs. The lack of hiring can be seen in the monthly non-farm payrolls report and the too much firing shows up in the weekly unemployment claims. Not all U.S. workers are eligible to collect unemployment however so the weekly claims numbers understate the actual number of people who lost their job. Even with the understatement, unemployment looks bad enough as is.

The number of former workers collecting extended benefits rose to 4,753,456 in the week ending July 31st (the most recent data). This was up 260,105 or over 5% from the previous week. A year earlier in 2009, only 2,961,457 were in this category, which includes people unemployed for over 26 weeks. So the number of people who are long-term unemployed and have not yet exhausted their benefits has risen over 60% in the last year -a year when economic recovery was supposedly taking place.

Since November 2009, the weekly jobless claims have mostly been in the 450,000 to 500,000 range. There is no noticeable trend of improvement. This is amazing, not just because of trillions in deficit spending that the government told us would make the economy better, but over the long-term (and three years is the long-term) this number should automatically drift down. Companies have to have a certain minimal amount of employees to run their operations. As time goes on, the number of people that can be terminated drops significantly and so should weekly unemployment claims. This drop in claims wouldn't mean the economy is getting better, although the mainstream media would blast headlines claiming that was happening, it would mean that there aren't a lot of people left to fire. At this point in the cycle, since claims aren't dropping, business activity has to be continually declining to maintain the same high unemployment numbers. That's the definition of a recession, not a recovery.

Investors should not be surprised if the weekly unemployment claims numbers start looking better soon and for the next couple of months. The U.S. employment situation is a major embarassment for the administation and there is an important election in November. This week, the president is making appearances in  five states to make the case that it was worth borrowing trillions of dollars for stimulus spending and doing so has put America 'back on the road to recovery'. The last nine months of weekly unemployment claims certainly aren't supporting this view. With a statistical adjustment here and there though, the numbers could suddenly look a whole lot better, even if the economy isn't improving at all.

Disclosure: No positions.

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

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

Liquidity Trap: The Global Collapse of Government Bond Yields

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.


Government bond yields are dropping throughout the world. The U.S. 2-year, the German 5-year, 10-year and 30-year, and the French 10-year have all hit record lows recently. The Japanese 10-year is back below 1.0% and has fallen as low as 0.90%. The UK 10-year yield has been dropping for months and is only 17 basis points above its Credit Crisis low.

Record or close to record low yields on government bonds indicates enormous buying demand. Bonds hitting record low yields are by definition hitting record high prices. Moreover bond prices are going up when supply has undergone a tremendous expansion to pay for all the economic stimulus programs governments are running. So demand for government bonds has to be increasing faster than the rapidly growing supply if yields are falling. The obvious question is: Who is buying all of these bonds?

If yields were dropping in just one country instead of in almost everywhere, increased demand might be partially explained by countries with big foreign reserves like China buying more government debt. China has been a major purchaser of U.S. treasuries for a long time, but last month it sold about 3% of its holdings. Yet yields on long-term treasuries continued to drop, when they should have gone up. In the U.S., there has been enough buying to not only make up for the loss from China, but to purchase an even larger amount of bonds. There is only one possible source for funding for this demand for government paper in the U.S. and elsewhere on the planet and that is the national central banks and treasury departments.

Essentially, the central banks are 'printing' huge amounts of new money. This money goes into the financial system and gets recycled into purchasing government bonds and also stuck in the banking system as reserves. Most of the newly created money does not go into the real economy. It does allow governments to spend much more money than they could have ordinarily however, but most of this 'stimulus' actually goes for maintaining the status quo (with the objective of preventing further collapse) rather than for anything that would create growth in the future. So the economy stagnates, but holds up as long as the money printing ruse can be maintained. This is a liquidity trap and much of the global economy has already fallen into it based on the interest rate behavior of government bonds.

A liquidity trap is an ugly situation to say the least.  Either a country continues to spend its wealth to support its lifestyle until all of it is dissipated and complete impoverishment occurs or it finds a way to get some of the liquidity into the real economy. The problem is that only small measured amounts of liquidity can be allowed to flow into the economy in any given time period, but this is not the likely scenario. If the central bankers were capable of making this happen, they would have already done it. More likely is that the floodgates will be open and too much liquidity goes into the real economy too quickly. Hyperinflation will then occur and prices could start to skyrocket almost overnight. Japan has faced this situation for the last twenty years, now it looks like all the developed economies are going to be facing it.


Disclosure: No positions.

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

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

Consumer Confidence Still Worse Than Last 4 Recessions

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


Fed Chair Ben Bernanke said yesterday that he expected a recovery in consuming spending. Media headlines blared the good news and stocks rallied. The details of 'sometime in the next several quarters' got lost in the shuffle however. Nor did the media report that Bernanke has rarely made a prediction that has turned out to be correct.

An examination of where consumers are now compared to previous recessions can help shed some light on any impending consumer recovery. The Conference Board's consumer confidence number was 50.4 in July. The highest number in the 'recovery' so far was 63.30 this May. The number 90 is used as the dividing line between a lackluster and healthy economy. U.S. consumers haven't registered confidence levels anywhere near that level since December 2007 when the recession began. Confidence was 90.6 that month and then fell and has remained below 90 since that time.

Consumer confidence behaved differently before the 1990/91 recession than afterwards as is the case for a host of economic data. It was after 1990/91 recession when the first 'jobless recovery' took place. Prior to that time, unemployment bottomed during the same quarter that GDP bottomed. Only after U.S. government statisticians started making 'adjustments' to how the economic numbers were calculated in the 1980s, did such impossibilities as 'jobless recoveries' (an oxymoron if ever there was one) start to occur. Consumer confidence is affected by unemployment, so the confidence numbers would reasonably be expected to begin to lag the official recession dates as well.

The two recessions before the 1990/91 recession took place between January 1980 and July 1980 and July 1981 and November 1982. Consumer confidence bottomed in May 1980 at 50.10 (almost the same as the current value) right in the middle of the 1980 recession. The low number for the 1981/82 recession was 54.30 in October 1982, just before the recession's end. The worse point for consumer confidence in the 1982 recession was better than the July 2010 reading. The recovery we are supposed to be in now wouldn't have been recognized in the 1980s.

The 1990/91 recession took place from July 1990 to March 1991. During that period, the low point in consumer confidence was 55.10 in January 1991. That wasn't the ultimate low however. That was 47.30 in February 2002 - eleven months after the recession officially ended. A slow to improve employment picture kept consumers in a subdued state.

The 2001 recession was unique in that it was the only recession in history where consumer spending didn't decline. Since consumer spending accounts for around 70% of U.S. GDP, it is very difficult for a recession to take place at all is there isn't a drop in consumer spending. During the official dates of the recession, March 2001 to November 2001, the low point in consumer confidence was an amazingly high 84.90 in November. The ultimate low was 64.30 in March 2003 -relatively good for a recession bottom. The low point for the 2001 recession is almost the high point that we have experienced in the current recovery.

Recently, the low point in consumer confidence was 25.30 in February 2009. That is not just the bottom for the current recession, but the all-time low (the all-time high was 144.70 in 2000). After committing trillions of dollars for bailouts, $3 trillion in federal deficit spending in the last two years, and zero interest rates since December 2008, we have now managed to achieve a consumer confidence number that is worse than or around the low point for the last four recessions. From the consumer's perspective, government efforts to handle the current downturn look like the most expensive failure in history.

Disclosure: No positions.

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

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

8 More Reasons Why a Double-Dip is Coming

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 earnings season continues and one company after another beats expectations, the economic numbers are continuing to come in below estimates. The data and indicators are increasingly painting a picture of an economy that is falling apart. Here are a few of the reasons why another recession is imminent:

1. U.S. orders for durable goods fell 1.0% in June. Economists expected them to rise 1.0%.  Excluding the volatile transportation sector, orders fell 0.6% and shipments were down 1.3%. Inventories rose for the sixth month in a row, indicating goods are being produced, but they're not moving out the door.

2. Industrial output in China fell 2.8% in June. A "potential weakening of the global economy" was cited as the cause.

3. The ECRI (Economic Cycle Research Institute) weekly leading indicators index has fallen as low as minus 10.5. There has never been a case when it has gotten this low and there hasn't been a recession.

4. The Consumer Metrics Institute's Growth Index has been negative since January and is now around minus 3.0 (it fell to around minus 6.0 in August 2008). It leads U.S. GDP by approximately two quarters.

5. The U.S. trade deficit widened in May and was the largest in 18 months. This happened even though oil imports fell over 9%. Rising oil imports are usually the factor that makes the trade deficit go up. The trade deficit subtracts from GDP.

6. After a sharp drop in June, U.S. consumer confidence fell even more in July. The Conference Board's latest reading was 50.4. As usual, economist's estimates were on the high side. A reading of 90 or above indicates a robust economy. Before the most recent recession, consumer spending was 72% of GDP.

7. U.S. weekly unemployment claims refuse to drop below 400,000, the approximate dividing line between recession and non-recession. At no point during the current 'recovery' have they gotten that low. The unadjusted number of claims for the week of July 17th was 498,000. Even though companies are reporting huge earnings increases and raising estimates for next quarter, more and more workers continue to lose their jobs.

8. The economic cheerleader-in-chief, Fed Chair Ben Bernanke, gave a gloomy report on the U.S. economy last week in his bi-annual testimony before congress. Bernanke didn't see the subprime crisis coming, nor did he realize the U.S. was in a recession in the spring of 2008, months after the recession had begun. So if even he admits the economy is weak, it must really be in bad shape. Bank of England Governor Mervyn King, has also recently stated, "Britain can't be confident that a sustained recovery is under way".

Disclosure: No positions.

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

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

Bernanke Admits Major Policy Failures; Stocks Soar

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.


What's wrong with this picture? In his bi-annual testimony before congress yesterday, Fed Chair Ben Bernanke admitted that after more than a year and a half of zero interest rates and $3 trillion in federal deficit spending since 2008, the best case scenario for the U.S. economy is slow growth and high unemployment. The S&P 500 is up 2.5% so far this morning on this 'good' news.

Bernanke's congressional testimony included the following statements (emphasis added by me):

"Most [FOMC] participants viewed uncertainty about the outlook for growth and unemployment as greater than normal, and the majority saw [at the June Fed meeting] the risks to growth as weighted to the downside."

"financial conditions--though much improved since the depth of the financial crisis--have become less supportive of economic growth in recent months."

"many banks continue to have a large volume of troubled loans on their books, and bank lending standards remain tight. With credit demand weak and with banks writing down problem credits, bank loans outstanding have continued to contract."

"After two years of job losses, private payrolls expanded at an average of about 100,000 per month during the first half of this year, a pace insufficient to reduce the unemployment rate materially. In all likelihood, a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009."

The market dropped as Bernanke delivered his testimony yesterday afternoon - and he was blamed for bringing it down. The Dow closed more than 109 points lower. The Dow was then up more than 117 points right after the open today and the Nasdaq gapped up over 26 points. The mainstream media reported bullish news out of Europe and good corporate earnings instantly turned market psychology around. One major news service stated, "earnings Thursday showed that if the economy is slowing, many companies are not being affected too much by the downturn". In other words corporate profits have decoupled from the state of the economy. While this may sound completely idiotic, it may not be as absurd as it initially appears to be.

If the federal government has spent $3 trillion of borrowed and printed money in the last two years, that money has to have gone somewhere. Either direct or indirect government purchases could be responsible for the current batch of good corporate earnings, although sales to the economically strong economies in East and South Asian are behind better performance for many U.S. companies that do most of their business overseas. So the private sector of the U.S. economy can be dead in the water, but corporate earnings can be good because the government has become such a large component of the economy (as is the case in socialist states).

While corporate earnings are up and cash levels are at record highs, the money doesn't seem to be flowing into the general economy. Despite the supposedly great state of corporate America, there are few announcements of major business expansions, nor is hiring picking up. The usual evidence of a robust corporate sector is simply not there. Weekly jobless claims in fact rose 37,000 to 464,000 this week. While 'seasonal adjustments' were cited behind the big increase, weekly claims have been at recessionary (if not depressionary) levels for two years now. Apparently there are negative seasonal factors in winter, spring, summer, and fall.

The alternative explanation for today's big stock market rally, despite major gloomy news, is the not so invisible hand of government manipulation. Bernanke made it clear early on that he was more than willing to interfere in the markets. When the Fed began its rate lowering campaign in August 2007, it did so one hour before monthly futures expired and this created a huge rally that wiped out the profits of the shorts (and gave a huge gift to the parties that were on the other side of the trade - the big Wall Street banks perhaps?). More recently, the Fed created a huge global liquidity facility on May 9th, after the Flash Crash, and markets soared - at least for awhile. Since there are major elections in the fall, investors should assume that powers that be will not want a crashing stock market and the announcement of a new recession. It will be interesting to see how they try to cover this up.

Disclosure: No positions.

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

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

Drop in Shipping Indicates Slowing Global Economy

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 Baltic Dry Index, a measure of international shipping rates for dry bulk cargoes, hit new lows for the year on Monday June 28th. The index has dropped sharply in the last month and is indicating that global manufacturing activity is experiencing a major slowdown.

Shipping rates are very dependent on market demand (it takes a long time to build a large ship and to increase the supply of shipping capacity) and will rise and fall sharply in response to it. The Baltic Dry Index (BDIY:IND) is a daily record of costs to ship goods such as building materials, coal, metallic ores and grains. Oil and natural gas are not included in the index. Many of the products that are included are used as inputs somewhere in the manufacturing pipeline.

Shipping activity for 2010 peaked so far on May 26th when the Baltic Dry Index reached 4209. Yesterday, a little more than one month later, the index stood at 2447 - a 42% drop. Until this week, the low for the year had been 2501 on January 25th.  Not only is shipping at a new low for 2010, but the high for this year was less than the high reached on November 23, 2009. On that date the index was 4423 and as of now that was the post Credit Crisis peak. This compares to the all-time high of 11,793. It looks like we won't be reaching that level again anytime soon.

Lower highs and lower lows paint a picture of a weakening trend for shipping. The next key level for investors to watch is 2163. This was the low in activity on September 24, 2009. If the index breaks below this, returns to the incredibly lackluster levels in the spring of 2009 are possible. It is not likely though that we will be returning to the all-time low level of 663 from December 5, 2008. At that time, global economic activity was literally frozen and was at a severe depression level. Even in a fairly steep double dip recession, there should be more shipping activity than that.

Disclosure: None

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

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

Fed Statement Not so Bullish This Month

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. Fed ended its two-day meeting today and left its zero interest rate policy in place. While this was unsurprising, the statement the Fed issued provides investors with some insight into its current thinking on the economy. It was much less bullish today than in April, but still contained a lot of spin and denial. 

In past articles on March 17th and April 29th, I have discussed how the Fed has waited two to three years after the end of a post war era recession before raising rates and that this would be happening again.  That would mean the earliest Fed rate rise would take place around July 2011. Nevertheless, at that time many economists at the biggest U.S. bond dealers were predicting that a rate rise was likely at the Fed meeting this June. Since then, an article by the Federal Reserve Bank of San Francisco has appeared that suggested that the Fed should possibly wait until 2012 before raising rates (a three year period after the end of the recession). After reading that, the highly paid economists at the too big to fail institutions changed their tune and now almost all of them are predicting that the Fed won't raise rates until next year or even 2012. Your taxes were used for government bailout money to pay the salaries of many of these 'can't think for themselves' economists.

Almost all of these same economists are also parroting the Federal Reserve mantra that there can't be inflation while resource slack exists in the economy. One chief economist for a major bank recently stated, "inflation will hardly be a threat in an economy where massive labor-market slack is suppressing wages". Was he discussing the U.S. where unemployment is around 10% or Zimbabwe where it reached 94%? Of course, everyone would say it must be the U.S. because Zimbabwe had the second worse hyperinflation in world history. Truly massive resource slack always accompanies hyperinflation, but don't expect to get facts like that from the typical mainstream economist. They're paid to provide views that help their institutions make money, not to give the public the facts.

In its April meeting, buffoonish Ben and his stalwart crew of fed governors broke out the cigars to congratulate themselves on the great state of the U.S. economy.  The Fed statement released after the meeting was filled with glowing statements about the economy such as: "economic activity has continued to strengthen and the labor market is beginning to improve", "growth in household spending has picked up recently", "business spending on equipment and software has risen significantly", and "financial market conditions remain supportive of economic growth". There was one fly in the ointment however, " bank lending continues to contract". The Fed didn't seem too concerned. After all that only impacts the real economy, small and medium size businesses, and the guy on Main Street. Lack of lending can also cause recessions however. The Fed has apparently woken up to this unpleasant annoyance recently and behind the scenes reports indicate that it has been studying what to do in case the U.S. economy takes a second nosedive.

The Fed statement from the June meeting wasn't quite as optimistic after a number of recent economic releases indicated a weakening U.S. economy. Before the meeting ended today, it was revealed that new homes sales plunged 33% to record low level in May. The May employment report was unimpressive and indicated most new jobs were temporary and coming from the Census. Despite the obvious economic deterioration taking place, the Fed said in today's statement, "Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually".

The Fed continued to maintain that household spending was increasing, but admitted that it was constrained by high unemployment, lower housing wealth and tight credit (that certainly sounds like something that's going to be taking off in the near future). The Fed also stated that investment in commercial real estate continues to be weak and that "employers remain reluctant to hire". It acknowledged that "housing starts remain at a depressed level" (it would be hard to argue that something that was at the lowest point ever was anything but). The Fed further stated that financial conditions had become less supportive of economic growth and then blamed the Europeans. Moreover it reiterated once again that "bank lending has continued to contract in recent months". The Fed then ended its statement still upbeat about the future.  Maybe they just don't think recession is such a bad thing after all.

Disclosure: None

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

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

Past Recessions Provide Insight Into When the Fed Will Raise Rates

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 Federal Reserve left the fed funds rate in the zero to 0.25% range at its March meeting. This is the 15th month that the Fed has maintained rates at an all-time low. At the conclusion of the meeting the Fed stated that it will keep rates near zero "for an extended period of time", so no rate increase should be expected for at least several more months. Examining how the Fed reacted to past recessions can provide investors with some insight into when the Fed will actually change to a more restrictive interest rate policy this time around.

According to the official record, the previous U.S. recession took place between March 2001 and November 2001. This recession was unique in that it is the only one in U.S. history where consumer spending didn't drop and it was also one of the mildest recessions on record. Fed funds bottomed at 1.00% in June 2003 - 19 months after the recession was supposedly over. The backdrop was very low inflation. New reports of a jobless recovery were common even in the fall of 2003 and there was great concern at the time because the unemployment rate was at the 6% level (as opposed to 10% today). Fed funds remained at a low point for 11 months. So the Fed started raising its funds rate 30 months after the recession officially ended. If we optimistically assume that the current recession ended in July 2009 because GDP turned positive in the third quarter of the year, this would imply Fed funds would start rising around January 2012.

The recession before the one in the early 2000s took place between July 1990 and March 1991. Fed funds bottomed at 3.00% in September 1992 - 18 months after the recession officially ended. Jobless recovery was also a big news item in 1993. Commentators noted that payroll employment in the 7 previous U.S. recessions had increased on average around seven percent in the two-years following the business trough, but had barely budged in that time period after the 1990-1991 recession. The unemployment rate was around the 7% level. The backdrop was declining inflation. The fed started raising rates in February 1994, so the low rate was maintained for 16 months and this was 35 months after the recession was declared to be over. This would imply that the Fed will start raising rates around June 2012.

The prior recessionary period was the double dip recession that took place between January 1980 to July 1980 and July 1981 to November 1982. This recession was actually created by Federal Reserve policy and sent the U.S. industrial base into a decline from which it never recovered. Inflation was high and at its peak, so interest rates were at the start of a long-term decline. Fed chair Volcker kept raising Fed funds rates until they reached 20%. They last time that they were that high was October 1981. They were then lowered until they had fallen to 8.5% in December 1982. The funds rate was then raised until a new lowering cycle began in September 1984. The funds rate bottomed at 5.875% in August 1986. High fed funds rates did not cause our current recession, so this period of economic history is not necessarily relevant to today's situation. The recession did take place at the beginning of a multi-decade shift in interest rates and this is also occurring now, although we are at the bottom of the cycle and not at the top like we were in the early 1980s. Japan's experience since 1990 indicates that rates can remain at or near their low point for well over a decade.

Before our current recession, the worst post World War II recession occurred between November 1973 and March 1975. Inflation was high and rising during this time period, so interest rates were generally trending upward. Unemployment peaked at 9.0% in May 1975. The concept of jobless recovery was an unknown phenomenon. The fed funds rate reached a low of 4.75% in January and November 1976. The Fed started a consistently more restrictive interest rate policy 21 months after the recession ended. That would imply that April 2011 could be the first Fed funds rate increase this time around.

Historical examination indicates that when the Fed starts raising rates depends on when a recession occurs in the context of a longer-term inflationary/deflationary cycle. When the inflation rate has already been falling for a decade or more or is around its low point, it takes longer for a rate rise than it does in a rising inflationary environment. Two to three years after a U.S. recession has been declared officially ended seems to be the norm before a tighter interest rate environment begins regardless of the inflationary backdrop. If the Fed raises rates on the short side of this number, this will indicate we are heading into rapidly increasing inflation. If it takes more than three years, it will indicate the possibility of grinding deflation as has occurred in Japan since the 1990s. The first alternative is the proverbial devil and the second is the deep blue sea.

Disclosure: None

NEXT: The Dollar, Euro, Gold, Oil and Treasuries

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 Three Big Economic Lies of 2009

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

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

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

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

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

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

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

2. Employment is a lagging indicator.

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

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

3. Inflation is not a problem:

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

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

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

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

NEXT: Why Interest Rates Will Rise in 2010

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

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