Bernanke Makes No New Promises at Jackson Hole

 

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 underwent wild gyrations on Friday morning. First the Dow was up over 100 points just after the open on hopes that Fed Chair Bernanke would promise more QE in his Jackson Hole speech. Then, as Bernanke gave his remarks almost the entire rally disappeared. Then a few minutes later the Dow was up 100 points again.

Did anything happen to justify these market movements? The answer is no for the first rally and no for the second rally. Only the selling made sense. There was no promise in the speech for any additional QE in the immediate future. Bernanke did say "the Federal Reserve will provide additional policy accommodation as needed" as he has already stated dozens of times. This is a meaningless platitude that he repeats as often as a mindless parrot. He basically can't take any other position.

Bernanke had to admit that the economy wasn't in really awful shape, but he did emphasize that getting the unemployment rate lower was an important consideration for the FOMC. He did not make any case, nor did he offer proof that doing more quantitative easing would be effective in accomplishing this goal.  He did admit however that, "estimates of the effects of nontraditional policies on economic activity and inflation are uncertain". In other words, the central bank is playing a potentially dangerous game that might have very negative unforeseen consequences in the future.

Bernanke did admit that doing QE could disrupt the Treasury market. He stated that, "if the Federal Reserve became too dominant a buyer in certain segments of these markets, trading among private agents could dry up, degrading liquidity and price discovery".  All of the Fed's actions degrade free markets. That's why they are supposed to be effective. History has shown that markets always dominate in the end however.

Bernanke made it obvious in his speech that he doesn't think any underlying changes have taken place in the economy or financial markets. The ever-insightful Fed Chair also thought in the spring of 2007 that a mountain of subprime mortgage debt posed no risk to the economy or markets. This time Bernanke said, "rather than attributing the slow recovery to longer-term structural factors, I see growth being held back currently by a number of headwinds". Consider the Fed has been taking action since August 2007 (yes, it's been five years) and the economy still is not in great shape, you would think it might occur to him that maybe his policies don't work particularly well (note to readers: many economists are not particularly good at reality-based thinking).

Within the last few days, it has become obvious that Bernanke wouldn't promise anything at Jackson Hole. The QE touts were already making media appearances and publishing articles admitting this, but claiming that the Fed would be taking action at its September meeting. The same people said the Fed would be announcing QE at its June meeting and when that didn't happen, they said it would occur at the July/August meeting. Then it was supposed to take place at Jackson Hole. Now it's going to happen in September. Don't hold your breath.

There is no way the Fed can do QE3 before the election (unless Europe has a major collapse). It would just be too much of a political hot potato. While there are those who state correctly that the Fed has acted prior to presidential elections in the past, that was before the "Audit the Fed" movement started and before the Republicans started criticizing Bernanke's money printing. Romney has already said that if elected, he is going to dump Bernanke. Doing QE again with only the flimsiest of justifications would be seen as a blatant act to help reelect Obama and save his own job. Like QE itself, this could have "uncertain" consequences and many of them could be unpleasant.

The text of Bernanke's speech at Jackson Hole can be found here: http://www.marketwatch.com/story/text-of-bernanke-speech-at-jackson-hole-2012-08-31?pagenumber=2


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.

April 2012 Jobs, Labor Force Continues to 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 BLS release the employment situation for April 2012 this morning. The report showed that 115,000 jobs were created last month and the current unemployment rate is 8.1%. The big story however was the incredible number of people leaving the U.S. labor force  — almost ten million in the last five years.

Looking at any of the macro numbers since the Great Recession began in December 2007 indicates that the employment situation in the United States is severely challenged. People are leaving the labor force in droves. The participation rate continues to fall as well. This does not happen during economic recoveries. It happens during recessions and depressions. Not only have these numbers trended in the wrong direction since the "recovery" supposedly began in mid-2009, but there has been an acceleration.

These trends are hidden because large numbers of people enter the labor force because of school graduation and immigration. When balanced against the number of people retiring, the U.S. needs to create approximately 150,000 new jobs every month to keep the employment situation steady. It has rarely met or exceeded this number in the last four years, yet the unemployment rate reported by the BLS has declined significantly. This can only happen because large numbers of people have left the labor force (a sign of economic stress).

According to Table A of the BLS employment reports, there were 78,711,000 Americans not in the labor force in April 2007. In April 2008, four months after the Great Recession began, this number had risen to 79,241,000. In April 2009 just before the supposed recovery started, 80,554,000 Americans were not in the labor force.  This loss of less than two million during a recession isn't surprising . What is surprising is what happened during the recovery.

After almost a year of recovery, the number of people not in the labor force grew to 82,614,000. This was an increase of more than two million, a number greater than the loss during the previous two years that included the recession. Then in April 2011 after another year of recovery, 85,726,000 Americans were not in the U.S. labor force — an increase of over three million in only one year. Now in April 2012, 88,419,000 were not in the labor force. This was an increase of almost three million in one year.

In the five years since April 2007, 9,708,000 Americans have left the U.S. labor force. During this period the labor force should have grown approximately 9,000,000 (60 times 150,000). The picture these numbers present are one of an economy in severe decline. Don't expect to hear this from the U.S. government however. Politicians don't get reelected by reporting bad news.


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.

Inflation Makes Economy Look Better; Stocks Soar on the News

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.


Despite a number of economic reports at the beginning of the month indicating continued problems, stocks rallied strongly on September 1st. The Nikkei was up over 1% and the major European markets were up between 1% and 2%. The U.S. markets were up over 2% in morning trade.

U.S. stock futures were up strongly in the pre-market and not even an incredibly weak ADP employment report indicating a loss of private sector jobs in August could derail the rally. In a rare moment of candor, even news service coverage found the rally odd. One article stated, "The sharp jump in U.S. stock futures is surprising given the domestic economic reports due out later in the morning. Often investors don't make big bets ... heading into key economic reports, particularly in recent weeks as data has consistently showed growth is slowing." And this was before the ADP report indicated that job losses in the U.S. are accelerating again after three challenging years and despite trillions of dollars of government stimulus spending.

What supposedly started the global stock rise was 'good' news on China's manufacturing index (PMI). The official government number was 51.7 in August versus 51.2 in July. While that may seem OK, albeit rather mediocre, the details indicate big trouble on the horizon. One component of the report was disproportionately responsible for the index not falling below 50 and indicating contraction. That component was the Input Price Index, which rose from 50.4 in July to 60.5 in August. Isn't that an inflation indicator? Doesn't that mean that input prices went up around 20% in only one month? Couldn't this possibly indicate that China is on the verge of experiencing major inflation and this is masking a big drop in manufacturing activity there? Then the U.S. PMI was released at 10:30AM and it unexpectedly rose.  Of all its components, the highest number was Prices, also an inflation indicator.

In the U.S., the market was also pleased that home prices were rising.  This news however was more laughable than ominous. According to Case-Shiller, U.S. houses prices in select cities were up 4.4% in the second quarter. The entire time period included the $8,000 home-buyer tax credit. According to other sources, an increase of $8,000 in the median average U.S. home price would be about 4.4%. So what happened was the government gave homebuyers $8,000 and they then spent an average of $8,000 more to buy the same home they would have without the tax credit. This obviously didn't make real estate any more affordable, all it did was create the illusion that this was the case. It wasn't just naive and gullible homebuyers that fell for this scam either. One prominent mainstream economist commented on the data, "Even with concerns about near term developments, we recognize that the housing market is in better shape than this time last year." Home sellers of course got an extra $8,000 courtesy of the U.S. taxpayer (if you check your bank account and notice $8,000 missing, this is where the money went).

So how is it possible that stocks are having a massive rally on the above news items?  The state of the economy is not the short-term reason stocks rally or sell off. Stocks rally on liquidity. And it is obvious that central banks are injecting huge amounts of liquidity into the global financial system at the moment. The liquidity free lunch doesn't last for a long time however. It has to be paid for periodically with withdrawals of liquidity to prevent a huge inflation spike. This causes lots of volatility with stocks experiencing big price rises followed by sharp drops. We saw a lot of this in the second half of 2008 when the market went up and down like a yo-yo on crack cocaine. While this resulted in an eventual market collapse two-years ago, this is not likely to deter the Fed from continuing to play the same dangerous game again until the November 2nd election. Investors should brace themselves for a rocky market during the next two months.


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.

A Break in the Bull and China Stops Shopping

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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August has not been a good month for Chinese stocks. In mid-month, the markets were down 20%, but some recovery took place and it looked like the bull market which had moved stocks up 80% or more was holding. The month ended badly last night though. After dropping 3% on Friday, Shanghai was down 6.7% and Shenzhen down 7.1% last night. Volatility, and Chinese stocks have certainly been volatile in August, is classic sign of a bubble top. The market's plunge last night took place because of concern about a drop in bank lending. Like every other major government in the world, China has been pumping massive stimulus into the economy. Even the threat that the stimulus might be reduced is enough to tank the markets. What would happen if it actually was reduced?

There was no China contagion in the other Asian markets last night. They all had relatively minor drops. The Nikkei in Japan was even up strongly in the morning, but closed down slightly.
Initial bullishness was because of the election news. The ruling party, which has been in power almost continuously since 1955, was crushed at the polls. After approximately half a dozen recessions in the last 19 years, the Japanese electorate finally became fed up enough to try something else. The U.S. electorate is not likely to be so understanding for so long.

There are lessons for what has just happened in Japan for the U.S. Japan has been producing much better economic statistics lately. GDP turned strongly positive last quarter. Industrial production figures out last night were up for the fifth month in a row. Exports have been rising (thanks mostly to China - anything happens to the Chinese economy and the GDP will go right back in the tank in a number of countries). The real estate market turn up last year (after a 15 year drop) Despite the 'improving economy' unemployment is up and retail sales are very weak. The average Japanese citizen sees his or her personal situation deteriorating. Based on how the vote went, they obviously no longer believe the government's upbeat reports on the economy.

The picture in the U.S. right now is remarkably similar to Japan's. Economists predict 3% U.S. GDP growth this quarter. Industrial production is up. Real estate prices are supposedly going up (well, that's the claim at least). Exports are supposedly doing better. However, just like in Japan, unemployment is up and retail sales are in bad shape. The economy the average person sees is deteriorating. Without massive government stimulus, it would look like the 1930s depression. Government stimulus was also the key component in improving the Japanese economy, as has been the case over and over again since 1990. Keeping the U.S. economy out of recession, will require ongoing stimulus as well and in our case this means massive money printing. When governments are forced to chose between recession and inflation, inflation always wins out. No government can risk ongoing recession and survive - even in Japan apparently.

NEXT: Next Five Days Critical for Stock Rally

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


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

NBER Admits New York Investing Was Right

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

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

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

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

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

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

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

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