How Much Stimulus Will Be Done by China, the EU and UK?

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.

Much weaker than expected trade data out of China on Friday indicates more economic stimulus will be forthcoming there soon.  Even bigger stimulus is expected from the ECB as it revs up the printing presses to bail out Spain and Italy (unless Germany stops it of course). According to a recent released report, the recessionary economy in the UK may need massive doses of quantitative easing to recover.

Exports in China rose by only 1% year over year in July and this was well below forecasts of an increase of 8.6%. Imports were up 4.7%. For a country that has an export-based economy like China does, this is a serious problem. Like the U.S., Europe and Japan, China engaged in a massive amount of stimulus during the Credit Crisis in 2008/2009, spending $586 billion or 14 percent of its GDP in addition to cutting interest rates and lowering banking reserves.  This led to a big expansion of local government debt, a major housing bubble that has yet to burst and consumer inflation. Apparently, there are unfortunate side effects when governments apply a lot of economic stimulus (notice you rarely read about them in the mainstream media).
This time around, China has already cut interest rates twice and reserve requirement ratios for banks three times since November. Its economy has slowed for the last six quarters and probably by much more than official figures indicate (China's economic numbers should be taken with a grain of salt).
China is still in spectacular shape though compared to Japan, which had a massive trade deficit in the first half of 2012. Japan has been economically troubled for 22 years and despite zero percent interest rates and an unending number of stimulus measures its economy remains in the doldrums. While all the stimulus hasn't solved Japan's economic problems, it has led to a debt to GDP ratio of over 200% (worse than Greece's).
One reason China's exports are doing so poorly is the weakening economy in Europe. On Thursday, the ECB cut its growth forecasts and is now predicting the eurozone economy will contract by 0.3% in 2012.  They are still hopeful of slight growth in 2013 however. Maybe they think it will come from all the money they plan on printing to bail out Spain and Italy. The Eurozone is basically tapped out from all the bailouts it has already done in Greece, Portugal, and Ireland (Cyprus and banks in Spain are now on the list as well). Greece needs a third bailout and is struggling to make it through the month until it receives its next welfare payment in September. The situation there is potentially explosive. The IMF has stated Ireland will need another bailout by next spring.
When ECB President Draghi said on July 9th that the central bank will take any measures within its mandate to save the euro, the inevitable conclusion was that he was willing to engage in massive money printing. The amount of money needed for the huge bailouts that Spain and Italy would require simply doesn't exist so it has to be created out of thin air. The Draghi proposal is for the ECB to buy bonds, but the ECB has already tried buying bonds under the SMP program.  The moment the buying stopped, interest rates shot right back up. This approach is costly and only effective in the very short term — a typical government program. It won't prevent the Eurozone's failure, it will merely delay it and make it worse when it happens.
The UK is not part of the Eurozone, but its economy is also contracting. Citigroup economists have stated that the UK will need to print an additional £500 billion and lower interest rates to 0.25% to prevent continued stagnation. Apparently, they don't think there are serious risks if this approach is taken. Neither did the Weimar Germans in the early 1920s, the Zimbabweans in the 2000s, the Chinese in the 1940s, the Brazilians for most of the 20th century, the Yugoslavians in the 1990s or the Hungarians in 1946. In fact, countries that create hyperinflation always claim the risks of money printing are minimal before it takes place. And there are usually a large number of top economists that support this view.  

There are serious structural problems in the major economies today. The usual Keynesian quick fixes that have been applied since World War II no longer seem to work, nor will they. These have led to a world drowning in debt and all debtors eventually reach their borrowing limit. When this happens with countries, they then try to print their way to prosperity. History makes it quite clear that this doesn't work either. 

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.

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.

A Tale of 3 PMIs: China, the EU, and U.S.

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.


Stock markets in Europe, Asia and the U.S. rallied strongly on August 1st even though reports from purchasing managers in China, the EU and the U.S. did not bode well for future economic activity.

In China, the HSBC PMI (purchasing managers index) for July was 49.4. This indicates Chinese manufacturing contracted last month (50 is the dividing point between expansion and contraction for all the PMI indices). The official Chinese government report though came in at 51.2, indicating a slight expansion was still taking place. China is the growth engine of the world economy and a downturn there has negative implications far and wide. Mainstream media tried to put a positive spin on the news by saying the Chinese government wanted to slow the Chinese economy down, so a drop in manufacturing activity is good news. What the government actually wanted to do was slow down the property bubble created by their massive stimulus program during the Credit Crisis. They did not wish to slow down activity related to exports, which is their bread and butter. That seems to be an unfortunate side effect of their actions however.

While the news out of China was unabashedly bad, traders in the EU were ebullient that the EU purchasing managers July number was revised up to 56.7 from a previous estimate of 56.5. This change is statistically meaningless. Based on the data available, it also looks like Germany was almost single-handedly responsible for the good number. Exports were the key. The big drop in the euro to 1.18 in early June (from around 1.50 late last year) would certainly have boosted exports from the EU since it made their goods much cheaper - and Germany's economy is export based. However, the report also indicated that export orders are slowing (as the euro rises) and new orders are well below this year's peak. The service providers in the report also had the most negative outlook for future activity in eight months.

The U.S. PMI was 55.5 for July, down from 56.2 in June. Of the components in the index, New Orders were down the most, dropping 5.0. The second biggest decline was in Production, which fell 4.4. The Backlog of Orders category was also lower by 2.5. All of these are indicators of future activity. The biggest increase in the report was Inventories, which were up 4.4. Looks like goods are being produced, but are piling up in the warehouse. Together, these components all seem to indicate that U.S. manufacturing will be slowing down later this year.

Manufacturing was the big success story of the stimulus spending that started during the Credit Crisis. This had a greater impact in China than in the Western economies because manufacturing is a greater component of their economy. In the U.S., the service sector is four times bigger than the manufacturing sector, so a buoyant manufacturing sector is not enough by itself to create a strong recovery. This is one reason the American economy remains lackluster despite $3 trillion in budget deficit spending in the last two years. Stimulus spending though will be declining in the U.S. and in the EU into the foreseeable future. We are already seeing what impact that will have based on the PMI reports coming out of China.

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.

U.S. 4th Quarter GDP - Slower Decline Leads to Growth

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.


Only in the magic world of economic statistics can a slower rate of decline be declared as growth. It was just this sort of Alice in Wonderland logic that led to the U.S. government declaring that its fourth quarter GDP grew at a 5.7% annual rate.  This number didn't result from actual economic growth per se, but from a slower rate of decline of inventories. While the 4th quarter GDP numbers are being used as 'proof' that the recession is over, the average American is likely to remain skeptical preferring a more reality-based criteria.

Inventory numbers that were falling at a slower rate acccounted for approximately 3.4% of the 5.7% GDP growth at the end of 2009. There has been a decrease in inventories for seven quarters in a row. Private businesses decreased inventories $33.5 billion in the fourth quarter, following a bigger decrease of $139.2 billion in the third quarter and an even bigger decrease of $160.2 billion in the second. While this number series looks like continuing economic decline, the Bureau of Economic Analysis (BEA) considers it growth because each drop is less than the previous one. If the American economy was actually healthy, inventories would be steadily increasing. Of course, they probably will have an increase in the next quarter or two. This will not necessarily mean the economy has turned the corner, it will mean that inventories can't go to zero.  

Other highlights from the report include a 2.9% increase in real nonresidential fixed investment, despite a decline of 15.4% in nonresidential structures. This was offset by a 13.3% increase in business equipment and software. One would think based on that number that U.S. business activity was humming along at a breakneck pace. BEA statisticians seem to be the only people who can find evidence of this however. They also calculated that that real residential fixed investment increased by 5.7% (something which had declined 14 quarters in a row prior to the 3rd quarter of 2009 because of weakness in the residential real estate market).

The BEA also found that real exports of goods and services increased 18.1 percent in the fourth quarter, while real imports increased by only 10.5 percent. This would indicate a remarkable improvement in the U.S. trade deficit, which has existed continually since the 1970s. While December trade numbers haven't been released yet, October and November's figures didn't indicate any such rosy development.

In addition to claiming that a decline in the rate inventories are falling represents growth, or that American business is in great shape, or the real estate market is recovering, the BEA also stated that government spending fell in the fourth quarter. Certainly a budget deficit for fiscal year 2010 (which started Oct 1, 2009) that is now estimated at $1.35 trillion seems to indicate fiscal probity and restraint on Washington's part. It is true that the deficit estimate was recently lowered from $1.5 trillion. Whether or not this is going to be reflected in less actual federal government spending remains to be seen.

The GDP report also stated that real GDP decreased 2.4 percent in 2009 after an increase of 0.4 percent in 2008. Before a multi-decade revision of GDP numbers in July 2009, the BEA had reported an increase of GDP in 2008 closer to 3%, a good growth rate for the American economy. Since it was universally acknowledged that the U.S. was in a severe recession during all of 2008, how could GDP have increased since a recession indicates negative growth? It's enough to make you wonder if U.S. GDP is being overstated by three to six percent.
 
Disclosure: None

NEXT: The 2011 U.S. Budget - Inflationary and Out of Control

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.

America's Other Deficit - More Borrowing Ahead

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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Everyone knows about the huge U.S. budget deficit and ever climbing national debt (now approaching $12 trillion), but much less attention is paid to the Trade Deficit. Both have multi-decade histories at this point. With the exception of the last four years of the Clinton administration, the U.S. has run budget deficits since 1970. There have been continual trade deficits since 1977. While the U.S. budget deficit hit a record high of $455 billion in fiscal year 2008, the Trade Deficit also hit a record by the end of the year and was even larger at $695.9 billion. Both deficits have to be paid for by borrowing, although the trade deficit has be funded by borrowing from foreign sources. This is how the budget deficit has been funded for many years as well, until the U.S. had to start resorting to out and out money printing in 2008. Few people realize though that the Trade Deficit can actually be a bigger drain on U.S. credit than the budget deficit is.

The reason for the current complacency is that the budget deficit soared in fiscal 2009, while the trade deficit is shrinking this year because of the after effects of the Credit Crisis on global trade. The U.S. trade deficit is now projected to come in at annual $366 billion for 2009. The budget deficit for fiscal 2009 (ending on September 30th) was $1.4 trillion. Next year's budget deficit is projected to be over $1 trillion as well. Whether the U.S. trade deficit has bottomed is dependent on the level of global trade and the price of oil. Oil is the key swing factor and if oil prices rise significantly they will overwhelm any benefits in rising exports from a falling U.S. dollar.

U.S. trade deficit figures for September was released on November 13th. The monthly deficit was $36.5 billion, almost $5 billion greater than analysts had expected. One media headline summed up the situation perfectly (a rare event for the mainstream financial press), "Trade deficit jumps more than expected in September as big rise in foreign oil swamps export gain". Rising prices led to oil imports going up 20.1% and imports overall 5.8% higher. Exports did indeed rise on the falling dollar, but were up only 2.9%. They were overwhelmed by the bigger import number thanks to oil.

While economic recovery means a potentially better U.S. budget deficit, it also means a worse U.S. trade deficit. Recovery outside the U.S., but a weak U.S. economy would be the worse of all worlds. Commodities are priced based on global demand and roaring economies in East Asia can drive the price of oil higher and higher. The U.S. trade deficit would rise and so would the budget deficit creating a self-feeding inflationary spiral. The Chinese economy is already much stronger the U.S. economy and yet the September U.S. trade deficit with China was $22.1 billion. China has managed to keep its exports high because it re-pegged its currency to the U.S. dollar in mid-2008 and this keeps the price of Chinese goods low in the West. It is generally believed the Chinese yuan is 40% undervalued because of the government doesn't let it float. While this undervaluation has allowed China to continue its high level of exports, there will be a price to pay down the road. Undervaluing currencies, just like excessively low interest rates and money printing, is inflationary. The market made this point clearly when the trade deficit news was released, gold shot up and the U.S. dollar sold off.

Disclosure: Long gold, no positions in the U.S. dollar

NEXT: Future U.S. Bailouts - FHA, FDIC, PBGC and U.S. States

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.

So Much for That Recovery

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 G20 meeting ends today and precious metals should be under pressure and the dollar should continue to rally. Traders are worried that some rumblings about supporting the U.S. dollar may come out of the meeting, although the Japanese Finance minister recently said he was uninterested in intervening to drive the Yen down. While something could be said, the likelihood that anything would be done in the near-term is less than nil. Currency intervention is expensive and the printing presses of the major central banks are already booked full-time to support government economic stimulus programs.

The much ballyhooed impending U.S. economic recovery seems to be crumbling. While this only means more government stimulus and money printing, gold and silver are selling off instead of skyrocketing on the news (no that doesn't make any sense). The U.S. Durable Goods report came out this morning and it was down 2.4% in August. A drop of 48% in highly volatile aircraft orders was mostly responsible for the decline , as was the 98% increase in aircraft orders last month that lead to the rise in July. Autos were still up 0.4% last month with the impact of the Cash for Clunkers program waning. Core capital goods, which are the key to what is really going on in the economy, were down 0.4% in August. They dropped by 1.3% in July. So far, there doesn't seem to be any solid evidence of a sustainable recovery in manufacturing.

The bad durable goods numbers followed a 2.7% drop in existing home sales in August that was announced yesterday. That report indicated that 31% of U.S. house sales were 'distressed' (foreclosures for example) and that sales were concentrated in the low end of the market. Well that sounds like a description of a healthy housing market doesn't it? As if the banking system didn't have enough trouble from residential real estate, worse news today came from a report on large bank loans (these are loans over $20 million). Of these, 22.3% are 'troubled'. That is up from 13.4% last year. As a reminder, the U.S. banking system is supposed to have been 'stabilized' according to the Federal Reserve.

While things may look bad in the U.S., they seem to be worse in Japan. Japan is an export based economy and exports there fell 36% in August. Car shipments were down 50% and steel down 43%. GDP was positive last quarter and Japan supposedly exited its most recent recession (one of many in the last two decades)...well, maybe not. The stock of Japan's largest brokerage house, Nomura, plunged 16% last night on the news that it was issuing more stock. This is the second new stock issue in 6 months. Japan has been 'stabilizing' it financial sector for 19 years now. The U.S. looks like it is heading toward long-term 'stabilization' as well.

NEXT: Precious Metals Watch

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 Cash From Clunk-Heads Program

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 U.S. Cash for Clunkers program seems to be working quite well in reviving the economy - not the U.S. economy, but the Japanese economy. The U.S. government program that uses taxpayer money to let people who foolishly bought gas-guzzling cars trade them in for newer energy efficient models is just another reward the losers, from the losers Credit Crisis program. Yesterday's trade deficit figures tell the story. The July deficit widened by a whopping 16.3% in one month. The reason for this huge increase? Auto and auto part imports increased by 21.5%.

A widening trade deficit is negative for GDP. Yesterday's figures knock down one of the three pillars of economic recovery that mainstream economists have cited for their prediction that the U.S. recession is over (almost 100% agree that the economy is recovering). Actually, they specifically said exports were increasing, which indeed was the case in yesterday's report (thanks to highly volatile civilian aircraft shipments). Unfortunately, imports increased much more. Even though this subtracts from GDP, the press managed to put a positive spin on it. One well known economist stated "This was a positive report in that it provides further evidence that both the U.S. and foreign economies are coming back." Something that makes GDP decline is good news for the U.S. economy? Since when? There is obviously no absurdity that the mainstream media won't publish.

Of course the stock market went up on this 'good' news. Cash for Clunkers is indeed reviving manufacturing activity within the U.S (manufacturing is only 20% of the commercial economy versus 80% for services). You can see the figures have improved the most in industries related to automobiles. What one hand giveth, the other is taking away however (as seems typical of Obama administration initiatives). Toyota and Honda have been the two biggest beneficiaries of the program. Once the program stops though, you can expect manufacturing to decline again until the U.S. government comes up with another stimulus program (and another ... and another). The third pillar of the economic recovery, rising homes sales and prices, is just not believable. Foreclosures keep rising, housing inventory keeps rising, consumer credit and income keep falling, yet people are rushing to buy homes and paying more for them? It's only likely in the fantasy land known as manipulated statistics.

The U.S. is not the only country engaging in economic stimulus, it's a global phenomenon (the British also have something they call a 'Car Scrappage Scheme' by the way - at least they used the word scheme so people know what is actually going on). The Chinese market had a big rally last night after China said industrial output, investment, loans and retail sales remained strong in August, "supported by colossal stimulus measures" (a quote from one of the news services). The world's economies seem to be following the Japanese model. In the last two decades, Japan tried to repeatedly revive its economy through stimulus programs. In some cases, quarterly GDP growth exceeded 10% on an annual basis (an enormous number). However, every time the stimulus was removed, the economy sooner or later sank back into recession. There is one major difference however. Japan entered its stimulus period in a strong financial condition, whereas the U.S. and Britain were extremely overextended at the beginning of the Credit Crisis. Our stimulus plans will have to be paid for by printing money.

NEXT: Gold Closes at Record High

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 Stupidity Pandemic; U.S GDP Tanks

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

Our Video Related to this Blog:

The handling and coverage of the current swine flu outbreak has lots of lessons for investing. While the word pandemic is constantly being used by medical authorities for the spread of the flu, the only pandemic that seems to exist is the stupidity in handling and reporting the problem. No realistic concept of probability is being utilized in the amount of attention being paid to this incident. The same problem causes bad investing decisions. Meanwhile, the U.S. GDP figures were released this morning and the 6.1% decline was much worse than analysts had expected.

In my experience, doctors generally have a poor sense of probability and they also tend to be bad investors. The complete lack of context and statements from the medical establishment about the swine flu outbreak vividly illustrate this. Flu of some sort is omnipresent in the U.S and it is a major cause of mortality with an average of 36,000 flu related deaths annually in the 1990s. The very young, the old and the immune compromised are particularly at risk. By any statistical measure, the numbers for the recently discovered swine flu are insignificant. It has only gotten any attention at all because a new strain has been identified. Until an infant death was reported today in Texas, the mortality of this flu outside of Mexico was zero and it would be reasonable to conclude that this new flu is much less risky than the ordinary strains we have to deal with every winter. The U.S. medical establishment's record of handling of swine flu in the past is also rather tarnished to say the least. A vaccine to prevent it in 1976 (the disease never really showed up despite dire warnings of impending peril - there were only 200 cases and one death) killed and crippled far more people than those who got the disease. It was thought at the time that the deadly 1918-1919 flu pandemic was swine flu. It was not, it was a type of avian flu.

Probability always needs to be taken into account when deciding what action to take. Worrying about risks that are minimal are a waste of time. People make the same mistake when investing. Their view of risk in the market tends to be highest at the bottom when this risk of losing money is actually minimal and lowest at the top when the risk of losing money is the greatest. Successful investors look for opportunities where the probability of winning is over 50% (if it is under 50% you are gambling and not investing). The higher your chances of winning are above the 50% level, the better. Over time, you will ultimately make money with this strategy, just as gamblers ultimately lose because they deal with probabilities of less than 50%.

The GDP report this morning was dismal to say the least. Analysts had expected a drop of 4.9% and the number came in at 6.1%. The drop in Q4 2008 was 6.3%. This is the first time since the deep recession of 1974-1975 that GDP has declined three quarters in a row. Highlights from the report: Exports collapsed 30 percent, the biggest decline since 1969, the decline reduced GDP by a record 4.06%; Investment by businesses tumbled a record 37.9 percent in the first quarter, while residential investment dived 38 percent; Business inventories plummeted by a record $103.7 billion in the first quarter and this lowered GDP by 2.79%. Consumer spending supposedly rose by 2.2% from the very depressed levels at the end of last year. I am skeptical of this however, but then again I am skeptical of many things - and for good reason.

NEXT: Markets Rise Depsite Swine Flu Scamdemic

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. Trade Deficit - There's Good News and Bad News

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

Our Video Related to this Blog:

The U.S. Trade Deficit dropped by a whopping 29% in November, one of the biggest drops in history, if not the biggest. Much of the 'improvement' was accounted for by price changes in imports (the numbers are not adjusted for inflation or deflation as is the case for most U.S. government economic reports) Nevertheless, both imports and exports declined significantly, indicating a shrinking global economy. Imports of course dropped much more than exports and this took place because of falling oil prices.

Oil prices (the U.S. is a major oil importer) have the biggest influence by far in determining the U.S. Trade Deficit. The trade deficit overall dropped 29% and oil imports dropped by a similar amount. Based on the average price for a barrel of oil used in the report, oil prices dropped 27% during the month, although the report itself states that 'petroleum prices' fell 32%. Imports of industrial supplies, the category in the report that includes petroleum products and natural gas, fell by 25%. Based on these figures it looks like a little less oil is being consumed by the U.S., but not much. Almost the entire change is merely a change in pricing.

On the flip side of the equation, imports were also falling in November, but that decline seems somewhat more related to an actual drop in trade than a drop in prices. U.S. exports of industrial supplies, capital goods, autos, consumer goods, and food and feed all fell. The one significant rise was in the aircraft category, which jumped 7.1%. This was caused by a strike in Boeing ending and should be assumed to be a one-time event. Drops in imports and exports of services were approximately equivalent.

The average price of a barrel of oil used for the November report was $66.72 a barrel and oil has fallen much lower since then. 'Improvements' in the U.S. Trade Deficit are likely for the next few months because of this. As the price of oil gets to its cost of production, the 'improvements' will disappear however. When the price of oil rises again, the 'improvements' will reverse. The drop in U.S. exports is actually the much bigger story. It was a collapse in U.S. exports that was a key marker of the Great Depression in the 1930s.

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.

China's Trade Gap and the Global Economic Future

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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China's import/export figures for November were released today. Both had significant declines. Year over year exports fell 2.2%, while only last month they were up 19.2%. Imports fell even more, declining 17.9% after being up 15.6% on the year in October. The Trade Surplus swelled. The turnaround was dramatic to say the least and gives the appearance of an economy falling off a cliff. The last time China's exports fell was in February 2002.

The sharp fall in imports is perhaps more worrisome than the export drop, even though the Chinese economy is export driven with internal demand being weak and an undeveloped component. As a manufacturing economy which imports a lot of the raw materials that it needs to produce the items it exports, large drops in imports can mean a lot less will be produced in the future. Falling prices of commodities could account for much of this drop however. Regardless, lower imports imply significant weakening is taking place in the commodity producing economies that supply China. On the other hand, lower exports imply weakening is accelerating in the world's developed economies that buy China's finished goods.

In case you might find these figures worrisome, the Wall Street hype machine has been out in full force this week to bull up expectations about the U.S. economy and stock market (you should always worry when this happens). Headlines like, "Worst of the recession upon us, forecasters say" and "Stocks most undervalued since 1974" are just some of the many examples that I have seen lately. The optimistic forecasters all work for Wall Street firms of course and even the top ranked are pretty sure that things will be getting better soon (by the way, being a top ranked Wall Street economist is an honor similar to having the best vision in the school for the blind). I particularly liked the article I read quoting a well-known investor about how it was a good time to get into the stock market. You had to look toward the end of the article to see that he was down 58% for the year and his judgment about the market had obviously been completely wrong lately.

All of the recent press also shows that Wall Street is universally in favor of the Fed lowering interest rates further (which would make the New York Investing's prediction of ZIRP - zero interest rate policy - a reality) and "flooding the economy with money". This of course would benefit the big Wall Street banks and brokers by lowering their costs and increasing their profits. And, yes the economy would likely recover for a short time before it drowned in the wave of inflation that will inevitably followed these actions.

NEXT: Unemployment - Truth Worse than Even Government Reports

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.

China's Olympic Sized Bubble

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.

The credit bubble in the U.S. did not exist in isolation, but was inextricably linked to a bubble in China U.S. trade. One of the many manifestations of this bubble was a Chinese stock market that started going straight up in late 2006, reaching extreme valuation levels based on any historical standard. The New York Investing meetup discussed this issue in its October 2007 meeting in a presentation entitled, "Thinking Outside the Bucks" (please see: http://investing.meetup.com/21/files).

In the 1990s and early 2000s, China was the most significant economic success story in the world. Rapid industrialization and trade grew the Chinese economy and kept consumer prices down in the West. This was accomplished by utilizing China's large pool of inexpensive labor to produce an increasingly greater number of goods for export. Since labor is the largest cost component for almost all manufactured goods, this lowered prices globally for a number of items. However, China went one step further to insure it could continue to sell its exports at low prices - it pegged its currency to the U.S. dollar (an idea originally suggested by the American monetary authorities, much to the later regret of U.S. politicians). The dollar peg allowed China to keep its currency undervalued, just as Japan had done during its decades of spectacular growth, and provided its exports with a huge advantage in world markets. It also insured the creation of a massive bubble.

As Chinese exports to the U.S. increased, China accumulated a growing hoard of dollars that it used to purchase U.S. treasury bonds. This in turn kept interest rates low in the U.S. and allowed Americans to borrow ever greater sums to finance a purchasing-based consumer economy and for the U.S. government to borrow cheaply to finance a ballooning national debt.
Pegged currencies are not without their downsides, however, as China eventually found out when its internal rate of inflation began rising. In July of 2005, China officially, but not actually depegged the Yuan from the U.S. dollar. The Yuan was allowed to float in such a narrow trading band that by September 2007 it had fallen only to 7.50 from 8.28 to the dollar. Since the Yuan wasn't allowed to float to a realistic level, inflation started taking off in the mainland and the Chinese government announced price controls that month to try to halt it.

Meanwhile, the greater wealth created within the Chinese economy led to an exploding stock market. This bubble in stocks was further fueled by asset controls that prevented most Chinese investors from moving their money outside of China. The effects of this could be seen by examining prices of Chinese stocks that traded in both the mainland and Hong Kong. The prices on the mainland exchanges were much higher than those in Hong Kong. In August of 2007, the Chinese government announced a policy shift that would allow mainland investors to buy and sell stocks in Hong Kong. The effect of stock prices in Hong Kong was explosive and only days later the Chinese government announced this policy change would be on hold for the foreseeable future.

For more on this topic, please see the video: "Global Perspectives on the Decline and Fall of the U.S. Dollar" at: http://www.youtube.com/watch?v=dbHxbOvjYis&NR=1

Next: All that Glitters Isn't Gold, It's Also Silver

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please go to our web site at: http://investing.meetup.com/21.

The Myth About the U.S. Dollar and the Trade Deficit

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.

One of the most widespread pieces of misinformation that is believed in and broadcast by the financial community is that as the U.S. dollar falls, the trade deficit will improve and by implication even disappear. It is almost impossible to view financial TV or read the press without seeing this incorrect piece of information being cited with great certainty and authority by the 'experts'. While this idea was indeed true when the U.S. was on the gold standard, it is not true in a monetary regime where where the dollar floats instead of having a fixed value.

It is only necessary to look at two charts to see that the generally accepted relationship between the U.S. dollar and the trade deficit is false. Those charts are the value of the trade-weight dollar (the value of the U.S. dollar based on the currencies of its major trading partners) and the trade deficit itself. It becomes immediately obvious when examining these charts the declining dollar has had less and less positive impact on the trade deficit over time and seems to have actually made the trade deficit worse since 2000. New York Investing meetup thought this issue was so important that we made one of our first videos about it (please see: "The U.S. Dollar Relationship to Inflation and the Economy" at: http://www.youtube.com/watch?v=3amH-T1B9pQ).

The U.S. went off the gold standard in 1971. There has been a continual trade deficit since 1977 and the amount of the deficit has gotten bigger and bigger over time. Classical economics would infer from this that the value of the dollar has been steadily rising. Instead the value of the dollar has been in a long-term downtrend since 1984. The trade-weighted dollar in fact lost around half its value between 1984 and 1992 and while the trade deficit decreased at the end of this period, at no point did it disappear. The dollar has been in a sharp decline since 2002 and the trade deficit, in total contradiction to classical economic theory, has skyrocketed during that time.

A hint as to how the U.S. trade deficit has managed to grow while the dollar was in sharp decline appeared in the report on the January 2008 trade deficit. Even though the U.S. dollar had been almost in free fall for the preceding several months because of Federal Reserve easy money policy, the trade deficit once again defied classical economic thought and increased instead of decreasing. An explanation in the report mentioned that the price of oil had gone up so much (and the U.S. is a major oil importer and has imported an increasing amount of oil since the early 1970s), that it had more than wiped out any benefits from the falling dollar elsewhere. Since the falling dollar itself makes the price of oil go up, a possible destructive feedback mechanism could be at work. In this scenario a falling dollar causes oil prices to rise and overwhelm the benefits elsewhere of the falling dollar, so the trade deficit goes up. In turn, the rising trade deficit damages the U.S. dollar (since the U.S. has to borrow money from foreigners to fund the trade deficit) and the dollar goes down further. The cycle then repeats itself over and over again.

Next: Housing Market Collapses, but the Statistics Hold Up

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please go to our web site: http://investing.meetup.com/21